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This edition was written by Adriana Adames Acosta, Jack Spira, Zixun Tan, and Louise Sheiner
Rising longevity puts pressure on both Social Security and Medicare, but healthier aging means it does not affect the two programs equally. Using data from the Medicare Current Beneficiary Survey, Liran Einav of Stanford and Amy Finkelstein of MIT estimate that the remaining life expectancy for the average 66-year-old increased by 2.4 years from 1992-1994 to 2016-2018. All of the added years were healthy years, while expected time spent with severe health limitations fell by about 30%. Applying 2017 rather than 1993 mortality and morbidity patterns to a hypothetical 66-year-old, they find that expected remaining public outlays rise by $53,400, with $42,500 coming from Social Security and $10,800 from Medicare. Put differently, longer lives increase expected lifetime Social Security spending by 14%, while longer but healthier lives increase expected lifetime Medicare spending by only 6%. The authors also show that, dollar for dollar, Medicare can provide more insurance value than Social Security because it protects against variation in health as well as longevity risk.
As nonbank financial institutions (NBFIs) have become more important lenders to businesses, banks may still be exposed to some of the risks in those loans through their lending to NBFIs. Jan-Peter Siedlarek of the Cleveland Fed uses issuer-to-holder data from the Fed’s enhanced financial accounts to estimate the size of this indirect exposure. He finds that NBFI business lending indirectly financed by banks has accounted for about 5% to 6% of all business loans over the past 20 years, up from about 3% to 4% in the 1990s. That increase accounts for only a small part of the longer-run shift from bank to nonbank business lending, but it suggests that banks remain exposed to risks in NBFI lending, particularly if those loans are riskier than loans made directly by banks.
Using minute-by-minute exchange-rate data for 18 countries from 2009 to 2023, Joshua Aizenman of the University of Southern California and co-authors study how exchange rates respond to Fed policy surprises, measured by movements in federal funds futures around FOMC announcements. They find that when the Fed tightens by 10 basis points more than markets expect, foreign currencies depreciate against the dollar by about 0.4% within 20 minutes. Dollar reserves cushion that depreciation, likely because they give central banks a usable buffer when Fed tightening raises demand for dollars: a roughly 20-percentage-point increase in dollar reserves as a share of GDP reduces depreciation by up to 0.1 percentage point. Non-dollar foreign-exchange reserves do little to offset the depreciation. Gold reserves also help, suggesting that gold can serve as a backup reserve asset when access to dollar liquidity is uncertain: a one-standard-deviation increase in gold reserves, equal to 1.9 percentage points of GDP, reduces depreciation by about 0.04 percentage points. The cushioning effects of dollar and gold reserves are larger for countries without Fed swap or repo lines and for countries heavily exposed to the dollar, especially through dollar-denominated external liabilities. Amid sanctions risk and concerns about access to dollar liquidity, the results suggest that the type of reserves countries hold—not just the amount—matters for exchange-rate resilience.
"Cross-border finance is a good thing. It supports growth by moving capital to where it’s more productive. But when flows become excessive, they can widen trade gaps, fuel protectionism and distort asset prices. Capital gets misallocated. Pressures cumulate and financial stability risks increase," says Tiff Macklem, Governor of the Bank of Canada.
"In principle, imbalances should prompt gradual adjustment. Exchange rates should change, capital and trade flows shift, and financing gaps narrow. But in practice, that adjustment can be delayed.
"The role of the US dollar as the world’s reserve currency has supported deep and liquid markets. But the attractiveness of US dollars may have let imbalances persist longer than they otherwise might, allowing pressures to build and distortions to deepen. One-way flows can fuel asset bubbles—we saw this in the run-up to the global financial crisis—and we may be seeing it again with the AI boom. China is still working through the legacy of overinvestment in real estate, while in Europe, underinvestment has held back productivity. The common thread is clear: when adjustment is delayed, imbalances persist, growth is held back and risks build across the global system."
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