With unemployment above 9 percent for more than two years, policymakers are grappling with how to create jobs. But many proposals, such as more fiscal stimulus, temporary tax breaks, and subsidies for private hiring, may not have the punch that their supporters hope. The cover story in the latest issue of Region Focus magazine looks at these and other job-creation concepts.

Bennett T. McCallum of Carnegie Mellon University and the National Bureau of Economic Research and a visiting scholar at the Richmond Fed discusses whether central banks should set higher inflation targets, such as 4 percent rather than 2 percent. Some economists have argued that because providing monetary stimulus when interest rates are at the zero lower bound is more difficult, central banks should consider increasing their inflation rate targets. McCallum notes that the benefits of providing additional monetary stimulus at the zero lower bound must be weighed against the costs of maintaining higher inflation outside of that scenario. To make that comparison, he explores pertinent research and theory, including Milton Friedman’s “optimal quantity of money” result, New Keynesian literature on resource misallocation caused by price stickiness that affects only some sellers, and the contention that the zero lower bound does not necessarily constitute a limit to monetary stimulus.

In the wake of the crisis in U.S. housing markets, policymakers are considering how to reform mortgage finance. Many other developed nations intervene in housing finance to a lesser degree than the United States does—can their experiences provide some insight? The cover story in the latest issue of Region Focus magazine puts U.S. housing finance in an international context.

In this housing-themed issue of Economic Quarterly, Sonya Ravindranath Waddell, Anne Davlin, and Edward Simpson Prescott of the Richmond Fed explore the role of house prices and labor market conditions in mortgage default. The authors focus their research on default rates in the Fifth District, looking in particular at Prince William County, Va., and Charlotte, N.C. Using a simple model of MSA fixed effects to examine variation in foreclosure rates, they find that declining house prices are a key factor in escalating subprime and prime foreclosure rates. The analysis explores how default rates vary among localities, revealing that the decision to default depends not only on national and statewide factors, but also on local conditions.

The Federal Reserve Bank of Richmond today released its 2010 Annual Report, which features the essay "The Rise in Long-Term Unemployment: Potential Causes and Implications."

Since late 2008, both inflation and nominal interest rates have been extremely low in the United States. These facts have focused attention on ideas motivated by the theory discussed in several articles by economists Jess Benhabib, Stephanie Schmitt-Grohé, and Martín Uribe—in particular, that an active Taylor rule, together with a moderate inflation target, could have the unintended consequence of leading the economy to undesirably low inflation with a near-zero nominal interest rate.

The recent financial crisis caught many economists by surprise. Were they studying the wrong things? If so, how did it come to be that way — and will the financial crisis bring about a fundamental change in economic research? The cover story in the latest issue of Region Focus puts these questions into historical context.

Economists have declared that the latest recession stretched from December 2007 to June 2009 -- making it the longest downturn since the Great Depression. Moreover, while the recovery is under way, weaknesses still persist, especially in the labor market. The cover story of the latest issue of Region Focus looks at the causes of recoveries and examines what policymakers can do to hasten them and which factors are often beyond their control.

In the new issue of Economic Quarterly, Kartik B. Athreya and Devin Reilly of the Richmond Fed and Nicole B. Simpson of Colgate University consider several relatively overlooked aspects of the Earned Income Tax Credit (EITC), the largest federal cash-assistance program for lower income families.

Millions of Americans receive -- or plan to receive -- retirement benefits from public pension plans. But the financial viability of many of those plans has come under scrutiny recently. Some observers worry that already precarious funding levels are likely to worsen, while others believe they will gradually improve as the economy recovers. The cover story of the latest issue of Region Focus examines this looming issue and considers options for putting public pensions on track toward better financial health.

Economists have long debated how important deficit spending is to macroeconomic outcomes. Most economists now agree that deficits are not inherently inflationary, but they differ on the effects of fiscal imbalances on interest rates and other economic variables.

In the new issue of Economic Quarterly Yash Mehra and Bansi Sawhney examine whether monetary policy actions during the Greenspan era, in particular between 2002 and 2006.

This special issue of Economic Quarterly is devoted to Douglas Diamond and Philip Dybvig's seminal 1983 article on bank fragility and banking regulation, which continues to provide insights for today's policymakers and researchers.

The Federal Reserve Bank of Richmond today released its 2009 Annual Report, which features the essay, "Systemic Risk and the Pursuit of Efficiency."

