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, Chase Parry, Andrew Rosin, and David Wessel.
Corporate lending has increasingly moved from deposit-funded banks to private credit funds, raising concerns about vulnerabilities outside of the regulatory perimeter. Using fund- and asset-level data representing about 60%-70% of U.S. private credit assets, Gregor Matvos of Northwestern, Tomasz Piskorski of Columbia, and Amit Seru of Stanford find that private credit funds do not share the features that make banks systemically fragile. A key difference is that private credit funds finance about 65-80% of their investments with equity—more than six times the share at commercial banks. Furthermore, private credit funds have long-term funding structures: fund lives average 10–12 years, while underlying loans typically mature sooner, implying little maturity mismatch. In contrast, banks fund long-term assets with short-term liabilities that can be withdrawn on demand. Because private credit funding comes primarily from long-term equity, losses are borne by long-horizon investors rather than short-term creditors, limiting spillovers to the broader economy. The authors caution, however, that as the sector grows, increased leverage, stronger bank linkages, and losses borne by investors could create new channels for spillovers to the broader financial system.
Niklas Engbom of NYU, Aniket Baksy of the University of Melbourne, and private-sector economist Daniele Caratelli argue that weak U.S. wage growth since the 1980s can be explained by a decline in upward job mobility. Using data from the Current Population Survey and a job-ladder model, they estimate that the likelihood that an employed worker receives a better-paying outside job offer is about half of what it was in the 1980s. Cross-state variation is consistent with the decline in upward mobility being driven by increased employer concentration and the growing use of noncompete agreements—both of which limit workers’ ability to search for better outside opportunities. The decline in upward job mobility is estimated to have reduced annual real wage growth by 0.68 percentage points over the past four decades, accounting for about one-third of the overall slowdown. Wages rose more slowly both because workers climbed the job ladder less often and because firms—which face less competition for workers when outside job opportunities are more limited—offered lower wages.
Central banks often act as lenders of last resort during financial crises as private bank liquidity disappears. Pawel Janas of the California Institute of Technology exploits a natural experiment during the Great Depression, comparing counties on either side of the border between the Atlanta and St. Louis Federal Reserve districts. During the banking panic of 1930, the Atlanta Fed aggressively extended liquidity to distressed banks, while the St. Louis Fed largely refrained from intervention. Using newly available county-level data, the author shows that the counties in the Atlanta district experienced fewer bank failures and smaller declines in manufacturing output, employment, and the number of establishments. These differences translated into persistent labor market effects: individuals employed in manufacturing in Atlanta Fed-district counties during the Depression were more likely to be employed in 1940 and less likely to have migrated across state lines.
“Fiscal policy might need to play a role in adjusting to the energy shock. Governments may try to protect households with energy caps and subsidy schemes. This may cushion cost of living pressures in the short run, but these measures are fiscally costly at a time when many government budgets are stretched. And because they suppress price signals, they often prevent an orderly reduction in energy usage and may keep overall energy prices—and demand generally—elevated for longer,” says Dan Katz, First Deputy Managing Director of the IMF.
“For central banks, the policy environment is particularly challenging. If energy prices remain higher for longer, central banks may have to balance risks to price stability against a downturn in the economy and a potential tightening of financial conditions. Former U.S. President Teddy Roosevelt once said that in moments of decision, the ‘worst thing you can do is nothing.’ While this logic might have applied to the combat or high-stakes political situations for which President Roosevelt is famous, it does not apply to central banks facing an energy shock.
“Doing nothing is perfectly logical if it is the best available alternative, and for central banks in the current moment, there is very high option value to waiting for now. Central banks with less firmly anchored inflation expectations and that have been struggling with persistently high inflation may need to respond faster. But central banks that were on hold or in the process of gradually adjusting policy can likely afford to take their time and receive additional clarity about the rapidly evolving situation before deciding whether a pivot—either toward a more restrictive stance to address inflation risks or a more accommodative stance to address output risks—is warranted.”
About the Hutchins Center on Fiscal and Monetary Policy at Brookings
