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Is inflation (still) a global phenomenon? We study the international co-movement of inflation based on a dynamic factor model and in a sample spanning up to 56 countries during the 1960-2023 period. Over the entire period, a first global factor explains approximately 58% of the variation in headline inflation across all countries and over 72% in OECD economies. The explanatory power of global inflation is equally high in a shorter sample spanning the time since 2000. Core inflation is also remarkably global, with 53% of its variation attributable to a first global factor. The explanatory power of a second global factor is lower, except for select emerging economies. Variables such as a broad dollar index, the US federal funds rate, and a measure of commodity prices positively correlate with the first global factor. This global factor is also correlated with US inflation during the 70s, 80s, the GFC, and COVID. However, it lags these variables during the post-COVID period. Country-level integration in global value chains accounts for a significant proportion of the share of both local headline and core inflation dynamics explained by global factors. [ABSTRACT FROM AUTHOR]

We document a sizable effect of oil price fluctuations on US banking variables by estimating an SVAR with sign restrictions as in Baumeister and Hamilton (2019). We find that oil market shocks that lead to a contraction in world economic activity unambiguously lower the amount of bank credit to the US economy, tend to decrease US banks' net worth, and tend to increase the US credit spread. The effects can be strong and long-lasting, or more modest and short-lived, depending on the source of the oil price fluctuations. The effects are stronger for smaller and lower leveraged banks. [ABSTRACT FROM AUTHOR]

We study how random variation in the availability of highly educated, foreign-born workers impacts firm performance and recruitment behavior. We combine two rich data sources: 1) administrative employer-employee matched data from the US Census Bureau; and 2) firmlevel information on the first large-scale H-1B visa lottery in 2007. Using an event-study approach, we find that lottery wins lead to increases in firm hiring of college-educated, immigrant labor along with increases in scale and survival. These effects are stronger for small, skill-intensive, and high-productivity firms that participate in the lottery. We do not find evidence for displacement of native-born, college-educated workers at the firm level, on net. However, this result masks dynamics among more specific subgroups of incumbents that we further elucidate. [ABSTRACT FROM AUTHOR]

The Texas Manufacturing Outlook Survey (TMOS) is a monthly survey of area manufacturers conducted by the Federal Reserve Bank of Dallas. TMOS indexes provide timely information on manufacturing activity in Texas, which is useful for understanding broader changes in regional economic conditions. This paper describes the survey methodology and analyzes the explanatory and predictive power of TMOS indexes with regard to other measures of state economic activity. Regression analysis shows that several TMOS indexes successfully track changes in Texas employment, gross domestic product and consumer price index. Forecasting exercises show that several TMOS indexes are also useful in predicting future changes in some of these regional economic indicators. [ABSTRACT FROM AUTHOR]

How should industrial policies be directed to reduce distortions and foster economic development? We study this question in a multi-sector model with technology adoption, where the production of goods and modern technologies features rich network structures. We provide simple formulas for the sectoral policy multipliers, and provide insights regarding the power of alternative policy instruments. We devise a simple procedure to estimate the model parameters and the distribution of technologies across sectors, which we apply to Indian data. We find that technology adoption greatly amplifies the multipliers’ magnitudes, and it changes the ranking of priority sectors for industrial policy. Further, we find that adoption subsidies are the most cost-effective instrument for promoting economic development. [ABSTRACT FROM AUTHOR]

This paper documents the effect of the oil embargo and price cap on Russian oil exports in the wake of the Russian invasion of Ukraine in February 2022. We show that the embargo forced Russia to accept a $32/bbl discount on its Urals crude in March 2023 relative to January 2022, nearly half of which is directly attributable to the higher cost of shipping crude oil over longer distances, as Russia diverted much of its crude oil exports to India. Based on a calibrated model of global oil supply and demand, the remainder ($17/bbl) can be explained by increased Indian bargaining power. We also provide a similar analysis for the ESPO price discount on exports to China. In contrast, the price cap deprived Russia of the financial resources it spent on assembling a “shadow” fleet of tankers, but its effect on the Russian oil export price was negligible once the adoption of the price cap had facilitated the use of Western services to transport Russian oil to Asia. [ABSTRACT FROM AUTHOR]

