Predict financial crises, target inflation, etc.

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This week’s studies Gathering of the Hutchins note that the official CPI may be underestimating inflation, expectations of falling demand are causing small businesses to delay reopening, and more.

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Are economic crises predictable? Robin Greenwood, Samuel Hanson and Andrei Shleifer of Harvard and Jakob Ahm Sorensen of Copenhagen Business School say they can be predicted with data on credit and assets. The authors construct a dataset that includes indicators of financial crisis, credit growth to households and non-financial corporations, house prices and stock prices for 42 countries between 1950 and 2016. Using these Data, they identify periods of “overheating” the credit market when credit growth and asset price growth is both high. The authors find that when household or non-financial corporate credit markets overheat, the probability of a financial crisis in the next three years is around 40%. Despite the modest false positive rate of this predictive mechanism, the authors argue that crises are predictable enough to warrant early action by central banks when warning indicators emerge. In addition, since financial crises can lead to a permanent loss of real output, the authors recommend a much more frequent use of precautionary macro-financial policies, such as tightening monetary policy or increasing fund requirements. own banks.

Continuously low inflation drives nominal interest rates down and limits the monetary space – to what extent nominal rates can be reduced – available to central bankers to fight a recession. Some economists argue that a higher inflation target could create more money space by increasing inflation, and therefore nominal interest rates. Jean-Paul L’Huillier de Brandeis and Raphael Schoenle of the Federal Reserve Bank of Cleveland find that the monetary space does not respond one for one to an increase in the inflation target: a 2 percentage point increase in the target inflation would only generate 1.28 percentage point of monetary space; to get the 2 percentage points of space forecast, the inflation target should increase by around 3 percentage points. Firms adjust prices more frequently when inflation is higher, the authors explain, so monetary policy is less effective and central banks must react more aggressively. Therefore, the optimal inflation target must be around 1 percentage point higher to account for the loss of power.

Christopher R. Knittel and Bora Ozaltun of MIT correlate county-level COVID-19 death rates from April 4 to May 27, 2020 with county-level socioeconomic variables, health variables, modes of transportation and climate and pollution models. They find that counties with a higher proportion of African American residents have higher death rates. Mostly, it’s not because they have higher rates of uninsured, poverty, or diabetes; the model controls these variables. Therefore, the authors conclude that other possibilities should be explored, such as the systemic racism that affects the quality of insurance, hospitals, and health care for African Americans. Unlike previous work, the authors do not find a correlation between exposure to air pollution and death rates. Obesity rates, ICU beds per capita, or poverty rates also do not correlate with death rates. However, the authors find that patients who commute to work are more likely to die from the virus than those who telecommute, especially those who depend on public transportation.

Global public debt set to exceed post-WWII peak

“In terms of information flow over the summer, it will be unusually difficult for several reasons to extract signals on the medium-term outlook for the economy and the path of inflation,” says Philip Lane, Member of the Executive Board of the European Central Bank.

“First, while the unlocking of the economy is likely to be associated with a substantial improvement in various near-term growth indicators, the extent of the contraction has been so large that overall activity will remain well below pre-crisis level and the size of the initial rebound in those weeks will not necessarily be a good indicator of the speed and strength of the recovery. Second, at the same time, it is plausible that it will take a prolonged period of improving economic and public health conditions before the trust channel that is so important in determining household and business spending plans is fully realized. operational. Third, projections of the speed of the recovery also depend on the design and timing of fiscal stimulus programs. In particular, the outcome of the negotiations on the EU stimulus fund will be an important factor in determining the future trajectory of the euro area economy. “



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