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Jósef Sigurdsson of Stockholm University finds that a change to the Icelandic tax code led men to drop out of school without similarly affecting women. Iceland collected no income tax on earnings in 1987 as it changed its national taxation system, creating an opportunity for Icelanders to earn substantially more in the short term. Dropout rates for men who were just old enough to leave high school and start working were 5 percentage points higher than for men just below the cutoff, while dropout rates for women were unchanged. Dropouts rarely returned to school and suffered large losses in lifetime income despite higher earnings in the years after 1987. The findings indicate that short-term earnings opportunities affect men and women differently, suggesting “gender differences in nonpecuniary costs of school attendance, myopia, or perceived returns to education.”
Using U.S. industry-level data over the 1959 to 2022 period, Simon C. Smith of the Federal Reserve Board, Allan Timmermann of the University of California, San Diego, and Jonathan H. Wright of Johns Hopkins University find that the Phillips Curve – the relationship between inflation and labor market slack – steepened in 1972 (meaning that inflation became more sensitive to slack) and flattened in 2001. The flattening was more pronounced for goods prices than service prices and concentrated in metropolitan areas with higher rates of import penetration from China. The authors also find that the Phillips Curve is nonlinear and steeper when the labor market is tight. A steeper Phillips Curve and a higher natural rate of unemployment can explain about half of the surge in prices over the 2020-2022 period, they find. Breaks in the slope of the Phillips Curve make pre-break data less informative for policymakers, causing them to be less certain about the relationship between the unemployment gap and inflation. To compensate for this additional caution, policymakers “respond less aggressively to deviations in the unemployment gap but, conversely, respond more aggressively to deviations from target inflation,” the authors say.
China’s role as an international lender of last resort has grown exponentially in recent years, according to Sebastian Horn of the World Bank and co-authors. Since 2000, more than 20 debtor countries — primarily debtors of China’s Belt and Road Initiative — have received $240 billion USD from the People’s Bank of China in rescue lending — $170 billion USD via a global swap line that is quickly growing, and $70 billion USD in rescue loans for balance of payments support. Of this, $185 billion USD was lent between 2016 and 2021. China’s overseas lending, the authors say, is making the international financial system more multipolar, less institutionalized, and less transparent.
Chart courtesy of Jason Furman
“With financial instability contained, monetary policy should remain focused on bringing inflation down, but stand ready to quickly adjust to financial developments. A silver lining is that the banking turmoil will help slow aggregate activity as banks curtail lending. In and of itself, this should partially mitigate the need for further monetary tightening to achieve the same policy stance. But any expectation that central banks will prematurely surrender the inflation fight would have the opposite effect: lowering yields, supporting activity beyond what is warranted, and ultimately complicating the task of monetary authorities. Fiscal policy can also play an active role. By cooling off economic activity, tighter fiscal policy would support monetary policy, allowing real interest rates to return faster to a low natural level. Appropriately designed fiscal consolidation will also help rebuild much needed buffers and help strengthen financial stability. While fiscal policy is turning less expansionary in many countries this year, more could be done to regain fiscal space,” says Pierre-Olivier Gourinchas, Economic Counsellor of the International Monetary Fund.
“Our latest projections also indicate an overall slowdown in medium-term growth forecasts. Five-year ahead growth projections declined steadily from 4.6% in 2011 to 3% in 2023. Some of this decline reflects the growth slowdown of previously rapidly growing economies such as China or Korea. This is predictable: growth slows down as countries converge. But some of the more recent slowdown may also reflect more ominous forces: the scarring impact of the pandemic, a slower pace of structural reforms, as well as the rising and increasingly real threat of geoeconomic fragmentation leading to more trade tensions, less direct investment, and a slower pace of innovation and technology adoption across fragmented ‘blocks.’ A fragmented world is unlikely to achieve progress for all, or to successfully tackle global challenges such as climate change or pandemic preparedness. We must avoid that path at all costs.”
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