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This paper investigates the effectiveness of one of the Federal Reserve's unconventional monetary policy tools, the term auction facility (TAF). At issue is whether the TAF reduced the spread between the London interbank offered rate (LIBOR) rates and equivalent-term Treasury rates by reducing the liquidity premium embedded in LIBOR rates. This paper suggests that rather than reducing the liquidity premium in LIBOR rates, the announcement of the TAF increased the risk premium in financial and other bond rates because market participants interpreted the announcement by the Fed and other central banks as a sign that the financial crisis was worse than previously thought. Evidence is presented that supports this hypothesis. [ABSTRACT FROM AUTHOR]

This article contains synopses of the papers presented at the 35th Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis held October 21-22, 2010. The conference theme was “Frictions in Financial and Labor Markets.” Leading participants in this field presented their research and commentary. [ABSTRACT FROM AUTHOR]

First-order approximation methods are a standard technique for analyzing the local dynamics of dynamic stochastic general equilibrium (DSGE) models. Although linear methods yield quite accurate solutions for a broad class of DSGE models, some important economic issues (e.g., portfolio choice and welfare) cannot be adequately addressed by first-order methods. This paper provides yet another case when first-order methods may be inadequate for capturing the business cycle properties of a DSGE model. In particular, the authors show that increasing returns to scale (due to production externalities) may induce asymmetric business cycles and nonlinear income effects that are not fully captured by linear approximation methods. For example, hump-shaped output dynamics can emerge even when externalities are below the threshold level required for indeterminacy, and output expansion tends to be smoother and longer, whereas contraction tends to be deeper but shorter-lived, as observed in the U.S. economy. [ABSTRACT FROM AUTHOR]

This paper provides a comprehensive examination of corporate responses to financial distress during an economy-wide crisis, specifically through the restructuring of assets (through asset sales, mergers, or liquidations) and/or liabilities. Using firm-level data from five countries hardest hit by the East Asian financial crisis of 1997-98, this study contrasts the effects that financial and corporate governance variables have on restructuring choices. The study finds that, during a crisis, financial constraints and corporate governance each have a large effect on restructuring choices. [ABSTRACT FROM AUTHOR]

In this paper the author discusses the possibility that the U.S. economy may become enmeshed in a Japanese-style deflationary outcome within the next several years. To frame the discussion, the author relies on an analysis that emphasizes two possible long-run steady states for the economy: one that is consistent with monetary policy as it has typically been implemented in the United States in recent years and one that is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period. The data considered seem to be quite consistent with the two steady-state possibilities. The author describes and critiques seven stories that are told in monetary policy circles regarding this analysis and emphasizes two main conclusions: (i) The Federal Open Market Committee's "extended period" language may be increasing the probability of a Japanese-style outcome for the United States and (ii), on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome. [ABSTRACT FROM AUTHOR]

Measuring the overall restrictiveness of a country's international trade policies is important and, in fact, essential for estimating the effects of trade policies and for negotiations to reduce trade barriers. A good measure is also difficult to produce: Trade restrictiveness indices are constructed by combining the actual structure of trade restrictions, which is generally quite different across goods, into a single number. Under certain assumptions, this single number is the uniform tariff that would produce the same trade restrictiveness as the actual differentiated structure of restrictions. In this paper, the economic intuition underlying the construction of these indices is presented and estimates of these indices and the resulting insights are summarized. [ABSTRACT FROM AUTHOR]

This paper examines the role of community colleges in the U.S. higher education system and their advantages and shortcomings. In particular, it discusses the population of community college students and economic returns to community college education for various demographic groups. It offers new evidence on the returns to an associate's degree. Furthermore, the paper uses data from the National Survey of College Graduates to compare educational objectives, progress, and labor market outcomes of individuals who start their postsecondary education at community colleges with those who start at four-year colleges. Particular attention is paid to the Federal Reserve's Eighth District, the geographic area served by the Federal Reserve Bank of St. Louis. [ABSTRACT FROM AUTHOR]

Congestion at airports imposes large costs on airlines and their passengers. A key reason for congestion is that an airline schedules its flights without regard to the costs imposed on other airlines and their passengers. As a result, during some time intervals, airlines schedule more flights to and from an airport than that airport can accommodate and flights are delayed. This paper explores how a specific market-based proposal by the Federal Aviation Administration (FAA), which includes the use of auctions to determine the right to arrive or depart in a specific time interval at airports in the New York City area, might be used as part of a strategy to mitigate delays and congestion. By explaining the underlying economic theory and key arguments with minimal technical jargon, the paper allows those with little formal training in economics to understand the fundamental issues associated with the FAA's controversial proposal. Moreover, the basics of the proposed auction process, known as a combinatorial auction, and value capture are also explained. [ABSTRACT FROM AUTHOR]

