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This edition was written by Tristan Loa, Andrew Rosin, Jack Spira, and David Wessel.
The Taylor rule suggests that, during inflationary periods, central banks should raise nominal interest rates more than one-for-one with inflation to increase real interest rates. Emi Nakamura, Venance Riblier, and Jón Steinsson of the University of California, Berkeley argue that the credibility the Fed built over decades of low and stable inflation firmly anchored long-run inflation expectations and thus allowed it to deviate from this rule during the post-COVID inflation surge. The Fed used a muted “look through” monetary policy response—raising rates less than one-for-one with inflation—without losing control of prices. The authors say that such an approach may be optimal when using forward guidance to manage cost-push shocks and when navigating transitory inflation because the long and variable lags of monetary policy render it ineffective against temporary price increases. The authors conclude that for a central bank with strong credibility, it is optimal to ‘look through’ inflationary episodes. Conversely, for a bank with weaker credibility, the optimal policy may be to adhere more closely to the Taylor rule.
Complex recertification requirements for safety net programs like Medicaid and SNAP reduce enrollment among both ineligible and eligible individuals. In a randomized control trial, Rebecca Mary Myerson of Emory University, Laura Dague of Texas A&M University, and Allison Espeseth of Covering Wisconsin used pre-recorded phone calls to remind Medicaid beneficiaries of renewal deadlines and offer free help with the renewal process; they estimate that this outreach increased Medicaid re-enrollment by one percentage point among eligible beneficiaries. The effect of the intervention was magnified when looking only at individuals who received a call—at least 39% of calls to treatment group members were not answered—and when looking only at individuals who sought assistance from a health insurance navigator, which reduced the risk of losing coverage by 21.1 percentage points. The authors also find considerably larger effects of the intervention for more disadvantaged groups, including tribal members, children, individuals with below-median income, and individuals with chronic conditions. The results suggest that many eligible individuals lose Medicaid coverage solely due to administrative burdens, challenging the typical rationale for raising barriers to enrollment—namely, that they efficiently discourage participation by those who do not need or value the benefits.
Economic theory predicts that a country imposing unilateral tariffs should see increased demand for its currency, and global economic uncertainty has typically boosted the dollar in the past. Nevertheless, the dollar's value fell following President Trump’s announcement of tariffs on April 2. Using dollar-pegged stablecoins trading on centralized exchanges as a proxy for dollar demand in highly decentralized foreign exchange markets, Anantha Divakaruni of the University of Bergen and Peter Zimmerman of the Federal Reserve find that while dollar demand decreased in aggregate, it decreased less or increased among investors in countries facing the steepest tariff hikes, consistent with prevailing theory. They reason that tariff-exposed investors, anticipating it would become more expensive for them to acquire dollars in the future, bought dollars immediately. The authors further find that the effect was stronger for countries with tighter capital controls, for more stable and liquid stablecoins, and for offshore stablecoin exchanges, all of which suggest the changes observed in stablecoin demand were driven by demand for dollars.
“While the US plays a very important role in global trade, its dominance in international finance is just much greater, which means it has been the recipient of large amounts of capital flows. And if you look at the last 15 years particularly, because the U.S. economy has on average surprised on the upside, and because of the dynamism of its tech sector, and because of the strength of the dollar over the last 10 to 15 years, the rest of the world’s exposure to the U.S. is very large. There’s been a very large increase in equity holdings in the U.S. from the rest the world, which obviously has benefited the U.S. a lot, and also benefits [other countries] because they get to be a part of that dynamism,” says Gita Gopinath, former chief economic adviser at the IMF.
“Now, just mechanically, if a country goes into autarky in trade, then it goes into autarky in finance. And the cost of that would be tremendous given how much the U.S. is engaged in finance around the world.”
