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This edition was written by Sarah Ahmad, Tristan Loa, Louise Sheiner, and Jack Spira.
Analyzing 35 years of academic biomedical research funded by the National Institutes of Health (NIH), Pierre Azoulay of MIT and Wesley Greenblatt of Harvard find that peer-review penalizes risk-taking in the awarding of grants. Using citations and metadata from publications acknowledging NIH support, the authors construct four measures of risk-taking—variance in the influence of publications, tendency to challenge existing literature, dissimilarity from an investigator’s prior work, and uniqueness among contemporary research—to determine the effect of risk-taking on the likelihood of grant renewal. Distinguishing between risk-taking and novelty of research, the analysis shows that while more novel research is more likely to receive grant renewals, riskier research by any measure is less likely. Among research that does win renewed funding, however, risk-taking projects tend to be more influential, suggesting that the risk penalty may be greater than is socially optimal.
Using microdata on Belgian manufacturers’ prices and production costs, Luca Gagliardone of NYU and co-authors find that firms are more likely to adjust prices when the gap between their listed and optimal price (the price that maximizes profits based on production costs) widens. This relationship remains stable in normal times when inflation is low, with price adjustments occurring at a steady rate. However, during periods of large aggregate cost shocks, such as the post-pandemic inflation surge, firms adjust prices more frequently to close the gap. From 2020 to 2023, the quarterly inflation rate was on average one percentage point higher than the past 20-year trend, coinciding with a 10 percentage point increase in the frequency of price changes. The authors conclude that sharp fluctuations in production costs, particularly intermediate costs from abroad, were the key driver of inflation surges in the post-pandemic period.
Examining housing market data in the United Kingdom, Daniel Albuquerque and Jamie Lenney of the Bank of England and Thomas Lazarowicz of the University College London find that a one percentage point increase in the central bank’s interest rate causes house prices to fall by 6% within 16 months; rents on rental property stay stable for about two years and then start falling. The authors also find that after a rate increase, home sales fall and the stock of houses for sale rises. This suggests that some households continue to rent instead of taking advantage of lower house prices to buy, pushing up rents. In the U.K., unlike the U.S., rates on most mortgages adjust every few years so housing is a particularly important channel for monetary policy. Given that contractionary monetary policy holds rents stable (or can increase them slightly) while decreasing other prices, the authors conclude that stabilizing both the housing and non-housing market sectors of the economy at the same time is difficult. Because reducing an inflation measure that includes rents would require a large increase in interest rates, they suggest that policymakers focus on an inflation measure that excludes housing.
"Q: So how restrictive is the ECB’s monetary policy at the moment?"
"A: The data are showing that the degree of restriction has come down significantly, up to a point where we can no longer say with confidence that our monetary policy is still restrictive," says Isabel Schnabel, Member of the Executive Board of the European Central Bank. "One of the important data sources in this context is the bank lending survey. We’re looking at that very carefully. For corporate loans, 90% of banks said in the most recent round that the general level of interest rates has no impact on loan demand, while 8% said it has lifted credit demand. A year ago, a third of banks said that interest rates were weighing on loan demand. It’s even clearer when you look at mortgages. Almost half of banks said in the most recent round that the general level of interest rates is supporting loan demand. A year ago, more than 40% said that it was constraining loan demand. This is also reflected in a historically strong increase in mortgage demand in that same survey, which is gradually transmitting into the hard data on loan growth. Corporate loans were growing by 1.5% in December, mortgages by 1.1%.The easing is also being transmitted to the real economy. Consumption picked up in the third quarter by more than we had expected. And the savings rate has started to come down from its very high level. But of course, there are transmission lags, and part of the easing is still in the pipeline."
"Q: Some economists argue that the big uncertainty and all those shocks could justify insurance cuts. Do you have any view on that?"
"A: I don't see any argument for that at this point, especially as we are getting closer to no longer being restrictive. If anything, we are getting closer to the point where we may have to pause or halt our rate cuts."
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
