The latest release of the macroeconomic microscope by the Federal Reserve, called the macroeconomic chapter 6, examines several topics from the view of the macroeconomy. The topic is divided into three major parts. The first part examines how the distribution of income between classes in society varies over time. The second part looks at the sources of economic growth and examines why some segments of the population are better off than others. Finally, the third part discusses the vulnerabilities of financial institutions and discusses methods to reduce that vulnerability.
The first section analyzes income distribution by class, focusing on trends in real per capita income over time. The second section focuses on explanations for the widening gap between classes over time, concluding that increasing income at the top of the distribution is driving up inequality. The third section looks at methods of reducing that inequality. One of the recommended readings…
The second recommended reading is a working paper by Edward Glaeser and Michael Webster, entitled “Microeconomics: Micro Business Cycles and Micro Finance.” This paper examines the relationship between changes in the availability of credit and changes in productivity. Specifically, the authors examine the effect of increases in the availability of credit on firms' ability to expand, on the production and employment levels of low-income persons, and on the productivity of large volumes of firms that serve medium-sized and large volumes of small businesses. The paper concludes that firms' decisions to expand in order to increase output are often dependent upon firms' expectations of future customer returns, which they attach to future market sales of intermediate goods. In this light, it suggests that changes in the availability of credit can affect productivity growth and employment levels through the adjustment of prices for intermediate goods sold by firms to cover the costs of increased production.
The third recommended reading is a working paper by Robert Kaplan and Douglas K. Smith, entitled “Macroeconomic Advisers, Public Sector Debt, and the Great Housing Bubble.” In this paper, the researchers examined the relationship between government policies and aggregate household debt, including the effects of changes in the Federal Reserve's interest rate and changes in the amount of credit extended by local governments. The researchers found that household debt was largely determined by the Federal Reserve's policies and that the increase in the Fed's interest rate had little effect on household debt. They also examined the relationship between changes in the FOMC's interest rate and the expansion or contraction of the national credit system and the growth or contraction of the overall economy. Finally, they looked at how the expansion of the credit market led to increases in both corporate debt and personal debt relative to disposable income.
The fourth recommended reading in this chapter is a working paper by Joshua A. Angrist and Weiqi Hsu, entitled “Macrofinance, Microfinance, and Public Sector Risk Management: An Overview,” which is incorporated herein by permission. The authors presented a case study of a public bank that tried to improve its financial management practices through a number of organizational changes, such as eliminating unproductive units, streamlining internal processes, expanding supervision of supervision, and instituting stronger lending criteria. The bank's efforts to ameliorate its operations resulted in substantial . . . . . . reduction in total unit charges and credit risk, with corresponding reductions in bank operating costs and credit risk. The conclusion of the study offered an examination of macropricential policy changes, focusing on the role of the Fed and the relationship between domestic monetary policy, credit policy, and financial sector liquidity. The research was concluded by examining the relationships between macroeconomic Chapter 1 and macroeconomic Chapter 7 symptoms and the implications of changes in these symptoms for various models of economic distress.
The last recommended reading in the macroeconomic chapter is a Working Paper on “Regulatory Borrowing, Microcredit, and the Financial System” by Edward C. MacEvers and Donald J. Krebs. This article will focus on the first three chapters, examining (in order) how state and local government regulatory agencies structure of financial markets, the impact of credit policy changes on bank financing, and how changes in the physical environment affect bank risk retention and capital structure. The authors rightly claim that regulatory borrowing, both at the state and federal levels, has become an important and necessary function of government. However, the discussion is too short to address aspects of bank risk retention or the role of regulation in overall risk management.