ECONOMY
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Why Investment-Led Growth Lowers Chinese Living Standards
Matthew Higgins Rapid GDP growth, due in part to high rates of investment and capital accumulation, has raised China out of poverty and into middle-income status. But progress in raising living standards has lagged, as a side-effect of policies favoring investment over consumption. At present, consumption per capita stands some 40 percent below what might be expected given China’s income…
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Has Treasury Market Liquidity Improved in 2024?
Michael Fleming Standard metrics point to an improvement in Treasury market liquidity in 2024 to levels last seen before the start of the current monetary policy tightening cycle. Volatility has also trended down, consistent with the improved liquidity. While at least one market functioning metric has worsened in recent months, that measure is an indirect gauge of market liquidity and…
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The Dueling Intraday Demands on Reserves
Adam Copeland and Sarah Yu Wang A central use of reserves held at Federal Reserve Banks (FRBs) is for the settlement of interbank obligations. These obligations are substantial—the average daily total reserves used on two main settlement systems, Fedwire Funds and Fedwire Securities, exceeds $6.5 trillion. The total amount of reserves needed to efficiently settle these obligations is an active…
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Tracking Reserve Ampleness in Real Time Using Reserve Demand Elasticity
Gara Afonso, Domenico Giannone, Gabriele La Spada, and John C. Williams As central banks shrink their balance sheets to restore price stability and phase out expansionary programs, gauging the ampleness of reserves has become a central topic to policymakers and academics alike. The reason is that the ampleness of reserves informs when to slow and then stop quantitative tightening (QT). The Federal…
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What Do Climate Risk Indices Measure?
Hyeyoon Jung and Oliver Hannaoui As interest in understanding the economic impacts of climate change grows, the climate economics and finance literature has developed a number of indices to quantify climate risks. Various approaches have been employed, utilizing firm-level emissions data, financial market data (from equity and derivatives markets), or textual data. Focusing on the latter approach, we conduct descriptive…
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International Stock Markets’ Reactions to EU Climate Policy Shocks
Julian di Giovanni, Galina Hale, Neel Lahiri, and Anirban Sanyal While policies to combat climate change are designed to address a global problem, they are generally implemented at the national level. Nevertheless, the impact of domestic climate policies may spill over internationally given countries’ economic and financial interdependence. For example, a carbon tax charged to domestic firms for their use…
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A New Indicator of Labor Market Tightness for Predicting Wage Inflation
Sebastian Heise, Jeremy Pearce, and Jacob P. Weber A key question in economic policy is how labor market tightness affects wage inflation and ultimately prices. In this post, we highlight the importance of two measures of tightness in determining wage growth: the quits rate, and vacancies per searcher (V/S)—where searchers include both employed and non-employed job seekers. Amongst a broad…
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Are Nonbank Financial Institutions Systemic?
Andres Aradillas Fernandez, Martin Hiti, and Asani Sarkar Recent events have heightened awareness of systemic risk stemming from nonbank financial sectors. For example, during the COVID-19 pandemic, liquidity demand from nonbank financial entities caused a “dash for cash” in financial markets that required government support. In this post, we provide a quantitative assessment of systemic risk in the nonbank sectors.…
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Exposure to Generative AI and Expectations About Inequality
Natalia Emanuel and Emma Harrington With the rise of generative AI (genAI) tools such as ChatGPT, many worry about the tools’ potential displacement effects in the labor market and the implications for income inequality. In supplemental questions to the February 2024 Survey of Consumer Expectations (SCE), we asked a representative sample of U.S. residents about their experience with genAI tools.…
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The Central Banking Beauty Contest
Gonzalo Cisternas and Aaron Kolb Expectations can play a significant role in driving economic outcomes, with central banks factoring market sentiment into policy decisions and market participants forming their own assumptions about monetary policy. But how well do central banks understand the expectations of market participants—and vice versa? Our model, developed in a recent paper, features a dynamic game between…
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