Modelling the size, cost and health impacts of universal basic income: what can be done in advance of a trial?

Opposition to Universal Basic Income (UBI) is encapsulated by Martinelli’s claim that ‘an affordable basic income would be inadequate, and an adequate basic income would be unaffordable’. In this article, we present a model of health impact that transforms that assumption. We argue that UBI can affect higher level social determinants of health down to individual determinants of health and on to improvements in public health that lead to a number of economic returns on investment. Given that no trial has been designed and deployed with that impact in mind, we present a methodological framework for assessing prospective costs and returns on investment through modelling to make the case f..

Macroeconomics

Are Bank Bailouts Welfare Improving?

The financial sector bailouts seen during the Great Recession generated substantial opposition and controversy. We assess the welfare benefits of government-funded emergency support to the financial sector, taking into account its effects on risk-taking incentives. In our quantitative general equilibrium model, the financial crisis probability depends on financial intermediaries' balance sheet choices, influenced by capital adequacy constraints and ex ante known emergency support provisions. These policy tools interact to make financial sector bailouts welfare improving when capital adequacy constraints are consistent with the current Basel III regulation, but potentially welfare decreasing ..

Macroeconomics

Monetary Policy in a Schumpeterian Growth Model with Two R&D Sectors

We explore the growth and welfare effects of monetary policy in a two-sector Schumpeterian economy with cash-in-advance (CIA) constrained R&D investment in both sectors. We show that a nominal interest rate increase generates two effects on equilibrium labor allocation: a manufacturing-R&D-reallocation effect and a cross-R&D-sector effect. The former reduces economic growth by shifting labor from R&D to production, whereas the latter can enhance it by shifting labor from the less productive R&D sector to the more productive one. Unless the high productivity R&D sector is severely more CIA-constrained than the low productivity one, aggregate R&D overinvestment is sufficient but not necessary ..

Macroeconomics

Liquidity, Capital Pledgeability and Inflation Redistribution

We study the redistributive effects of expected inflation in a microfounded monetary model with heterogeneous discount factors and collateral constraints. In equilibrium, this heterogeneity leads to borrowing and lending. Model assumptions also guarantee a tractable distribution of money and capital holdings. Several results emerge from our analysis. First, in this framework expected inflation is detrimental to capital accumulation. Second, expected inflation affects borrowing and lending when collateral constraints are present, thus also inducing redistributive effects through credit. Third, we find this channel to be regressive when we calibrate our model using US data. This is because the..

Macroeconomics

How Does Market Power Affect Fire-Sale Externalities?

An important role of capital and liquidity regulations for financial institutions is to counteract inefficiencies associated with “fire-sale externalities,” such as the tendency of institutions to lever up and hold illiquid assets to the extent that their collective actions increase financial vulnerabilities. However, theoretical models that study such externalities commonly assume perfect competition among financial institutions, in spite of high (and increasing) financial sector concentration. In this post, which is based on our forthcoming article, we consider instead how the effects of fire-sale externalities change when financial institutions have market power.

Macroeconomics

Unemployment in the Time of COVID-19: A Flow-Based Approach to Real-time Unemployment Projections

This paper presents a flow-based methodology for real-time unemployment rate projections and shows that this approach performed considerably better at the onset of the COVID-19 recession in spring 2020 in predicting the peak unemployment rate as well as its rapid decline over the year. It presents an alternative scenario analysis for 2021 based on this methodology and argues that the unemployment rate is likely to end slightly below 5 percent by the end of 2021. The predictive power of the methodology comes from its combined use of real-time data with the flow approach.

Macroeconomics

COVID Government-Aid Programs and Wealth Creation

The purpose of this study is to investigate the impact of COVID government-aid programs on wealth creation. When the pandemic spread to the US, the economy shut down. The lockdown compelled state governments across the United States to enforce shelter-in-place policies. As a result, unemployment surged, and many government-aid programs were created to help working-class families survive through the lockdown since the economy was at a standstill. Those whose political leanings favor the Democratic Party and Progressive Movements have argued that the COVID government-aid programs contributed to creating wealth, increased GDP growth, and increased the consumers’ income and consumption. Those ..

