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This edition was written by Elijah Asdourian, Sam Boocker, Georgia Nabors, and David Wessel.
Using a newly expanded survey of over 6,000 firms from across the euro area in 2023, Ursel Baumann of the European Central Bank and co-authors find a high degree of disagreement in firms’ inflation expectations. Average one-year inflation and five-year expectations were 5.8% and 4.8%, respectively, while the standard deviations in responses were 2.95% and 4.99%. The authors also find that providing information to firms can change their expectations: Firms that were presented with the latest euro area inflation data and inflation forecasts had persistently lower inflation expectations than firms who received no information, suggesting that “policy communication has considerable potential to shape inflation expectations of firms.”
Occupational licensing prohibits workers from entering some professions without a license or credential. Leveraging differences in occupational licensing laws across states, Peter Blair of Harvard and Bobby Chung of the University of South Florida find that during the COVID-19 recession occupational licensing shielded licensed workers from a 0.82 percentage point increase in unemployment. In states with mandatory COVID-19 lockdowns, licensing protected licensed workers from a 3-percentage point increase in unemployment. During the Great Recession, licensed workers were shielded from a 1.11 percentage point increase in unemployment. The authors argue that licensed workers are less likely to be laid off than their unlicensed peers because the latter cannot substitute for the former.
Over 80% of global trade is conducted by sea, making port infrastructure vital for trade and consumer welfare. Using data from 2016 to 2021 at 51 US ports and estimated costs for port projects from the U.S. Army Corp of Engineers, Giulia Brancaccio of New York University, Myrto Kalouptsidi of Harvard, and Theodore Papageorgiou of Boston College show that delays and disruptions at ports are costly: they estimate that a one-day port disruption costs $45,000 for the average ship. The authors argue that investment in a 1% increase in the total capacity of U.S. ports could increase trade by 1.3% and consumer welfare by 0.8%. However, the gains vary across ports: net returns are positive for just 29% (15/51) of ports. Lastly, they find that the returns to infrastructure investment are higher in a world with more disruptive economic shocks—when economic volatility doubles, the welfare benefits of increasing port capacity doubles.
Q: "Will you be taking a cautious approach given how wages are still rising rapidly and services inflation is still well above 2%?"
A: “Things will be bumpy and gradual. The best way to frame the debate this year is that we still need to be restrictive all year long. But within the zone of restrictiveness we can move down somewhat. We don’t need the data to say normalization is a lock. What we do need the data to say is: is it proportional, is it safe, within the restrictive zone to move down," says Philip Lane, Chief Economist of the European Central Bank.
"Under the baseline forecasts, next year, when we expect wages to have visibly decelerated, when some of the base effects of fiscal measures which are pushing up inflation this year have faded out, then there will be a discussion about normalization. Unless a shock arrives, the debate for this year is about staying restrictive. But exactly what level of restrictiveness is needed will be data-dependent. We need to use this time between now and the end of this year − because we have quite a few meetings to go this year − for thinking about what are the thresholds and what are the triggers for moving down the rate path within this restrictive zone. That will be the debate.”
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