This paper develops methods for the production and evaluation of censored density forecasts. The focus is on censored density forecasts that quantify forecast risks in a middle region of the density covering a specified probability, and ignore the magnitude but not the frequency of outlying observations. We propose a fixedpoint algorithm that fits a potentially skewed and fat-tailed density to the inner observations, acknowledging that the outlying observations may be drawn from a different but unknown distribution. We also introduce a new test for calibration of censored density forecasts. An application using historical forecast errors from the Federal Reserve Board and the Monetary Policy Committee (MPC) at the Bank of England suggests that the use of censored density functions to represent the pattern of forecast errors results in much greater parameter stability than do uncensored densities. We illustrate the utility of censored density forecasts when quantifying forecast risks after shocks such as the global financial crisis and the COVID-19 pandemic and find that these outperform the official forecasts produced by the MPC. [ABSTRACT FROM AUTHOR]

In coca-growing villages of Colombia, where pesos are scarce, coca-base is not only used as the main input for cocaine production-it also acts as a complementary currency (CC), circulating locally as a medium of exchange for day-to-day transactions. This paper provides a clear rationale for the economically-motivated adoption of a CC in a small open economy underprovided with official currency. An equilibrium currency shortage arises endogenously in our model, whereby shocks to the local supply of currency have a real impact on local trade and welfare. We show how a CC can mitigate the underprovision of liquidity and derive general insights relating the CC's characteristics to its ability to supplement the official currency. In an application, we quantify the unintended consequences of various anti-narcotic policies pursued by the Colombian government on liquidity provision in coca-growing villages and identify the least-harmful policy tools given the policy objectives at stake. [ABSTRACT FROM AUTHOR]

In this paper, I review the history of "core" PCE inflation and its rationale: remove volatile items with transitory shocks to better highlight the trend in inflation. Structural changes in the inflation process imply that, on a "reducing volatility" basis, the list of items excluded from the "core" inflation basket (aside from gasoline) is far from optimal. This is true whether one assesses volatility on the basis of a weighted component monthly, or an index monthly, or a 12-month index, or a 5-year index. In addition, I demonstrate other deficiencies of exclusion indexes. Excluded items do not just experience transitory shocks, but also have persistent trends; thus excluding them imparts a significant timevarying bias to core inflation. Meanwhile, items that are not excluded can experience volatility and moreover can cause core inflation to depart notably from trend inflation, sometimes at crucial moments. Two other prominent trend inflation measures, trimmed mean PCE inflation and median PCE inflation, gracefully address these issues, but themselves have notable time-varying bias. I discuss the source of the bias in these other measures and how to correct for bias in real time. I then summarize and extend a wide variety of evidence comparing these three trend measures. I conclude that, for a variety of considerations that are relevant for monetary policy deliberations and communication, either trimmed mean PCE inflation or median PCE inflation are superior measures. [ABSTRACT FROM AUTHOR]

Business owners in the United States are disproportionately represented among the very wealthy and are exposed to substantial idiosyncratic risk. Further, recent evidence indicates business income primarily reflects returns to the human (rather than financial) capital of the owner. Motivated by these facts, this paper characterizes the optimal taxation of income and wealth in an environment where business income depends jointly on innate ability, luck, and the accumulated past effort exerted by the owner. I show that in (constrained) efficient allocations, more productive entrepreneurs typically bear more risk and that the associated stationary distributions of income, wealth, and firm size exhibit the thick right (Pareto) tails observed in the data. Finally, when owners may save in a risk-free bond and trade shares of their business, I show that the optimal linear taxes in this environment call for positive taxes on firm profits and risk-free savings, and for a tax/subsidy on wealth that may assume either sign. [ABSTRACT FROM AUTHOR]