Milton Friedman's publications and commentaries became the subject of enormous publicity and scrutiny in the United Kingdom. This paper analyzes the interaction of Milton Friedman and U.K. economic policy from 1938 to 1979. The period under study is separated into four subperiods: 1938-46, 1946-59, 1959-70, and 1970-79. For each of these subperiods, the author considers Friedman's observations on, and role in, key developments in U.K. monetary policy and in general U.K. economic policy. [ABSTRACT FROM AUTHOR]

In this article, the author comments on an article on determining trends in the aggregate labor force by Kenneth J. Matheny, published within this issue. The estimation of the statistical component of the labor force is discussed. The measure for calculating labor input is analyzed. According to the author, there is a major defect in calculating the potential labor force using fixed or trend participation rates.

This paper examines some of the more recent mortgage products now available to borrowers. The authors describe how these products differ across important characteristics, such as the down payment requirement, repayment structure, and amortization schedule. The paper also presents a model with the potential to analyze the implications for various mortgage contracts for individual households, as well as to address many current housing market issues. In this paper, the authors use the model to examine the implications of alternative mortgages for homeownership. The authors use the model to show that interest rate-adjustable mortgages and combo loans can help explain the rise-and fall-in homeownership since 1994. [ABSTRACT FROM AUTHOR]

Monetary policy analysts often rely on rules of thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy with historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations. One interesting question is whether such rules of thumb should draw on policymakers' forecasts of key variables, such as inflation and unemployment, or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor rule that relies on outcomes may be the result of systematic responses to information captured in policymakers' own projections. This paper investigates this proposition in the context of Federal Open Market Committee (FOMC) policy decisions over the past 20 years, using publicly available FOMC projections from the semiannual monetary policy reports to Congress (Humphrey-Hawkins reports). The results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC's own projections rather than observed outcomes. Thus, a forecast-based rule of thumb better characterizes FOMC decisionmaking. This paper also confirms that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style rule may be considered systematic responses to information contained in FOMC projections. [ABSTRACT FROM AUTHOR]

This paper studies the design of optimal monetary policy under uncertainty using a Markov jumplinear-quadratic (MJLQ) approach. To approximate the uncertainty that policymakers face, the authors use different discrete modes in a Markov chain and take mode-dependent linear-quadratic approximations of the underlying model. This allows the authors to apply a powerful methodology with convenient solution algorithms that they have developed. They apply their methods to analyze the effects of uncertainty and potential gains from experimentation for two sources of uncertainty in the New Keynesian Phillips curve. The examples highlight that learning may have sizable effects on losses and, although it is generally beneficial, it need not always be so. The experimentation component typically has little effect and in some cases it can lead to attenuation of policy. [ABSTRACT FROM AUTHOR]

Many predictions of the economic and social costs of a modern-day pandemic are based on the effects of the influenza pandemic of 1918. Despite killing 675,000 people in the United States and 40 million worldwide, the influenza of 1918 has been nearly forgotten. The purpose of this paper is to provide an overview of the influenza pandemic of 1918 in the United States, its economic effects, and its implications for a modern-day pandemic. The paper provides a brief historical background as well as detailed influenza mortality statistics for cities and states, including those in the Eighth Federal Reserve District, that account for differences in race, income, and place of residence. Information is obtained from two sources: (i) newspaper articles published during the pandemic and (ii) a survey of economic research on the subject. (JEL I1, N0, R0) [ABSTRACT FROM AUTHOR]

The empirical literature on the effects of government spending shocks lacks unanimity about the responses of consumption and wages. Proponents of shocks identified by structural vector autoregressions (VARs) find results consistent with New Keynesian models: consumption and wages increase. On the other hand, proponents of the narrative approach find results consistent with neoclassical models: consumption and wages decrease. This paper reviews these two identifications and confirms their differences by using standard economic series. It also uses alternative measures of government spending, output, and the labor market and shows that, although there are minor fluctuations within each identification, the disparate results between the two are robust to the alternative measures. However, under the structural VAR approach, the authors find some differences between the responses to federal and state/local government spending. (JEL C32, E62) [ABSTRACT FROM AUTHOR]

The author comments on the paper by Glenn Rudebusch et al which surveys literatures on monetary economics and interest rates. He expresses his view on the patterns in Figure 1 which presents the federal funds rate and 1- to 15-year forward rates through the past two recessions. He notes the error in the measurement of expected interest rates. He asserts that slope movements in the yield curve do not indicate risk premia nor does covariance with monetary policy shocks generate real risk premia.

