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This edition was written by Elijah Asdourian, Georgia Nabors, Lorae Stojanovic, and David Wessel.
In 2022, major central banks across the world began quantitative tightening (QT), shrinking their balance sheets by as much as 40% after having engaged in substantial quantitative easing (QE) during the COVID-19 pandemic to lower long-term interest rates. Using data on the holdings of seven of these banks, Wenxin Du of Columbia, Kristin Forbes of MIT, and Matthew Luzzetti of Deutsche Bank find that QT does not “simply revers[e] the effects of QE.” While QE significantly lowered yields on government bonds, the authors find that QT announcements increase yields by much less—just 0.04 to 0.08 percentage points for bonds with maturities of a year or longer. Additionally, they find that increased bond purchases of domestic nonbanks has largely offset the reduced bond holdings by central banks. The authors conclude that QT has provided a small degree of support in the larger effort by central banks to tighten financial conditions.
Using Canadian tax data from 1978 to 2016, Sencer Karademir, Jean-William P. Laliberté, and Stefan Staubli of the University of Calgary find that mothers experience an immediate and enduring decline in employment and earnings after the birth of their first child while fathers see far smaller and more gradual reductions. The birth of a first grandchild also reduces employment for grandparents. Looking across census divisions, they find that in areas where grandmothers reduce their employment more following the birth of a first child, mothers reduce their employment less, suggesting that childcare by grandparents is substituted for maternal care. Further, mothers see smaller declines in employment in areas where formal childcare is widely available. Grandmothers, however, experience larger employment reductions in these areas, suggesting that informal grandparental care complements formal childcare. Universal childcare in Quebec—introduced in 1997— decreased the long-term impact of children on earnings by about 8% for mothers but reduced average earnings among grandmothers. The authors conclude that the effect of childcare subsidies on mothers’ employment is dependent on the availability of informal care by grandparents.
Miguel Antón of IESE Business School and co-authors find that the fact that firms are increasingly owned by a decreasing number of institutional investors—called common ownership—can encourage or discourage innovation. When one firm’s technological progress benefits other firms, a common owner encourages innovation because shareholders are more likely to capture the full benefits of the innovation, the authors hypothesize. However, common ownership could discourage innovation that is aimed at stealing market share from other firms. Using firm-level data on innovation from 1985 to 2015, as measured by R&D expenditures and patents, the authors find evidence consistent with their hypotheses: when a firm’s shareholders own other firms that would benefit from technology spillovers, innovation is higher, but when a firms’ shareholders own other firms that are direct competitors, innovation is lower. Antitrust and innovation policy should distinguish between common ownership of horizontal competitors and common ownership of technologically related firms, the authors conclude.
“As my staff and I have talked to business decision-makers in recent weeks, the theme we've heard rings of expectant optimism. Despite business activity broadly moderating, firms are not distressed. Instead, many executives tell us they are on pause, ready to deploy assets and ramp up hiring when the time is right. I asked one gathering of business leaders if they were ready to pounce at the first hint of an interest rate cut. The response was an overwhelming "yes," writes Raphael Bostic, President and CEO of the Federal Reserve Bank of Atlanta.
“If that scenario were to unfold on a large scale, it holds the potential to unleash a burst of new demand that could reverse the progress toward rebalancing supply and demand. That would create upward pressure on prices. This threat of what I'll call pent-up exuberance is a new upside risk that I think bears scrutiny in coming months.”
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