Macroeconomics

Flexible Average Inflation Targeting and Prospects for U.S. Monetary Policy: a speech at the Symposium on Monetary Policy Frameworks, The Brookings Institution, Washington, D.C. (via webcast), November 8, 2021

Macroeconomics

An Efficient Long-Run Economic Growth Strategy for Estonia

International tourism and FDI inflows have generated detectable beneficial impacts on the economy of Estonia in the last decades. However, recently, poor international market conditions mostly caused by the trade war and COVID-19 pandemic have been a potential threat to these two factors. Besides, the poor performance of investments in recent years is behind the stagnation of productivity in Estonia. This study examines the dynamics of the effects of these factors on the rate of economic growth in Estonia and provides policy implications in line with sustained recovery. A Nonlinear ARDL technique is employed in this study to investigate the long-run effects of FDI and the degree of tourism s..

Macroeconomics

Hey, Economist! Tell Us about the New Applied Macroeconomics and Econometrics Center

Marco Del Negro is the director of the Federal Reserve Bank of New York’s new research center, AMEC, which stands for the Applied Macroeconomics and Econometrics Center. Ahead of hosting its first symposium, “Heterogeneity in Macroeconomics: Implications for Policy,” Liberty Street Economics caught up with Del Negro to learn more about his vision for AMEC.

Macroeconomics

Financial Factors, Firm size and Firm Potential

Using a unique dataset covering the universe of Portuguese firms and their credit situation we show that financially constrained firms are found across the entire firm size distribution, account for a larger total asset share compared to standard heterogeneous firms models, and exhibit a higher cyclical sensitivity, conditional on size. In light of these findings we reassess the importance of the firm distribution in shaping aggregate outcomes in the canonical model of heterogeneous firms with financial frictions. We augment the productivity process with ex-ante heterogeneity of firms, allowing us to match the distribution of constrained firms conditional on size. This, together with the fac..

Macroeconomics

Estimating the elasticity of consumer prices to the exchange rate: an accounting approach

We analyse the elasticity of the household consumption expenditure (HCE) deflator to the exchange rate, using world input-output tables (WIOT) from 1995 to 2019. In line with the existing literature, we find a modest output-weighted elasticity of around 0.1. This elasticity is stable over time but heterogeneous across countries, ranging from 0.05 to 0.22. Such heterogeneity mainly reflects differences in foreign product content of consumption and intermediate products. Direct effects through imported consumption and intermediate products entering domestic production explain most of the transmission of an exchange rate appreciation to domestic prices. By contrast, indirect effects linked to p..

Macroeconomics

Competition, Ageing and Lack of Investment

Abstract This report discusses factors that have caused a decrease in tangible investments in machinery and equipment, and intangible assets in Finland. A decline in the R&D investments of the electronics industry practically entirely explains a decrease in investments in Finland, which has prolonged the recovery from the collapse of productivity growth during the financial crisis. The corporate sector, which accounts for most investments, also contracted so much during the financial crisis relative to the rest of the economy that the aggregate productive investments remained lower than before. Companies’ investments in relation to their value added did not decrease, however. The main reas..

Macroeconomics

Ascendant altruism and asset price bubbles

We consider an overlapping generations economy with altruism towards parents and a long-lived asset that delivers no dividends (pure bubble asset). We explore the role of ascendant altruism on the dynamics properties of equilibrium and rational bubbles in the cases of exogenous and endogenous growths.

Macroeconomics

Assessing the nexus between mobile financial service usage and inflation – evidence from Bangladesh

This paper set out to uncover the nexus between the propensity of mobile financial service (MFS) usage and inflation in Bangladesh, if any. This paper hypothesizes that the usage of MFS will lead to an increase in the velocity of money, i.e., the ease of using MFS in lieu of cash will lead to money transferring ownership quicker. All things constant, this will lead to inflation—as stipulated by the quantity theory of money. To this end, monthly data pertaining to the general price index, number of MFS agents, number of average daily MFS transactions, number of MFS clients and number of banks supporting MFS transactions have been used ranging from FY16 to FY20, subject to availability. The ..

