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Summary

Heterogeneous Labor Market Effects of Monetary Policy
Author(s):
David A. Matsa, Northwestern University and NBER
Nittai Bergman, Tel Aviv University
Michael Weber, University of Chicago and NBER
Discussant(s):
Giovanni L. Violante, Princeton University and NBER
Abstract:

This paper analyzes the heterogeneous effects of monetary policy on workers with different levels of labor force attachment. Exploiting variation in labor market tightness across metropolitan areas, Matsa, Bergman, and Weber show that the employment of populations with lower labor force attachment-Blacks, high school dropouts, and women-is more responsive to expansionary monetary policy in tighter labor markets. They develop a New Keynesian model with heterogeneous workers that explains these results. The model shows that expansionary monetary shocks lead to larger and more persistent increases in the employment of low attachment populations when the central bank follows an average inflation targeting rule and when the Phillips curve is flatter. These findings suggest that, by tightening labor markets, the Federal Reserve's recent move from a strict to an average inflation targeting framework will especially benefit workers with lower labor force attachment.

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Inflation Expectations and Consumption: Evidence from 1951
Author(s):
Carola Binder, Haverford College
Gillian Brunet, Wesleyan University
Discussant(s):
Ruediger Bachmann, University of Notre Dame
Abstract:

Binder and Brunet use rich microdata from the 1951 Survey of Consumer Finances to study inflation expectations and consumption in the United States around the start of the Korean War. Since the Treasury required the Federal Reserve to hold nominal interest rates constant, increases in expected inflation corresponded to reductions in the real interest rate (similar to a zero lower bound episode). The survey includes measures of actual spending on durables, cars, and homes in 1950, and expected expenditures in these categories in 1951, at extensive and intensive margins. Consumption in 1950 increases with expected inflation, while expected consumption in 1951 decreases.

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The People versus the Markets: A Parsimonious Model of Inflation Expectations
Author(s):
Ricardo Reis, London School of Economics
Discussant(s):
Monika Piazzesi, Stanford University and NBER
Abstract:

Expected long-run inflation is sometimes inferred using market prices, other times using surveys. The discrepancy between the two measures has large business-cycle fluctuations, is systematically correlated with monetary policies, and is mostly driven by disagreement, both between households and traders, and between different traders. A parsimonious model that captures both the dispersed expectations in surveys, and the trading of inflation risk in financial markets, can fit the data, and it provides estimates of the underlying expected inflation anchor. Applied to US data, the estimates suggest that inflation became gradually, but steadily, unanchored from 2014 onwards. The model detects this from the fall in cross-person expectations skewness, first across traders, then across people. In general equilibrium, when inflation and the discrepancy are jointly determined, monetary policy faces a trade-off in how strongly to respond to the discrepancy.

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Tracing the International Transmission of a Crisis Through Multinational Firms
Author(s):
Marcus Biermann, Université Catholique de Louvain
Kilian Huber, University of Chicago and NBER
Discussant(s):
Isabelle Mejean, Ecole Polytechnique
Abstract:

This paper shows that idiosyncratic shocks to individual firms can affect growth all over the world, even if shocked firms have no direct foreign connections and no operations abroad. Biermann and Huber identifies an idiosyncratic shock to a German bank, which caused the bank to cut lending to German borrowers. Multinational parent firms located in Germany became financially constrained. In response, international affiliates of affected parents supported their parent by lending through internal capital markets and became constrained themselves. The real growth of affiliates fell sharply and took three years to fully recover. Though the initial shock only hit the domestic activities of a firm in Germany, the impact in other countries was sizable (for instance, around 0.4 percent of aggregate sales in Austria and the Czech Republic). The findings reveal that idiosyncratic shocks to individual firms influence economic outcomes far beyond firms' direct scope of operation.

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Optimal Monetary Policy in Production Networks
Author(s):
Jennifer La'O, Columbia University and NBER
Alireza Tahbaz-Salehi, Northwestern University
Discussant(s):
Elisa Rubbo, University of Chicago and NBER
Abstract:

This paper studies the optimal conduct of monetary policy in a multi-sector economy in which firms buy and sell intermediate goods over a production network. La'O and Tahbaz-Salehi first provide a necessary and sufficient condition for the monetary policy’s ability to implement flexible-price equilibria in the presence of nominal rigidities and show that, generically, no monetary policy can implement the first-best allocation. The researchers then characterize the constrained-efficient policy in terms of the economy’s production network and the extent and nature of nominal rigidities. Their characterization result yields general principles for the optimal conduct of monetary policy in the presence of input-output linkages: it establishes that optimal policy stabilizes a price index with higher weights assigned to larger, stickier, and more upstream industries, as well as industries with less sticky upstream suppliers but stickier downstream customers. In a calibrated version of the model, La'O and Tahbaz-Salehi find that implementing the optimal policy can result in quantitatively meaningful welfare gains.

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Demand Composition and the Strength of Recoveries
Author(s):
Martin Beraja, Massachusetts Institute of Technology and NBER
Christian K. Wolf, University of Chicago and NBER
Discussant(s):
Johannes Wieland, University of California, San Diego and NBER
Abstract:

Beraja and Wolf argue that recoveries from demand-driven recessions with expenditure cuts concentrated in services tend to be weaker than recoveries from recessions biased towards durables. Intuitively, the smaller the bias towards durables, the less the recovery is buffeted by pent-up demand. In standard multisector business-cycle models, this result on recovery strength holds if and only if, following a contractionary monetary policy shock, durable expenditures revert back faster than services and non-durable expenditures. This condition receives ample support in aggregate U.S. time series data. The researchers then use a semi-structural shift-share as well as a structural model to quantify how recovery strength varies with (i) differences in long-run expenditure shares across countries and (ii) the sectoral incidence of demand shocks across recessions. Beraja and Wolf find the effects to be large, and so discuss implications for optimal stabilization policy.

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Participants

Marcus Biermann, Université Catholique de Louvain
Carola Binder, Haverford College
Yoosoon Chang, Indiana University
Amy Handlan, University of Minnesota
Juan D. Herreno, Inter-American Development Bank
Thuy Lan Nguyen, Santa Clara University
Pascal Paul, Federal Reserve Bank of San Francisco
Daniel K. Tarullo, Harvard University

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