Some of the items that make up the Consumer Price Index change prices frequently, while others are slow to change. We explore whether these two sets of prices-sticky and flexible-provide insight on different aspects of the inflation process. We find that sticky prices appear to incorporate expectations about future inflation to a greater degree than prices that change on a frequent basis, while flexible prices respond more powerfully to economic conditions-economic slack. Importantly, our sticky-price measure seems to contain a component of inflation expectations, and that component may be useful when trying to gauge where inflation is heading.
Throughout the history of the US, there have been many times where shortages of cash were so severe they made life difficult for a lot of people -- and hindered the smooth operation of the economy. One frequent response to cash shortages has been to create a local substitute currency, which people call scrip. Scrip has been issued off and on in the US by different kinds of entities and for a number of reasons, not just to overcome liquidity shortages. Some scrip was payable in goods or services. Other scrip represented claims to bank deposits, which could be redeemed once a bank ended a suspension. Issuing scrip was also viewed during the 1930s as a way to encourage local spending. The US experience with stamp scrip illustrates the importance of a well-functioning medium of exchange. Hi...
Coordinating the actions of individuals is not a trivial task. Paradoxically, one of the most celebrated ideas in economics -- what Adam Smith called the invisible hand -- tells people that it is not hard at all to coordinate: Market forces will guarantee an efficient allocation of resources. Labor markets are particularly susceptible to coordination failures because of the various frictions that exist within the complicated process through which workers and employers are matched together. Coordination failures make it possible for a labor market to wind up in a number of states, some of which are far more desirable in terms of social welfare. Just as drivers at an intersection benefit from traffic signals, labor markets might benefit from mechanisms that force particular outcomes in si...
In a speech given by Sandra Pianalto, president and chief executive officer of the Federal Reserve Bank of Cleveland, to the Forecaster's Club of New York on April 22, 2004, Pianalto said that two tenets should guide monetary policymaking. First, price stability enhances economic welfare by creating an environment in which people can make better decisions-decisions that are conducive to long-term economic growth and stability. Second, central banks can be more effective when they act systematically and transparently. Three behaviors that have made the Federal Open Markets Committee more systematic and transparent are: 1. anchoring inflation expectations, 2. acting predictably, and 3. drawing on credibility to deal with unusual circumstances.
Changes in an adjustable-rate mortgage's (ARM) interest rate result primarily from changes in the index rate on which it is based. Borrowers whose mortgages are based on an interest rate known as Libor might face a higher interest rate than the comparable borrower whose mortgage is tied to the other frequently used index, which is based on US Treasury rates. Using actual data for the six-month Libor and assuming a rate of 3.0% otherwise after July 2008, the authors see that interest rates, on average, stay roughly the same or fall for Libor-based mortgages scheduled to see their first rate reset in the second half of 2008. Interestingly, interest rates for mortgages that were adjusted for the first time before July 2008 are now about a percentage point higher than their initial rates, o...
Over the past several decades, central banks around the world have been pretty successful at dramatically lowering inflation rates. There is good reason to believe that inflation is harmful even at what one might consider relatively moderate rates -- annual rates of perhaps 5% to 10%. The evidence of this claim began to accumulate in the mid-1990s. At the time, most economists believed that, under certain conditions, inflation could be a good thing. A key insight of the recent theories is that inflation exacerbates so-called frictions in credit markets. One way inflation might affect economic growth through the banking sector is by reducing the overall amount of credit that is available to businesses. Several economists have found that countries with high inflation rates have inefficien...
Flip through the pages of any business periodical and you are likely to find seemingly precise economic predictions from various experts. This commentary examines economists' year-ahead growth and inflation predictions since 1983 to see whether any have distinguished themselves as particularly good (or bad) forecasters over time. Regardless of what motivates the forecaster, the investigation suggests that over the past 23 years, economists have had trouble producing forecasts that were superior to naive predictions, and only a small proportion of forecasters were more accurate than the median forecast -- and none statistically so. Finally, while some economists may distinguish themselves as being more accurate than their colleagues, none of the economists in the sample was able to demon...
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