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November 29, 2018

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Cryptocurrency and Central Bank E-Money

The Atlanta Fed recently hosted a workshop, "Financial Stability Implications of New Technology," which was cosponsored by the Center for the Economic Analysis of Risk at Georgia State University. This macroblog post discusses the workshop's panel on cryptocurrency and central bank e-money. A companion Notes from the Vault post provides some highlights from the rest of the workshop.

The panel began with Douglas Elliot, a partner at Oliver Wyman, discussing some of the public policy issues associated with cryptoassets. Drawing on a recent paper he cowrote, Elliot observed that there are "at least four substantial market segments" that provide long-term support for cryptoassets:

• libertarians and techno-anarchists who, for ideological reasons, want a currency without a government;
• people who deeply distrust their government's economic management;
• seekers of anonymity, who don't want their names associated with transactions and investments; and
• technical users who find cryptoassets useful for some blockchain applications.

Besides these groups are the speculators and investors who hope to benefit from price appreciation of these assets.

Given the strong interest of these four groups, Elliot argues that cryptoassets are here to stay, but he also asserts that these assets raise public policy issues that regulation should address. Some issues, such as anti–money laundering, are being addressed, but all would benefit from a coordinated global approach. However, he observes that of the four long-term support groups, only the technical users are likely to favor such regulations.

Another paper, by University of Chicago professor Gina C. Pieters, analyzed the extent to which the cryptocurrency market is global using purchases of cryptocurrency by state-issued currencies. She finds that more than 90 percent of all cryptocurrency transactions occur using one of three currencies: the U.S. dollar, the South Korean won, and the Japanese yen. She further finds that the dominance of these three currencies cannot be explained by economic size, financial openness, or internet access. Pieters also observed that transactions involving bitcoin, the largest cryptocurrency by market value, do not necessarily represent a country's cryptomarket share.

Warren Weber, former Minneapolis Fed economist and a visiting scholar at the Atlanta Fed, discussed so-called "stable coins," one type of cryptocurrency. The value of many cryptocurrencies has fluctuated widely in recent years, with the price of one bitcoin soaring from under $6,000 to more than $19,000 and then plunging to just over $6,000—all within the period from October 2017 to October 2018. This extreme price volatility creates a significant impediment to Elliot's technical users who would like some method of buying blockchain services with a currency controlled by a blockchain. In an attempt to meet this demand, a number of "stable coins" have been issued or are under development.

Drawing on a preliminary paper, Weber discussed three types of stable coins. One type backs all of the currency it issues with holdings of a state-issued currency, such as the U.S. dollar. A potential weakness of these coins is that they incur operational costs that require payment. Weber observed that interest earnings might cover part of these expenses if the stable coin issuer holds the dollars in an interest-bearing asset. Additionally, charging redemption fees might offset some or all of the expense.

The other two alternatives involve the creation of cryptofinancial entities or crypto "central banks." Both of these approaches seek to adjust the quantity of the cryptocurrency outstanding to stabilize its price in another currency. However, Weber observed that both of these approaches are subject to the problem that the cryptocurrency could take on many values depending upon people's expectations. If people come to expect that a coin will lose its value, neither of these approaches can prevent the coin from becoming worthless.

The question of whether existing central banks should issue e-money was the topic of a presentation by Francisco Rivadeneyra of the Bank of Canada. Summarizing the results of his paper, Rivadeneyra observed that central banks could provide e-money that looks like a token or a more traditional account. The potential for central banks to offer widely available account-based services has long existed. However, after considering the tradeoffs, central banks have elected not to provide these accounts, and recent technological developments have not changed this calculus. However, new technologies may have changed the tradeoff for token-based systems. Many issues will need to be addressed first, though.

November 29, 2018 in Capital and Investment , Technology | Permalink | Comments ( 0)

November 16, 2018

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Polarization through the Prism of the Wage Growth Tracker (Take Two)

In a previous macroblog post, I thought I had discovered an interesting differential between the wage growth of middle-wage earners and that of low/high-paid workers. It turns out that what I actually discovered is that my programming skills could be improved upon. The following is an update to the post, written after correcting the coding error. Although there is no obvious wage growth polarization story, the wages of low-wage workers are currently rising at a faster median rate than for other workers.

Updated Post:

One of the most frequent questions we receive about the Atlanta Fed's Wage Growth Tracker (the median of year-over-year percent changes in individuals' hourly wage) is about the relationship between wage level and wage growth. For example, do high-wage earners also tend to experience greater wage growth?

When looking at wage growth by wage level, whether you use the prior or current wage level as the reference point matters—a lot. If we looked at wage growth categorized by the prior year's wages, we would find higher median wage growth for low-wage earners than for high-wage earners. This is because some workers who earned low wages last year earn middle or high wages this year, and some of last year's high-wage workers earn middle or low wages this year. If we instead categorized people based on current-year wages, we would see exactly the opposite: lower median wage growth for low-wage workers than for high-wage workers (see here for more discussion).

