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 Alex Conner, Tristan Loa, Georgia Nabors, and David Wessel.
Cost-sharing agreements (CSAs) allow multinational corporations to share research and development (R&D) costs with their foreign affiliates while indefinitely deferring U.S. taxation on profits from the resulting intellectual property. A 2005 court ruling permitted firms with CSAs to treat employee stock option compensation as an entirely domestic cost rather than a shared one, increasing domestic tax deductions and effectively lowering the cost of R&D. Lysle Boller of the University of Pennsylvania and Clare Doyle and Juan Carlos Suárez Serrato of Stanford find that the 2005 ruling acted as an R&D subsidy for firms with CSAs. Specifically, they find that the stock market value of companies with CSAs increased significantly after the ruling, and companies with CSAs substantially increased their international R&D investment relative to those without agreements. In response to the decision, firms with CSAs increased both the share of R&D spending and share of labor costs comprised of stock option compensation. The authors conclude that tax minimization strategies can significantly influence firms’ real economic behavior.
In previous work, Larry Ball of Johns Hopkins, Prachi Mishra of Ashoka University, and Daniel Leigh of the IMF found that labor market tightness, elevated inflation expectations, and shocks like relative price increases or supply constraints explain the 2021-2022 inflation surge. The authors return to their framework, finding that a reversal of these factors helps explain the fall of inflation from recent peaks. They argue that passthrough from headline shocks – like higher energy prices –explains the initial rise in core inflation in 2021 and early 2022. After that period, labor market tightness becomes the dominant driver of inflation. The authors show that inflation has fallen in line with the vacancy-to-unemployment ratio (V/U), though marginally more slowly than the decline in V/U would predict. The authors also show that, starting in mid-2022, negative energy price shocks have helped temper headline inflation. However, their estimates reveal that the pass-through from energy and other relative price shocks is asymmetric: positive shocks raise core inflation, but negative shocks have little effect.
Analyzing inflation trends across 166 countries from 2020 to 2023, Joseph Gagnon of the Peterson Institute for International Economics and Steven Kamin of the American Enterprise Institute find that nations with higher inflation from 2000 to 2015 tended to experience higher COVID-era inflation. This long-term inflation history was a better predictor of COVID-era inflation than factors like inflation targets or newly established central bank independence, particularly during periods of high volatility like the early stages of the pandemic and the energy price shocks following Russia’s invasion of Ukraine. In contrast, during more stable periods like 2016–2019, recent inflation played a larger role, and the influence of long-past inflation was less pronounced. The authors also find that long-term inflation projections from professional forecasters remained anchored throughout the COVID period and had little ability to predict the inflation surge. They argue that economists’ inflation expectations are more sensitive to policy tools, while non-economists’ expectations are shaped more by past inflation experience.
"Consider the crypto markets again. These products have already laid bare how their heightened risk profiles can result in harm for investors," says Caroline A. Crenshaw, Securities and Exchange Commission Commissioner. "Crypto presents certain novel risks – including those related to hacks and the prevalence of crypto as a method of payment for illicit activity. This last year alone saw a 66% increase in total fraud-related crypto losses – primarily affecting individuals over the age of 60. Plus, we’ve already experienced what a large-scale crypto crisis can look like. As recently as 2022, following the fallout of FTX, there was a shared sense of concern and call to action for regulators. Those risks have not gone away, but the calls for serious regulatory scrutiny are a lot quieter these days. For example, unique challenges with custody, conflicts of interest, disclosure, and market integrity remain unresolved – despite the pressure for widespread crypto adoption and experimentation. Adding to the complexity, are the scores of “traditional” products that reference crypto assets in some form, including crypto futures ETFs and crypto ETPs. Failing to appreciate and address these risks and complexities destines us to repeat hard lessons with high stakes as crypto becomes increasingly entangled with traditional finance."