The cover story in this issue of Region Focus considers whether there is a new -- and higher -- "natural" rate of unemployment that will help to define the labor market over the long run.

The featured article in this issue of Region Focus surveys the debate over the efficient market hypothesis in the wake of the financial crisis.

At the aggregate level, employment can be well explained by a relatively small number of factors. But when individual sectors are examined, things are quite different, according to findings by Richmond Fed economist Pierre-Daniel Sarte and research assistant Nadezhda Malysheva. Their results suggest that across all goods and services, common shocks explain on average only 31 percent of the variation in sectoral employment. "In other words, employment at the sectoral level is driven mostly by idiosyncratic shocks, rather than common shocks, to the different sectors," the authors write.

The cover story of this issue of Region Focus looks at how recent economic research can help us better understand quality of life.

General equilibrium theory — a starting point for much economic analysis — suggests that market allocations are efficient and that the societally preferred level of income redistribution can in principle be achieved by non-distortionary lump-sum taxes and transfers. But when governments do not possess sufficiently fine information about people’s preferences, this finding does not hold. Richmond Fed economist Borys Grochulski studies the use of distortionary taxes — taxes that alter people’s incentives – to achieve a given level of redistribution.

The cover story of this issue of Region Focus considers what role credit rating agencies played in contributing to the financial crisis and examines proposals to reform those agencies.

The cover story of this issue of Region Focus considers what role credit rating agencies played in contributing to the financial crisis and examines proposals to reform those agencies.

The Consolidation of Financial Regulation: Pros, Cons, and Implications for the United States by Sabrina R. Pellerin, John R. Walter, and Patricia E. Wescott

The Federal Reserve Bank of Richmond today released its 2008 Annual Report, which features the essay "The Financial Crisis: Toward an Explanation and Policy Response."

Many people presume that financial innovations over the last 30 years that have made it easier for households to borrow against the collateral value of their homes have increased the demand for housing and, as a result, house prices.

Discussions of the Phillips curve — the relationship between inflation and unemployment — have been at the core of monetary policymaking since the 1960s. The four articles in this Special Issue of Economic Quarterly explore the history of the Phillips curve, the structural estimation of the New Keynesian Phillips curve, and the policy implications of the nominal rigidities underlying the New Keynesian Phillips curve.

The cover story of this issue of Region Focus considers what could be done to help the functioning of the housing market.

In the latest issue of the Federal Reserve Bank of Richmond’s Economic Quarterly, Stephen Williamson of Washington University and a visiting scholar at the Bank evaluates the overall success of the New Keynesian project.

Richmond Fed publication explores the state of modern economics.

Income inequality in the United States has received considerable attention in recent policy debates. Richmond Fed economists Kevin A. Bryan and Leonardo Martinez find that income inequality has risen since the 1960s, and that this is explained mainly by increases in inequality at the top of the income distribution. In addition, they document periods characterized by a decline in real income for lower income groups. Bryan and Martinez also explain that welfare inequality may have increased less than income inequality and, in fact, may actually have decreased, due to changing trends in leisure consumption.

The role of private equity firms—organizations that buy companies in order to reshape them and sell them later at a profit — is often misunderstood. Some buyouts and firms make splashy headlines, and credit market turmoil is prompting questions about whether this is the end of an era for private equity. The cover story of the latest Region Focus de-mystifies this industry and explores its importance in keeping the economy competitive.

Bank supervisors gather important information on banks' balance sheet, operations, and management. This is information that is potentially valuable to investors, but neither the supervisors nor the banks are allowed to share it. Should such information be made public? Richmond Fed economist Edward S. Prescott examines whether public dissemination of this knowledge can actually have a negative effect on the ability of supervisors to collect it and therefore limit the effectiveness of supervision.

The Federal Reserve Bank of Richmond today released its 2007 Annual Report, which features the essay "Are We Saving Enough? Households and Retirement."

There was a time when downtowns were the center of economic life in nearly every American city. Those days are gone, but some downtowns are making a comeback. In the cover story of the latest Region Focus, a visit to the bustling, rejuvenated downtown in Greenville, S.C., reveals how city centers are reinventing themselves. The most successful have transformed into niche markets, catering to young professionals and empty nesters.