The article presents a commentary on the paper by Riccardo DiCecio and Edward Nelson which considers the estimation of the parameters of a dynamic stochastic general equilibrium (DSGE) model for the British economy. The methodology used for estimation was analyzed. The generic problem in approximating the DSGE model with a structural vector autoregressions (SVAR) was highlighted. Some problems with multiple parameter values in both the Phillips curve and the wage equation were also discussed.

This paper uses a Markov-switching model with structural breaks to characterize and compare regional business cycles in Japan for the period 1976-2005. An early-1990s structural break meant a reduction in national and regional growth rates in expansion and recession, usually resulting in an increase in the spread between the two phases. Although recessions tended to be experienced across a majority of regions throughout the sample period, the occurrence and lengths of recessions at the regional level have increased over time. [ABSTRACT FROM AUTHOR]

Personal bankruptcy filings in the United States increased, per capita, nearly 350 percent between 1980 and 2005. This paper first addresses the changes in economic and institutional factors that have occurred over the past 100 years, many of which have occurred in the past 30 years, which are likely contributors to the dramatic rise in personal bankruptcy filings seen across the country. These factors include a reduction in personal savings, an increase in consumer debt, the proliferation of revolving credit, changes to bankruptcy law, and a reduced social stigma associated with filing for bankruptcy. Given the availability of bankruptcy data at various levels of aggregation, the remaining sections of the paper contain results from several different empirical analyses of bankruptcy filings using various data sets. Careful attention is paid to personal bankruptcy filings in counties located in Eighth Federal Reserve District states. [ABSTRACT FROM AUTHOR]

This paper reviews the evolution of the major credit and insurance programs undertaken by the U.S. government in support of urban housing. As the review makes clear, the Federal Housing Administration (FHA), Veterans Administration, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation have played major roles in the development of liberal and efficient primary and secondary mortgage markets in the United States. The development of capacity in mortgage lending and securitization in the private sector does suggest, however, that federally subsidizing mortgage market activities can be restrained with little effect on homeownership-- the principal goal of this federal activity. In particular, the orderly reduction in the mortgage investment activities of the government-sponsored enterprises (GSEs) and the imposition of guarantee fees on mortgage-backed securities insured by the GSEs are first steps in restraining federal activity. More generally, a concentration of FHA and GSE activity on first-time homebuyers would reduce federal risk exposure while preserving the economic rationale for government activity. [ABSTRACT FROM AUTHOR]

Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation's economic future. The paper offers three policies to eliminate the nation's enormous fiscal gap and avert bankruptcy: a retail sales tax, personalized Social Security, and a globally budgeted universal healthcare system. [ABSTRACT FROM AUTHOR]

The size of the U.S. federal government, as well as state and local governments, increased dramatically during the 20th century. This paper reviews several theories of government size and growth that are dominant in the public choice and political science literature. The theories are divided into two categories: citizen-over-state theories and state-over-citizen theories. The relationship between the 16th Amendment to the U.S. Constitution and the timing of government growth is also presented. It is likely that portions of each theory can explain government size and growth, but the challenge facing economists is to develop a single unifying theory of government growth. [ABSTRACT FROM AUTHOR]

In their paper "Targeting versus Instrument Rules for Monetary Policy," McCallum and Nelson critique targeting rules for the analysis of monetary policy. Their arguments are rebutted here. First, McCallum and Nelson's preference to study the robustness of simple monetary policy rules is no reason at all to limit attention to simple instrument rules; simple targeting rules may have more desirable properties. Second, optimal targeting rules are a compact, robust, and structural description of goal-directed monetary policy, analogous to the compact, robust, and structural consumption Euler conditions in the theory of consumption. They express the very robust condition of equality of the marginal rates of substitution and transformation between the central bank's target variables. Indeed, they provide desirable micro foundations of monetary policy. Third, under realistic information assumptions, the instrument rule analog to any targeting rule that McCallum and Nelson have proposed results in very large instrument rate volatility and is also, for other reasons, inferior to a targeting rule. [ABSTRACT FROM AUTHOR]

Comments on a paper by Kathryn Koenders and Richard Rogerson which proposes a new explanation for the apparent slow growth in employment during the past two recoveries. Observations on Koenders and Rogerson's model; General equilibrium (GE) version of the model by Koenders and Rogerson; Analysis of the GE model.

