Volume 25, Issue 1

Unexpected revelations in the Federal Open Market Committee (FOMC) meeting minutes may provide critical information and hinder the Federal Reserve’s (Fed) credibility. Our analysis explores the impact of unanticipated content on FOMC policy discussions, revealing that more-hawkish-than-expected minutes reduce daily stock market returns by raising the risk premium. We also find a non-linear relationship between the unexpected minutes’ sentiment and the Fed’s credibility: surprise hawkish revelations can worsen credibility, with larger deviations further de-anchoring long-term inflation expectations from the 2 % target. Our findings suggest that the Fed should continue refining its communication strategies to avoid the damage of unexpectedly hawkish minutes in its credibility.

This paper tests the granular hypothesis introduced by Gabaix (2011. “The Granular Origins of Aggregate Fluctuations.” Econometrica 79 (3): 733–72) in the US, Germany, Canada, France, Japan, and the UK. We find that firm-level idiosyncratic shocks significantly impact aggregate fluctuations in only three of the six countries analyzed. Compared to the US, Japan and Germany, the UK, France, and Canada show greater granularity, but also a negligible firm-level contribution to aggregate volatility. Additional results look at the role of the transportation sector as a potential driver of granular effects in the US, Germany and Japan.

We document cross country-evidence showing financially under-developed economies have lower productivity investment, a smaller employment share of large firms, and smaller average firm size within sectors. We present a tractable model with heterogeneous entrepreneurs that face financial constraints limiting investment at entry. The model can be solved analytically, making clear predictions for the impact of constraints on outcomes of interest consistent with the evidence we document. The calibrated model can account for about one fifth of the variance in observed average firm size and TFP across countries, all substantial relative to the literature.

In this paper, we build a simple overlapping generations model with endogenous fertility and a PAYG pension system. Children are costly, but healthy grandparents can reduce this cost by providing grandparental care. However, if grandparents are unhealthy, their adult children have to spend time caring for them. The results show how longevity and grandparenting affect equilibrium fertility and pensions, depending on the elderly’s health, thus adding two important dimensions – grandparenting and elderly health – to the stylized textbook OLG model with longevity and endogenous fertility.

This paper addresses the challenge of uncertainty in monetary policy by incorporating local model uncertainty arising from heterogeneous expectations into a behavioral New Keynesian DSGE framework. Non-Bayesian control techniques are adopted to minimize a welfare loss derived from the second-order approximation of agents’ utilities to derive robust optimal policies. In the context of uncertainty regarding the formation of behavioral expectations, the importance of gradualism in monetary adjustments is emphasized. Policymakers should consider the ratio of rational to boundedly rational agents and anticipate that a significant presence of boundedly rational agents, especially those with long-horizon expectations, may require more dynamic adjustments to interest rates. Accounting for multidimensional uncertainty exponentially increases the complexity of the analysis and model indeterminacy.

This paper examines the impact of fiscal rules on inflation across 79 countries from 1985 to 2021, employing entropy balancing as the methodology. Adopting this approach, the study addresses potential endogeneity concerns and considers variations among different country groups, including advanced economies, emerging markets, developing economies, and low-income countries. The primary outcome derived from the analysis indicates a negative relationship between fiscal rules and inflation in emerging and low-income countries. Moreover, this effect is observed for moderate and high inflation rates. These results are robust to different specifications.

This study investigates whether the Federal Reserve (Fed) should care about inequality. We develop a Heterogeneous Agent New Keynesian (HANK) model, which generates empirically realistic inequalities and business cycle properties observed in the U.S. data. We consider the income Gini coefficient in a monetary policy rule to see how an inequality-targeting monetary policy affects aggregate and disaggregate outcomes, as well as economic welfare. We find that a monetary policy rule with an explicit inequality target can be welfare improving, even if inequality becomes volatile. In particular, the policy reform can improve the welfare of the poorest the most. Finally, we demonstrate the feasibility of a subgroup targeting monetary policy as a tool for an implementable inclusive monetary policy.