One way to lessen this wage-level base effect is to categorize an individual's wage growth according to their average wage across the two years. The following chart shows this categorization for the 2016–17 wage growth distribution of all workers in the Wage Growth Tracker data. (Note that since 1997, the annual salary for people whose earnings are only reported on a weekly basis is top-coded at $150,000 a year—these masked observations are excluded from the analysis). In the chart, the first quartile depicts the lowest-paid 25 percent of workers based on their average 2016–17 hourly wage, and so on. The center line of the box for each quartile is the median of that group's wage growth distribution, and the lower and upper boundaries of the box are the 25th and 75th percentiles, respectively. The outer lines are the thresholds for outlier observations (see here for the calculation.)

The chart shows that the wage growth distribution across the average-wage quartiles does, in fact, differ. In particular, the median wage growth for the lowest-paid workers is higher than the median for other types of workers. The median wage growth from 2016 to 2017 for the lowest quartile is 3.8 percent, 3.0 percent for the second quartile, and 3.2 percent for the third and fourth quartiles.

However, the pattern of relatively higher median wage growth for low-wage workers is not uniform over time. This difference is apparent in the following chart, which plots median wage growth over time for each average-wage quartile.

As the chart shows, median wage growth of low-wage workers (the green line, representing the first quartile) currently exceeds that of higher-wage workers, but it was below the median for higher-paid workers in the wake of the Great Recession. This pattern is consistent with the both the severity of the recession and what we have been hearing more recently about emerging shortages of low-skilled workers. It also appears that the median wage growth of the highest-paid workers (the blue line, representing the fourth quartile) slows by a bit less than that of other workers during downturns but is otherwise not much different than for workers in the middle of the wage distribution.

So, relative to the incorrect charts I had in the previous version of this post, there is no obvious wage growth polarization story here. The wages of low-wage workers are currently rising at a faster median rate than for other workers, and these other workers are experiencing broadly similar median wage growth.

By John Robertson, a senior policy adviser in the Atlanta Fed's research department

November 16, 2018 in Employment , Labor Markets , Wage Growth | Permalink | Comments ( 0)

November 14, 2018

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Polarization through the Prism of the Wage Growth Tracker

One of the most frequent questions we receive about the Atlanta Fed's Wage Growth Tracker (the median of year-over-year percent changes in individuals' hourly wage) is about the relationship between wage level and wage growth. For example, do high-wage earners also tend to experience greater wage growth?

An earlier macroblog post explored this question. Unfortunately, answering it is not as easy as it might appear. When looking at wage growth by wage level, whether you use the prior or current wage level as the reference point matters—a lot. If we looked at wage growth categorized by the prior year's wages, we would find higher median wage growth for low-wage earners than for high-wage earners. This is because some workers who earned low wages last year earn middle or high wages this year, and some of last year's high-wage workers earn middle or low wages this year. If we instead categorized people based on current-year wages, we would see exactly the opposite: lower median wage growth for low-wage workers than for high-wage workers.

One way to lessen this wage-level base effect is to categorize an individual's wage growth according to their average wage across the two years. The following chart shows this categorization for the 2016 to 2017 wage growth distribution of all workers in the Wage Growth Tracker data. In the chart, the first quartile (labeled <$13.8) depicts the lowest-paid 25 percent of workers based on their average 2016–17 hourly wage, and so on. The center line of the box for each quartile is the median of that group's wage growth distribution, and the lower and upper boundaries of the box are the 25th and 75th percentiles, respectively. The outer lines are the thresholds for outlier observations (see here for the calculation.)

The chart shows that the wage growth distribution across the average-wage quartiles does, in fact, differ. For example, the median wage growth from 2016 to 2017 for the lowest quartile is 3.9 percent, 1.6 percent for the second quartile, 1.9 percent for the third quartile, and 3.2 percent for the top quartile.

The pattern of higher median wage growth in the lower and upper quartiles, compared with the middle part of the wage distribution, is reasonably uniform over time.  However, there is a cyclical difference between the median wage growth of high- and low-wage earners. This difference is apparent in the following chart, which plots median wage growth over time for each average-wage quartile.

As the chart shows, median wage growth of low-wage workers (the green line, first quartile) currently exceeds that of high-wage workers (the blue line, fourth quartile), but it was below the median for high-wage workers in the wake of the Great Recession. This pattern is consistent with the both the severity of the recession and what we have been hearing more recently about emerging shortages of low-skilled workers. In contrast, median wage growth for workers in the middle of the wage distribution (the orange and purple lines) remains lower than for either high- or low-wage workers. Overall, these findings reinforce the idea of polarization, where the demand for workers has generally grown more in the tails of the skill/wage distribution than in the middle.

