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This paper analyzes inflation dynamics in 21 advanced and emerging market economies since 2020. We decompose inflation into core inflation as measured by the weighted median inflation rate, and headline shocks––deviations of headline inflation from core. Headline shocks occurred largely on account of energy price changes, although food price changes and indicators of supply chain problems also played a role. We explain the evolution of core inflation with two factors: the strength of macroeconomic conditions—measured by the unemployment gap, the output gap, and the ratio of job vacancies to unemployment—and the pass-through into core inflation from past headline shocks. We conclude that the international rise and fall of inflation since 2020 largely reflected the direct and pass-through effects of headline shocks. Macroeconomic conditions generally played a secondary role. In the United States, estimated price pressures from strong macroeconomic conditions had been greater than in other economies but have eased.
India introduced credit scoring technology in 2007. We study adoption by the two main types of banks operating there, new private banks (NPBs) and state-owned public sector banks (PSBs). NPBs start checking the credit scores of most borrowers before lending, soon after the technology is introduced. PSBs do so equally quickly for new borrowers but very slowly for prior clients, although lending without checking scores is reliably associated with more delinquencies. We show that an important factor explaining the difference in adoption is the stickiness of past bank structures and associated managerial practices. Past practices hold back better practices today.
Since Tocqueville (1835), civil society has been recognized as a cornerstone of liberal democracy. But populists claim to be the only legitimate representatives of the people, leaving no space for civil society. Are populism and civil society enemies? To answer this question, we look at voters’ choices in Europe. We find that individuals belonging to associations are less likely by 1.6 to 2.8 percentage points to vote for populist parties, which is large considering that the average vote share for populist parties is between 12 and 22 percent. This results survives to a large number of robustness checks.
India’s economy was weak in 2019, but appeared to be near a trough. A protracted slide in growth had continued since 2016. The continued challenges in implementation of the 2017 national Goods and Services Tax, and credit stresses in the domestic financial sector beginning in 2018 weighed on growth and sentiment. Sectors such as construction, housing, and autos reflected extremely low levels of activity. The Reserve Bank of India eased monetary policy and pledged to stabilize the financial sector, while the government introduced a large corporate tax cut to attract manufacturing activity, among other measures. While we did not believe any of these measures represented a forceful cyclical policy stimulus that would result in a sharp rebound, we thought that, together, they would help put a floor under the deceleration in growth, and combined with better external conditions, we would see India's growth climbing back towards its long-term trend by early 2021. However, just as the Indian economy was starting to look up at the beginning of this year, the rising tide gave way to the COVID-19 shock. Against this backdrop, this paper presents a synthesis of our research on the macroeconomic and fiscal implications of the COVID-19 crisis for India, and lays out the challenges in setting and implementing policy. Discretionary fiscal policy support – defined as targeted support to households and businesses, the kind of policy support that can revive any economy quickly in times of an unprecedented shock – has been tepid so far, in our view. Monetary policy has been the main “game in town”, and has eased significantly, combined with large injections of banking system liquidity. The transmission of conventional monetary policy, however, continues to pose challenges. In addition, the exchange rate has remained remarkably stable during this crisis; the real effective exchange rate has, in fact, strengthened, and will likely be a drag on growth. Therefore, while pent-up demand, favorable base effects, and massive policy support in advanced economies driving a global recovery could help lift India’s economy, we struggle to see any domestic fundamental forces to drive India’s growth forward in the medium run. In particular, the accelerating spread of the virus, continued risk aversion and confidence concerns in the domestic financial sector, and deteriorating fiscal and debt positions are the three key risks to India’s recovery in the medium term.
We analyze a unique episode in the history of monetary economics, the 2016 Indian ``demonetization.'' This policy made 86\% of cash in circulation illegal tender overnight, with new notes gradually introduced over the next several months. We present a model of demonetization where agents hold cash both to satisfy a cash-in-advance constraint and for tax evasion purposes. We test the predictions of the model in the cross-section of Indian districts using several novel data sets including: the geographic distribution of demonetized and new notes for causal inference; nightlight activity and employment surveys to measure economic activity including in the informal sector; debit/credit cards and e-wallet transactions data; and banking data on deposit and credit growth. Districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth. The cross-sectional responses cumulate to a contraction in aggregate employment and nightlights-based output due to the the cash shortage of at least 2 p.p. and of bank credit of 2 p.p. in 2016Q4 relative to their counterfactual paths, effects which dissipate over the next few months. Our analysis rejects money non-neutrality using a large scale natural experiment, something that is yet rare in the vast literature on the effects of monetary policy.
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