The Phillips curve has long been used to represent the tradeoff between inflation and economic activity. However, since the mid-1960s, many theorists have agreed that during periods of persistently high inflation, this model does not hold true. Has the U.S. economy become too complex for this economic model? Richmond Fed economist Andreas Hornstein examines a more contemporary model to determine if it can better reflect the changing nature of inflation in the United States.

Why do pluralities commonly support policies that run contrary to the advice of economists? For several decades, public choice theory has provided the leading explanation: Voters are rationally ignorant, with special interests largely controlling the democratic process. But now, an economist at George Mason University has turned that model on its head. Voters are getting precisely what they want, says Bryan Caplan, because they are irrational. Caplan's new book has sparked considerable debate over the validity of the traditional public choice model, developed by James Buchanan, Gordon Tullock, and other members of the "Virginia school of political economy."

A slowing economy and rising inflation are typically understood to require opposite policy responses: lowering the short-term interest rate to counter slower real growth while raising the rate to tame inflation. What, then, is the relationship between growth and inflation and how is it related to monetary policy? Jeff Lacker, Richmond Fed President, and John Weinberg, Research Director and Senior Vice President, explore this question by looking at the history of the Phillips curve – the statistical relationship between inflation and unemployment.

Proponents of school choice argue that it would help poor-performing schools and the students who must attend them. With vouchers, parents can shop for the best schools, creating competition and improving educational outcomes. Until recently, however, there was little data to test the theory. In the cover story of the latest issue of Region Focus, Doug Campbell looks at a pioneering program in Milwaukee and concludes that while the evidence is mixed, school choice has benefited many of that city's schools and students. Soon, conversations about vouchers may be based on facts instead of opinion.

Congress passed a law last year that allows the Federal Reserve to pay interest on balances held by depository institutions at the central bank. The implications for the demand for reserves, and by extension, monetary policy, may be significant. At present, banks face opportunity costs for holding reserves overnight at the Fed, since their funds might be able to earn interest if deployed elsewhere. During the daytime, banks weigh the tradeoff of holding as few reserves as possible with the costs of obtaining intraday credit from the Fed to meet their payment obligations. By 2011, when the new law takes effect, the incentives for these choices will be different. Since effective monetary policy may depend on predictable demand for reserves, understanding how these new incentives alter banks' decisions about reserve holdings may be useful. Richmond Fed economists Huberto Ennis and John Weinberg build a model of the demand for reserves by banks and study the potential consequences of paying interest on reserves.

Today the Federal Reserve Bank of Richmond released its 2006 Annual Report, which features an examination of the relationship between economic growth and inflation, as illustrated by the history of the Phillips curve.

Milton Friedman was arguably the most influential economist of the 20th century. He made groundbreaking scientific contributions that changed the way economists approached some of the most important questions in monetary economics and macroeconomics. He also was an ingenious policy analyst, proposing such measures as school choice and the end of the military draft in favor of a volunteer army. Finally, he had a unique ability to make economics accessible to a general audience, through his Newsweek column and countless television appearances. Richmond Fed economist Robert Hetzel, a former student of Friedman, recounts and analyzes his teacher’s numerous contributions and puts them in historical perspective.

Stock options can align employee and shareholder interests. But they aren't free to issue, despite the way firms have been allowed to report them — until now. In the cover story of the Winter 2007 issue of Region Focus, Doug Campbell explains how economic and accounting principles are finally merging with the adoption of a new financial reporting rule.

Banks are viewed as pillars of local communities, but recently the banking industry has experienced significant consolidation, with many community banks being acquired by larger institutions. Are we headed toward a day when there will be just a few huge banks operating throughout the country? Hubert P. Janicki and Edward S. Prescott examine changes in the size distribution of U.S. banks from the period 1960 to 2005, and find that although the ten largest banks increased their share of the banking industry’s assets from 21 to almost 60 percent during this period, many small and mid-size banks continue to exist and thrive. Janicki and Prescott present the key facts that a theory of bank size distribution should explain and argue that such a theory could be useful in helping us understand future consolidation in the banking industry.

Deregulation of the electricity industry was supposed to produce competition and deliver reduced retail prices. But in states like Maryland, the benefits of deregulation have been slow to materialize. In the cover story of the fall 2006 issue of Region Focus, Vanessa Sumo explains the economic principles of retail power competition, and why consumers in deregulated states may yet see lower bills.