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 Alex Conner, Georgia Nabors, Tristan Loa, and David Wessel.
Santiago Alvarez-Blaser of Harvard Business School and co-authors use detailed transaction data from 16 countries between 2005 and 2022 to examine the extent to which inflation is driven by pricing decisions of large firms, shocks to specific categories of products, or traditional economy-wide pressures like monetary policy surprises. The authors find a significant role for the pricing decisions of large firms; the firm component explains 41% of inflation variance in advanced economies before the pandemic. The 10 largest firms alone account for 27% of the variance. The authors also find a role for category-specific price pressures, such as crop failures driving food prices, which account for about 15% of the variance. The common, economy-wide component explains the remaining 44%. The authors find that the firm component is smaller in nations with lower market concentration and in emerging market economies where inflation tends to be higher than advanced economies. The common component explains 80% of inflation variance in the pre-pandemic emerging market sample. The authors find that the relative importance of firm and category-specific price movements increased during the pandemic and argue that understanding these granular components could have lessons for monetary policy, especially understanding the role of outlier firms in the inflation process.
Electric vehicle (EV) battery costs have declined by more than 90% over the past decade. Using global EV and EV battery sales data from 2013 to 2020, Panle Jia Barwick of the University of Wisconsin-Madison and co-authors estimate that learning-by-doing (where production experience leads to lower unit costs through improvements in efficiency) accounted for 35.5% of the price decline over the study period. The authors find that learning-by-doing amplifies the effects of EV consumer subsidies and drives cross-country spillovers from these subsidies as the EV supply chain is international. The subsidies also correct for the under-provision of learning that results from upstream battery suppliers capturing only a minor share of the welfare gains from learning-by-doing. Lastly, the authors find that China’s local content requirement policy from 2016 to 2019 benefitted domestic battery producers but harmed consumers and foreign suppliers. Implementing the policy any later would have created a net negative effect on domestic welfare as the learning curve for EV battery production flattened.
"U.S. trade policy is a major source of uncertainty. There are many possible scenarios. We don’t know what new tariffs will be imposed, when or how long they will last. We don’t know the scope of retaliatory measures or what fiscal supports will be provided. And even when we know more about what is going to happen, it will still be difficult to be precise about the economic impacts because we have little experience with tariffs of the magnitude being proposed. Nevertheless, some things are clear," says Governor of the Bank of Canada Tiff Macklem.
"A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada. At the same time, the higher cost of imported goods will put direct upward pressure on inflation. The magnitude and timing of the impacts on output and inflation will depend importantly on how businesses and households in the United States and Canada adjust to higher import prices.
Unfortunately, tariffs mean economies simply work less efficiently—we produce and earn less than without tariffs. Monetary policy cannot offset this. What we can do is help the economy adjust. With inflation back around the 2% target, we are better positioned to be a source of economic stability. However, with a single instrument—our policy interest rate—we can’t lean against weaker output and higher inflation at the same time. As we consider our monetary policy response, we will need to carefully assess the downward pressure on inflation from weakness in the economy, and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions."
Call for papers
We are seeking papers on the municipal bond market, state and local fiscal issues, taxes, infrastructure spending, and climate change for the Municipal Finance Conference to be held in-person Tuesday, July 22, 2025 and Wednesday, July 23, 2025 in Washington, D.C.
About the Hutchins Center on Fiscal and Monetary Policy at Brookings
