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This edition was written by Elijah Asdourian, Sam Boocker, Moraa Ogendi, and Louise Sheiner.
High inflation in developed nations in recent years has made households and firms more attentive to inflation rates. Using randomized controlled trials from 2018 to 2023 in different countries, Michael Weber of the University of Chicago and co-authors find that providing participants with information about inflation or monetary policy had less effect on inflation expectations the higher the prevailing inflation rate, suggesting that when inflation is high, the information provided is already known by the participants. The authors say this has important policy implications: when households and firms are more attentive to economic information, it becomes easier for policymakers to communicate with the public, and mechanisms like forward guidance are more likely to affect agent behavior. The authors conclude that future policy design should take into consideration the endogenous effect that economic environment has on agent attentiveness.
Using tax records, standardized testing data, and admissions records from 1996 to 2021, Raj Chetty and David Deming of Harvard and John Friedman of Brown find that highly selective, “Ivy-Plus” private universities admit different students than selective public flagship universities. Among students with comparable standardized test scores, Ivy-Plus universities admit a higher percentage of students from very high-income families than from others, while the difference is negligible at selective flagships. This is driven by legacy admissions, athletic recruiting, and admissions from private high schools. The authors also find that graduates of Ivy-Plus universities don’t earn more on average than comparable graduates of selective public flagships, but that they are much more likely to end up in the top 1% of wage earners, attend elite graduate schools and work for elite firms. The authors conclude that Ivy-Plus universities could become more socioeconomically diverse if they eliminated preferences for legacies, athletes, and private school students.
Matthew Johnson and Alison Pei of Duke and Michael Lipsitz of the Federal Trade Commission find that when states make worker noncompete agreements more enforceable in innovative industries, labor mobility rates and patent counts decrease, causing an economy-wide reduction in innovation. With data on patents, job mobility, and business dynamics from 1991 to 2014, the authors find that average increases in the enforceability of worker noncompete agreements at the state-level decrease the number of patents by 16% to 19%. Their findings also indicate that while increased non-compete enforceability positively affected publicly traded firms’ investment in R&D, the net impact on innovation at those firms is negative. These findings illustrate the fact that worker mobility comes with tradeoffs: it can spread information and knowledge across firms, driving innovation, but it can also make firms hesitant to invest in research and development.
"Hopefully, with inflation starting to recede, we have entered the final stage of the inflationary cycle that started in 2021. But hope is not a policy, and the touchdown may prove quite tricky to execute. Risks to inflation are now more balanced and most major economies are less likely to need additional outsized increases in policy rates. Rates have already peaked in some Latin American economies. Yet, it is critical to avoid easing rates prematurely, that is, until underlying inflation shows clear and sustained signs of cooling. We are not there yet. All the while, central banks should continue to monitor the financial system and stand ready to use their other tools to maintain financial stability," says Pierre-Olivier Gourinchas, Economic Counsellor and Director of Research of the International Monetary Fund.
"After years of heavy fiscal support in many countries, it is now time to gradually restore fiscal buffers, and put debt dynamics on a more sustainable footing. This will help to safeguard financial stability and to reinforce the overall credibility of the disinflation strategy. This is not a call for generalized austerity: the pace and composition of this fiscal consolidation should be mindful of the strength of private demand, while protecting the most vulnerable. Yet, some consolidation measures seem entirely appropriate. For instance, with energy prices back to their pre-pandemic levels, many fiscal measures, such as energy subsidies, should be phased out."
"Fiscal space is also key to implement many needed structural reforms, especially in emerging and developing economies. This is especially important since prospects for medium-term growth in income per capita have dimmed over the past decade. The slowdown is sharper for low- and middle-income economies relative to high-income ones. In other words, prospects for catching up to higher living standards have diminished markedly."
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