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This edition was written by Sarah Ahmad, Alex Conner, Tristan Loa, and David Wessel.
Mortgage lock-in occurs when the prevailing mortgage rate exceeds rates on existing mortgages. This discourages homeowners from selling their house and purchasing a different one, reducing both supply and demand. Kristopher Gerardi, Franklin Qian, and David Zhang of the Federal Reserve Bank of Atlanta use administrative mortgage data to estimate the effects of mortgage lock-in. They find that, in 2022 Q4, lock-in reduced the average probability of listing a home by 23%, increased the time listings spend on the market by 52% to 142%, and increased house prices by 3% to 8%. The effects of lock-in became much stronger over the course of 2022 when the Federal Reserve was raising rates aggressively. The authors argue that lock-in most affects people under age 45 because it disrupts lifecycle patterns where people sell their house and move to a better home, often in a different place with better prospects for their children.
Kevin Donovan of Yale and co-authors examine characteristics of labor market downturns using quarterly unemployment rates from 311 recessions across 83 countries. They find that, while many downturns result in mild and brief unemployment spikes, a few lead to larger and more long-lasting increases. Most downturns result in unemployment increases of 0-2 percentage points and last about six quarters, but for the most severe 10%, unemployment rises by 5-19 percentage points and takes 16-33 quarters to recover. Manufacturing and construction account for the majority of the decline in employment. Additionally, the unemployment rate during downturns increases the most for younger and less-educated workers, who are the least prepared to weather the financial shock of joblessness.
Using TransUnion consumer credit data from 2000 to 2020, Sylvain Catherine of Wharton, Constantine Yannelis of Cambridge, and Mehran Ebrahimian of the Stockholm School of Economics find that nearly half of the increases in student loan balances are due to deferred payments under income-driven repayment (IDR) plans, which link payments to income. IDR plans provide significant welfare gains, equivalent to $50,600 on average per borrower, because they smooth consumption and insurance against employment and income risk. The authors estimate that the SAVE plan, proposed by the Biden administration but currently facing legal challenges, would generate $5,300 in welfare gains per borrower. However, these gains are almost completely the result of transfers from taxpayers. To increase gains from income-driven repayment plans without additional cost to taxpayers, the authors recommend extending plan maturities and making plans more progressive by raising the income threshold above which borrowers make payments and raising payment rates.
"While the decline in policy rates provides some fiscal relief by lowering funding costs, this will not be sufficient, especially as long-term real interest rates remain far above pre-pandemic levels. In many countries, primary balances (the difference between fiscal revenues and public spending net of debt service) need to improve.
For some, including the United States and China, current fiscal plans do not stabilize debt dynamics. In many others, while early fiscal plans showed promise after the pandemic and cost-of-living crises, there are increasing signs of slippage.
The path is narrow: delaying consolidation increases the risk of disorderly market-imposed adjustments, while an excessively abrupt turn toward fiscal tightening could be self-defeating and hurt economic activity.
Success requires implementing a sustained and credible multi-year adjustments without delay, where consolidation is necessary. The more credible and disciplined the fiscal adjustment, the more monetary policy can play a supporting role by easing policy rates while keeping inflation in check. But the willingness or ability to deliver disciplined and credible fiscal adjustments have been lacking."
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