Hutchins Roundup: Monetary policy and housing, income-based repayment plans, and more

Vivien Lee,
Vivien Lee Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution
Michael Ng, and
Michael Ng Former Research Analyst - Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution
Louise Sheiner

May 16, 2019

Studies in this week’s Hutchins Roundup find that tight monetary policy leads to higher housing rents, income-based student loan repayment doesn’t distort work effort, and more.

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Tight monetary policy leads to higher housing rents

Daniel Dias and João Duarte of the Federal Reserve Board find that an increase in interest rates leads to higher rents and lower rental vacancy rates as consumers switch from buying to renting homes. Examining Consumer Price Index (CPI) data from the 1980s to 2017, the authors show that while almost all other components of the CPI decline or stay the same in response to an unexpected increase in interest rates, rents increase. The authors argue that as interest rates rise, mortgages become more expensive and the cost of owning a home increases, leading to greater demand for renting relative to buying. Consistent with this theory, they find that rental vacancies, housing prices, and homeownership rates decline in response to an unexpected increase in interest rates. The authors show that when excluding measures of rent from the CPI, monetary policy has a stronger effect on overall prices than previously estimated.

Income-based student loan repayment doesn’t distort work effort

Around 85% of college students in the United Kingdom who are eligible for loans participate in income-based repayment plans. Because each additional dollar of earnings over a threshold increases the loan repayment amount, these plans may reduce borrowers’ work effort. Linking student loan data from 1998 to 2008 with tax data from 2001 to 2014, Jack Britton of the Institute for Fiscal Studies and Jonathan Gruber of MIT use changes in the earnings threshold over time to observe whether and how graduates respond. They find no evidence that income-based repayment leads to lower earnings. The results hold for those who are self-employed and those who itemize on their tax returns—two groups that usually are responsive to tax rates. The authors note, however, that income-based repayment may distort other outcomes, such as inducing more people to go to college or leading students to choose more remunerative majors.

Decreasing health insurance subsidies reduces coverage

Covered California—one of the largest state health insurance exchanges established by the Affordable Care Act—provides health insurance options for individuals not covered by an employer or a public program; premiums for many participants are subsidized by the federal government. Pietro Tebaldi and Alexander Torgovitsky of the University of Chicago and Hanbin Yang of Harvard University find that a $10 decrease in monthly premium subsidies would cause between a 1.6% and 7.0% decline in the proportion of low-income adults with health insurance in Covered California. The reduction in total annual consumer benefit would be between $63 million and $78 million, they estimate, while the savings in yearly subsidy outlays would be between $238 and $604 million. The authors show that poorer consumers would incur the bulk of the lost consumer benefit. The results confirm existing research showing that demand for health insurance among low-income adults is very sensitive to prices, the authors say, but the sensitivity that they estimate is much greater than other models suggest.

Chart of the week: US fertility rates have yet to rebound from Great Recession decline


Quote of the week:

“Labor-market watchers must retool their methods of estimating slack. In the same way prices reflect supply and demand in most other markets, the rate of compensation growth is the best way to determine how near the labor market is to maximum employment. The price of labor—wages and other compensation—should rise at a rate roughly equal to productivity growth plus inflation. With productivity growth climbing to 1.5%, maximum employment and stable inflation will likely occur when wages are rising at a sustained rate of about 3.5%,” says Neel Kashkari, president of the Federal Reserve Bank of Minneapolis.

“Today wage growth is only around 3%, meaning there is likely still slack in the labor market: The economy hasn’t yet reached its capacity…No one knows how many more Americans want to work. But if the job market continues to improve with only modest wage growth and below-target inflation, it can be safely assumed that maximum employment isn’t here yet and there is no present need to raise interest rates.”