Results for “interest rates risk fed”

50 found

This is one of those headache topics.  Daniel Gross presents a clear treatment:

…the yield curve…describes the relationship between interest rates on long-term and short-term U.S. government bonds. Interest rates on the shortest-term bonds correlate very closely with the interest rates set by the Federal Reserve Board. Long-term interest rates, by contrast, are influenced by many more factors, ranging from China’s purchase of debt to investors’ optimism about inflation and growth. Typically, bonds that mature further in the future pay higher yields–compensation for the risk of locking up money for a longer period.

The yield curve rarely inverts. And when it does, it usually spells trouble for the economy. It means that investors and the Federal Reserve are fretting about inflation in the short term, and that investors are pessimistic about long-term growth. According to Brian Reynolds, chief market strategist at MS Howells & Co., in the last 30 years, periods of prolonged inversion of the curve between two-year and 10-year government bonds have generally presaged recessions. The most recent period of inversion ran from February 2000 through December 2000–just before the 2001 recession.

A year ago, the yield curve was rather steep. But in the last year, the Federal Reserve Open Market Committee has taken the short-term Federal Funds rate from 1 percent to 3 percent in eight straight tightenings, the most recent one in May. (All the Fed’s 2005 actions can be seen here.) Today, with two-year bonds at about 3.5 percent and the 10-year bond having fallen to about 3.9 percent, only a few dozen basis points separate the two.

Gross is an excellent economic journalist but I must differ on one key point.  The yield curve is overrated as a predictor of future output.  Here is a more cautionary and accurate analysis:

…the 1985-95 sub-sample completely reverses the results.  The yield spread becomes the least accurate forecast, and adding it to lagged GDP actually worsens the fit.

Another recent study shows that the short rate, not the yield spread, holds most of the relevant predictive power.

The bottom line: The previous power of the inverted yield curve was based on a few good predictions.  But no such predictor will stand up over time.  First, asset prices are very noisy.  Second, knowledge that we had an accurate predictor would itself change the relationship we are trying to predict. 

We face some serious economic problems today; savings may be taking the wrong form (capital gains rather than income reallocation), and perhaps we are in a housing bubble.  But observed spread in the term structure of interest rates does not add to my worries. 

Books: J. Bradford DeLong: Intermediate Macroeconomics, and Paul Blustein, And the Money Kept Rolling in (and Out)

Real Business Cycles

Stadler, George. “Real Business Cycles,” Journal of Economic Literature, December 1994, 1750-1783.

Long, John B. and Plosser, Charles. “Real Business Cycles,” Journal of Political Economy, 1983, 39-69.

Barsky, Robert and Miron, Jeffrey. “The Seasonal Cycle and the Business Cycle,” Journal of Political Economy, 1989, 503-534.

Prescott-Summers debate, Quarterly Review, Minneapolis Fed., “Theory Ahead of Business Cycle Measurement,” “Some Skeptical Observations on Real Business Cycle Theory,” and “Response to a Skeptic.”

Bils, Mark. “The Cyclical Behavior of Marginal Cost and Price,” American Economic Review, 1987, 838-55.

Romer, Christina. “Changes in Business Cycles,” Journal of Economic Perspectives, Spring 1999, 23-45.

Black, Fischer. “Noise,” Journal of Finance, 1986.

Mehrling, Perry. “Understanding Fischer Black,” you can find this paper at: http://www.econ.barnard.columbia.edu/faculty/mehrling/understanding_fischer_black.pdf

Finance and interest rates

Ross, Stephen. “Finance,” In The New Palgrave, pp.322-336.

Chapters six and seven, “Objects of Choice,” and “Market Equilibrium”.

Jagannathan, Ravi  and McGrattan, Ellen. “The CAPM Debate.” Federal Reserve Bank of Minneapolis,  Fall 1995, 2-17.

Campbell,  John Y. and Vuolteenaho, Tuomo, “Bad Beta, Good Beta,” American Economic Review, December 2004, 1249-1275.

Campbell, John, “Some Lessons for the Yield Curve,” Journal of Economic Perspectives, Summer 1995, 129-152.

Siegel, Jeremy and Thaler, Richard. “The Equity Premium Puzzle,” Journal of Economic Perspectives, Winter 1997, 191-200.

Kocherlakota, Narayana R. “The Equity Premium: It’s Still a Puzzle,” Journal of Economic Literature, March 1996, 42-71.

Lee, Charles, Shleifer, Andrei, and Thaler, Richard. “Anomalies: Closed End Mutual Funds,” Journal of Economic Perspectives, Fall 1990, 153-164.

Keynesian Economics

Cowen, Tyler. “Why Keynesianism Triumphed Or, Could So Many Keynesians Have Been Wrong?”, Critical Review, Summer/Fall 1989, 518-530.

