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Between 2007 and 2009, the amount that college students could borrow in federal loans increased substantially. Sandra Black of Columbia and co-authors find that the increased access to liquidity benefited borrowers, raising graduation rates by 4 percentage points and earnings after graduation by 3% to 5%. Students affected by the higher limits were also less likely to have paid employment while attending college. Though increased loan limits raised average debt burdens, students had lower default rates and were equally likely to have mortgages and car loans as those who borrowed when loan limits were lower, suggesting few negative spillovers from the increased availability of credit. The findings suggest that students may be underborrowing to attend college, not overborrowing, and that potential reductions in student loan limits “may actually serve to lower educational attainment and negatively affect later-life outcomes for many undergraduate borrowers.”
The persistent decline in the U.S. unemployment rate over the 2010-2019 period was not accompanied by a rise in inflation rates, which remained below long-run expectations. Renato Faccini at the National Bank of Denmark and Leonardo Melosi at the Federal Reserve Bank of Chicago find that low wage competition between employers explains why the tightness in the labor market did not raise price pressures. Using survey data from the 2014-2019 period, the authors find a decline in the willingness of employed workers to search for a different job during this period. Employers thus faced fewer requests for higher wages to compete with outside offers. The decline in on-the-job search rates also made workers less likely to find jobs well-suited to them, making it cheaper for employers to poach workers who were poorly matched. The authors estimate that the increase in employed workers’ propensity to look for new jobs during the pandemic contributed to inflation, raising it by 1 percentage point in 2021.
John Roberts, formerly of the Federal Reserve Board, uses a modified version of the Board’s large-scale macro model (FRB/US) to explore how the economy might respond to rate cuts if inflation is lower than expected in 2023. Although Roberts considers the Fed’s current inflation projection the most likely outcome, he argues that unanticipated supply chain improvements, higher-than-expected price sensitivity to drops in aggregate demand (especially among core goods), and a downward shift in the Beveridge Curve could all cause inflation to retreat more quickly. If core PCE inflation falls to 2.5% in Q2 2023 and the Fed responds by cutting the federal funds rate target to 2.5% by Q3 2023, Roberts finds that the 10-year Treasury yield would decline by 60 basis points and unemployment would rise only to 4.2% by mid-2023 (rather than the 4.6% projected in the baseline scenario) before falling to 4.0% by the end of 2024. Even more aggressive rate cuts would have similar effects on the 10-year, but unemployment would peak at 4.1% early in 2022 before falling to 3.8% by the end of 2024. Roberts says his results may alleviate some concerns about overtightening: “These scenarios suggest that a prompt response of the monetary policy to good news on inflation could eliminate much of the run-up in the unemployment rate that many forecasters are expecting.”
Chart courtesy of the Wall Street Journal
“[T]here is too much uncertainty in the economy to unconditionally pre-commit to a specific policy course. There is uncertainty on the evolution of the war, on energy and food commodity prices and their pass-through to retail prices, on the reopening of the economy and its effects on supply chains, on the global economy (think of China and the United States), on the domestic economy (will we have a recession?), and on the impact of these developments on productive capacity,” says Fabio Panetta, Member of the Executive Board of the European Central Bank.
“We should provide clarity on, and be guided by, our reaction function, which is rooted in our price stability mandate and consists of two main elements. The first is the economic and inflation outlook: we will react to medium-term inflation remaining above our target. The second is the risks surrounding this outlook, today mainly related to the possible emergence of second-round effects: we want to prevent a de-anchoring of inflation expectations or the start of a wage-price spiral. It will be the economy, of course, and how its evolution will affect the two elements of our reaction function. Depending on this assessment, we may decide that more or less tightening is needed compared to what we envisaged in December. We should thus not be surprised that investors adjust their expectations of future rates as new data emerge. But we need to make our own reading of these data clear to them.”
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