ABSTRACT: The global fertility rate has reached a record low, with nearly half of all countries now below replacement level. This has sparked renewed interest among policymakers and researchers alike. In this paper, we explore a novel explanation for low birth rates based on comparison motives. We show theoretically that strong comparison motives lead to high parental investments—both in time and money—and low fertility. We further show that comparison motives can amplify fertility declines driven by other forces. We provide suggestive empirical support for the role of comparison motives in explaining cross-country and within-US regional variation in fertility. The resulting policy implications are different from those usually considered. Specifically, reliance on high-stakes testing and precise rankings in the education system may heighten comparison motives and thereby contribute to fertility decline. Taxing or regulating certain types of private education institutions or reforming college admission could reduce excessive parental investments and thereby stimulate fertility.
ABSTRACT: The CHIPS and Science Act, enacted in August 2022, is a key element of the revival of US industrial policy. We examine the short-term employment effects of the act. Drawing on quarterly industry-by-county data from the Quarterly Census of Employment and Wages (QCEW), we implement two county-level difference-in-differences designs, the first comparing counties with preexisting semiconductor facilities to other counties with high-tech industries and the second comparing counties with semiconductor fabrication facilities (which were targeted for the bulk of the CHIPS funding) to counties with non-fabrication semiconductor facilities. Using both approaches, we find robust, positive employment impacts in affected counties. The effects began at the time of the passage in the Senate of a precursor bill, in anticipation of the signing of the CHIPS Act. Our preferred estimates suggest an increase of 110 jobs per affected county in the first design and 180 jobs per affected county in the second design. We also find robust positive impacts on local construction employment. Evidence on total employment and GDP at the county level, as well as on employment in upstream input sectors, is mixed. Simple back-of-the-envelope calculations (which come with caveats) suggest national direct employment effects of approximately 15,000–16,000 jobs in the core semiconductor sector and indirect effects of 15,000–30,000 jobs in related sectors.
A policy priority of the US government is to reduce America's long-standing trade deficit. Economic planners in the Trump administration blame the postwar world trading system for harming the US economy and hope to change it through wide-ranging tariffs and other measures. Three prominent myths underlie the narrative that the United States has been victimized by trade partners. The first holds that trade liberalization that has left the United States open to mercantilist foreign practices is a primary cause of the aggregate US trade deficit. The second is that the dollar's status as the premier international reserve currency obliges the United States to run trade deficits to supply foreign official holders with dollars. The third is that US deficits are caused entirely by foreign financial inflows that America must accommodate by consuming more than it produces. This paper shows that the realities are more nuanced. While foreign and domestic trade policies can affect both imports and exports separately, they are not principal drivers of their difference, the trade deficit. The United States can supply the world with dollars without trade deficits. Finally, the trade deficit reflects the interplay of foreign and US macroeconomic factors (including China's saving rate and the US government budget deficit) and often US factors are dominant. Higher federal fiscal deficits, for example, will raise US trade deficits despite more import tariffs.
We build a simple model that shows how the incentives and constraints facing three key types of market players-broker-dealers, hedge funds, and asset managers-interact to create a heightened level of fragility in the Treasury market, and how this fragility can become more pronounced as the supply of Treasury securities increases. After validating a number of the model's empirical premises and implications, we ask what it can tell us about how the Federal Reserve might best address future episodes of market dysfunction. In so doing, we take as given that an important priority for any Fed response to Treasury market dysfunction is that it be clearly separated from anything having to do with monetary policy.
The COVID business cycle was unique. The recession was by far the deepest and shortest in the US postwar record and the recovery was remarkably rapid. The cycle saw an unprecedented reallocation of employment and consumption away from in-person services toward goods that can be consumed at home and outdoors. This paper provides a simple empirical model that attributes these and other anomalies in real economic activity to a single unobserved shock. That shock is closely connected to COVID deaths and diminishes in importance over the expansion, consistent with self-protective measures like masking, pandemic fatigue, and eventually the availability of the vaccine. The COVID shock and anomalous COVID dynamics largely disappeared by late 2022. It appears that macrodynamics have returned to normal and that the structural shifts wrought by the COVID-19 pandemic have had limited effects on the underlying economic trends of key indicators, despite notable changes like the prevalence of remote work. The greatest macroeconomic legacy of the COVID business cycle has been on the national debt.
