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This edition was written by Sam Boocker, Alex Conner, Georgia Nabors, and David Wessel.
Eva Vivalt of the University of Toronto and co-authors use a randomized controlled trial to examine the effects of unconditional cash transfers. The trial distributed $1,000 each month to 1,000 low-income individuals and $50 each month to a control group of 2,000 over a 3-year period. They find that, excluding the transfer, total household income fell by $2,500 per year for the treated population relative to the control group, reflecting a reduction in labor supply among transfer recipients and other adult members of their households. Transfer recipients primarily used their additional time for leisure, transportation, and household finances, and not for caregiving, self-improvement, or job searching. The authors find that the cash transfers did not lead to improvements in job quality or significant human capital investments such as education. The authors conclude that unconditional cash transfers reduce labor supply without producing a corresponding increase in other productive activities.
Using a high frequency survey of U.K. firms, Ivan Yotzov of the Bank of England and co-authors find that firms’ perceptions of current inflation respond very quickly – sometimes within hours – to Consumer Prices Index releases. A 1 percentage point increase in inflation translates to a roughly 0.7 percentage point increase in firms’ inflation perceptions. The authors find that firms’ perceptions of overall inflation do not respond more strongly to an upside surprise than a downside one. However, firms’ expectations of their own prices are more strongly correlated with inflation increases than decreases, especially when inflation is already high. The authors argue that this asymmetry may arise because firms don’t want their prices to fall relative to the competition. They also construct a time series of “inflation chatter” in U.K. newspapers and find that, all else equal, more media coverage makes firms’ expectations of their own prices more sensitive to inflation. Over COVID, higher inflation led firms to expect lower sales, suggesting a negative supply shock view of the economy. The authors note that higher inflation led firms to expect higher borrowing costs, consistent with firms anticipating the response of monetary policy.
U.S. investment in artificial intelligence (AI) has surged relative to that of other advanced economies. Using macroeconomic data (including productivity, investment, and stock prices) from 1973 to 2023 for the U.S. and the other six Group of 7 (G7) advanced economies, Danilo Cascaldi-Garcia and Hyunseung Oh of the Federal Reserve argue that the U.S. economy may be on the verge of a productivity boom, unlike the other economies, noting that recent shocks to expected productivity growth appear similar to those that occurred during the dot.com boom. The authors forecast that an AI-driven productivity boom in the U.S. would raise U.S. stock prices, investment, and GDP, and would further strengthen the dollar. Cascaldi-Garcia and Oh also argue that such a boom would cause divergence between U.S. and the other six countries’ growth paths as productivity spillovers between the U.S. and other countries are unlikely to occur.
"An important step in the reform agenda—and one of the most effective reforms to build resilience against future banking stress—is to improve the prioritization of safety and soundness in the examination process, ensuring a careful focus on core financial risks. In my mind, successful prioritization involves increased transparency of expectations and a renewed focus on core financial risks. This includes avoiding issues that are only tangential to statutory mandates and critical areas of responsibility. Where necessary, it also includes adopting a more proactive approach for bank management and bank supervisors to deal with identified risks. Our goal must be to avoid straying from these core issues to focus on less foundational and less pressing areas," says Michelle Bowman, member of the Federal Reserve Board of Governors.
"There have been some notable examples of regulatory mission creep, including the climate guidance introduced last year by the banking agencies. I have no doubt that this guidance is well-intended, and that climate change is an important public policy issue. But the question should be whether banks should be required to divert limited risk management resources away from critical, near-term risk management, with a parallel shift in focus by bank examiners. Looking at this guidance through the lens of prioritization, one could reasonably conclude that climate change is not currently a financial risk to the banking system and does not justify a shift in prioritization.
While some may view this position as provocative, my goal is to demonstrate a more foundational point—mis-prioritizing supervisory objectives will have consequences, making banks riskier and the U.S. financial system less resilient over time."
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