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Hutchins Roundup: Unconditional cash transfers, countercyclical capital buffers, and more.

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Studies in this week’s Hutchins Roundup find that Alaska’s Permanent Fund Dividend increased fertility, countercyclical capital buffers don’t prevent financial crises, and more.

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Would Universal Basic Income increase fertility? Lessons from Alaska   

Nishant Yonzan and Laxman Timilsina from the City University of New York, and Inas Rashad Kelly from Loyola Marymount University find that Alaska’s Permanent Fund Dividend—which offers cash to every Alaskan, including infants born anytime during the year—has increased the fertility rate 13 percent for women between 15 and 44 years of age. The result is driven by changes in fertility for women over 20; the authors find no changes for teenagers. They conclude that discussions of unconditional cash transfer programs should consider their effects on fertility and the consequent implications for economic growth. 

Countercyclical capital buffer may not improve financial stability 

Christoffer Koch of the Federal Reserve Bank of Dallas, Gary Richardson of the University of California, Irvine, and Patrick Van Horn of Scripps College find that during the run-up to the banking crisis in 1929, systemically important banks built capital buffers of 3 to 5 percent of assets in preparation for the bust that they believed would follow. This helped these banks survive the depression of the 1930s. In contrast, during the run-up to the 2007 crisis, systemically important banks kept their capital ratios at the regulatory minimum because they expected the government to rescue them in a crisis. As part of the post-crisis reforms, regulators introduced the countercyclical capital buffer (CCyB), which, if triggered by regulators, requires banks to accumulate capital during booms to draw down in busts. But while the buffer may protect systemically important banks from failing, the authors warn, the historical record suggests it may not improve overall financial stability: Financial crises were quite common during the era in which countercyclical capital buffering played a prominent role in bank regulation. 

Responses to monetary policy depend on household liquidity 

Using Norwegian administrative data on household income and wealth from 1996 to 2015, Martin Blomhoff Holm from the University of Oslo, Pascal Paul from the Federal Reserve Bank of San Francisco, and Andreas Tishbirek from the University of Lausanne study how households respond to monetary policy. Following an increase in interest rates, households without much liquid wealth reduce their consumption substantially, suggesting that financial frictions prevent these households from consumption smoothing. Monetary policy also affects consumption by changing the financial income of borrowers and savers. Households at the top of the liquid wealth distribution, who tend to be net creditors, experience an increase in interest income after an interest rate hike, and respond by increasing their consumption, while the opposite is true for households at the bottom of the liquid wealth distribution. These results support the importance of financial frictions and cash-flow channels in the transmission of monetary policy, they conclude.   

Chart of the week: 

treasury-debt

Quote of the week: 

 “Structural factors are relevant for understanding how the economy is changing over time. But in the end, inflation is a monetary phenomenon. These are forces that can have one-off, transitory effects. But if a central bank is doing its job, it is probably not a useful approach to say that these factors permanently affect the inflation rate. Clearly, one of the big trends in the world economy is the ageing of the population. I think that ultimately has mixed effects on the inflation dynamics. For example, the shrinking of the labour force by and large could make, over time, labour more expensive. It is surely changing the bounds of consumption of different types of goods, and it has pervasive effects on the economy. But I wouldn’t classify it all as working in one direction in terms of inflationary pressure,” says Phillip R. Lane, Member of the Executive Board of the European Central Bank 

There is also a question about saving versus the allocation of portfolios: super-safe versus riskier assets. When people get close to retirement, their portfolio might shift towards safer assets. We think that is part of the reason why interest rates are super low: it is this kind of safety preference that is emerging. How much of this is due to demographics and how much due to people having been scarred by the financial crisis remains an open question. On digitalisation, again we think it definitely has an impact on those goods where an online presence is important. Going back to the difference between services and goods, the online dimension is, of course, quite important for particular categories of goods. But it would not be so important in setting services prices, for example: I do not think it makes a big difference to the rent you pay. 

Research indicates that digitalisation may also be making a difference to how firms set prices, because they have a lot more information now. Their use of pricing algorithms may mean they respond differently to changes in demand and so on. So it is changing the structure in some categories, but we do not think that it is something that is so fundamental that the monetary drivers of inflation are somehow disconnected. My basic point is that a lot of these digital developments may generate important relative price movements. We know that certain goods are a lot cheaper now than they used to be because of online searches and so on. But I am not so sure you can say that the overall inflation rate in the economy is permanently affected.” 

 

Jeffrey Cheng

Research Analyst - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution

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