The Unassuming Economist

From a paper by Jeffrey A. Levy, Gabriel Mathy, and Xuguang Simon Sheng:

“Uncertain times are often bad times, and separating uncertainty shocks from large negative
level shocks is difficult. We use the Base Realignment and Closure (BRAC) process in the
United States in 2005 to investigate this issue, where the level shock may be positive, negative,
or neutral, and is finalized only after a well defined period of significant uncertainty. When
combined with an even greater period of time before the level shock is implemented, we can
clearly separate first-moment from second-moment shocks. When using attention to BRAC
as an instrument, we find that the effect of uncertainty on employment and the labor force is
small but significant, with a 1% decrease in response to a one standard deviation increase in
uncertainty. While similar, the peak effect is smaller and comes after a shorter lag than the
effect found in the existing literature that relies on dynamic models that fall short of making
causal claims.”

From a paper by Matthew Busigin:

“This paper presents a novel methodology for enhancing macroeconomic output gap models through systematic residual analysis. Starting with a baseline model incorporating unemployment rate, total capacity utilization, and exchange rate dynamics, we develop a comprehensive framework for identifying and incorporating missing economic variables. Our enhanced model achieves a dramatic improvement in explanatory power, increasing R2 from 86.7% to 95.2% (8.6 percentage point improvement) while reducing root mean square error by 40.2%. The methodology successfully identifies optimal lag structures for monetary policy transmission (6 months), labor market intensive margins (3 months), and fiscal policy effects (3 months). This approach demonstrates that systematic residual analysis, guided by economic theory, can substantially improve macroeconomic model performance and provides a replicable framework for model enhancement across various economic applications.”

From a paper by Abdelkader Aguir:

“The global COVID-19 crisis led to a major recession, following a supply and demand shock severely affecting both developed and emerging economies. Containment measures reduced demand and production, while financial market volatility impacted emerging economies. Countries’ stimulus policies had mixed effects on these economies. The pandemic also disrupted global supply chains, leading to volatility in the prices of raw materials such as oil, metals and agricultural products. These fluctuations had an impact on production costs and, consequently, on the prices of final goods and services. In the wake of rising inflation, some are questioning the effectiveness of inflation-targeting policies. Our study evaluates the performance of this monetary regime in the face of crisis, estimating the efficiency frontier: inflation variability – output variability, which allows us to deduce measures of economic performance and measures of the efficiency of monetary policy in the face of an economic crisis.”

From a paper by Sini Sabu:

“This study examines the asymmetric relationship between real exchange rate fluctuations and household inflation expectations in India via ARDL and multiple threshold nonlinear autoregressive distributed lag (MTNARDL) models. The results indicate that inflation expectations respond significantly to exchange rate appreciation but are less sensitive to depreciation. A threshold analysis confirms that only substantial exchange rate deviations affect expectations, whereas minor fluctuations have negligible effects. Empirical evidence suggests that an appreciation of the real effective exchange rate by 10 units reduces inflation expectations by approximately 3.2 percentage points, whereas a similar depreciation results in only a 1.4 percentage point increase. These findings challenge the assumption of symmetric exchange rate pass-through and emphasize the importance of exchange rate stability in monetary policy formulation. Given the implications for inflation targeting, policymakers should prioritize exchange rate interventions that minimize excessive appreciation, while also strengthening communication strategies to manage inflation expectations more effectively.”

From a VoxEU post by Maarten Verwey and  Kristian Orsini:

“President Trump’s sweeping “reciprocal tariffs” announced on 2 April sent shockwaves through the global economy. This column introduces the European Commission’s Spring Forecast, which depicts a resilient EU economy. Yet growth is set to remain modest, reinforcing the image of a continent buffeted by external shocks and mired in low growth. Tariffs, and even more so, heightened uncertainty and tightening financial conditions weigh on trade and investment. While the labour market remains strong and inflation recedes, households still hesitate to spend, dimming prospects for a more substantial improvement in economic conditions. With policy buffers constrained, the margin for countercyclical support is limited. Still, by fully leveraging its strengths and addressing structural gaps, the EU can move beyond resilience – and thrive even in a more fragmented, volatile, and at times hostile world.”