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This edition was written by Sarah Ahmad, Chase Parry, Jack Spira, and David Wessel.
Are parents a good source of wage insurance? Andreas Fagereng of BI Norwegian Business School and co-authors find that negative wage shocks prompt transfers from parents to children in Norwegian families. When children undergo temporary income loss, parents tend to dissave immediately, replacing 43% of the loss; when negative wage shocks are persistent, parents tend to replace only 27% of long-term losses. Transfer amounts are also lower when children have other smoothing options, such as a working spouse, though a “competition for attention” trend is also observed: parents are more likely to contribute to a child if a spouse’s parents are also able to contribute. Finally, familial wage insurance goes only one way—children tend not to transfer money to their parents.
Using data from 18 advanced economies over 151 years, Ugo Albertazzi, James ’t Hooft, and Lucas ter Steege of the European Central Bank find that inflation is detrimental to financial stability. Comparing countries with floating and fixed exchange rates to distinguish between the direct effects of inflation and those of the monetary policy it triggers (because pegged countries import the monetary policy of the countries to which they are tied, but not necessarily the inflation shocks), they find that inflation increases the risk of financial crises even more than the interest rate hikes it brings about. In another experiment, they isolate the effects of inflation by analyzing the prevalence of financial crises in response to oil supply shocks, an external factor that raises inflation independently of local economic conditions. They find that a one percentage point increase in inflation doubles the probability of a financial crisis. This effect is strongest when mortgage-to-GDP ratios are high and wage growth is low, pointing to borrower solvency as a key transmission channel, and is also strong in countries with central banks that are less politically independent. The authors conclude that “allowing inflation to rise is detrimental compared to the necessary rate hike to counter it,” but that, once inflation has risen, central banks face a difficult trade-off between stabilizing prices and preserving financial stability.
Immigration restrictions are sometimes viewed as a way to increase employment among native workers. However, Jens Friedmann of Erasmus University, Britta Glennon and Exequiel Hernandez of the University of Pennsylvania find that firms respond to constraints on hiring foreign-born workers by making more acquisitions—which are complex and costly—suggesting that native-born workers cannot readily provide the talent firms seek. Using data on 3,900 U.S. firms and their use of the H-1B visa program from 2001 to 2020, they find that when firms cannot build capabilities through hiring, they acquire other organizations to compensate for the loss in talent, especially firms whose purposes closely align with the skills of the immigrants the firms originally attempted to hire. As a result of the 2004 H-1B cap reduction that cut the annual quota by 70%, firms made one additional acquisition for every 500 unfilled H-1B visa positions. The effect was stronger for small rather than large acquisitions, and for domestic rather than foreign deals.
"Shorter-term inflation expectations have tended to respond to near-term inflation so if inflation goes up, inflation expectations will predict that it takes just a little while to get back down. Fortunately, throughout this period, longer-term inflation expectations both break even in the markets and almost all of the longer-term surveys, Michigan being a bit of an outlier lately, have been just rock solid in terms of running at levels that are consistent with 2% inflation over time," says Jerome Powell, Chair of the Federal Reserve.
"We don’t take that for granted. We actually assume that our actions have a real effect on that we need to continually show and also mention/discuss our commitment to 2% inflation, and so you’ll hear us doing that. But it’s a difficult situation because we have risks that are both affecting the labor market and inflation. Those are our two goals. And so we have to balance those two. When they’re both at risk, we have to balance them and that’s really what we’re trying to do.”
