The Unassuming Economist

In a new IMF blog (2022), Tobias Adrian et al write about the effectiveness and risks of counter-cyclical monetary policy measures taken by central banks in emerging markets, specifically asset purchases.

‘Targeted asset purchases helped emerging markets manage financial distress during the COVID-19 crisis without noticeable capital outflow and exchange rate pressures but also pose significant risks, including the risk to central banks’ own balance sheets and governments pressuring central banks to act in a certain way’. It then goes on to discuss some principles for asset purchases and direct financing that may help central banks override this problem.

Click here to read the full blog.

Source: VoxEU CEPR

“Early signs of a recession can lead to a negative feedback loop, with workers’ concerns about unemployment dampening demand and thus deepening the recession. This column uses a heterogeneous agent model to quantify the importance of the ‘unemployment-risk’ channel for business cycle fluctuations in the US economy. It shows that the channel accounts for around one-third of observed unemployment fluctuations. As the demand amplification through precautionary savings is inefficient, this finding provides an additional rationale for stabilisation policies by policymakers. “

Figure: Estimated response of unemployment to monetary policy and total factor productivity (TFP) shocks

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From a NBER paper by Daniel E. Sichel:

“This paper focuses on the price of nails since 1695 and the proximate source of changes in those prices. Why nails? They are a basic manufactured product whose form and quality have changed relatively little over the last three centuries, yet the process for producing them has changed dramatically. Accordingly, nails provide a useful prism through which to examine a wide range of economic and technological developments that touch on multiple areas of both micro- and macroeconomics. Several conclusions emerge. First, from the late 1700s to the mid 20th century real nail prices fell by a factor of about 10 relative to overall consumer prices. These declines had important effects on downstream industries, most notably construction. Second, while declining materials prices contribute to reductions in nail prices, the largest proximate source of the decline during this period was multifactor productivity growth in nail manufacturing, highlighting the role of the specialization of labor and re-organization of production processes. Third, the share of nails in GDP dropped back from 0.4 percent of GDP in 1810—comparable to today’s share of household purchases of personal computers—to a de minimis share more recently; accordingly, nails played a bigger role in American life in that earlier period. Finally, real nail prices have increased since the mid 20th century, reflecting in part an upturn in materials prices and a shift toward specialty nails in the wake of import competition, though the introduction of nail guns partly offset these increases for the price of installed nails.”

In a piece for the VoxEU CEPR blog, Professors Francesco D’ Acunto of Boston College and Michael Weber of Booth School of Business, University of Chicago write about rising inflation in the times of Covid-19 pandemic, and why it may be worrisome for reasons even beyond those that we think most about. Aside from the three channels that have been discussed often (pent-up demand pressures, supply constraints, and labor shortages), they bring into focus the self-fulfilling nature of consumers’ expectations of prices that impacts inflation rates.

The natural question then is why should policymakers be concerned about households’ expectations of price levels anyway.

“The concern is that a surge in inflation expectations might become self-fulfilling. Recent research uses microdata to document that higher inflation expectations often result in higher consumer spending before prices increase. Further demand pressure given the post-COVID supply bottlenecks would push inflation even higher.” They further go on to add, “households might also demand higher wages to keep their perceived purchasing power constant based on their elevated inflation expectations.”

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They say economists rarely agree on one thing.

However, now this statement may not hold true as before. Based on a survey of members of the American Economic Association, a paper by Doris Geide-Stevenson and Alvaro La Parra Perez of the Weber State University compares the academic positions of economists over four decades.

“The main result is an increased consensus on many economic propositions, specifically the appropriate role of fiscal policy in macroeconomics and issues surrounding income distribution. Economists now embrace the role of fiscal policy in a way not obvious in previous surveys and are largely supportive of government policies that mitigate income inequality. Another area of consensus is concern with climate change and the use of appropriate policy tools to address climate change.”

Click here to download the paper and here to be a part of the discussion on it.