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Economic Perspectives

Fernando Alvarez and Marcelo Veracierto

The authors explore the quantitative effects of introducing temporary employment contracts of various lengths after first calibrating an equilibrium search model with undirected search and an out-of-the-labor-force state to pre-1984 Spain. They find that introducing temporary contracts of three years’ duration—the same magnitude as that allowed by Spain starting in 1984—provides about half as much labor market flexibility as moving to a laissez-faire regime, with zero firing costs to firms.

Jonathan Rose

Senior economist Jonathan Rose seeks to understand the potential costs and benefits of yield curve caps or targets by reviewing a period from 1942 to 1951 when the Federal Reserve helped the U.S. Treasury to finance war debt by pegging interest rates on short-term Treasury bills (T-bills) at a fixed interest rate and capping rates on longer-term Treasury securities.

Rose also seeks to understand the impact of the end of yield curve control in 1951, in particular for the residential mortgage market. One lesson of this episode is that the end of yield curve control will cause capital losses for investors holding longer-term securities if long-term yields rise. If such investors include major credit providers, some degree of downward pressure on the supply of credit would be the natural result.

Robert Barsky and Matthew Easton

The authors revisit Ben Bernanke’s global saving glut (GSG) hypothesis from 2005—which links low long-term real interest rates in the United States to excess saving in a number of non-Western countries, including, but not limited to, China. Using an analytical framework and empirical data, they find that the ability of the GSG hypothesis to explain the fall in long-term real rates between 2002 and 2006 is likely much greater than its ability to account for the further fall in these rates from the Great Recession onward.

Nahiomy Alvarez

Cleared derivatives contracts are now concentrated among a small and dwindling number of institutions. Many policymakers and regulators have argued that this concentration has adverse consequences, some of which may have systemic risk implications. The author explores the benefits and challenges of encouraging major end-users of derivatives to become direct clearing members of central counterparties (CCPs). If done prudently, increasing and diversifying the pool of clearing members and redistributing outstanding derivatives contracts across them may help CCPs become more resilient.

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