Conference Draft Papers from Brookings Panel on Economic Activity: Spring 2014

Joshua K. Hausman and Johannes F. Wieland: Abenomics: Preliminary Analysis and Outlook

In early 2013, Japan enacted a monetary regime change. The Bank of Japan set a two percent inflation target and specified concrete actions to achieve this goal by 2015. Shinzo Abe’s government is supporting this change with fiscal policy and structural reforms. We show that Abenomics ended deflation in 2013 and raised long-run inflation expectations. Our estimates suggest that Abenomics also raised 2013 output growth by 0.9 to 1.7 percentage points. Monetary policy alone accounted for up to a percentage point of growth, largely through positive effects on consumption. In the medium and long-run, Abenomics will likely continue to be stimulative. But the size of this effect, while highly uncertain, thus far appears likely to fall short of Japan’s large output gap. In part this is because the Bank of Japan’s two percent inflation target is not yet fully credible. We conclude by outlining how to interpret future data releases in light of our results.

Gabriel Chodorow-Reich: Effects of Unconventional Monetary Policy on Financial Institutions:

Unconventional monetary policy affects financial institutions through their exposure to real project risk, the value of their legacy assets, their temptation to reach for yield, and their choice of leverage. I use high frequency event studies to show the introduction of unconventional policy in the winter of 2008-09 had a strong, beneficial impact on banks and especially on life insurance companies, consistent with the positive effect on legacy asset prices dominating any impulse for additional risk taking.
Subsequent policy announcements had minor effects on these institutions. The interaction of low nominal interest rates and administrative costs led money market funds to waive fees, producing a possible incentive to reach for higher returns to reduce waivers. I find some evidence of high cost money market funds reaching for yield in 2009-11, but little thereafter. Private defined benefit pension funds with worse funding status or shorter liability duration also seem to have reached for higher returns beginning in 2009, but again the evidence suggests such behavior dissipated by 2012. Overall, in the present environment there does not seem to be a trade-off between expansionary policy and the health or stability of the financial institutions studied.

Kevin D. Sheedy: Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting

Financial markets are incomplete, thus for many households borrowing is possible only by accepting a financial contract that specifies a fixed repayment. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper argues that a monetary policy of nominal GDP targeting can improve the functioning of incomplete financial markets when incomplete contracts are written in terms of money. By insulating households’ nominal incomes from aggregate real shocks, this policy effectively completes financial markets by stabilizing the ratio of debt to income. The paper argues the objective of replicating complete financial markets should receive substantial weight even in an environment with other frictions that have been used to justify a policy of strict inflation targeting.

Christopher Boone, Arindraji Dube, and Ethan Kaplan: The Political Economy of Discretionary Spending: Evidence from the American Recovery and Reinvestment Act

We study the spatial allocation of contract, grant and loan awards in the ARRA, one of the largest discretionary funding bills in the history of the United States. Contrary to both evidence from previous fiscal stimulus and standard theories of legislative politics, we do not find evidence of substantial political targeting. Party leaders did not receive more funds than rank-and file legislators. Democrats in swing districts did not receive more than Republicans in such districts. Ideological moderates and pivotal members of Congress received slightly less than average. While Democratic districts overall received slightly more than Republican districts per resident, this differential mostly disappears when we consider award per worker in the district. At the same time, we find no relationship between extent of award and measures of the severity of the downturn in the local economy, or the pace at which funds were spent, while we do find more funds owing to areas with more economic activity and a greater incidence of poverty. Overall, most of the variation in spending across congressional districts remains unexplained. The results are consistent with the discretionary component of ARRA being allocated based on project characteristics other than countercyclical efficacy or political expediency—both of which stand in contrast to evidence from fiscal stimulus in the New Deal. One explanation suggests that legislative norms have reduced the scope of discretion—with attendant benefits and costs.

Alan B. Krueger, Judd Cramer, and David Cho: Are the Long-Term Unemployed on the Margins of the Labor Market?

Greg Kaplan, Giovanni L. Violante, and Justin Weidner: The Wealthy Hand-to-Mouth

The wealthy hand-to-mouth are households who hold little or no liquid wealth (cash, checking, and savings accounts), despite owning sizable amounts of illiquid assets (assets that carry a transaction cost, such as housing or retirement accounts). This portfolio configuration implies that these households have a high marginal propensity to consume out of transitory income changes–a key determinant of the macroeconomic effects of fiscal policy. The wealthy hand- to-mouth, therefore, behave in many respects like households with little or no net worth, yet they escape standard definitions and empirical measurements based on the distribution of net worth. We use survey data on household portfolios for the U.S., Canada, Australia, the U.K., Germany, France, Italy, and Spain to document the share of such households across countries, their demographic characteristics, the composition of their balance sheets, and the persistence of hand-to-mouth status over the life cycle. Using PSID data, we estimate that the wealthy hand-to-mouth have a strong consumption response to transitory income shocks. Finally, we discuss the implications of this group of consumers for macroeconomic modeling and policy analysis.