This paper estimates an SVAR with housing and mortgage markets to study the 2007–2009 financial crisis along two dimensions. Firstly, it examines the links between the composition of mortgage-backed securities (MBS) and the US housing market leading up to the financial crisis. Secondly, it investigates the role of liquidity shocks and GSEs in triggering the financial crisis. Four main findings emerge from the estimates. Firstly, house prices increase following shocks to private MBS issuance activity. Secondly, positive housing demand shocks increase the share of private MBS issuances relative to securities issued by the GSEs. These housing and MBS market linkages are economically and statistically significant during the 1998–2006 housing price boom. Thirdly, liquidity shocks emerge as the most important driver of the commercial paper spread during the 2007–2009 financial crisis. Lastly, the role of the GSEs in the collapse of the MBS market is limited.

For the last three decades, the ex-Soviet republics have been facing a dual challenge: moving away from communism and dealing with a tricky geopolitical reality. In this context, it is interesting to investigate the role that military spending in shaping the inequitable income distribution of their societies. Employing Two-way fixed effects and Two-stage least squares models, we estimate the causal relationship between these variables, mitigating concerns about endogeneity and shedding light on potential mechanisms at play. Our analysis reveals a generally positive effect between military expenditure and income inequality, where increased military spending appears to lead widening the income inequality gap in our sample countries context. However, the opposite one another effects emerge while we estimate high- and middle-income countries separately. For the high-income countries, defence expenditure is mitigating the income gap, while it is deepening the situation in the middle-income countries case. Further, we also disaggregate military expenditure and income distribution indicators into subsets in order to provide more detailed understanding of the mechanisms underlying this relationship. Notably, our decomposition techniques yields that focusing on troop number expansion and their welfare within military expenditure can exacerbate income inequality while prioritizing investment in the military-industrial complex, particularly heavy weapons manufacturing, can reduce such disparity. Finally, we employ the number of granted patents as a mediating factor to reveal the basic mechanism of this linkage. This approach demonstrates the presence of crowding-out and spillover effects, depending on the context. These insights offer valuable guidance for informing public policy discussions on equity and efficient resource allocation, especially in the context of our sample states where they are trying to maintain a balanced approach.

We quantitatively investigate the macroeconomic effects of natural disasters using a standard RBC model with a focus on their impact on capital accumulation. Natural disasters can have ambiguous effects on domestic capital accumulation, through their two opposing effects on households’ incentives for domestic capital accumulation. On the one hand, natural disasters hurt domestic capital accumulation due to their destructive nature. On the other hand, a high natural disaster risk leads households to increase precautionary savings, which can increase the long-run capital stock when it is invested domestically. Our quantitative results show that in a closed economy, the long-run capital stock exhibits a “U” shape with respect to the intensity of natural disasters, and that in a small open economy, the long-run capital stock monotonically decreases with respect to the intensity of natural disasters. This result can provide an explanation to Skidmore, M., and H. Toya. 2002. “Do Natural Disasters Promote Long-Run Growth?” Economic Inquiry 40 (4): 664–87 puzzling empirical finding: Lack of observed negative long-run relationship between natural disasters and long-run capital stock/economic output. Moreover, in the event study analysis on the short-run macroeconomic dynamics during the natural disaster crises, we find that households’ capital flight can exacerbate output costs of the natural disasters. This finding is also in line with Noy, I. 2009. “The Macroeconomic Consequences of Disasters.” Journal of Development Economics 88 (2): 221–31 puzzling finding that capital market openness adversely affects the short-run output cost of natural disasters.

This paper examines the short-run economic impacts of the 2018 Kerala flood, the third most severe flood in India since 1900, utilizing a variety of monthly data. During the disaster, both household income and expenditure declined significantly, hitting their lowest levels three months after the onset of the event. Expenditure then quickly rebounded to pre-disaster levels, in line with changes in ATM transactions. Household income in contrast surged significantly above pre-disaster levels, propelled by markedly higher wage income. Finally, households borrowed more for housing and consumer durables and aggregate credit increased. We provide indirect evidence that the increase in wage income may be linked to reconstruction efforts and the tightening of the labor market. The findings highlight that while the immediate economic impact of disasters can be severe, reconstruction efforts and government support can be crucial in accelerating economic recovery in the aftermath of natural disasters.