This paper measures the job-finding, separation, and job-to-job transition rates in the United States from 1948 to 2004. The job-finding and job-to-job transition rates are strongly procyclical and the separation rate is nearly acyclical, especially since 1985. The author develops a simple model in which unemployed workers search for jobs and employed workers search for better jobs. The model predicts that an increase in either the job-finding rate or the separation rate raises the job-to-job transition rate, which is qualitatively and quantitatively consistent with the available evidence. In contrast, if the job-finding rate were acyclical and the separation rate countercyclical, as is the conventional wisdom, the model predicts that the job-to-job transition rate would be counterfactually countercyclical. [ABSTRACT FROM AUTHOR]

This paper revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. First, the author argues that, contrary to what is often believed, there are many reasons why hours could be nonstationary in those models, while preserving the property of balanced growth. Second, the author shows that the postwar evidence for most industrialized economies is clearly at odds with the assumption of stationary hours per capita. Third, he examines the implications of that evidence for the role of technology as a source of economic fluctuations in the G7 countries. [ABSTRACT FROM AUTHOR]

This paper constructs daily measures of the real interest rate and expected inflation using commodity futures prices and the term structure of Treasury yields. We find that commodity futures markets respond to surprise increases in the federal funds rate target by raising the inflation rate expected over the next 3 to 9 months. There is no evidence that the real interest rate responds to surprises in the federal funds target. The data from the commodity futures markets are highly volatile; we show that one can substantially reduce the noise using limited information estimators such as the median change. Nevertheless, the basket of commodities actually traded daily is quite narrow and we do not know whether our observable rates are closely connected to the unobservable inflation and real rates that affect economywide consumption and investment decisions. [ABSTRACT FROM AUTHOR]

When taxing real property at the local level in the United States, land and improvements to the land, such as buildings, are generally taxed at the same rate. Two-rate (or split-rate) taxation departs from this practice by taxing land at a higher rate than structures. This paper begins with an elementary discussion of taxation and the economic rationale for two-rate taxation. In theory, moving to a two-rate tax reduces the deadweight losses associated with distortionary taxation and generates additional economic activity. The paper also provides a history of two-rate taxation in the United States and a summary of studies attempting to quantify its economic effects. Discussions of the practical and political challenges of implementing two-rate taxation complete the paper. [ABSTRACT FROM AUTHOR]

This paper tests the ability of consumer sentiment to predict retail spending at the state level. The results here suggest that, although there is a significant relationship between consumer sentiment measures and retail sales growth in several states, consumer sentiment exhibits only modest predictive power for future changes in retail spending. Measures of consumer sentiment, however, contain additional explanatory power beyond the information available in other indicators. By restricting attention to fluctuations in retail sales that occur at the business cycle frequency, the authors uncover a significant relationship between consumer sentiment and retail sales growth in many additional states. In light of these results, the authors conclude that the practical value of sentiment indices to forecast consumer spending at the state level is, at best, limited. [ABSTRACT FROM AUTHOR]

This paper compares various specifications of the gravity model of trade as nested versions of a general specification that uses bilateral country-pair fixed effects to control for heterogeneity. For each specification, we show that the atheoretical restrictions used to obtain them from the general model are not supported statistically. Because the gravity model has become the "workhorse" base-line model for estimating the effects of international integration, this has important empirical implications. In particular, we show that, unless heterogeneity is accounted for correctly, gravity models can greatly overestimate the effects of integration on the volume of trade. [ABSTRACT FROM AUTHOR]

In recent years, we have witnessed rising trade protectionism with broad ranges of tariffs imposed on intermediate products. In this article, we develop an accounting framework to evaluate the sectoral impacts of the current U.S.-China trade war. We find that U.S. final demand and intermediate demand for goods produced by China decline significantly, with the largest losses occurring in the Electronic and ICT (information and communications technology) industry and the Electrical industry. We obtain sizable deadweight losses for the United States, particularly in the Electronic and ICT; Electrical; and Furniture industries. We also find that, with a leakage rate of 20 percent, total losses to U.S. consumers and importers are $3.3 billion, about 0.05 percent of gross U.S. output, whereas the full leakage losses are $10.7 billion, or 0.16 percent of gross U.S. output, which is twice as much as the annual welfare gains from the North America Free Trade Agreement. [ABSTRACT FROM AUTHOR]

Comments on the study conducted by Dan Thornton which determined the effectiveness of daily data to estimate liquidity effects on the federal funds market in the United States. Overview of modern macroeconomic literature on liquidity effects; Discussion on a model of the federal funds market; Examination of the relationship between money and nominal interest rates in response to monetary policy innovations.

