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Hutchins Roundup: Swap arrangements, green investment, and more

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Studies in this week’s Hutchins Roundup find countries with ties to the U.S. received more liquidity support from the Fed during the Great Recessiongreen investments have a higher impact on GDP than non-ecofriendly spending, and more.   

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How did Fed’s central bank swap lines with other central banks work during COVID-19?  

During the Global Financial Crisis (GFC), the Federal Reserve created swap arrangements – agreements to exchange dollars for local currency – with 14 foreign central banks to help them meet the strong demand for U.S. dollars without disrupting financial markets. In March 2020, as the COVID-19 pandemic again led to a shortage of dollars, the Fed reopened the nine swap lines that had lapsed since the GFC and eased the conditions for the five standing lines, increasing maturities and decreasing prices. In addition, the Fed created a repurchase agreement (repo) facility (known as FIMA for Financial Institutions and Monetary Authorities) to allow other foreign central banks to easily exchange their holdings of U.S. Treasury securities for U.S. dollars. Joshua Aizenman of the University of Southern California, Hiro Ito of Portland State University, and Gurnain Kaur Pasricha of the International Monetary Fund find that countries with trade, financial, and military ties to the U.S. got a greater share of support from the Fed’s liquidity efforts. Countries whose currencies appreciated more against the dollar and experienced exchange rate volatility auctioned off more of the dollars they received from the Fed in their domestic markets, suggesting increased demand for safe havens amidst market turmoil.  When swap arrangements and the FIMA repo facility were announced, countries with access to them experienced appreciation of their currencies against the dollar, declines in credit default swap spreads, and declines in 10-year government bond yields. Dollar auctions run by the Bank of England, European Central Bank, Bank of Japan, and Swiss National Bank had substantial spillovers to smaller economies, pushing up the values of their currencies.   

Green investments generate more per dollar in real GDP than non-ecofriendly spending  

Using data spanning 20 countries from 1995 to 2016, Nicoletta Batini of the IMF and co-authors find that investments in clean energy and natural negative emissions technologies like biodiversity conservation boost the economy more than investments in fossil fuels and conventional agriculture. After five years, the cumulative increase in real GDP associated with $1 of investment in green energy infrastructure is nearly twice as high as that on equivalent spending on non-ecofriendly energy, with green investment generating $1.11 in GDP per dollar and “brown” investment generating only $0.52.  Each dollar invested in sustainable land use generates nearly $7 in GDP after five years, while each dollar spent on subsidies to industrial agriculture generates less than $1 in increased economic activity. The larger fiscal multipliers associated with green investments are attributable to the labor-intensive nature of renewable energy investments and the fact that sustainable land uses often are less mechanized and more reliant on domestic inputs, the authors say. The estimates do not account for the negative impact on GDP and public health of climate change and biodiversity losses, likely underestimating the relative benefits of green spending. Post-COVID stimulus policies that focus on decarbonization are “not just good for the planet,” the authors say—they may also be “the cheapest and shortest route back to a prosperous global economy.”  

 Federal Pandemic Unemployment Compensation had no effect on employment  

Using data from online job site Glassdoor, Ioana Marinescu of the University of Pennsylvania, Daphne Skandalis of the University of Copenhagen, and Daniel Zhao of Glassdoor find that the Federal Pandemic Unemployment Compensation (FPUC), which increased unemployment compensation by $600 per week, led to a decline in job applications. This was not surprising, say the authors, given that unemployment benefits under the FPUC were higher than pre-pandemic earnings for three-quarters of beneficiaries. However, despite the higher wages that workers could have demanded and the lower job search efforts, the authors did not find any effect on posted job vacancies. Overall, although the increase in unemployment benefits ultimately increased labor market tightness, measured by the ratio of vacancies to applications, the labor market from March to July of 2020 was still much weaker than in January and February 2020, before the pandemic. The authors conclude that, given the extreme competition between workers for jobs in the pandemic-depressed labor market, the generosity of FPUC reduced unnecessary or wasteful job applications while having almost no effect on employment.  

Chart of the week: Travel picks up in in recent weeks, particularly amongst older Americans 

Line graph of number of travelers passing through TSA, seven-day rolling sum, from January 2020 through March 2021

Quote of the week:  

“This pandemic has disrupted multiple stories we’ve been telling about the economy for the past few decades… The first is a trend called “hollowing out,” which refers to growth in high- and low-income jobs at the expense of those in the middle. But the pandemic targeted the low-end this time: It wiped out 37% of low-wage jobs between February and April,” says Tom Barkin, President of the Federal Reserve Bank of Richmond. 

“The second story is the triumph of cities: In recent decades, metro areas have seen higher population and employment growth than nonmetro areas. But the pandemic hit urban employment harder, especially early on, since higher population density necessitated earlier and longer shutdowns, and because rural employment is more likely to be in essential industries like agriculture and food production. Now we’re also seeing rising vacancy rates… and what happens to the businesses and employees that depend on downtown office workers if those people keep working from home? 

The third story that’s been turned on its head is the disparate effect of recessions on men… as they were disproportionately represented in industries like manufacturing and construction. But the COVID-19 recession hit women’s employment harder, both in job loss and in labor force participation, given their industry mix and the challenges of schools, childcare and elder care.” 

Sophia Campbell

Research Assistant - Hutchins Center on Fiscal and Monetary Policy

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