Quantile regression methods are increasingly used to forecast tail risks and uncertainties in macroeconomic outcomes. This paper reconsiders how to construct predictive densities from quantile regressions. We compare a popular two-step approach that fits a specific parametric density to the quantile forecasts with a nonparametric alternative that lets the "data speak." Simulation evidence and an application revisiting GDP growth uncertainties in the US demonstrate the flexibility of the nonparametric approach when constructing density forecasts from both frequentist and Bayesian quantile regressions. They identify its ability to unmask deviations from symmetrical and unimodal densities. The dominant macroeconomic narrative becomes one of the evolution, over the business cycle, of multimodalities rather than asymmetries in the predictive distribution of GDP growth when conditioned on financial conditions. [ABSTRACT FROM AUTHOR]

This paper explores the role of restrictions on the use of international reserves as economic sanctions. We develop a simple model of the strategic game between a sanctioning (creditor) country and a sanctioned (debtor) country. We show how the sanctioning country should impose restrictions optimally, internalizing the geopolitical benefits and the financial costs of a potential default from the sanctioned country. [ABSTRACT FROM AUTHOR]

In the US, unemployed workers must satisfy two requirements to receive unemployment insurance (UI): a tenure requirement that stipulates the minimum qualifying work spell and a monetary requirement that determines a past minimum wage. This paper develops a heterogeneous agents model with historydependent UI benefits in order to quantitatively obtain an optimal UI program design. We first conduct an empirical analysis using the discontinuity of UI rules at state borders and find that both the monetary and the tenure requirement reduce unemployment. The monetary requirement decreases the number of employers and the share of part-time workers, while the tenure requirement has the opposite effect. We then use a quantitative model to rationalize these results. When the tenure requirement is long, workers tend to accept more low paying jobs to become eligible for UI sooner and to protect themselves from risk, while the monetary requirement works conversely. We show that because it mitigates moral hazard, the monetary requirement can generate higher welfare levels than an increase in the length of the tenure requirement. [ABSTRACT FROM AUTHOR]

This paper analyzes the welfare effects of unemployment insurance in a life-cycle model, focusing on partial vs. general equilibrium effects. We study an OLG economy with learning-by-doing human capital accumulation. Agents can be employed or unemployed. While unemployed agents costly search for new jobs. We calibrate the model to the U.S. economy, and find that replacement ratio and potential duration are close to the current one. But, in contrast with the previous literature, we find that the optimal policies under general and partial equilibrium are almost the same. Through a series of exercises we conclude that the life-cycle model provides two key components, crucial for welfare evaluation: it emphasizes workers’ insurance needs by accurately reproducing the left tail of the wealth distribution, and generates a realistic response of precautionary savings to transfers. [ABSTRACT FROM AUTHOR]

This paper clarifies the conditions under which the state-of-the-art approach to identifying TFP news shocks in Kurmann and Sims (2021, KS) identifies not only news shocks but also surprise shocks. We examine the ability of the KS procedure to recover responses to these shocks from data generated by a conventional New Keynesian DSGE model. Our analysis shows that the KS response estimator tends to be strongly biased even in the absence of measurement error. This bias worsens in realistically small samples, and the estimator becomes highly variable. Incorporating a direct measure of TFP news into the model and adapting the identification strategy accordingly removes this asymptotic bias and greatly reduces the RMSE when TFP news are correctly measured. However, the high variability of this alternative estimator in small samples suggests caution in interpreting empirical estimates. We examine to what extent empirical estimates of the responses to news and surprise shocks from a range of VAR models based on alternative measures of TFP news are economically plausible. [ABSTRACT FROM AUTHOR]

We study the reaction of voters to shifts in local economic conditions. Using the departure from the gold standard of US trading partners in 1931 and the US in 1933, we exploit heterogeneity in export destinations, creating local differences in expenditure-switching in US counties by isolating the aggregate effects of the monetary shocks using time fixed effects. We find significant changes in local voting behavior in response to both shocks, one originating abroad, and another domestically. The response to both shocks have similar magnitude. We argue that voters punished and rewarded incumbents regardless of the shocks' origin, implying strong feedback from economic conditions to electoral outcomes. [ABSTRACT FROM AUTHOR]

This paper shows how policy announcements can be used to manage expectations and have a role as a policy tool. Using regional variation in radio exposure, I evaluate the impact of President Franklin D. Roosevelt's 1935 Fireside Chat, in which he showcased the introduction of important social policies, establishing a new cycle of the New Deal. I document that cities with higher exposure to the announcement exhibited a significant increase in spending on durable goods. I provide evidence that this result is not driven by wealth or other potentially confounding variables. The estimated effect is consistent with changes in expectations toward the policies announced. This paper shows the power of communication as a policy tool in affecting economic activity. [ABSTRACT FROM AUTHOR]

