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Global savings, higher interest rates, and demand for US assets strengthen the dollar

Using data on cross-country capital flows, Zhengyang Jiang of Northwestern University, Robert Richmond of New York University, and Tony Zhang of the Federal Reserve Board find that underlying economic factors can explain the 22.5% appreciation of the U.S. dollar over the 2011-2019 period. Specifically, they find that higher short-term interest rates in the U.S. relative to other countries accounted for a 5.8% rise in the dollar, a shift toward U.S. assets by foreign investors accounted for a 9.3% of dollar appreciation, and a rise in global net savings led to an additional 8.7% appreciation. The authors estimate that any country unilaterally selling its U.S. assets would cause a modest depreciation of the dollar (0.2% to 0.7%) since other countries would buy up the excess supply.

Neither drop in immigration nor rise of remote work affected labor market mobility

U.S. natives’ propensity to move across states has been declining for decades. Giovanni Peri and Reem Zaiour of the University of California, Davis, find that two large labor market shifts during COVID—a sudden drop in the in-flow of foreign workers and the increased availability of remote work options—did not affect interstate mobility. Further, they find only weak evidence that cross-sector mobility was higher in sectors with more foreign-born workers. The authors argue that these results suggest rigidity in the American labor market: job vacancies have been persistently high since the onset of the COVID-19 pandemic, yet native-born workers have not rushed to fill the jobs foreign-born workers left behind, even with the option to work remotely.

‘Taper tantrum’ had no noticeable negative macroeconomic effects

When the Federal Reserve surprised financial markets in 2013 by saying that it planned to reduce the pace of quantitative easing, the yield on long-term Treasury bonds spiked 100 basis points. Nitish Sinha and Michael Smolyansky of the Federal Reserve Board find that this “taper tantrum” did not negatively affect key macroeconomic variables such as output growth, the unemployment rate, and inflation when compared to pre-trends and professionals’ forecasts. Their results suggest that a 100 basis point increase in rates is too small to have any noticeable negative effect on the economy. Central banks may be able to begin policy tightening more rapidly than previously thought during an economic recovery, they conclude, with little downside risk to the economy.

Chart of the week: Job vacancies are falling from their peak, but remain high

Line graph of total nonfarm job openings in the United States, in millions, reported monthly from January 2014 to November 2022. The time series began with vacancies near 4 million, rising to over 7 million before the pandemic began. At the start of the pandemic, openings precipitously dropped to under 5 million, before rapidly rising to a 10-year peak of near 12 million in March 2022. Since then, job openings have been falling once again. The most recent (preliminary) November value was 10.458 million job openings.Data from the U.S. Bureau of Labor Statistics – Job Openings and Labor Turnover Survey

Quote of the week:

“I’ve…been wrestling with why we missed this high inflation and what we can learn going forward. To state clearly, I was solidly on ‘Team Transitory,’ so I am not throwing stones. But many of us — those inside the Federal Reserve and the vast majority of outside forecasters — together made the same errors in, first, being surprised when inflation surged as much as it did and, second, assuming that inflation would fall quickly,” writes Neel Kashkari, President of the Federal Reserve Bank of Minneapolis.

“I see a couple problems with dismissing the miss because of shocks. First, because shocks are unforecastable, it absolves us from needing to learn from this experience and do better in the future. And second, I believe that even if we had been able to identify all the shocks in advance, I don’t think our workhorse models would have come anywhere close to forecasting 7% inflation. I think the root of our miss is that our models are not currently equipped to forecast the surge pricing inflation we are experiencing.”

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