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. 

House prices respond quickly to monetary policy  

House prices respond quickly to announcements from the Federal Reserve despite prior research that says otherwise, according to Denis Gorea of the European Investment Bank, Oleksiy Kryvtsov of the Bank of Canada, and Marianna Kudlyak of the Federal Reserve Bank of San Francisco. Using data from 2001 to 2019, the authors focus on U.S. housing list prices rather than the more frequently studied sales prices. While unexpected changes in short-term interest rates have little effect on house prices, surprises about future interest rates affect list prices in as little as two or three weeks. This effect may operate in part through the mortgage market, the authors say. They estimate that a monetary surprise that causes a 1 percentage point increase in 30-year mortgage rates lowers house list prices by 3% over the month following the FOMC announcement.   

Higher education plays dominant role in attracting foreign-born entrepreneurs 

Immigrants play a vital role in America’s entrepreneurial ecosystem. Using data on venture capital-backed startups, Natee Amornsiripanitch of the Philadelphia Fed and co-authors find that over three-quarters of highly successful immigrant entrepreneurs first came to the U.S. to earn a degree, not to work. Compared with other venture capital-backed entrepreneurs, immigrants disproportionately attend top universities on the coasts, earn STEM degrees, and found firms in the state where they got their education. These findings suggest that approving policies which restrict the flow of foreign students to the U.S. or restrict the ability of foreign students to stay after graduating carry significant costs for the country. Furthermore, because immigrant entrepreneurs frequently found companies near their universities, regional economies may be able to boost growth by attracting international students to local universities. That, however, would require a sustained effort over an extended period, given the long lag between arrival in the U.S. and founding a firm and the fact that most firms founded to date have been in California, Massachusetts, or New York.   

Firms base inflation expectations on price changes observed along their supply chain  

Using a unique data set on Chilean retail and manufacturing firms, Elias Albagli and Emiliano Luttini of the Central Bank of Chile and Francesco Grigoli of the International Monetary Fund find that companies form expectations about aggregate inflation from changes in the input costs they face, even if these changes are unrelated to overall inflation. Firms’ inflation expectations are a key determinant of their pricing decisions, the authors find, with increases in inflation expectations passed through completely to the prices they charge. Since prices along the supply chain likely differ across firms, this channel can help explain the dispersion of inflation expectations and prices. It also implies a weaker expectations channel for monetary policy. Improvements in central bank communications aimed at firms could preserve monetary policy transmission through the expectations channel, the authors conclude. 

Chart of the week: State and local government wages outpaced by private sector 

Line chart of wages and salaries, change from second quarter of 2020, for private industry workers and state and local government workers from Q2 2020 to Q2 2022.

Quote of the week:  

“[W]e’re happy to see inflation start to move down and I’d like to see a period of sustained inflation under control and until we do that I think we’re just going to have to continue to move rates into restrictive territory…We’d like to see inflation running at our target which is 2% on the PCE…I think there’s still more to come to get into restrictive territory. The economy seems to be weathering it well. There are obviously sectors that are more impacted than others but if you look at the jobs report and you look at the other data we’ve been getting over the last several weeks, it still seems like the economy is fundamentally sound,” says Thomas Barkin, President of the Richmond Fed. 

“[A] tight labor market doesn’t have to cause inflation. We certainly had a tight labor market in 2018 and 2019 and inflation is being driven by commodity prices. It’s being driven by supply chain issues, and it’s being driven by demand. So, as we move rates and try to normalize demand hopefully, we’ll get some help from those other two lanes as well and then it wouldn’t be inconsistent with the labor market at all.” 

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