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 Sarah Ahmad, Alex Conner, Tristan Loa, and David Wessel.
Giovanni Favara and Francesca Loria of the Federal Reserve Board and Egon Zakrajšek of the Federal Reserve Bank of Boston use ZIP code level IRS data from 1998 to 2019 to measure the effect of monetary policy on income inequality, measured by the ratio of incomes in the last and first deciles. The authors exploit the differential response to monetary surprises across the country and find that, four years after an unanticipated 25 basis point increase in interest rates, salary and wage inequality rises by 1.5%. This results from labor income for the lowest decile falling faster than labor income for the top decile. Furthermore, the rise in inequality is faster in places where the labor market is weaker than average.
Valerie Ramey of Hoover Institution at Stanford re-evaluates the empirical evidence on the effects of temporary transfers on the macroeconomy using four case studies: the 2001 and 2008 U.S. tax rebates, a 2008 stimulus package in Australia, and the 2011 cash transfers in Singapore. She finds that prior literature overestimated the marginal propensities to consume (MPCs) out of these transfers, with aggregate evidence suggesting MPCs close to zero. Ramey argues that the debt accumulation from such policies imposes long-term costs, particularly when fiscal consolidations require distortionary tax increases. Her analysis calls into question the effectiveness of temporary cash transfers as a macroeconomic stimulus.
Will artificial intelligence (AI) significantly reduce labor demand and depress wages? Or will it increase demand for workers by boosting firm productivity? Menaka Hampole of Yale and co-authors find evidence for both. While higher average AI exposure on an occupation’s tasks reduces employment within firms, the effect is mitigated when workers are highly exposed in only some tasks, because workers shift to other tasks. This shifting increases productivity and employment. Across firms, the effects of AI adoption on employment are also limited by offsetting forces: Jobs highly exposed to AI face lower labor demand compared to less exposed jobs, but the resulting increase in firm productivity generates employment growth across all occupations. The authors conclude that rather than eliminating jobs, AI reshapes labor demand by reallocating tasks.
“I think a clear lesson is that no single model alone can give a policymaker an understanding of every possible state of the economy. Policymakers must be open to various options, models, and frameworks—and not be afraid to experiment in search of more accurate answers. Policymakers must be very attentive to the most recent contributions from academia and empirical practitioners. Broadly, that is the approach I take, and why I apply the same rigor I did as an academic researcher to the monetary policy decisions that I confront," says Adriana Kugler, Governor of the Federal Reserve Board.
"The recent run-up in inflation in many ways was a rather unique period, spurred, at least initially, by the first onset of a global pandemic in more than a century. Fully understanding the dynamics at play has provided a tough test for economists."
"...Another lesson to be learned from this experience is that the feared harsh tradeoff between unemployment and inflation, one that requires large costs in terms of job loss and reduction in incomes in order to reduce inflation, did not materialize in the years immediately after the 2022 inflation peak. Inflation has been significantly reduced while the labor market has remained solid. This is a historically unusual, but most welcome, outcome. While this outcome is in part due to the actions of Fed policymakers, it is also possible to explain that remarkable result through the lens of the models that I have presented today. A large fraction of the rise in inflation, most specifically core goods inflation, can be explained by supply chain snarls. The untangling of supply chains contributed to a decline in inflation with little cost in terms of unemployment. Likewise, labor markets were very tight in this period. As workers returned to the labor force, labor markets became less tight, and the vacancy-to-unemployment ratio declined. That corresponded with a subsequent decline in inflation. That is a consistent result because services inflation is closely connected to the cost of labor.”
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.
New paper alert
Louise Sheiner, Wendy Edelberg, and Ben Harris of Brookings assess the likelihood that the federal debt will lead to a crisis. Read it here.
About the Hutchins Center on Fiscal and Monetary Policy at Brookings
