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on Central Banking |
| By: | Felipe Alves; Giovanni L. Violante |
| Abstract: | The current monetary policy framework of the Fed intends to be more ’inclusive’ by running the economy hot for longer during expansions. The logic of this strategy rests on Okun’s (1973) hypothesis that sustaining a ‘high-pressure economy’ persistently improves labor market outcomes of low-wage workers. To evaluate this conjecture, we develop a Heterogeneous Agent New Keynesian framework with a three-state frictional model of the labor market where low-skilled workers are more exposed to the business cycle and recessions have a long-lasting effect on their labor force participation and earnings, in line with the evidence. Under a canonical Inflation Targeting rule, the ZLB generates a deflationary bias and severely amplifies the persistent scars of recessions at the bottom of the wage distribution. The Lower-for-Longer strategy is an effective antidote to the ZLB-driven hysteresis and leads to notable earnings gains for low-wage workers and a reduction to overall earnings inequality. If pursued aggressively, however, the policy reverts the inflation bias from negative to positive. Since policymakers might prioritize differently inflation relative to inclusion, we conclude by quantifying the inflation-inclusion trade-off implied by various monetary policy rules. |
| JEL: | E10 E30 E5 J63 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33488 |
| By: | Mumtaz, Haroon; Ruch, Franz Ulrich |
| Abstract: | This paper identifies two types of policy uncertainty measures–government spending and real interest rates–and their impact on macroeconomic activity in 54 advanced, emerging, and developing economies. Policy uncertainty is defined as the inability to predict policy moves, that is, the conditional volatility of policy shocks. This is achieved in a panel vector autoregression model which allows, but does not require, the stochastic volatility of identified shocks to have direct and dynamic effects on macroeconomic outcomes. It shows that fiscal and monetary policy uncertainty are damaging to economic activity and act like negative supply shocks: raising prices while lowering output, investment and consumption. A one standard deviation government spending uncertainty shock decreases real gross domestic product (GDP) by a cumulative 1.0 percentage point and marginally increases inflation after two years. A one standard deviation real interest rate uncertainty shock lowers real GDP by a cumulative 1.3 percentage points after two years but raises inflation by 0.5 percentage point. |
| Date: | 2023–09–11 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10564 |
| By: | Steven J. Davis; Dingqian Liu; Xuguang Simon Sheng; Yan Wang |
| Abstract: | China’s stock market greatly outperformed other national markets during the first several months of the COVID-19 pandemic, and it did so even before it became evident that early containment efforts would flounder in the United States and many other countries. As to why, one view holds that aggressive monetary and credit easing propped up Chinese equity values. To assess this view, we consider several interventions that eased monetary and credit conditions in the first six months of 2020. Our analysis finds clear evidence that these interventions raised implied stock market volatility but little evidence that they influenced stock price levels. We also consider policy actions that restricted short selling, limited stock sales, and boosted stock purchases. These efforts to raise net equity demand were small in scale and highly time-limited, as we discuss, suggesting that any direct effects on stock prices were also modest. Neither our study nor other work known to us provides a ready explanation for the extraordinary performance of China’s stock market in the first half of 2020. This performance is even more striking in hindsight, given later developments in China’s economy and stock market. |
| JEL: | E52 E58 E65 G12 G18 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33485 |
| By: | Joel Kariel; Anthony Savagar |
| Abstract: | We present empirical evidence on the relationship between demand shocks and price changes, conditional on returns to scale. We find that in industries with decreasing returns to scale, demand increases (which raise costs) correspond to price increases. Whereas, in industries with increasing returns to scale, demand increases (which lower costs) correspond to stable prices. We interpret the results with a theory of imperfect competition and returns to scale. For prices to remain stable following a cost decrease, markups necessarily rise. For prices to increase as cost increases, it is not necessary for markups to change but does not preclude their role. From a macroeconomic perspective, our results imply that inflation dynamics and the effectiveness of monetary policy depend on market structures. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.05898 |
| By: | Fabio Braggion; Felix von Meyerinck; Nic Schaub; Michael Weber; Michael Weber |
| Abstract: | We study the long-term effects of inflation surges on inflation expectations using Germany as a laboratory. Households living in areas with higher local inflation during the hyperinflation of the 1920s expect higher inflation today, even after controlling for known determinants of historical inflation and inflation expectations and despite facing similar inflation rates today. Our evidence points towards a vertical transmission of inflation experiences from parents to children and a horizontal transmission through collective memory. Differential historical inflation also modulates the updating of expectations to current inflation, the response to economic policies affecting inflation, and financial decisions. We obtain similar results for Polish households residing in formerly German areas. Overall, our findings are consistent with inflationary shocks having a long-lasting impact on attitudes towards inflation, which raises the costs of disinflationary policies by central banks. |
| Keywords: | inflation, inflation expectations, long-term persistence, German hyperinflation |
| JEL: | D14 E31 E71 G41 N14 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11679 |