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Reaching for yield, which we define as an investor preference for higher-yield bonds at a given rating or for higher-rated bonds at given yields, is associated with inflated valuation and thus negatively predicts risk-adjusted returns. Controlling for ratings, alphas are lower for higher-yield bonds, whereas, controlling for yields, alphas are lower for safer-looking, higher-rated bonds. Future bond returns are particularly low when current interest rates are low and demand from yield-reaching investors increases. These bonds experience more frequent downgrades and defaults, suggesting that they are riskier despite their high valuation. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The e-companion and data are available at https://doi.org/10.1287/mnsc.2023.4920. [ABSTRACT FROM AUTHOR]

Interest rates have risen rapidly in many advanced economies over the last two years, leading to a monetary squeeze. The impact of this squeeze varies across countries due to factors such as private debt levels, the distribution of debt, and the average maturity of fixed rate debt. The UK, Italy, and Germany are expected to be the hardest hit economies, while Korea and Japan will be the least affected. Other indicators of the monetary squeeze include money and credit growth, changes in bank credit standards, quantitative tightening, and property price changes. Overall, the findings suggest downside risks to growth in Italy, Spain, and Australia, while supporting positive GDP forecasts for Korea and Japan. [Extracted from the article]

This document provides a list of recommended readings for undergraduate economics teachers, covering a range of topics including wealth taxation, corporate bonds, productivity growth, Federal Home Loan Banks, and non-fungible tokens (NFTs). It also mentions a special issue of the Journal of Benefit-Cost Analysis focusing on sustainable development goals. The document discusses the congestion pricing plan in Manhattan, implemented by the Metropolitan Transportation Authority (MTA), which aims to reduce traffic and raise funds for public transit. The Journal of Economic Education has published a symposium on economics education, highlighting the decline in students taking economics courses. Steven Levitt, co-author of Freakonomics, has retired from academic economics, citing a lack of impact and a desire to reach a wider audience through media platforms. The Dunning-Kruger effect, which refers to people lacking the expertise to recognize their own lack of expertise, is discussed in an interview with David Dunning. Edward Glaeser explores the concept of the "15-minute city" and its potential impact on racial and income segregation in American cities. The document also examines the changing nature of tipping in the United States, with tipping becoming more expected in various transactions. Lastly, it discusses the decline in the shareholder tax base in the United States, with foreign and tax-exempt investors now dominating stock ownership. [Extracted from the article]

I examine the role of costly consumer search for the pricing of deposits. Estimates of a model of heterogeneous search cost households reveal a large fraction of high‐search‐cost depositors composed of elderly and less financially sophisticated households. Those households grant banks significant monopoly power that results in low and asymmetric interest rate pass‐through. The predictions of the estimated model are consistent with responses in the Survey of Consumer Finances to questions related to financial sophistication, search for investment return, and deposit allocations across multiple bank accounts. The estimated model also reveals a nonmonotone relationship between bank entry, deposit rates, and consumer surplus. [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]

Two hallmarks of U.S. monetary policy since the 1981–1982 recession are declining interest rates and moderation in inflation, at least until recently. Coincident with these trends was a surge in U.S. wealth inequality, with the Gini coefficient up by 0.070 between 1983 and 2019. This article analyzes the connection between these two developments on the basis of the Survey of Consumer Finances. Contrary to expectations, the article finds that these two monetary effects reduced wealth inequality rather than increasing it. The effect is quite sizeable, with the Gini coefficient declining by 0.045 over these years. Asset price changes and debt devaluation also accounted for 72.6 percent of the advance of mean wealth and would have led to a 204.9 percent gain in median wealth compared to its actual rise of 23.4 percent. Moreover, they helped lower the racial wealth gap rather than enlarging it. These results are at odds with previous literature in which estimates range from a weak negative effect on inequality to neutral, small positive, and strong positive. In terms of methodology, this article differs from previous work by focusing on only the direct effects of interest rate changes and inflation on the household balance sheet. [ABSTRACT FROM AUTHOR]

The enduring impact of the COVID-19 crisis on the financial sector is undeniable, persisting far beyond the eventual waning of the pandemic. This research examines central bank interventions during the pandemic, using a quantitative event study approach over a five-day window to analyse the impact of 188 monetary policy announcements on banking stocks in China, the U.S., and Europe. Our results demonstrate how monetary policy announcements targeting different economic mechanisms have produced a diverse market reaction throughout the COVID-19 pandemic. Namely, cuts in interest rates and the maintenance of a low interest rate environment by the Federal Reserve resulted in negative abnormal returns in the U.S.A., while short-term announcements surrounding intra-day credit and liquidity provisions boosted banking sector stock prices. In Europe, a muted reaction by the banking sector was observed, with negative abnormal returns observed in response to the ECB's 2% inflation objectives. Finally, banking stocks in China responded strongly and positively to foreign currency and exchange-related announcements by the People's Bank of China. The results and insights from this analysis can thus inform preparations made by policymakers, governments, and financial market stakeholders in the event of future waves of COVID-19, or further extreme societal disruptions. [ABSTRACT FROM AUTHOR]

Carbon risk, a type of climate risk, is expected to have a crucial impact, especially on high-carbon-emitting, "polluting" firms as opposed to less carbon-intensive, "clean" ones. With a rising number of actions and policies being continuously proposed to mitigate these concerns and an increasing number of investors demanding more climate adaptation initiatives, this transition risk will certainly need to be incorporated into a firm's credit risk assessment. In this paper, we explore the impact of the carbon risk factor, constructed as the daily median difference in default protection between polluting and clean European firms, on firm creditworthiness using quantile regressions on the tail distribution of credit default swap spreads for different maturities between 2020 and 2023. In particular, the recent European interest rate hikes lead to unexpected conclusions about when the carbon risk factor affects firm creditworthiness and how rapidly the net-zero economy transition must occur. Contrary to the previous literature, we find that investors are expecting the transition to occur in the medium-to-long term. [ABSTRACT FROM AUTHOR]