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U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data
We examine three main channels through which U.S. monetary policy shocks affect firm investment in foreign countries: (1) the balance sheet channel; (2) the financial channel of the exchange rate; and (3) the trade channel. For this purpose, we use quarterly firm-level data for 63 advanced economies (AEs) and emerging market and developing economies (EMDEs) over 1996-2016. Our results suggest an important and independent role for all three key channels. U.S. monetary policy shocks have larger effects on investment for firms that are more leveraged (balance sheet channel), for firms that have a higher share of debt in foreign currency (financial channel of the exchange rate), and for firms that operate in sectors with higher export dependence (trade channel). Back-of-the-envelope calculations suggest that the balance sheet channel is the most important channel of transmission of U.S. monetary policy shocks on aggregate firm investment.
India’s State-Owned Enterprises
India’s recently announced privatization strategy can facilitate a change in the composition of the public sector balance sheet toward high-return public sector investments in infrastructure and human capital where there is a clear role for government, leaving commercially viable companies for the private sector. Against this background, this paper provides a description of the SOE sector in India, consider different criteria which can inform the scope and rationale for privatization. It also highlights takeaways from international experience with privatization, highlights the importance of improved governance and oversight of SOEs and showcases analytical tools that can help analyze risks from SOEs. While this paper focuses on India, the framework for SOEs developed in this paper can be used to evaluate SOEs policy options in other countries.
Inequality and Poverty in India: Impact of COVID-19 Pandemic and Policy Response
Using microdata from nationally representative household and labor force surveys, we study the impact and drivers of poverty and inequality in India during the pandemic. We have three main findings. First, India has made significant progress in reducing poverty in recent decades, but the economic downturn associated with the COVID-19 pandemic is estimated to have temporarily increased poverty and inequality. Second, education and employment status seem to be the main factors associated with poverty and income/consumption changes. Finally, the government’s expansion of food subsidies has likely played a significant role in mitigating the increase in poverty during the pandemic.
Policy Uncertainty in Japan
We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards building on the approach of Baker, Bloom and Davis (2016). Each index reflects the frequency of newspaper articles that contain certain terms pertaining to the economy, policy matters and uncertainty. Our overall EPU index co-varies positively with implied volatilities for Japanese equities, exchange rates and interest rates and with a survey-based measure of political uncertainty. The EPU index rises around contested national elections and major leadership transitions in Japan, during the Asian Financial Crisis and in reaction to the Lehman Brothers failure, U.S. debt downgrade in 2011, Brexit refer...
Policy Uncertainty in Japan
We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards building on the approach of Baker, Bloom and Davis (2016). Each index reflects the frequency of newspaper articles that contain certain terms pertaining to the economy, policy matters and uncertainty. Our overall EPU index co-varies positively with implied volatilities for Japanese equities, exchange rates and interest rates and with a survey-based measure of political uncertainty. The EPU index rises around contested national elections and major leadership transitions in Japan, during the Asian Financial Crisis and in reaction to the Lehman Brothers failure, U.S. debt downgrade in 2011, Brexit refer...
Invisible Geniuses: Could the Knowledge Frontier Advance Faster?
The advancement of the knowledge frontier is crucial for technological innovation and human progress. Using novel data from the setting of mathematics, this paper establishes two results. First, we document that individuals who demonstrate exceptional talent in their teenage years have an irreplaceable ability to create new ideas over their lifetime, suggesting that talent is a central ingredient in the production of knowledge. Second, such talented individuals born in low- or middle-income countries are systematically less likely to become knowledge producers. Our findings suggest that policies to encourage exceptionally-talented youth to pursue scientific careers—especially those from lower income countries—could accelerate the advancement of the knowledge frontier.
Fear Thy Neighbor: Spillovers from Economic Policy Uncertainty
High levels of economic policy uncertainty in various parts of the world revamped the de- bate about its impact on economic activity. With increasingly stronger economic, financial, and political ties among countries, economic agents have more reasons to be vigilant of for- eign economic policy. Employing heterogeneous panel structural vector autoregressions, this paper tests for spillovers from economic policy uncertainty on other countries' economic ac- tivity. Furthermore, using local projections, the paper zooms in on shocks originating in the United States, Europe, and China. Our results suggest that economic policy uncertainty re- duces growth in real output, private consumption, and private investment, and that spillovers from abroad account for about two-thirds of the negative effect. Moreover, uncertainty in the United States, Europe, and China reduces economic activity in the rest of the world, with the effects being mostly felt in Europe and the Western Hemisphere.
Corporate Sector Resilience in India in the Wake of the COVID-19 Shock
To assess the resilience of India’s corporate sector against COVID-19-related shocks, we conducted a series of stress tests using firm-level corporate balance sheet data. The results reveal a differential impact across sectors, with the most severe impact on contact-intensive services, construction, and manufacturing sectors, and micro, small, and medium enterprises. On policy impact, the results highlight that temporary policy measures have been particularly effective in supporting firm liquidity, but the impact on solvency is less pronounced. On financial sector balance sheets, we found that public sector banks are more vulnerable to stress in the corporate sector, partly due to their weaker starting capital positions. When considering forward-looking multiperiod growth scenarios, we find that the overall corporate performance will depend on the speed of recovery. A slower pace of recovery could lead to persistently high levels of debt at risk, especially in some services and industrial sectors.
Government Policies and the Delayed Economic Recovery
This book examines the reasons for the unprecedented weak recovery following the recent US recession and explores the possibility that government economic policy is the problem. Drawing on empirical research that looks at issues from policy uncertainty to increased regulation, the volume offers a broad-based assessment of how government policies are slowing economic growth and provides a framework for understanding how those policies should change to restore prosperity in America.
The Case for a Long-Run Inflation Target of Four Percent
Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly.