This paper examines the advantages and drawbacks of alternative methods of estimating oil supply and oil demand elasticities and of incorporating this information into structural VAR models. I not only summarize the state of the literature, but also draw attention to a number of econometric problems that have been overlooked in this literature. Once these problems are recognized, seemingly conflicting conclusions in the recent literature can be resolved. My analysis reaffirms the conclusion that the one-month oil supply elasticity is close to zero, which implies that oil demand shocks are the dominant driver of the real price of oil. The focus of this paper is not only on correcting some misunderstandings in the recent literature, but on the substantive and methodological insights generated by this exchange, which are of broader interest to applied researchers. [ABSTRACT FROM AUTHOR]

This paper studies shock-dependent exchange rate pass-through for Japan with a Bayesian structural vector autoregression model. We identify the shocks by complementing the traditional sign and zero restrictions with narrative sign restrictions related to the Plaza Accord. We find that the narrative sign restrictions are highly informative, and substantially sharpen and even change the inferences of the structural vector autoregression model originally identified with only the traditional sign and zero restrictions. We show that there is a significant variation in the exchange rate pass-through across different shocks. Nevertheless, the exogenous exchange rate shock remains the most important driver of exchange rate fluctuations. Finally, we apply our model to "forecast" the dynamics of the exchange rate and prices conditional on certain foreign exchange interventions in 2018, which provides important policy implications for our shock-identification exercise. [ABSTRACT FROM AUTHOR]

The Cobb-Douglas matching function is ubiquitous in search and matching models, even though it imposes a constant matching elasticity that is unlikely to hold empirically. Using a general constant returns to scale matching function, this paper first derives analytical conditions that determine how the cyclicality of the matching elasticity amplifies or dampens the nonlinear dynamics of the job finding and unemployment rates. It then demonstrates that these effects are quantitatively significant and driven by plausible variation in the matching elasticity. [ABSTRACT FROM AUTHOR]

In the US, income and expenditure-side estimates of GDP (GDPI and GDPE) measure "true" GDP with error and are available at a quarterly frequency. Methods exist for using these proxies to produce reconciled quarterly estimates of true GDP. In this paper, we extend these methods to provide reconciled historical true GDP estimates at a monthly frequency. We do this using a Bayesian mixed frequency vector autoregression (MF-VAR) involving GDPE, GDPI, unobserved true GDP, and monthly indicators of short-term economic activity. Our MF-VAR imposes restrictions that reect a measurement-error perspective (that is, the two GDP proxies are assumed to equal true GDP plus measurement error). Without further restrictions, our model is unidentified. We consider a range of restrictions that allow for point and set identification of true GDP and show that they lead to informative monthly GDP estimates. We illustrate how these new monthly data contribute to our historical understanding of business cycles and we provide a real-time application nowcasting monthly GDP over the pandemic recession. [ABSTRACT FROM AUTHOR]