Housing prices across much of America have hit historic highs, while less housing is being built. If the US housing stock had expanded at the same rate from 2000-2020 as it did from 1980-2000, there would be 15 million more housing units. This paper analyzes the decline of America's new housing supply, focusing on large Sunbelt markets such as Atlanta, Dallas, Miami, and Phoenix that were once building superstars. New housing growth rates have decreased and converged across these and many other metro areas, and prices have risen most where new supply has fallen the most. A model illustrates that structural estimation of long-term supply elasticity is difficult because variables that make places more attractive are likely to change neighborhood composition, which itself is likely to influence permitting. Our framework also suggests that as barriers to building become more important and heterogeneous across place, the positive connection between building and home prices and the negative connection between building and density will both attenuate. We document both of these trends throughout America's housing markets. In the Sunbelt, these changes manifest as substantially less building in lower-density census tracts with higher home prices. America's suburban frontier appears to be closing.
We examine the responsiveness of labor participation, unemployment, and labor migration to exogenous variations in labor demand. Our empirical approach considers four instruments for regional labor demand commonly used in the literature. Empirically, we find that labor migration is a significant margin of adjustment for all our instruments. Following an increase in regional labor demand, the initial increase in employment is accounted for mainly by a reduction in unemployment. Over time however, net labor in-migration becomes the dominant factor contributing to increased regional employment. After five years, roughly 60 percent of the increase in employment is explained by the change in population. Responses of labor migration are strongest for individuals age 20-35. Based on historical data back to the 1950s, we find no evidence of a decline in the elasticity of migration to changes in employment.
China's hybrid economy blends state planning with market mechanisms, using annual economic targets to guide development and macro economic management to ensure their achievement. Local governments set ambitious growth targets to align with central mandates and incentivize sub ordinates, leading to asymmetric adjustments: Targets rise rapidly during booms but decline sluggishly during slowdowns. This dynamic has heightened pressure on local governments to intervene in the economy, particularly after 2010. Our analysis shows that when a region falls short of its growth target, it increases infrastructure investment, land sales, and local government debt to close the gap. Notably, during the relatively stable period of 2011-2019, overly optimistic targets contributed an additional 14.0 percent of GDP to local gov ernment debt. While these interventions helped smooth cyclical fluctuations and moderated the trend of GDP deceleration, they also eroded GDP growth's reliability as an economic indicator, weakening its correlation with corporate revenue, household demand, and total factor productivity gains.
ABSTRACT: We analyze monetary policy documents to examine what role the new policy framework adopted by the Federal Reserve in 2020 and its implementation played in the slow response of policy to the inflation of 2021–2022. We show that the two changes that are most explicit in the new framework—moving to flexible average inflation targeting and not responding to employment above its "maximum" level—had little impact. However, two changes that were more subtle—moving away from preemptive policy actions and, especially, strengthening and elevating the employment side of the dual mandate—played significant roles. We conclude by discussing implications for the Federal Reserve's upcoming framework review.
ABSTRACT: The 2020 revisions to the Federal Reserve's monetary policy framework included a shift in the Fed's policy focus to shortfalls (rather than deviations ) from maximum employment and a commitment to "flexible average inflation targeting." The new framework, and the associated guidance and asset purchases with which it was implemented, were tested by the surge in inflation in 2021 and 2022. We consider the lessons learned from this experience. We conclude that the changes to the framework were too focused on the experience following the financial crisis and hence were not robust in the face of unexpected changes in economic circumstances. We also argue that the Fed made mistakes with the calibration and communication of the tools used to implement the framework—the forward guidance on the policy rate and the asset purchase program. We recommend a broad framework that would be appropriate in a wide range of policy environments, with the specific policy approach to be taken in any given circumstance to be communicated through forward guidance and asset purchase announcements. We suggest ways in which the Fed could implement these tools with better calibration and communication, in order to avoid having its policy commitments exacerbate costly economic outcomes.
