Understanding U.S. Inflation During the COVID Era
This paper analyzes the dramatic rise in U.S. inflation since 2020, which we decompose into a rise
in core inflation as measured by the weighted median inflation rate and deviations of headline
inflation from core. We explain the rise in core with two factors, the tightening of the labor market
as captured by the ratio of job vacancies to unemployment, and the pass-through into core from
past shocks to headline inflation. The headline shocks themselves are explained largely by
increases in energy prices and by supply chain problems as captured by backlogs of orders for
goods and services. Looking forward, we simulate the future path of inflation for alternative paths
of the unemployment rate, focusing on the projections of Federal Reserve policymakers in which
unemployment rises only modestly to 4.4 percent. We find that this unemployment path returns
inflation to near the Fed’s target only under optimistic assumptions about both inflation
expectations and the Beveridge curve relating the unemployment and vacancy rates. Under less
benign assumptions about these factors, the inflation rate remains well above target unless
unemployment rises by more than the Fed projects.
How do Central Bank Governors Matter? Macroeconomic Policy, Regulation and the Financial Sector
Do employment and educational characteristics of central bank governors affect financial regulation? To answer this question, we construct a new and unique dataset based on curriculum vitae of all central bank governors around the world in 1970-2011, and merge this with data on financial regulation and other variables. The proportion of governors that had past experience in finance increases from 10 percent in 1980 to 30 percent in 2010. Past experience in finance matters, and the effect is large: Over the average duration in office (5.6 years), a central bank governor with financial sector experience deregulates three times more than a governor without financial sector experience. Experience in finance after tenure as governor is not important. Similar results hold for past experience at the International Monetary Fund; in contrast, past experience at the Bank of International Settlements and the United Nations have the opposite effect, slowing the pace of deregulation. Our findings are consistent with the view that past work experiences of central bankers shape their beliefs and preferences, which, in turn, are consequential for policy outcomes.
Impact of Fed Tapering Announcements on Emerging Markets
This paper analyzes market reactions to the 2013-14 Fed announcements related to the tapering of asset purchases and examines how these reactions are influenced by financial depth. The study focuses on long-term government bond yields and uses daily data for all emerging markets. Controlling for all time-invariant country characteristics as well as time-varying macroeconomic fundamentals (changes in current account, fiscal balance, GDP growth, and inflation), countries with deeper domestic financial markets (as measured by higher bank credit, M2, M3, or stock market capitalization) experienced smaller increases in government bond yields during four-day windows around Federal Open Market Committee (FOMC) announcements related to tapering. Countries with better macroeconomic fundamentals (measured by improvements in current account, fiscal balance, and GDP growth) also experienced smaller increases in government bond yields around such episodes.
Establishing Rules of the Game for the International Monetary System
In order to avoid the destructive ‘beggar-thy-neighbour’ strategies that emerged during the Great Depression, the post-war Bretton Woods regime attempted to prevent countries from depreciating their currencies to gain an unfair and sustained competitive advantage. It required fixed, but occasionally adjustable, exchange rates and restricted cross-border capital flows.
How Does Trade Evolve in the Aftermath of Financial Crises?
International trade collapsed in 2008-09, particularly in countries that experienced a financial crisis. Was this collapse unique or part of a broader historical pattern? Using an augmented gravity model and 179 episodes from 1970-2009, we find that financial crises are associated with sharp declines in imports of the crisis country-19 percent, on average, in the year following a crisis-and this decline is persistent, with imports recovering to their gravity-predicted levels only after 10 years. In contrast, exports of the crisis country fall modestly and then remain close to or even above the predicted level. The protracted drop in imports post-crisis is consistent with evidence of a sustained depreciation of the exchange rate and impaired credit conditions following crises.