This paper studies the optimal design of a liability-sharing arrangement as an infinitely repeated game. We construct a noncooperative model with two agents: one active and one passive. The active agent can take a costly and unobservable action to reduce the incidence of crisis, but a crisis is costly for both agents. When a crisis occurs, each agent decides unilaterally how much to contribute mitigating it. For the one-shot game, when the avoidance cost is too high relative to the expected loss of crisis for the active agent, the first-best is not achievable. That is, the active agent cannot be induced to put in effort to minimize the incidence of crisis in a static game. We show that with the same stage-game environment, the first-best cannot be implemented as a perfect public equilibrium (PPE) of the infinitely repeated game either. Instead, at any constrained efficient PPE, the active agent "shirks" infinitely often, and when crisis happens, the active agent is "bailed out" infinitely often. The frequencies of crisis and bailout are endogenously determined in equilibrium. The welfare optimal equilibrium being characterized by recurrent crises and bailouts is consistent with historical episodes of financial crises, which features varying frequency and varied external responses for troubled institutions and countries in the real world. We explore some comparative statics of the PPEs of the repeated game numerically. This paper studies the optimal design of a liability-sharing arrangement as an infinitely repeated game. We construct a noncooperative model with two agents: one active and one passive. The active agent can take a costly and unobservable action to reduce the incidence of crisis, but a crisis is costly for both agents. When a crisis occurs, each agent decides unilaterally how much to contribute mitigating it. For the one-shot game, when the avoidance cost is too high relative to the expected loss of crisis for the active agent, the first-best is not achievable. That is, the active agent cannot be induced to put in effort to minimize the incidence of crisis in a static game. We show that with the same stage-game environment, the first-best cannot be implemented as a perfect public equilibrium (PPE) of the infinitely repeated game either. Instead, at any constrained efficient PPE, the active agent "shirks" infinitely often, and when crisis happens, the active agent is "bailed out" infinitely often. The frequencies of crisis and bailout are endogenously determined in equilibrium. The welfare optimal equilibrium being characterized by recurrent crises and bailouts is consistent with historical episodes of financial crises, which features varying frequency and varied external responses for troubled institutions and countries in the real world. We explore some comparative statics of the PPEs of the repeated game numerically. [ABSTRACT FROM AUTHOR]

It is well known that monetary and fiscal policy are connected by a common budget constraint. In this paper, we study how this manifests itself in the context of the Eurozone, where that connection links the European Central Bank, the 19 national central banks, the Treasuries of 19 countries, and the European Union. Our goal is twofold. First, we wish to clarify how seigniorage ows from the monetary authority to the budget of each country. Second, we seek to answer the question of how the taxpayers of each country are affected by a default of one of the participants to the union. In answering this question, we analyze the mechanisms that ensure (or do not ensure) that net liabilities across countries stay bounded, and we establish how the answer depends on the liquidity premium that each category of assets commands (cash, excess reserves within the Eurosystem, and government bonds). We find that the official risk-sharing provisions of the policy of quantitative easing (QE), whereby national central banks retain 90% of the risk intrinsic in bonds of their own country, only holds under restrictive assumptions; under plausible scenarios, a significantly larger fraction of the risk is mutualized. [ABSTRACT FROM AUTHOR]

In a series of recent studies, Raffaella Giacomini and Toru Kitagawa have developed an innovative new methodological approach to estimating sign-identified structural VAR models that seeks to build a bridge between Bayesian and frequentist approaches in the literature. Their latest paper with Matthew Read contains thought-provoking new insights about modeling narrative restrictions in sign-identified structural VAR models. My discussion puts their contribution into the context of Giacomini and Kitagawa's broader research agenda and relates it to the larger literature on estimating structural VAR models subject to sign restrictions. [ABSTRACT FROM AUTHOR]

Some observers have argued that the short selling of bank stock contributes to bank runs and bank failures. Previously, no evidence has been available. We find no evidence that more short selling of bank stock is associated with materially larger outflows of bank deposits. We believe this means that proposals to restrict the short selling of bank stock should be supported by other arguments. [ABSTRACT FROM AUTHOR]

For decades, the Federal Reserve Bank of Cleveland (FRBC) has produced median and trimmed-mean consumer price index (CPI) measures. These have proven useful in various contexts, such as forecasting and understanding post-COVID inflation dynamics. Revisions to the FRBC methodology have historically involved increasing the level of disaggregation in the CPI components, which has improved accuracy. Thus, it may seem logical that further disaggregation would continue to enhance its accuracy. However, we theoretically demonstrate that this may not necessarily be the case. We then explore the empirical impact of further disaggregation along two dimensions: shelter and non-shelter components. We find that significantly increasing the disaggregation in the shelter indexes, when combined with only a slight increase in non-shelter disaggregation, improves the ability of the median and trimmed-mean CPI to track the medium-term trend in CPI inflation and marginally increases predictive power over future movements in CPI inflation. Finally, we examine the practical implications of our preferred degree of disaggregation. Our preferred measure of the median CPI suggests that trend inflation was lower pre-pandemic, while both our preferred median and trimmed-mean measures suggest a faster acceleration in trend inflation in 2021. We also find that higher disaggregation marginally weakens the Phillips curve relationship between median CPI inflation and the unemployment gap, though it remains statistically significant. [ABSTRACT FROM AUTHOR]

