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Hutchins Roundup: Bank regulation, tax reform, and more

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What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday.

Basel III bank regulations increased welfare in the US

Bank liquidity and capital requirements reduce the risk of financial instability but also reduce economic activity by restricting bank lending. Using a structural model to assess the costs to society of the requirements, Skander J. Van den Heuvel of the Federal Reserve Board finds that imposing a 10% liquidity requirement leads to a permanent loss in consumption of 0.02%, which he terms “modest.”  A similarly sized increase in the capital requirement reduces consumption by roughly 0.2%, 10 times as much. Van den Heuvel finds that the financial stability benefits of capital requirements are broader than those of liquidity requirements and optimal policy relies on both to safeguard financial stability. Comparing his cost estimates to benefits found in other research, Van den Heuvel concludes that the capital and liquidity requirements in the Basel III accord produced net welfare gains.

Governments avoid tax reform announcements in lead-up to elections

In a panel of 22 countries from 1990 to 2018, Antonio C. David and Can Sever of the International Monetary Fund find that governments avoid announcing tax reforms in the six months leading up to an election and tend to announce more reforms in the three months following an election. Their results are consistent with prior research showing that politicians announce unpopular reforms when reelection risks are minimized. Countries with high scores on indexes of law and order and bureaucratic quality had less dramatic tax policy changes across the election cycle, suggesting that strong institutions can insulate policy from the reelection ambitions of politicians.

National wage setting is a common practice for large firms

Jonathon Hazell of the London School of Economics and co-authors find that a substantial minority of national firms do not vary wages by location. Combining job posting data with a survey of HR representatives from U.S. firms, they argue that national wage setting is a common and deliberate policy, usually in order to reduce administrative burden, adhere to fairness norms within companies, or retain talent. National wage setting also affects the broader economy by lowering aggregate wage inequality across regions, driving workers to low-cost areas where the same nominal wage has more purchasing power, and increasing national firms’ presence in low-cost areas. Abstracting from any productivity boosts from national wage setting, the authors find that wage-setting policies likely hurt profits, as employers have to pay a premium for workers in relatively cheaper regions.

Even excluding food and energy, inflation is high globally

Line graph showing monthly observations of 12-month change in consumer prices, excluding volatile items such as food and energy, from January 2019 to October 2022, in 6 areas: Sweden, Australia, the U.S., the U.K., Canada, and the Eurozone. All countries’ prices changes stayed within a range of 0 to 2.5% until the start of 2021, when they rapidly increased to annual price changes in the range of 5 to 7%.

Chart courtesy of the Wall Street Journal

Quote of the week:

“We can survive recession. It is hard, but we can survive it. We can survive inflation [but] what we cannot survive, as humanity, is an unmitigated climate crisis…” says International Monetary Fund Managing Director Kristalina Georgieva.

“First and foremost, we have to price carbon and gradually increase this price to the level necessary to create the incentive for businesses and consumers to bring down emissions. Currently carbon price globally on average is $5 a ton. By 2030 it has to be at least $75 a ton if we want to reach the goals of the Paris Agreement. Second, we need to mobilize on [a] much bigger scale private investment in emerging markets in developing economies.”

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation. 

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