The Unassuming Economist

From a paper by Guilherme Spinato Morlin, Marco Stamegna, and Simone D’Alessandro:

“The surge in energy prices following the Russian-Ukrainian conflict triggered the most significant inflation in advanced economies in recent decades. Using the Eurogreen model for the Italian economy, we examine the macroeconomic and distributional impacts of rising energy prices alongside two policy measures: wage indexation and a temporary housing rent cap. We compare policy scenarios with a baseline reflecting the observed price shocks. We find that: i) energy price shocks disproportionately affect lower-income individuals due to the larger share of energy goods in their consumption baskets; ii) wage indexation results in higher average real wages compared to the baseline scenario, without triggering inflation acceleration, while temporarily boosting output and employment by supporting aggregate demand; iii) a temporary housing rent cap improves distribution in workers’ favor while reducing inflation; iv) both policies have a more substantial effect for low-skilled workers; and v) best outcomes appear when these policies are jointly implemented.”

From a paper by Emrehan Aktuğ and Abolfazl Rezghi:

“Using a large cross-country dataset covering over 150 countries and more than 10
macroeconomic variables, this study examines the consistency of IMF World Economic Outlook (WEO)
forecasts with the full information rational expectations (FIRE) hypothesis. Similar to Consensus Economics
forecasts, WEO forecasts exhibit an overreaction to news. Our analysis reveals that this overreaction is
asymmetric, with more measured response to bad news, bringing forecasts closer to the FIRE benchmark.
Moreover, forecasts align more closely with FIRE hypothesis during economic downturns or when a country is part of an IMF program. Overreaction becomes more pronounced for macroeconomic variables with low persistence and for forecasts over longer horizons, consistent with recent theoretical models. We also develop a model to explain how state-dependent nature of attentiveness may drive this asymmetric overreaction.”

See here a PPT by Torsten Slok, Rajvi Shah, and Shruti Galwankar on quantifying the impact of DOGE and tariffs on GDP and inflation.

From a paper by Angela Okeke and Constantinos Alexiou:

“This paper examines the relationship between public debt levels and income inequality during periods of fiscal consolidation (austerity). Specifically, it investigates two key questions: (a) whether high public debt during fiscal adjustments exacerbates income inequality, and (b) whether the composition of these adjustments influences the debt–inequality link. To address these issues, we apply a panel threshold methodology using annual data from 16 OECD countries over the period 1980–2019. Our findings reveal that public debt significantly affects income inequality, with the impact intensifying during fiscal adjustments, particularly at moderate debt thresholds (30–60%). Furthermore, when comparing the effects of tax-based versus spending-based adjustments, the evidence shows that tax-based consolidations tend to produce more persistent negative effects on income inequality.”

From a post by Claudia Sahm:

“Narratives about the U.S. economic outlook have darkened in the past month as concerns about lower growth and higher inflation mount. A stream of headlines on the federal government layoffs and contract cancellations from the Department of Government Efficiency (DOGE) have contributed to the unease.

The threat of DOGE to essential government services and those workers most directly affected by its actions is real, but is it a threat to the overall economy? Could DOGE cause a US recession? It’s unlikely. The scale is too limited, though it will weigh some on overall growth and employment this year. Even so, by moving quickly and maximizing the uncertainty, DOGE amplifies its aggregate risks.

A recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” according to the National Bureau of Economic Research. Size, breadth, and duration are important.

The U.S. labor force — people working or looking for work — is currently about 170 million people. It would require nearly 200,000 more unemployed workers to raise the unemployment rate by 0.1 percentage point. (It is worth noting that not all laid-off workers end up unemployed. Some retire or otherwise leave the labor force; some will find new employment quickly.) There is no official threshold for the unemployment rate in a recession, but historically, as reflected in the Sahm rule, the unemployment rate rises at least a half percentage point early in a recession. That’s an increase of almost one million more unemployed.

It is unlikely that DOGE triggers a recession.

Civilian federal employment (including the Post Office) is currently 3 million or less than 2% of the labor force. Changes in federal employment normally have little to do with the business cycle. There are temporary spikes every ten years due to the collection of the Census. Reductions in federal employment, such as during the Clinton administration in the 1990s, tend to occur in expansions.”

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