Consumers purchase energy in many forms. Sometimes energy goods are consumed directly, for instance, in the form of gasoline used to operate a vehicle, electricity to light a home, or natural gas to heat a home. At other times, the cost of energy is embodied in the prices of goods and services that consumers buy, say when purchasing an airline ticket or when buying online garden furniture made from plastic to be delivered by mail. Previous research has focused on quantifying the pass-through of the price of crude oil or the price of motor gasoline to U.S. inflation. Neither approach accounts for the fact that percent changes in refined product prices need not be proportionate to the percent change in the price of oil, that not all energy is derived from oil, and that the correlation of price shocks across energy markets is far from one. This paper develops a vector autoregressive model that quantifies the joint impact of shocks to several energy prices on headline and core CPI inflation. Our analysis confirms that focusing on gasoline price shocks alone will underestimate the inflationary pressures emanating from the energy sector, but not enough to overturn the conclusion that much of the observed increase in headline inflation in 2021 and 2022 reflected non-energy price shocks. [ABSTRACT FROM AUTHOR]

Using innovative longitudinal data from a survey of unemployment insurance (UI) recipients, we test several implications of a canonical job search model for reservation wages during unemployment spells. First, consistent with the model, we find that reservation wages fall faster when UI benefit durations are shorter. However, workers set their initial reservation wages higher, and adjust them slower, relative to model predictions. Second, workers' expectations--elicited at the beginning of their unemployment spell--about how their reservation wage will evolve if they remain unemployed are largely congruent with reservation wage realizations, as assumed in the canonical model. Third, our data on expectations and realizations suggest that dynamic selection over the unemployment spell is inconsequential for our results. Fourth, higher wages on workers' lost jobs, relative to predictions from a Mincerian wage regression, hasten the expected and realized declines in reservation wages over the unemployment spell. Finally, reservation wages are a more powerful predictor of re-employment wages than wages on the previous job. [ABSTRACT FROM AUTHOR]

We use emergency outages of coal generators as an exogenous source of variation in the power generation stack to study how changes in marginal fuel affect real-time prices. Contrary to anecdotal evidence, we find that wholesale prices are less volatile when natural gas is on the margin more often. [ABSTRACT FROM AUTHOR]

We use long-run annual cross-country data for 10 macroeconomic variables to evaluate the long-horizon forecast distributions of six forecasting models. The variables we use range from ones having little serial correlation to ones having persistence consistent with unit roots. Our forecasting models include simple time series models and frequency domain models developed in Müuller and Watson (2016). For plausibly stationary variables, an AR(1) model and a frequency domain model that does not require the user to take a stand on the order of integration appear reasonably well calibrated for forecast horizons of 10 and 25 years. For plausibly non-stationary variables, a random walk model appears reasonably well calibrated for forecast horizons of 10 and 25 years. No model appears well calibrated for forecast horizons of 50 years. [ABSTRACT FROM AUTHOR]

We link bond market functioning to future economic activity through a new measure, the Corporate Bond Market Distress Index (CMDI). The CMDI coalesces metrics from primary and secondary markets in real time, offering a unified measure to capture access to debt capital markets. The index correctly identifies periods of distress and predicts future realizations of commonly used measures of market functioning, while the converse is not the case. We show that disruptions in access to corporate bond markets have an economically material, statistically significant impact on the real economy, even after controlling for standard predictors including credit spreads. [ABSTRACT FROM AUTHOR]

We find evidence that bank capital matters for the distribution of future GDP growth but not its central tendency. Growth in the aggregate bank capital ratio compresses the tails of expected GDP growth, a relationship that is particularly robust in reducing the probability of the worst GDP outcomes. These results suggest a role for regulation to mitigate financial crises, with an additional 100 basis points of bank capital reducing the probability of negative GDP growth by 10 percent at the one-year horizon, even controlling for credit growth and financial conditions, and without a significant drag on expected GDP growth. [ABSTRACT FROM AUTHOR]