“Symposium: Keynesian Economics Today,” Journal of Economic Perspectives, Winter 1993, 3-82.

“Is There a Core of Practical Macroeconomics That We Should All Believe?” American Economic Review, symposium, May 1997, 230-246.

Taylor, John. “Reassessing Discretionary Fiscal Policy,” Journal of Economic Perspectives, Summer 2000, 21-36.

Bernheim, B. Douglas. “A Neoclassical Perspective on Budget Deficits,” Journal of Economic Perspectives, Spring 1989, 55-72.

Eisner, Robert. “Budget Deficits: Rhetoric and Reality,” Journal of Economic Perspectives, Spring 1989.

Stiglitz, Joseph E. “The Causes and Consequences of the Dependence of Quality on Price.” Journal of Economic Literature, March 1987, 1-48.

Hall, Robert E. “Employment Fluctuations with Equilibrium Wage Stickiness,” American Economic Review, March 2005, 50-65.

Summers, Lawrence. “The Scientific Illusion in Empirical Macroeconomics,” Scandinavian Journal of Economics, 1991, 129-148.

Monetary Policy

Blinder, Alan. “What Central Bankers Can Learn From Academics – and Vice Versa,” Journal of Economic Perspectives, Spring 1997, 3-20.

Bernanke, Ben and Mishkin, F. “Inflation Targeting,” Journal of Economic Perspectives, Spring 1997, 97-117.

Aiyagari, S. Rao, “Deflating the Case for Zero Inflation,” Federal Reserve Bank of Minneapolis, Quarterly Review, Summer 1990, 2-11.

“Symposium on the Monetary Transmission Mechanism,” Journal of Economic Perspectives, Fall 1995, 3-96.

Roberds, William. “What Hath the Fed Wrought? Interest Rate Smoothing in Theory and Practice,” Federal Reserve Bank of Atlanta, Economic Review, January/February 1992.

Shafir, Eldar, Diamond, Peter, and Tversky, Amos. “Money Illusion,” Quarterly Journal of Economics, May 1997, 341-374.

Caplin, Andrew and Spulber, Daniel. “Menu Costs and the Neutrality of Money,” Quarterly Journal of Economics, November 1987, 703-725.

Sargent, Thomas and Wallace, Neil. “Some Unpleasant Monetarist Arithmetic,” Federal Reserve Bank of Minneapolis, Quarterly Review, 1985, 1-17.

Wallace, Neil. “A Legal Restrictions Theory of the Demand for “Money” and the Role of Monetary Policy,” Federal Reserve Bank of Minneapolis Quarterly Review, Winter 1983.

Posen, Adam. “Why Central Bank

Independence Does Not Cause Low Inflation: There is No Institutional Fix for Politics,” in Finance and the International Economy, edited by Richard O’Brien, 1993.

Garrison, Roger, “The Austrian Theory of the Business Cycle,” At  href="http://www.auburn.edu/~garriro/a1abc.htm"

Krugman, Paul. “The Hangover Theory,” at http://www.slate.com/id/9593

Cowen, Tyler. Risk and Business Cycles, chapter three.

Savings and social security

Hubbard, R. Glenn and Skinner, Jonathan. “Assessing the Effectiveness of Savings Incentives.” Journal of Economic Perspectives, Fall 1996, 73-90.

Choi, Laibson, Madrian, and Metrick, “Optimal Defaults,” American Economic Review, May 2003, also at ttp://post.economics.harvard.edu/faculty/laibson/papers/optimaldefaults.pdf

Samwick, Andrew. Voxbaby weblog, read the entries on social security.

International Economics

Current issues: http://www.roubiniglobal.com/archives/2005/05/global_imbalanc.html

“If I Believed in Austrian Business Cycle Theory,” by

Tyler  Cowen, on MarginalRevolution.com.

Brad Setser’s WebLog.

Dornbusch, Rudiger. “Purchasing Power Parity,” in The New Palgrave.

Friedman, Milton. “The Case for Flexible Exchange Rates.” In Essays in Positive Economics, 1953, University Chicago Press.

Mundell-Fleming model, see Brad’s book.

The World

Japan

Krugman, Paul R. “It’s Baaack:

Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity, 1998, 29, 2, 137-87.

Kashyap, Anil K. “Sorting out Japan’s Financial Crisis,” Federal Reserve Bank of Chicago Economic Perspectives, 2002, 26, 4, 42-55.

China

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Europe

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Developing Nations

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History

Bordo, Michael D. “Essays in Exploration: A Survey of the Literature,” Explorations in Economic History, 1986, 339-415.

“Symposium: The Great Depression,” Journal of Economic Perspectives, Spring 1993, 3-102.

Romer, Christina H “What Ended the Great Depression?” Journal of Economic History, 1992, 52, 4, 757-84.

