Studies in this week’s Hutchins Roundup find that health interventions for at-risk infants have long-run benefits, less knowledge-sharing can help explain reduced U.S. business dynamism, and more.
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Using administrative data from Rhode Island, Eric Chyn of the University of Virginia, Samantha Gold of the Rhode Island Innovative Policy Lab, and Justine S. Hastings of Brown University find that health interventions in the first days of low-weight infants’ lives have significant effects on future educational achievement and reliance on social programs. The authors compare outcomes for children with birth weights just below the Very Low Birth Weight threshold, who tend to receive intensive medical care, to those born with birth weights just above it, who don’t. Children just below the threshold perform significantly better on tests between 3rd and 8th grade and are 20 percentage points more likely to enroll in college by age 22 than children born just above it, they show. Expenditures on Medicaid and other social services are also lower for these children, and the public savings more are much larger than the initial increase in hospital expenditures. The analysis indicates that investments in early health interventions for at-risk children have large public and private returns.
What explains the decline in business dynamism in the United States? Ufuk Akcigit of the University of Chicago and Sina T. Ates of the Federal Reserve Board show that declining dynamism mostly reflects a slowdown in the pace at which new knowledge diffuses from innovating companies to the rest of the economy. They show that this trend can explain more than 50% of the decline in business competition, increases in business profits, higher price markups, and other symptoms of lower dynamism. In contrast, changes in corporate taxes, research subsidies, and regulation can account for only about 10% of these trends. In addition, they find that patenting has become significantly more concentrated among top firms since 2000 and that firms increasingly use the patent system to strategically protect knowledge from others. The findings suggest that intellectual property protection and its effects on knowledge diffusion throughout the economy has played a significant role in the decline of business dynamism.
Central bank forward guidance about the future path of interest rates should reduce investors’ uncertainty about interest rates and dampen market reactions to news about the economy. However, Michael Ehrmann, Gaetano Gaballo, Peter Hoffmann, and Georg Strasser of the European Central Bank find that not all kinds of central bank communication accomplish this. They show that central bank commitments to keep interest rates low until a date far into the future (e.g., beyond two years) or until a certain condition has been met (e.g., unemployment has fallen) reduce investor uncertainty, diminish market responses to news, and help align professional forecasters’ outlooks. But open-ended commitments to keep interest rates low (like the ECB’s promises between 2013 and 2016) and promises to keep rates low only for a short period of time have the opposite of their intended effect: They amplify market responses to economic news and lead to wider disagreement among investors about the future of interest rates. The authors say that if forward guidance is not strong enough, investors may perceive it to conflict with their knowledge of the economic outlook and uncertainty will rise.
Chart of the week: Global financial conditions have loosened in 2019
Note: The FCI is defined as a weighted average of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on GDP. When FCI is higher, conditions are tighter, and vice versa.
“On monetary stability, for once I am concerned about too little inflation. In emerging markets, we still mostly worry about inflation being high, but some advanced economies keep on missing their targets from below. … That was the original goal with 2% inflation targets – the idea was to get an inflation rate households and firms wouldn’t notice. The problem with winning the war on inflation, however, is that the only price movements left tend to be temporary, from supply shocks,” says Lesetja Kganyago, governor of the South African Reserve Bank.
“This makes it easy to forget the responsibility of monetary policy for inflation. Indeed, the so-called Modern Monetary Theorists even think you can do away with independent central banks and tackle inflation with other tools. Well, if you build a maximum security jail and there are no escapes, does that prove you didn’t need to build a jail? I think it proves you built it right. The same goes for inflation. Price stability is proof of the success of independent central banks, not an argument for their abolition. But I worry there’s a new generation coming of age in the advanced economies who have never experienced inflation, and won’t appreciate that subtlety.”