Macroeconomics

The Italian nominal interest rate conundrum: a problem of growth or public finance?

In the economic literature, there has been a large heterogeneity of results in relation to the impact of fiscal variables on interest rates. Focusing on the Italian economy and considering the nature of our interest rate determinants (public finance variables and nominal GDP growth), we decided to undertake a cointegration analysis relying on the Autoregressive Distributed Lag (ARDL) bound test approach, a particular suitable procedure within this peculiar framework, able to disentangle short-run and long-run dynamics. Our results are quite controversial, shedding new light on the role of gross debt and primary balance as a share of GDP in relation to the long-term Italian nominal interest r..

Macroeconomics

Early monetary policies of the Tokugawa shogunate and merchants f coping strategies: 1695?1736

The Tokugawa monetary system was a new experience in Japanese history, and the Genroku debasement, which was necessitated by the exhaustion of gold and silver resources, was a new experiment for both the shogunate and merchants, the representatives of the townspeople. For the same reason, the shogunate had no choice but to implement a monetary policy gnominalistically, h but the merchants responded gmetallistically. h This was because the merchants valued money as bullion. The conflict between the shogunate and merchants played an important role in invigorating the Tokugawa economy. This study describes the historical economic situation.

Macroeconomics

Do workers share in firm success? Pass-through estimates for New Zealand

We study the extent to which firm financial performance is passed on to workers in the form of higher wages and the degree to which this pass-through has changed over the period 2002-2018. We use both value added per worker and a measure of quasi-rents as measures of financial performance. Value added per worker is the standard measure used internationally. Quasi-rents better approximate the resources available to be shared between workers and firms as it takes into account the rental cost of capital as well as the reservation wages of workers. We estimate the reservation wage bill for each firm using estimates from a two-way fixed-effect model. We estimate models similar to those typically ..

Macroeconomics

Class Struggle in a Schumpeterian Economy

This study explores the conflict of interests between workers and capitalists in a Schumpeterian economy. We consider the limit on the market power of monopolistic firms as a policy instrument and derive its optimal levels for workers and capitalists, respectively. Because monopolistic profit provides incentives for innovation, workers may prefer monopolistic firms to have some market power, but they prefer less powerful monopolistic firms than capitalists. Workers' preferred level of monopolistic power is decreasing in their discount rate and increasing in innovation productivity and the quality step size. Capitalists' preferred level of monopolistic power is increasing in the quality step ..

Macroeconomics

Does money growth tell us anything about inflation?

Economists and central bankers no longer consider monetary aggregates relevant for inflation forecasts. We explain this neglect by advancing and testing the hypothesis that monetary aggregates are only relevant for inflation in unsettled monetary and inflationary conditions. When inflation is basically stable around the central bank target (1.9 percent), as it has been in most of the last two decades, there is no apparent relationship between monetary aggregates and inflation....

Macroeconomics

Optimal Monetary Policy According to HANK

We study optimal monetary policy in an analytically tractable Heterogeneous Agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from that in a representative agent model because monetary policy can affect consumption inequality by reducing both idiosyncratic consumption risk and the inequality that arises from households’ unequal exposures to aggregate shocks. Simple target criteria summarize the planner’s trade-off between consumption inequality, productive efficiency and price stability. Mitigating consumption inequality requires putting some weight on stabilizing the level of output and correspondingly reducing the weights on the output gap and th..

Macroeconomics

Evaluating the Effects of Forward Guidance and Large-scale Asset Purchases

This paper evaluates the effects of forward guidance and large-scale asset purchases (LSAP) when the nominal interest rate reaches the zero lower bound. I investigate the effects of the two policies in a dynamic new Keynesian model with financial frictions adapted from Gertler and Karadi (2011, 2013), with changes implemented so that the framework delivers realistic predictions for the effects of each policy on the entire yield curve. I then match the change that the model predicts would arise from a linear combination of the two shocks with the observed change in the yield curve in a 30-minute window around Federal Reserve announcements, allowing me to identify the separate contributions of..

