Hutchins Roundup: Occupational licenses, monetary policy’s long-term effects, and more

Studies in this week’s Hutchins Roundup find that consumers care more about prices and reviews than home-improvement contractors’ licensing status, money is non-neutral for longer than typically assumed, and more.

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Occupational licenses are less important than prices and reviews

Using data from an online marketplace for home improvement professionals, Chiara Farronato of Harvard Business School and coauthors weigh benefits and costs of occupational licensing law. They find that consumers care about the professionals’ prices and online ratings but not their licensing status. In states with strict occupational licensing laws, the authors find less competition and higher prices, but surveys find that consumers aren’t any more satisfied. Digital technology can improve the design of regulation, the authors say. A feedback system in which consumers can easily and quickly identify bad professionals can be a substitute for occupational licensing, and the advent of an online reputation mechanism may provide this system.

Monetary Policy Can Have Long-Term Effects

An extensive literature in monetary economics assumes that money has no impact on real economic activity in the long-run. Oscar Jordà, Sanjay R. Singh, and Alan M. Taylor from the Federal Reserve Bank of San Francisco challenge this view by drawing from historical data beginning in 1870 for 17 advanced economies. They observe that a one percentage point increase in short-term interest rates decreases GDP per capita by six percent over 12 years. They say that the effects on output growth occur primarily through the response of capital accumulation and total factor productivity (TFP); the response of total hours worked is negligible. The authors reason that contractionary monetary policy shock would lead to a temporary decline in output which would slow down TFP growth, which would accumulate and lower output and capital permanently.

Cyber Attacks On Major Banks Would Significantly Impair the Financial System

Thomas M. Eisenach, Anna Kovner, and Michael Junho Lee from the Federal Reserve Bank of New York estimate the magnitude of risks posed by a cyber attack on the U.S. financial system. Using Fedwire Funds data on most wholesale payments between financial institutions in the U.S., they find that an attack completely impairing any of the five largest banks from sending payments could affect 38 percent of the U.S. financial system and severely disrupt almost 10 percent of metropolitan statistical areas. If non-affected banks respond by hoarding liquidity, the average impact and maximum risk of an attack are amplified substantially. The authors emphasize that while the attack they discuss is extreme, their results are probably conservative since they did not consider spillovers outside of the payment network or repercussions beyond a single day.

Chart of the week:

Source: Bank of International Settlements

Quote of the week:

“Regarding our stress tests under the Comprehensive Capital Analysis and Review (CCAR), I continue to look for ways to make the tests more transparent without making them game-able and without diluting their potency as a supervisory tool[….] First, I expect that we will continue to provide more transparency on the models used in CCAR. We started providing improved transparency on models last year, and…we will remain on that path until we have released substantial details on all of our key models. We also continue to consider ways to increase the transparency around the scenarios we use in CCAR[….],” says Randal K. Quarles, Vice Chair for Supervision of the Federal Reserve Board of Governors.

“Second, I expect that as part of the stress capital buffer, we will give banks significantly more time to review their stress test results and understand their capital requirements before we demand their final capital plan. Firms are currently permitted to revise and resubmit their capital plans after receiving their stress test results. But it is done on a short timeframe and allowing additional time would produce better results without in any way reducing the stringency of the stress tests. Fundamentally, I think banks will be better able to do intelligent capital planning if we provide them with their complete set of regulatory capital requirements before we require submission of a capital plan. Third[…], we continue to look for ways to reduce the volatility of stress-test requirements from year to year[…] such as averaging outcomes over multiple years or averaging the results of the current year’s stress test with the results of one or more previous years. Again, the goal here is not to make the tests less strenuous but to give banks a greater opportunity to plan for them and to meet our expectations ex ante rather than through an ex post remedial process.”