This paper studies how local policies-specifically, taxes on income with redistributive goals-affect the migration decisions of individuals and, in turn, how these migration decisions affect local and economy-wide tax and redistribution policies. The author develops a model of optimal taxation for a federal system of governments in the tradition of Mirrlees (1971), where taxes can be fully nonlinear but informational asymmetries prevent the equalization of well being across workers due to informational rents. This article extends the large literature on federalism and tax competition by obtaining optimal tax formulas for the federal and state governments. The literature has mainly focused on inefficiencies that arise due to fiscal externalities when governments have access to restricted instruments (for example, allowing only linear taxes). Contrary to previous results in that literature, the author shows here that state governments will provide redistribution through taxes and that, in a symmetric equilibrium, the overall tax schedule that combines the actions of both the federal and state governments is the same as that of a unitary government. This implies that, under the conditions analyzed in the model, there is no reason to restrict income redistribution objectives to the federal government only, as commonly prescribed in the literature. [ABSTRACT FROM AUTHOR]

In the mid-2000s, household private debt reached a new level 1.2 times larger than personal income- before collapsing during the Great Recession. This paper uses microeconomic data to document the main changes in personal debt and explore the behavior of debt across generations over two periods: before and after the Great Recession. Special emphasis is placed on participation rates by category of debt (the extensive margin), volume borrowed (the intensive margin), and default behavior. Key findings include that between 1999 and 2013 the fraction of individuals with only unsecured (e.g., credit card) debt decreased, as did their balances. In addition, most forms of private debt (mortgages, credit card debt, and auto loans) had significant boom-bust cycles, but the effects across generations have been very asymmetric. [ABSTRACT FROM AUTHOR]

Defends the author's paper dealing with the microeconomic foundations for monetary policy which was published in the May/June 1995 issue of Federal Reserve Bank of Saint Louis' `Review' magazine. Costs of information as result of the uncertainty on the duration of observed changes; Paper's lack of attack or opposition to the development of micro-foundations for macroeconomics.

The destructive economic impact of the COVID-19 pandemic was distributed unequally across the population. A worker's gender, race and ethnicity, age, education, industry, and occupation all mattered. We analyze the initial negative effect and its lingering effect through the recovery phase, across demographic and socioeconomic groups. The initial negative impact on employment was larger for women, minorities, the less educated, and the young whether or not we account for the industries and occupations they worked in. By February 2021, however, the differential effects across groups had gotten much smaller overall and had entirely vanished once the different industries and occupations they work in are taken into account. In particular, the differential effects between men and women vanished with or without the industry and occupation compositions taken into account, indicating that women's progress in the labor market over the past decades has not been wiped out by the pandemic. Across race and ethnicity, Hispanics and Asians were the worse hit but made up most of the lost ground, while the initial impact on Blacks was smaller but their recovery was slower. [ABSTRACT FROM AUTHOR]

Focuses on the contract-theoretic underpinnings of wage adjustment and worker displacement in moral hazard models of the labor market. Role of contracting imperfections in determining the fragility of employment relationships; Basic model of an employment relationship; Enforcement under various contracting environments; Efficiency wages and limited liquidity; Commentary on the paper from Christopher Foote, professor at Harvard University.

Introduces the six papers and six commentaries presented at the 23rd annual economic policy conference of the Federal Reserve Bank of St. Louis, Missouri concerning the issues of labor economics and macroeconomics. Kenneth McLaughlin's article about the skewness of the distribution of wage changes; Truman Bewley's `Why Wages Don't Fall During a Recession'; Discussion on the compensation process by Erica Groshen and Mark Schweitzer; Gilles Saint-Paul's study of job protection.

We investigate the role of global value chains in the declines of manufacturing employment and output in the U.S. during COVID-19. Specifically, we identify the role of global value chains by exploiting heterogeneity across industries in cross-country sourcing patterns and its interaction with exogenous cross-country variation in the containment policies introduced to combat the virus. We find that global value chains played a significant role in the decline of output and employment across U.S. manufactures. Moreover, we find a modest impact of diversifying or renationalizing global value chains in mitigating the economy's exposure to foreign shocks. [ABSTRACT FROM AUTHOR]

Presents a survey of literature on the relationship between inflation and economic growth. Review of the past decades' pictures of inflation and growth; High inflation crises and growth.

