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This edition was written by Elijah Asdourian, Sam Boocker, Lorae Stojanovic, and David Wessel.
Since 1985, urban incomes have grown much faster than rural incomes in the United States. Using data from 1970 to 2006, Anne Beck of the World Bank and Sebastian Doerr of the Bank for International Settlements find that part of the widening of the urban-rural income gap can be attributed to deregulation that allowed for interstate banking. Though incomes rose everywhere after 1985, incomes in urban counties rose between 0.2 and 0.3 percentage point faster per year, resulting in a substantial increase in income inequality between urban and rural areas. The authors attribute this faster growth to increased banking competition in cities post-deregulation. Urban counties saw a faster rise in bank branches and headquarters per capita after 1985 than rural counties, and this increased competition allowed financially constrained industries and firms to grow more quickly.
Which homes in the U.S. are most vulnerable to storm, flood, wildfire, and hurricane damage? Natee Amornsiripanitch and David Wylie of the Federal Reserve Bank of Philadelphia find that average annual property-level loss to single-family residences is highest in Gulf Coast states. Severe convective storms such as hailstorms and tornadoes, which affect nearly all single-family homes, pose the largest aggregate property risk with average annual losses of 0.06% of total insurable value. However, while less geographically widespread, flood and hurricane risks do more damage. For example, average annual losses among at-risk homes are 0.09% for flooding and 0.16% for hurricane storm surge. Peril-prone regions tend to have lower household incomes, lower labor market participation rates and lower educational attainment than regions with less risk. The authors find that the greatest growth in climate-related damage will occur in areas where risk is already most concentrated. Policies aimed at reducing the physical risks of climate change, the authors conclude, will therefore disproportionately benefit low-income populations.
Alicia Dang of Union College, Kala Krishna of Penn State, and Yingyan Zhao of George Washington University find that during the U.S.-China trade war from 2016 to 2019 the U.S. began importing goods from countries like Mexico and Vietnam instead of China. The shift was particularly strong for goods affected by U.S. tariffs, with imports from China of these goods dropping by about 26% relative to goods not facing tariffs. The authors note that the countries that benefitted the most from the increases in tariffs between the U.S. and China are those that had a comparative advantage in producing the targeted product as well as an abundant capital stock. Furthermore, the authors demonstrate that countries that exported more to the U.S. because of the tariffs on China also exported more to the entire world, rather than just simply redirecting their production of tariffed products away from other countries to the U.S.
Q: "Markets are pricing an early spring rate cut but the ECB has guided for steady rates for several quarters. How do you view this discrepancy?"
A: "Markets are confident that inflation is going to come down rapidly and therefore they are pricing early and very large rate cuts next year. Central banks are more cautious, and I would argue they have to be more cautious. After more than two years of above-target inflation, we need to err on the side of caution. If you look at our previous communication after the Governing Council meeting, we confirmed that our key policy rates need to remain sufficiently restrictive for as long as necessary to bring inflation back to our 2% target in a sustainable manner. This should happen no later than 2025," says Isabel Schnabel, Member of the Executive Board of the European Central Bank.
"According to our staff projections, the current level of restriction is sufficient to bring inflation back to target within that time frame. Transmission is working – lending growth is slowing, the economy is weakening and inflationary pressures are easing. We are right on track. But we still need to see some further progress with regard to underlying inflation. The disinflationary process on underlying inflation has only recently gained momentum. We now need to see whether this is sustained."
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