Hutchins Roundup: Earnings shocks, central bank communications, 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. 

Unemployment benefits and rebate checks offset large earning declines during the pandemic    

Using administrative tax data from the IRS, Jeff Larrimore of the Federal Reserve Board and Jacob Mortenson and David Splinter of the Joint Committee on Taxation find that increased unemployment insurance (UI) benefits and rebate checks during the pandemic helped offset large earning declines. The authors estimate that workers in the bottom two income quintiles were about 6% more likely to experience large earnings declines in 2020 than in the Great Recession; in contrast, workers in the top quintile were about 16% less likely. Over 60% of workers with large earnings declines did not receive UI in 2020, either because they did not qualify for or did not take up benefits. However, for those who did receive UI, it was quite protective: for the median recipient, UI benefits offset 103% of earnings declines. Accounting for both the expanded UI benefits and the rebate checks, they find that the likelihood of large earning declines for low-earning workers was smaller than during the Great Recession or even than during 2019. They conclude that, while the COVID-19 recession disproportionately affected the wages of lower-earning workers, the targeting of the fiscal response was effective at limiting the frequency of large earnings declines among these workers.  

Central bank communications can reduce uncertainty in professional inflation forecasts   

Cecilia Melo Fernandes of the European Central Bank (ECB) analyzes how central bank “information shocks” — announcements from the ECB that convey new information on the bank’s economic outlook — affect how confidently people forecast inflation. Using survey data on professional forecasters over the 2000-2019 period, the author finds that information shocks result in greater consensus among professionals about future inflation and cause individual forecasters to report their predictions with greater certainty. Forecasts of the inflation rate are also less likely to diverge from the mean following ECB announcements, suggesting that central bank communications help “stabilize” price expectations. “The decrease in disagreement after a central bank information shock implies that these shocks help to better align how forecasters interpret public information, providing evidence that the content of the shocks in this case is more related to clarifications or reinforcements of previous messages,” the author concludes.  

Offshoring affects the level and nature of innovation  

Does the offshoring of production change manufacturing firms’ capacity to innovate? Exploiting a policy shock that allowed the production of some Taiwanese electronics to be offshored to China, Lee Branstetter at Carnegie Mellon University and co-authors find that firms acquired fewer new patents in product categories they offshored. The decline was disproportionately driven by a reduction in firms’ investment in product innovation (introducing new and improved products) in offshored product categories; patents related to process innovation actually increased, as firms acquired new ways to take advantage of the low-cost manufacturing opportunities offshore. The authors also find that offshoring led firms to reallocate their R&D efforts towards domestically produced goods — particularly towards the innovation of new products that used similar technologies to those they offshored, likely because these areas matched their existing engineering talent. “Offshoring is a way for firms to maximize the benefits of low-cost labor (and other factors) through process innovation abroad, while increasing the options for exploring new product innovation at home,” the authors conclude, but recommend exercising caution in generalizing their findings from Taiwanese electronics firms to other industries.  

Chart of the week: Job vacancies are at a record high and outnumber unemployed Americans looking for work  

Line graph of job openings and unemployment level in the U.S. from December 2007 to present

Source: The Wall Street Journal

Quote of the week:  

“[O]ur tools, and in particular in the short run, our asset purchases are much more adept at stimulating demand. They’re not so adept at dealing with supply-demand imbalances … What I’m seeing now is the efficacy, the benefits of purchasing 80 billion of Treasuries and 40 billion of mortgage-backed securities — I think it was very high efficacy in 2020, early-2021. As we sit here today, I see some unintended side effects. And again, those purchases are more adept at stimulating demand, but we don’t have a demand problem right now. I worry that they’re creating excesses in risk-taking, excesses in the housing market, maybe exacerbating imbalances in the economy. For me, therefore, the bar for substantial further progress is lower because I’m starting to question the efficacy of our purchases. So, in that regard, I would rather begin adjusting these purchases soon,” says Robert Kaplan, President of the Dallas Fed. 

“On the fed funds rate, that’s not a decision, in my opinion, for 2021. That’s something we’ll debate based on conditions in 2022. I think the near-term judgment is on purchases … I am much more confident about the efficacy of keeping the fed funds rate where it is right now. I am much more doubtful about the value of these purchases. My concern is that they accentuate excesses and imbalances. They tend to be more beneficial to people who own assets than to those who don’t. This inflation discussion affects big businesses differently than small- and mid-sized businesses, and I think these supply-demand imbalances and inflation pressures affect low- to moderate-income communities differently than they do higher-income communities … I think adjusting these purchases sooner might actually allow us to be more patient on the fed funds rate down the road.”