Hutchins Roundup: Adjusting the CPI for the pandemic, corporate bond sell-off, and more

Studies in this week’s Hutchins Roundup find that CPI methodology should be adjusted during the current crisis, investors sold investment-grade corporate bonds to raise cash, and more.

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Current methods to calculate CPI are inadequate for the current crisis

The current coronavirus pandemic has induced shortages of goods and services across the globe, complicating construction of inflation measures such as the Consumer Price Index (CPI). Erwin Diewert of the University of British Columbia and Kevin Fox of the University of New South Wales find that using the current recommended approaches for dealing with products disappearing due to lockdowns or consumers stockpiling—imputing prices for missing goods and expenditure weights from a pre-lockdown period—will lead changes in real consumption to be overestimated and changes in the cost of living to be underestimated. They recommend urgently starting a program to obtain current expenditure weights for the consumption basket and producing a revisable CPI series that can be updated as new methodology is developed and new data sources are exploited.

Investment-grade corporate bonds sold-off because investors wanted cash

The US bond market experienced a sudden and sharp drop in prices in early March because of the coronavirus pandemic. While declines in high-yield corporate bonds and bond ETFs can be explained by higher risk of default, Valentin Haddad and Tyler Muir of the University of California, Los Angeles, and Alan Moreira of the University of Rochester argue that standard asset pricing theory cannot explain the fall in investment-grade (IG) corporate assets. Using market data, the authors show that IG assets fell even though investors judged they were unlikely to default. The authors suggest that as the pandemic worsened—and the economic outlook deteriorated—investors rushed to convert their portfolios into cash. They sold IG assets first, which were easiest to sell, putting large downward pressure on prices. The authors also find that Federal Reserve announcements to purchase bonds quickly reversed the decline. When the Fed said it would buy IG assets on March 23, IG asset prices increased with little effect on other prices; when the Fed expanded the purchases on April 9 to include some high-yield bonds, prices for both IG and high-yield assets increased.

Labor markets benefit from immigration, but the effects are unevenly distributed

Using US Census records on four million men from 1910 to 1930, Joseph Price, Christian vom Lehn, and Riley Wilson of Brigham Young University find that the arrival of foreign immigrants to a local labor market increases both native out-migration and in-migration. In-migrating natives and local workers who stay benefit, but workers who leave are likely to experience losses. Older and high-skilled workers, in particular, are less likely to be displaced and earn higher incomes, while younger and low-skilled workers move away at higher rates, enter the labor force at a younger age, and are more likely to experience income losses. . Although there are benefits from increased immigration, the authors conclude, the economic losses by displaced workers may rationalize native opposition to immigration.

Chart of the Week: Births Fall to 35-Year Low

Quote of the week:

“[T]he economic pain ushered in by the pandemic is extraordinary. The recent employment report underscores the unprecedented speed and ferocity with which jobs have been affected by this public health crisis. Social distancing and quarantine are essential health policy measures, but costly. It is important that the sacrifices and progress made so far not be undone. This requires that health policy measures limit the risk of second waves of the pandemic, to the extent possible,” says Eric Rosengren, President of the Federal Reserve Bank of Boston.

“From an economic policy standpoint, my view is that measures should be taken to limit the potential for medium- and longer-term “scarring” from the crisis. This means, among other things, minimizing the length of unemployment spells, and ensuring that solvent firms have the liquidity necessary to weather the crisis. As a result, it is very important that we maintain resolve to do whatever is necessary to restore the public health and economic health of the United States as quickly as possible.”