Macroeconomics

Euro area time-varying cyclicality of fiscal policy

We assess the cyclicality of fiscal policy in the 19 Euro area countries, notably during recessions, for the period 1995-2020. We use a time-varying measure of fiscal cyclicality to describe fiscal policy developments. The results suggest that during recessions discretionary fiscal policy becomes more pro-cyclical, but the overall budget balance becomes more counter-cyclical. Hence, pursuing a Ricardian fiscal regime by more indebted countries leads to higher counter-cyclicality of fiscal policy. Government size reduces counter-cyclicality, as well as trade openness, and financial development has a positive impact on counter-cyclicality.

Macroeconomics

TLTROs and collateral availability in Italy

In response to the Covid-19 pandemic, the ECB has adopted a broad set of measures aimed at ensuring that banks maintain wide access to central bank liquidity. In an environment where refinancing operations are conducted under a full allotment regime, it is important to analyse whether collateral scarcity might have influenced participation in the TLTRO-III operations and the contribution made by collateral easing measures. The analysis shows that the collateral availability of the Italian banking system proved to be adequate and it allowed Italian banks to benefit from the favorable conditions introduced under the TLTRO-III programme. For almost all the banks, the absence of collateral easin..

Macroeconomics

What Did Homeowners Do with Home Equity Borrowing? Contemporaneous and Long-term Effects

Using a panel sample from the Panel Study Income Dynamics (1999-2015), I find that homeowners’ contemporaneous spending and nonhome wealth increased with home equity withdrawals, but their longer-term spending and wealth declined if their home equity was extracted during the housing boom period. Following Hurst and Stafford’s (2004) definition of liquidity constraint, I find that the constrained homeowners' contemporaneous spending increased less, while their financial wealth increased more than those of the unconstrained. Unconstrained homeowners invested more than constrained homeowners in nonhome real estate and businesses. In the long run, the consumption spending of both g..

Macroeconomics

Going Cashless: Evidence from Japan’s Point Reward Program

In October 2019, the Japanese government started a unique program that offered points (discounts) for cashless payments. Using credit card transaction data, we compare credit card usage at restaurants that participated in this program and those that did not. Our main findings are as follows. First, the number of card users was 9- 12 percent higher in participating than in non-participating restaurants. Second, the positive impact of the program on the number of card users persisted even after the program ended in June 2020, indicating that the program had a lasting effect to promote cashless payments. Third, the impact of the program was significantly larger at restaurants that started accep..

Macroeconomics

It's not always about the money, sometimes it's about sending a message: Evidence of Informational Content in Monetary Policy Announcements

This paper introduces a transparent framework to identify the informational content of FOMC announcements. We do so by modelling the expectations of the FOMC and private sector agents using state of the art computational linguistic tools on both FOMC statements and New York Times articles. We identify the informational content of FOMC announcements as the projection of high frequency movements in financial assets onto differences in expectations. Our recovered series is intuitively reasonable and shows that information disclosure has a significant impact on the yields of short-term government bonds.

Macroeconomics

The Great Transition: Kuznets Facts for Family-Economists

The 20th century beheld a dramatic transformation of the family. Some Kuznets style facts regarding structural change in the family are presented. Over the course of the 20th century in the United States fertility declined, educational attainment waxed, housework fell, leisure increased, jobs shifted from blue to white collar, and marriage waned. These trends are also observed in the cross-country data. A model is developed, and then calibrated, to address the trends in the US data. The calibration procedure is closely connected to the underlying economic logic. Three drivers of the great transition are considered: neutral technological progress, skill-biased technological change, and drops ..

Macroeconomics

COVID-19, Income Shocks and Female Employment

Existing evidence shows that the Covid-19 pandemic has led to employed women witnessing larger losses in the labor market in India. We examine the heterogeneity that underlie these trends by studying the impact of Covid-19 induced income shocks on female employment. Using individual level panel data and a difference-in-differences strategy that exploits lockdown timing (April 2020) and accounts for seasonal employment trends, we find that women in households facing a hundred percent reduction in household male income during the lockdown were 1.5 pp (25%) more likely to take up work during the "unlockdown" months (June-August 2020). We also find these results to be predominant in poorer and l..

Macroeconomics

O Tell Me The Truth About Central Bank Digital Currency

Macroeconomics