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This edition was written by Sarah Ahmad, Alex Conner, Georgia Nabors, and David Wessel.
Ran Abramitzky of Stanford University and co-authors analyze historical records across 65 elite U.S. colleges from 1915 to 2013. Although college attendance among lower-income students has risen significantly over the past century, their representation in public and private elite colleges has not increased. Students from families in the bottom 20% of the income distribution have comprised only 5% of the student population at elite private colleges over the last century. Meanwhile, students from upper-income families now represent 65%-70% of their enrollment, their highest share since the 1980s. Despite no increase in economic diversity in elite colleges, racial diversity has improved, with an increase in the representation of Black students. The authors find that interventions such as the G.I. Bill and standardized testing have little effect in increasing economic diversity. They suggest that because these policies target individuals close to the age of applying to college, they might come “too late” to address existing educational inequalities.
With an eye to the Fed’s upcoming policy framework review, Laurence M. Ball of Johns Hopkins and Junnan Zhang of Xiamen University explore what average inflation targeting implies for optimal monetary policy in a simple model where the effective lower bound (ELB) occasionally limits how much stimulus the central bank can provide. When inflation expectations are anchored, the monetary authority pursues inflation somewhat above 2%. This is because they want inflation to average 2% over the long run, so it runs a little hot in normal times to make up for below-target inflation when the ELB binds during contractions. When inflation expectations are not well anchored, sufficiently large shocks can trigger a deflationary spiral that the central bank cannot arrest because of the ELB. In general, the path of inflation when expectations are unanchored depends on the state of the economy and how much weight the central bank puts on stabilizing inflation versus output. Assuming no spirals, the authors show that there are two possibilities when the central bank responds to a bout of below-target inflation: either inflation will gradually move back to steady state or it will overshoot before settling back in.
Using data from the American Community Survey from 2005 to 2019, David Neumark and Jyotsana Kala of the University of California, Irvine find that higher minimum wages significantly reduced employment among Black workers. Despite a higher minimum wage, the large decline in employment reduced overall earnings for Black workers. By contrast, the employment effects for white workers of a similar age and education level were negligible. The effects of minimum wages on Black workers are broadly similar across areas with different Black population shares, suggesting that employment effects stem from impacts on Black individuals rather than impacts on Black neighborhoods.
"Q: To what extent do you think the fact that the Federal Reserve is credibly independent is responsible for the good outcomes that we've had so far?"
"A: So, the credibility is really everything in our work. And I think, as you know, inflation spiked really globally all around the world, as the economies around the world reopened after the pandemic shut down and on the back of a lot of fiscal and monetary stimulus, we saw a burst of inflation all around the world. And what happened is we raised interest rates to bring that down, but the public had faith," says Jerome Powell, Chair of the Federal Reserve Board (video).
"We measure inflation expectations many different ways, surveys, and based on market-based instruments. And they all kind of showed the same thing, which is the public, all through all this, believed that we would get inflation down, that we would restore price stability, which we define as 2% inflation. And that's ultimately the key to it. Inflation is a social phenomenon. If people believe that inflation will be higher, then it probably will be. And if they believe that inflation will come down, then people who make and take prices and wages, they will make sure that it does come down. So, it's absolutely critical that we be credible. And part of that is that we responded so forcefully when it became clear that inflation needed a response from us, we responded quite forcefully, and we think that helped keep inflation expectations anchored, as we say."
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