By John Robertson, a senior policy adviser in the Atlanta Fed's research department

November 14, 2018 in Employment , Labor Markets , Wage Growth | Permalink | Comments ( 0)

October 26, 2018

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On Maximizing Employment, a Case for Caution

Over the past few months, I have been asked one question regularly: Why is the Fed removing monetary policy stimulus when there is little sign that inflation has run amok and threatens to undermine economic growth? This is a good question, and it speaks to a philosophy of how to maintain the stability of both economic performance and prices, which I view as important for the effective implementation of monetary policy.

In assessing the degree to which the Fed is achieving the congressional mandate of price stability, the Federal Open Market Committee (FOMC) identified 2 percent inflation in consumption prices as a benchmark—see here for more details. Based on currently available data, it seems that inflation is running close to this benchmark.

The Fed's other mandate from Congress is to foster maximum employment. A key metric for performance relative to that mandate is the official unemployment rate. So, when some people ask why the FOMC is reducing monetary policy stimulus in the absence of clear inflationary pressure, what they really might be thinking is, "Why doesn't the Fed just conduct monetary policy to help the unemployment rate go as low as physically possible? Isn't this by definition the representation of maximum employment?"

While this is indeed one definition of full employment, I think this is a somewhat short-sighted perspective that doesn't ultimately serve the economy and American workers well.  One important reason for being skeptical of this view is our nation's past experience with "high-pressure" economic periods. High-pressure periods are typically defined as periods in which the unemployment rate falls below the so-called natural rate—using an estimate of the natural rate, such as the one produced by the Congressional Budget Office (CBO).

As the CBO defines it, the natural rate is "the unemployment rate that arises from all sources other than fluctuations in demand associated with business cycles." These "other sources" include frictions like the time it takes people to find a job or frictions that result from a mismatch between the set of skills workers currently possess and the set of skills employers want to find.

When the actual unemployment rate declines substantially below the natural rate—highlighted as the red areas in the following chart—the economy has moved into a "high-pressure period."

For the purposes of this discussion, the important thing about high-pressure economies is that, virtually without exception, they are followed by a recession. Why? Well, as I described in a recent speech:

"One view is that it is because monetary policy tends to take on a much more 'muscular' stance—some might say too muscular—at the end of these high-pressure periods to combat rising nominal pressures.

"The other alternative is that the economy destabilizes when it pushes beyond its natural potential. These high-pressure periods lead to a buildup of competitive excesses, misdirected investment, and an inefficient allocation of societal resources. A recession naturally results and is needed to undo all the inefficiencies that have built up during the high-pressure period.

"Yet, some people suggest that deliberately running these high-pressure periods can improve outcomes for workers in communities who have been less attached to the labor market, such as minorities, those with lower incomes, and those living in rural communities. These workers have long had higher unemployment rates than other workers, and they are often the last to benefit from periods of extended economic growth.

"For example, the gap between the unemployment rates of minority and white workers narrows as recoveries endure. So, the argument goes, allowing the economy to run further and longer into these red areas on the chart provides a net benefit to these under-attached communities.

"But the key question isn't whether the high-pressure economy brings new people from disadvantaged groups into the labor market. Rather, the right question is whether these benefits are durable in the face of the recession that appears to inevitably follow.

"This question was explored in a research paper by Atlanta Fed economist Julie Hotchkiss and her research colleague Robert Moore. Unfortunately, they found that while workers in these aforementioned communities tend to experience greater benefits from these high-pressure periods, the pain and dislocation associated with the aftermath of the subsequent recession is just as significant, if not more so.

"Importantly, this research tells me we ought to guard against letting the economy slip too far into these high-pressure periods that ultimately impose heavy costs on many people across the economy. Facilitating a prolonged period of low—and sustainable—unemployment rates is a far more beneficial approach."

In short, I conclude that the pain inflicted from shifting from a high-pressure to a low-pressure economy is too great, and this tells me that it is important for the Fed to beware the potential for the economy overheating.

Formulating monetary policy would all be a lot easier, of course, if we were certain about the actual natural rate of unemployment. But we are not. The CBO has an estimate—currently 4.5 percent. The FOMC produces projections, and other forecasters produce estimates of what it thinks the unemployment rate would be over the longer run.

For my part, I estimate that the natural rate is closer to 4 percent, and given the current absence of accelerating inflationary pressures, we can't completely dismiss the possibility that the natural rate is even lower. Nonetheless, with the unemployment rate currently at 3.7 percent, it seems likely that we're at least at our full employment mandate.

So, what is this policymaker to do? Back to my speech:

"My thinking will be informed by the evolution of the incoming data and from what I'm able to glean from my business contacts. And while I wrestle with that choice, one thing seems clear: there is little reason to keep our foot on the gas pedal."

By Raphael Bostic, president and chief executive officer of the Atlanta Fed

October 26, 2018 in Economic conditions , Federal Reserve and Monetary Policy , Monetary Policy | Permalink | Comments ( 2)