Monetary Policy and Bank Lending Rates in Low-Income Countries: Heterogeneous Panel Estimates
This paper studies the transmission of monetary shocks to lending rates in a large sample of advanced, emerging, and low-income countries. Transmission is measured by the impulse response of bank lending rates to monetary policy shocks. Long-run restrictions are used to identify such shocks. Using a heterogeneous structural panel VAR, we find that there is wide variation in the response of bank lending rates to a monetary policy innovation across countries. Monetary policy shocks are more likely to affect bank lending rates in the theoretically expected direction in countries that have better institutional frameworks, more developed financial structures, and less concentrated banking systems. Low-income countries score poorly along all of these dimensions, and we find that such countries indeed exhibit much weaker transmission of monetary policy shocks to bank lending rates than do advanced and emerging economies.
Democracy and Reforms
Empirical evidence on the relationship between democracy and economic reforms is scarce, limited to few reforms and countries and for few years. This paper studies the impact of democracy on the adoption of economic reforms using a new dataset on reforms in the financial, capital, public, and banking sectors, product and labor markets, agriculture, and trade for 150 countries over the period 1960?2004. Democracy has a positive and significant impact on the adoption of economic reforms but there is no evidence that economic reforms foster democracy. Our results are robust to the inclusion of a large variety of controls and estimation strategies.
How Effective Is Monetary Transmission in Developing Countries? A Survey of the Empirical Evidence
This paper surveys the evidence on the effectiveness of monetary transmission in developing countries. We summarize the arguments for expecting the bank lending channel to be the dominant means of monetary transmission in such countries, and present a simple model that suggests why this channel may be both weak and unreliable under the conditions that usually characterize those economies. Next, we review the empirical methodologies that have been employed in the recent literature to assess monetary policy effectiveness, both in developing countries as well as in industrial and emerging economies, essentially based on vector autoregressions (VARs). It is very hard to come away from this review of the evidence with much confidence in the strength of monetary transmission in developing countries. We distinguish between the “facts on the ground” and “methodological deficiencies” interpretations of the absence of evidence for strong monetary transmission. We suspect, however, that “facts on the ground” are indeed an important part of the story. The fact that a wide range of empirical approaches have failed to yield evidence of effective monetary transmission in developing countries, and that the strongest evidence for effective monetary transmission has arisen for relatively prosperous and more institutionally developed countries such as some central and Eastern European transition economies (at least in the later stages of their transition) and Tunisia, makes us doubt whether methodological shortcomings are the whole story. If this conjecture is correct, the stabilization challenge in developing countries is acute indeed, and identifying the means of enhancing the effectiveness of monetary policy in such countries is an important challenge.
Spillover Effects of Exchange Rates: A Study of the Renminbi
This paper estimates the effect of China’s exchange rate changes on exports of developing countries in third markets. We develop an identification strategy in which the degree of competition between China and its developing country competitors in specific products and destinations plays a key role. We exploit variation across exporters, importers, products and time-afforded both by disaggregated trade data and bilateral exchange rates-to estimate this “competitor country effect.” We find robust evidence of a statistically and quantitatively significant effect. Our estimates suggest that a 10 percent appreciation of China’s real exchange rate boosts a developing country’s exports of a 4-digit HS product to third markets on average by about 1.5-2.5 percent.
Explaining Inflation in India: The Role of Food Prices
This paper conducts a forensic examination of inflation in India with a focus on food price inflation, using a disaggregated high-frequency commodity level dataset spanning the last two decades. First, we document stylized facts about the behavior of overall inflation in India. We establish that low inflation has historically been a rare occurrence in the Indian economy in the last two decades; the long-term trend in the inflation rate exhibits a U-shaped pattern with a structural break in the trend in 2000 and an inflection point in 2002. The long-term trend in food inflation has followed a pattern similar to overall inflation. Domestic and international food price inflation rates have been moderately correlated, though there is significant variation across commodities based on their tradability. Furthermore, we find food price inflation to be consistently higher than non-food, quite persistent, and having a significant pass-through to non-food inflation. Further, the price of food relative to non-food co-moves strongly with aggregate inflation rate. Next, we explicitly quantify the contribution of specific commodities to food price inflation. We find that animal source foods (milk, fish), processed food (sugar, edible oils), fruits and vegetables (e.g. onions) and cereals (rice and wheat) are the primary drivers of food price inflation. Finally, we conduct case studies of some of the top contributors to food price inflation. Combining the insights from macro as well as micro analyses, the paper suggests specific policy implications.