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Econ Focus 2nd Quarter 2015

Nov. 20, 2015

Richmond Fed’s Econ Focus Highlights Economic Risks of Private Debt

Richmond, Va.

Debt serves useful economic functions, but some economists also contend that high indebtedness by households and firms can lead to worse financial crises and shallower recoveries from recessions. A private sector that is highly leveraged may have a harder time absorbing economic shocks. Additionally, when a crisis does occur, households and firms may respond by deleveraging — cutting debt levels by reducing overall spending and investment. How big of a problem is this, and should policymakers try to limit the negative amplifying effects of debt during crises? The cover article in the latest issue of Econ Focus magazine looks at these questions and other potential effects of high private debt.

Also in this issue:

  • Assessing medical treatments with economic analysis. For many, it’s hard to think about putting a price on an extra day or year of life. But some health care experts believe considering cost-effectiveness is crucial to lowering health care costs and improving patient care.
  • Building a smarter electrical grid. As electric utilities rely more on wind and solar power, they may turn to a smarter grid — one that can communicate with customers’ equipment and adjust pricing based on demand and capacity.
  • The Fed’s 1994 tightening. In 1994, the Federal Open Market Committee wrestled with how to bring monetary policy back to normal after a long spell of low interest rates. In the end, the FOMC engineered a soft landing for the economy while keeping inflation in check — and set a precedent for the use of transparency as a policy tool.
  • Interview with James Poterba, an economist at the Massachusetts Institute of Technology and president of the National Bureau of Economic Research, on the home mortgage interest deduction, paying for retirement, and the rise of MIT’s economics department. 

Econ Focus is the economics magazine of the Federal Reserve Bank of Richmond. It covers economic issues affecting the Fifth Federal Reserve District and the nation. 

For a free subscription to Econ Focus or for copies of the magazine, call (800) 322-0565 or subscribe online. The articles also are available online

As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.


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