Hutchins Roundup: Trade with China, debt collection laws, and more

Studies in this week’s Hutchins Roundup find that trade with China is associated with significant productivity gains for advanced economies, legislation restricting debt collection practices reduces access to credit, and more.

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Trade with China is associated with considerable productivity gains

Using sector-level data on 18 advanced economies, JaeBin Ahn and Romain Duval of the IMF conclude that trade with China is associated with significant gains in total factor productivity but has mixed effects on employment. In particular, they find that trade with China might account for about 12 percent of the total increase in productivity growth in the median country-sector during 1995-2007. The effect on employment depends on the exposure of a particular sector in a particular country to trade with China: Imports reduce employment but exports increase it.

Stricter debt collection laws reduce access to credit and negatively affect financial health

Using a nationally representative sample of individuals with credit records, Katherine Strair and Basit Zafar of the New York Fed and Julia Fonseca of Princeton find that states that adopted stricter debt collection practices saw a significant decline in credit card and auto loan balances and originations, compared to states that didn’t change legislation. Stricter debt collection laws were also associated with a small reduction in credit scores, mostly among individuals with the lowest credit scores, consistent with the hypothesis that individuals take on more risk or over-borrow when it is harder for debt collectors to do their work.

Different consumption responses from winners and losers of monetary policy further amplify its effects

While the redistribution of income and wealth associated with changes in monetary policy is generally viewed as a side effect, Adrien Auclert of Stanford argues that it actually is an important channel through which monetary policy affects the real economy. In particular, he finds that taking into account the different consumption responses of monetary policy winners and losers makes monetary policy look more potent than suggested by models that ignore the effects of redistribution. Auclert concludes that the redistributive effects of monetary policy are important to understand its aggregate effect, and that different monetary policies—such as an  increase in the central bank’s inflation target—will have macroeconomic effects above and beyond their impact on real interest rates.

Chart of the week: The Fed has fallen short of its 2 percent inflation target

Quote of the week: “The economic upswing is becoming increasingly solid and continues to broaden across sectors and countries,” says European Central Bank President Mario Draghi. 

“Downside risks to the growth outlook are further diminishing, and some of the tail risks we were facing at the end of last year have receded measurably… Despite a firmer recovery, and looking through the volatile readings in [Harmonized Index of Consumer Prices] inflation over recent months, underlying inflation pressures have remained subdued. Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective. For domestic price pressures to strengthen, we still need very accommodative financing conditions, which are themselves dependent on a fairly substantial amount of monetary accommodation.”