October 5, 2023

The Hutchins Roundup brings the latest thinking in fiscal and monetary policy to your inbox. Have something you'd like us to include in the next Roundup? Email us and we'll take a look.

This edition was written by Elijah Asdourian, Alex Conner, Georgia Nabors, and David Wessel.

Central bank credibility is falling  

Stephen J. Cole of Marquette University, Enrique Martínez García of the Federal Reserve Bank of Dallas, and Eric Sims of Notre Dame use surveys of expected inflation, output growth, and interest rates to estimate central bank credibility for advanced economies between 1990 and 2022. They find that the Fed is the most credible central bank, followed closely by the European Central Bank (ECB) and the Bank of England (BoE), while the Bank of Japan lags its peers. Credibility fell for all central banks over the period, with an especially noticeable dip for the ECB and BoE at the onset of COVID. Because a central bank’s ability to make credible commitments about future policy is a key determinant of the effectiveness of forward guidance, the authors argue that imperfect credibility partially explains the weakness of forward guidance in stimulating inflation after the Global Financial Crisis and dampening it after COVID.

Infants’ long-term outcomes unaffected by Supplemental Security Income

Low-income families whose babies have very low birthweights are eligible for Supplemental Security Income (SSI). Using public health data, educational data, and census records from 1993 to 2019, Amelia Hawkins of Brandeis and co-authors find that SSI cash transfers do not improve long-term outcomes for low-birthweight infants or their siblings. The cash transfers are substantial for infants born under the weight cutoff—27% of recipient families’ incomes, on average—yet long-term educational attainment, use of public assistance, and mortality are unaffected by receipt of SSI in infancy. The authors note that this is a “surprising” result, as previous literature has documented large and sometimes intergenerational effects of cash transfers in early life on outcomes and suggests that generous cash interventions are not sufficient to “’undo’ some of the long-term disadvantage associated with poor health at birth.” 

Bank supervisors reduced some risk during the 2022 monetary tightening   

The collapse of Silicon Valley Bank and First Republic Corporation following the Fed’s 2022 monetary tightening led many to question the effectiveness of bank examiners. Using data from all commercial bank performance ratings, Yadav Gopalan of Indiana University and João Granja of the University of Chicago find that when the Fed began rate hikes, bank supervisors downgraded the liquidity and sensitivity to risk ratings of the banks most exposed to interest rate risk. However, bank supervisors did not downgrade the liquidity ratings of banks heavily reliant on uninsured deposits, despite their heightened risk exposure due to less stable funding sources. The authors show that banks subject to ratings downgrades reduced their holdings of longer duration securities, a move to mitigate risk as assets with longer maturities lose value under high rates. They conclude that bank examiners limited some systemic risk in 2022 and potentially deterred additional bank failures.    

Job quits are declining

Chart courtesy of the Wall Street Journal