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Americans saved much more than usual in the wake of the COVID-19 pandemic, largely as a result of government transfers to households in the bottom 80% of the income distribution. Adrien Auclert of Stanford, Matthew Rognlie of Northwestern, and Ludwig Straub of Harvard find that these excess savings are likely to “trickle up,” landing in the savings accounts of rich households over time. Though lower-income households are the recipients of most government transfers, they also spend a higher percentage of the money they receive. As the money they spend circulates through the economy, richer households receive it and save more of it than their low-income counterparts. The findings suggest that government transfers, even if targeted toward the lowest-income households, can increase wealth inequality in the long run once the money circulates to high-income households.
Using data on mortgage applications, Daniel Ringo of the Federal Reserve Board finds that low- and moderate-income households are less likely to purchase homes in response to a contractionary monetary policy shock than high-income households. Specifically, a monetary policy shock that raises mortgage rates by 1 percentage point results in a 7.5% decrease in the share of homebuyers who are low- to moderate-income. The effects are particularly strong for first-time homebuyers from these income groups. Liquidity-constrained households are more likely to be bound by limits on how much they can borrow relative to their income, making them more sensitive to mortgage rate increases. The findings suggest that “[w]hile low-wealth households may not experience an immediate appreciation of financial assets when the stance of monetary policy is expansionary, that stance can allow them to get their foot in the door of homeownership.”
Julian di Giovanni of the Federal Reserve Bank of New York and co-authors estimate the impact government spending had on inflation between December 2019 and June 2022. According to the authors, the surge in aggregate demand generated two-thirds of recent headline inflation. Of this, fiscal stimulus accounted for roughly half of the total increase in aggregate demand. Sectoral supply shocks, measured as deviations in the total hours worked, and sectoral demand shocks, measured as deviations in consumer spending, also contributed to overall inflation.
“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe. Inflation, too, showed improvement, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries … The inflation news is encouraging, but the battle is far from won. Monetary policy has started to bite, with a slowdown in new home construction in many countries. Yet, inflation-adjusted interest rates remain low or even negative in the euro area and other economies, and there is significant uncertainty about both the speed and effectiveness of monetary tightening in many countries,” says Pierre-Olivier Gourinchas, Chief Economist, International Monetary Fund.
“Where inflation pressures remain too elevated, central banks need to raise real policy rates above the neutral rate and keep them there until underlying inflation is on a decisive declining path. Easing too early risks undoing all the gains achieved so far. The financial environment remains fragile, especially as central banks embark on an uncharted path toward shrinking their balance sheets. It will be important to monitor the build-up of risks and address vulnerabilities, especially in the housing sector or in the less-regulated non-bank financial sector. Emerging market economies should let their currencies adjust as much as possible in response to the tighter global monetary conditions.”
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