Hutchins Roundup: Corporate bond spreads, central bank transparency, and more


Studies in this week’s Hutchins Roundup find that the policy response to spikes in credit spreads at the pandemic’s start contained the increase more successfully than the policy response during the Great Recession, central bank transparency is beneficial during credit expansions but becomes more costly as the credit cycle continues, and more.

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Increases in corporate bond spreads from COVID-19 reflect a liquidity crisis, rather than insolvency

Mahdi Ebsim, Miguel Faria-e-Castro and Julian Kozlowski of the Federal Reserve Bank of St. Louis compare the impacts of the Great Recession and the COVID-19 pandemic on corporate bond spreads, a measure of market volatility. While both crises led to similar initial spikes in credit spreads, the policy response to the pandemic’s shock—primarily by the Federal Reserve—appears to have contained the increase more swiftly than in the Great Recession. The authors attribute this difference to the nature of the shocks— during the Great Recession, differences between firms explained more of the variation in credit spreads, while dispersion between bonds issued by the same firm was more prevalent in 2020. Since default risk would affect all bonds issued by the same firm equally, these results suggest that solvency issues among firms played a larger role in the Great Recession, with other factors, including market liquidity, at play during the pandemic. In an analysis of firm-level characteristics, the authors find evidence that solvency characteristics do explain more of the cross-firm variation in the Great Recession, while measures of liquidity explained much of the recent increase in spreads. “The government, as a lender of last resort, may be better equipped to deal with liquidity rather than solvency crises,” the authors say. “This may be one reason why the COVID-19 pandemic resulted in a shorter-lived crisis than the Great Recession.”

When should central banks share information on financial vulnerabilities?

Central banks have access to a trove of data on the economy, as well as a large staff trained to interpret those data, which gives them a substantial informational advantage over the private sector. How should the recent increased central bank focus on financial stability influence their willingness to share this knowledge? David M. Arseneau of the Federal Reserve Board argues that it depends on whether the credit cycle is expanding or contracting and the factors driving the credit cycle. Historically, central banks have chosen to keep information private, allowing them to generate policy surprises. Following the Great Recession, central banks began releasing financial stability reports (FSRs) to call attention to significant vulnerabilities. Using an economic model, Arseneau shows that publishing an FSR is beneficial in the early stages of the credit cycle, but may turn costly in later stages, when credit is already contracting.  He concludes that in order to effectively balance the benefits and costs of transparency, central banks must be extremely well informed about financial conditions and about whether the credit cycle is expanding or contracting.

The gender pay gap is driven in part by school schedules

It’s long been known that a gender pay gap between parents emerges at children’s birth and persists even as children grow up, but the mechanisms contributing to the pay gap remain unclear. Using evidence from France’s 2013 school schedule reform, Emma Duchini of the University of Warwick and Clémentine Van Effenterre of the University of Toronto find that mothers shifted from part-time to full-time schedules after France introduced compulsory schooling on Wednesday mornings (previously a day off for school children). Prior to the reform, mothers were 20% less likely to work on Wednesdays than other days of the week, while fathers were equally likely to work on any given day of the week. The authors found that the reform resulted in closing nearly 40% of the so-called “Wednesday-gap.” Moreover, the authors estimate that mothers saw a 3% increase in their monthly wages which closed about one-fifth of the parental gender pay gap. Finally, the authors conduct a welfare analysis and conservatively estimate that, after including the additional cost of schooling and the additional tax revenues from mothers’ increased wages, a one euro investment in the additional schooling yielded approximately 3.7 euros in social welfare.

Chart of the week: Employment rates differ for high- and low-wage workers

Employment rate is higher for high-wage workers than low-wage workers

Chart courtesy of Opportunity Insights: Track the Recovery

Quote of the week:

“Continued targeted support to replace lost incomes will be an important factor in determining the strength of the recovery. Apart from the course of the virus itself, the most significant downside risk to my outlook would be the failure of additional fiscal support to materialize. Too little support would lead to a slower and weaker recovery. Premature withdrawal of fiscal support would risk allowing recessionary dynamics to become entrenched, holding back employment and spending, increasing scarring from extended unemployment spells, leading more businesses to shutter, and ultimately harming productive capacity,” says Lael Brainard, member of the Federal Reserve’s Board of Governors.

“The recovery will be broader based, stronger, and faster if monetary policy and fiscal policy both provide continued support to the economy. While monetary policy has helped keep credit available and borrowing costs low, fiscal policy has replaced lost incomes among households experiencing layoffs and businesses and states and localities suffering temporary drops in revenue.”