Argues that one fruitful approach in understanding the effects of monetary policy is to investigate the growth and welfare consequences of monetary policy shifts by modeling artificial economies and examining them using calibration methods. Approach as an explicit modeling of essential features of the hypothesized transmission mechanism; Broadening of the scope of inquiry.

Surveys the transmission mechanisms for monetary policy. Money and lending views on the monetary transmission mechanism; Real effects of nominal shocks; Measuring innovations to monetary policy.

Surveys the credit channels for monetary policy. Bank credit channels and financial accelerator as two possible credit channels for monetary policy; Evaluation of state of the macroeconomic and cross-sectional evidence on the credit channel.

Comments on Lee Ohanian and Alan Stockman's paper `Theoretical Issues of Liquidity Effects,' published in the May/June 1995 issue of the Federal Reserve Bank of Saint Louis' `Review.' Criticisms on the paper's treatment of the IS-LM model; Insufficiency of authors' representative-agent, cash-in-advance models to explain the liquidity effect of monetary policy.

Discusses the use of the monetary aggregate M2+ as a monetary policy proposed by the US Federal Reserve Board. Specification of the demand for M2+; Issues concerning the stability, indicator property and controllability of the monetary aggregate; Demand functions for M2+; Problems associated with the adoption of M2+; Effects on the economic and monetary policy.

Examines from a nonstructural, low frequency point of view, the basic proposition that money growth and inflation are closely related in the long run. Extension of Robert E. Lucas' illustration of the validity of the quantity theory; Support for money's long run neutrality; Statistical basis.

Opinion. Comments on the paper by Anderson and Kavajecz on the historical perspective of money aggregates of the Federal Reserve System in the United States. Importance of data on monetary aggregates to academic and policy research on macroeconomics; Focus on why researchers doing empirical monetary economics should care about the details of the measurement of monetary aggregates; More.

This study investigates how fiscal policy shocks affect the external sector through markup dynamics in advanced and developing economies. We focus on the role of markup dynamics as a channel through which fiscal policy has a distinct effect on real exchange rates. Using panel data from 32 countries, we employ a local projection to evaluate the impact of expansionary fiscal policy shocks on real exchange rates, markups, and current a ccounts. Our empirical findings show distinct responses to the shocks among advanced and developing countries regarding the real exchange rate, due to different markup d ynamics. Expansionary fiscal measures result in an appreciation of the real exchange rate and an increase in markup for developing countries, whereas advanced economies experience a decrease in markup and a depreciation of the real exchange rate. Markup dynamics vary between advanced and developing economies due to differences in firms' entry and exit conditions in their institutions. In advanced economies, expansionary fiscal policy shocks promote competition and new firm e ntry, r esulting in a reduced m arkup. On the other hand, unfavorable conditions in developing countries maintain or increase existing firms' market p ower. Our research highlights the heterogeneous effects of fiscal policy shocks on the external sector, emphasizing the need for policymakers to consider institutional and entry conditions while designing and implementing fiscal policies. [ABSTRACT FROM AUTHOR]

This article is based on the Homer Jones Memorial Lecture delivered at the Federal Reserve Bank of St. Louis, November 2, 2023. Headline inflation in the euro area declined rapidly to 2.9% in October 2023 from its peak of 10.6% one year earlier. The bulk of this large drop reflected the substantial decline in the contributions from energy and food inflation. Once these base effects reverse, continued disinflation relies critically on monetary policy succeeding in reducing underlying inflation in a steady and timely manner. The last mile is about this change in the disinflation process. Large uncertainty around the appropriate calibration and effective transmission of monetary policy, together with the risk of new supply-side shocks pulling inflation away from our target once again, makes this part of the disinflation process the most difficult. In particular, monetary policy transmission may be weaker, or less direct, than in the past, given the share of less-interest-rate-sensitive services industries in total activity has increased steadily in the euro area and globally over the past few decades. In addition, persistent worker shortages have muted the transmission through the labor market, with unemployment at record low levels despite the sharp increase in interest rates. So, although progress on inflation so far is encouraging, the disinflation process during the last mile will be more uncertain, slower, and bumpier. Continued vigilance is therefore needed. [ABSTRACT FROM AUTHOR]