Hutchins Roundup: Climate change, diverse policy committees, and more 


What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Higher temperatures increase the frequency and severity of economic downturns  

A warmer planet due to climate change will make severe economic downturns more likely, finds Michael T. Kiley of the Federal Reserve Board. Using data on temperature and annual real GDP per capita in 124 countries from 1961 to 2021, the author shows that the effect of temperature increases on growth is 50% larger on the lower decile of the growth distribution than on the median—implying that a warmer planet may be characterized by more frequent and severe fluctuations in economic growth. These effects are likely to vary across countries, the author notes; a case study of a high emission scenario for the United States, a high income and relatively temperate country, saw “relatively modest” impacts on the median and tail ends of percent change in real GDP per capita. Nigeria and India, on the other hand, saw real GDP growth per capita lowered by as much as 3.5 percentage points at the 10th percentile of growth, and smaller but still sizable declines at the median and 90th percentile— lowering the overall pace of economic growth and increasing the likelihood of downturns for these countries.  

Diverse policy committees are better able to reach underrepresented groups   

Using a randomized control trial of over 9,000 U.S. consumers, Francesco D’Acunto of Boston College, Andreas Fuster of the Swiss Finance Institute, and Michael Weber of the University of Chicago find that the gender and racial diversity of the Federal Open Market Committee (FOMC) make it more effective in guiding consumers’ macroeconomic expectations. For instance, the authors find that 52%-56% of white female respondents exposed to female or Black FOMC members form expectations within the range of the FOMC’s unemployment forecasts, compared to 48% of those exposed to white male members. Exposure to diverse members especially helps anchor the expectations of Black women, the authors find, and boosts the trust underrepresented groups have in the Federal Reserve’s effectiveness. The expectations of white men, who are overrepresented on the FOMC, do not respond differently based on the perceived diversity of the committee, the authors find. “Higher diversity might thus increase the ability of FOMC communication to influence consumers’ expectations and lead to more trust in the Fed, especially on the part of underrepresented consumers, who are often part of the most vulnerable communities,” they conclude.  

The decline in the number of public firms in the us has not been driven by regulatory costs  

Increasing burdens of disclosure and governance regulations are often cited as the reason that the number of public firms in the U.S. has been declining in recent decades. Using the fact that many public firm regulations apply only to firms whose float (the value of shares held by public investors) exceeds a certain threshold, Michael Ewens of the California Institute of Technology, Ting Xu of the University of Virginia, and Kairong Xiao of Columbia University examine the bunching of firms around these thresholds to infer the costs of regulation. Using public float and regulatory compliance data of public firms over the 1994-2018 period, the authors estimate that regulatory costs are quite substantial—costing the median U.S. firm 4.1% of its equity value. However, using a sample of venture capital-backed private firms, the authors find that regulatory costs explain only 7.4% of the declining likelihood of such firms going public since 2000, and have no effect on the decision of public firms to go private. Overall, their findings suggest that non-regulatory factors played a more important role in reducing the number of public firms in recent years, the authors conclude.   

Chart of the week: The fraction of small businesses that expect economic conditions to improve declined sharply in recent months  

Line graph from January 2020 to August 2021 showing the share of small-business owners who expect U.S. economic conditions to improve in the next 12 months

Quote of the week: 

“I am a little worried that asset prices and particularly housing prices are a concern that we should be thinking about… If you’re thinking about housing prices and you can’t get housing materials, and you can’t get construction workers to come back on the site, but we do increase demand for housing, then it doesn’t do much for our employment mandate, but it does increase housing prices more than it otherwise would. And what I don’t want to have is a boom and bust cycle in housing that is encouraged in part by monetary policy action,” says Eric Rosengren, President of the Federal Reserve Bank of Boston. 

“This is a long way of saying that I would take a somewhat different strategy as we think about tapering. And this is my own personal view, which is I would reduce both the MBS [mortgage-backed securities] and the Treasuries by the same amount. As you know, we’ve been purchasing more Treasuries than MBS. So that would imply that the MBS would end before the Treasuries. And would also hope that if we continue to see strong economic outcomes toward the middle of next year, that we’re done with the tapering program, again that’s dependent on how the data comes in, but that gives you a rough idea of the timeline.”  

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