Here is a searchable link to Brad DeLong’s website: http://www.j-bradford-delong.net/movable_type/2005-3_archives/000084.html

Using the threat of tariffs to pressure the Chinese to revalue their currency. 

Matt Yglesias considers the politics, don’t forget Dan Drezner either.  Brad DeLong offers the full economic analysis.  The bottom line is a bit difficult to parse from Brad’s lengthy post, but I’ll offer my summary. 

The Chinese (and other foreigners) are offering a massive subsidy to current levels of U.S. federal spending.  It happens to coincide with their desire to subsidize their exporters.  A low renminbi implies high Chinese exports, high dollar reserve accumulation in China, and relatively low interest rates in the U.S..  Forcing this picture to end overnight would run a significant risk of plummeting U.S. asset prices and a run on the dollar.  In the longer run the not-really-stable Chinese currency might end up whipsawed by international capital markets (Indonesia?  Thailand?  Argentina?).

I’ll make all the concessions here you want.  The current Chinese arrangement is screwy and harms the Chinese citizenry.  I don’t usually favor fixed exchange rates or export subsidies, implicit or explicit.  Somehow, sometime, someway, the Chinese should look toward another policy.  I’ll make those concessions until they are coming out of my ears.  But I still won’t favor dropping a lit match on an open field of gasoline, which is what this American pressure would amount to.  Nor does it matter whether or not you "trust the Chinese," whatever that might mean.  This is not the right way to deal with them, and yes it will remind them of the Opium Wars.

I am not a pessimist about our current economic course, but we can still wreck things if we choose.  And right now we may well make this gross mistake.

I have heard several accounts of why a low or falling dollar is bad:

1. U.S. citizens hold a relatively high percentage of dollar-denominated assets, so they are now poorer.

2. It looks bad when "the world’s strongest country" has a currency low in value.  Perhaps OPEC will start pricing oil in terms of Euros.

3. Markets dislike uncertainty per se.  People start wondering what a dollar is really worth and this causes them to hold off on other investments and purchases.  This hurts financial markets and the economy more generally.

4. The real problem concerns interest rate hikes.  The Fed won’t let the dollar fall too far, for some of the other reasons listed.  It will stop a dollar free-fall by raising interest rates, which is bad for the economy.

5. If the dollar is falling, people will expect it to fall more and unload dollar-denominated assets.  This one, however, is tricky.

If the dollar is expected to fall, we would expect nominal interest rates on dollar-denominated assets to rise (or the dollar must fall in value immediately).  A reasonable equilibrium will obtain and dollars will once again be an attractive asset to hold.

My take: #1 is correct, but not a major problem.  Imports are not a huge part of our economy, and often the exporter eats the currency loss, at least for a while.  I don’t put much stock in #2.  #3 and #4 are real.  #5 makes little sense to me, but I cannot rule out its role in today’s world.  How can it work?  Perhaps portfolio managers bear a special penalty from being thought stupid if they hold onto dollars while a falling dollar makes the headlines.  In this case a falling dollar would continually increase the real risk premia on dollar assets, even if traditional measures of risk do not much vary.

Keep in mind that the dollar did have a "soft landing" in the 1985-1989 period, so these are all possible costs, not necessary outcomes.

I cannot do links from this unusual Calcutta terminal, but read Brad DeLong’s recent posts on the dollar as well.

Seeking to tap into the billions of dollars that Mexicans working in the United States send home each year, a Mexican mortgage finance company is opening a New York branch on Thursday to offer loans to Mexicans who want to buy a house in their country.

Last year, Mexicans sent home $13.27 billion, more than the country earned from foreign tourism. The money lifts many families out of poverty and in some regions is the only source of income.

Many Mexicans working in the United States hope to save enough to buy a house in Mexico and return. But the money they send home is often consumed by daily needs.

Under the lending plan created by Hipotecaria Nacional, Mexico’s largest mortgage finance company, a Mexican working in the United States – legally or illegally – will be able to apply for a loan and pay the monthly installment in dollars through an American bank.

Relatives in Mexico must also sign the loan, which is issued in Mexico in pesos and backed by Mexico’s national mortgage bank, Sociedad Hipotecaria Federal.

And what do the stats look like?

…a worker would need to pay $400 a month for a 15-year mortgage at 15 percent interest on a house valued at about $36,000 with a 20 percent down payment. That interest rate, which would be quite high in the United States, is reasonable by Mexican standards, given higher base interest rates, inflation and the greater risk of default.

I’ll add that a house in rural Mexico costs only a few thousand dollars to buy or construct.

Nor are real estate-based capital movements restricted to mortgages proper:

…it has been Mexican companies that have come up with the most innovative ideas. Since 2001, Cemex, the cement giant, has allowed Mexicans to pay for bags of cement in the United States that relatives pick up in Mexico to build houses. The company, which has five offices in California and one in Chicago, even offers free engineering advice.

Here is the full story.