ABSTRACT: The Federal Reserve's 2020 strategic framework for monetary policy is sufficiently broad and flexible to face up to the wide-ranging challenges and uncertainties that are likely to emerge over the next many years. The 2020 revised framework addressed challenges that surfaced under the 2012 strategy and effective lower bound complications following the global financial crisis. Additions in the 2020 framework were intended to further anchor inflation expectations and preserve as much interest rate capacity to fight emerging recessions as a 2 percent inflation objective allows. I review the rationale for the inclusion of flexible average inflation targeting and refocusing on employment shortfalls. While the 2020 framework remains a sturdy foundation for monetary policymaking, I discuss implementation issues and suggest a few improvement opportunities that may help combat the challenges arising from the choice of a low 2 percent inflation objective.
This paper examines the effectiveness of economic sanctions imposed on Russia, particularly following its 2022 full-scale invasion of Ukraine. Despite the unprecedented scope and scale of these sanctions, their impact on Russia's economy has been mixed, with only moderate contraction reported by official Russian statistics. We combine an empirical assessment of these sanctions with the development of a theoretical framework to better understand the complexities and trade-offs in their application. Sanctions, while a critical tool of economic statecraft, are not a guaranteed solution to end wars or alter a country's behavior. To impose effective costs, we advocate for a comprehensive, technocratic approach with clear, measurable objectives, rather than a piecemeal strategy. The efficacy of sanctions depends on factors such as the target country's size and global integration, the sanctioning coalition's unity, the ability to enforce sanctions, and the economic burden on sanctioning nations. The paper underscores the importance of realistic expectations and careful design of sanctions policy on trade, finance, and payment systems.
This paper computes the unemployment rate u* that is consistent with full employment in the United States. First, the paper argues that social efficiency is the most appropriate economic interpretation of the legal concept of full employment. Here efficiency means minimizing the nonproductive use of labor-both unemployment and recruiting. As it takes one worker to service one job vacancy, the nonproductive use of labor is measured by the number of job seekers and job vacancies, u + v. Through the Beveridge curve, the numbers of job seekers and vacancies are inversely related, uv = constant. With such symmetry the labor market is efficient when there are as many job seekers as vacancies (u = v), inefficiently tight when there are more vacancies thanjob seekers (v > u), and inefficiently slack when there are more job seekers than vacancies (u > v). Accordingly, the full-employment rate of unemployment (FERU) is the geometric average of the unemployment and vacancy rates: u* = uv. From 1930 to 2024, the FERU averages 4.1 percent and is stable, remaining between 2.5 percent and 6.7 percent. Unemployment has generally been above the FERU (u > u*), especially during recessions. Unemployment has only been below the FERU (u < u*) during major wars, as well as shortly before and in the aftermath of the pandemic.
In this paper we assess the economic impacts of moving to a renewable-dominated grid in the United States. We use projections of capital costs to develop price bounds on future wholesale power prices at the local geographic level. We then use a class of spatial general equilibrium models to estimate the effect on wages and output of prices falling below these bounds in the medium term. Power prices fall anywhere between 20 percent and 80 percent, depending on local solar resources, leading to an aggregate real wage gain of 2-3 percent. Over the longer term, we show how moving to clean energy represents a qualitative change in the aggregate growth process, alleviating the "resource drag" that has slowed recent productivity growth in the United States.
The 2020 revisions to the Federal Reserve's monetary policy framework included a shift in the Fed's policy focus to shortfalls (rather than deviations) from maximum employment and a commitment to "flexible average inflation targeting." The new framework, and the associated guidance and asset purchases with which it was implemented, were tested by the surge in inflation in 2021 and 2022. We consider the lessons learned from this experience. We conclude that the changes to the framework were too focused on the experience following the financial crisis and hence were not robust in the face of unexpected changes in economic circumstances. We also argue that the Fed made mistakes with the calibration and communication of the tools used to implement the framework-the forward guidance on the policy rate and the asset purchase program. We recommend a broad framework that would be appropriate in a wide range of policy environments, with the specific policy approach to be taken in any given circumstance to be communicated through forward guidance and asset purchase announcements. We suggest ways in which the Fed could implement these tools with better calibration and communication, in order to avoid having its policy commitments exacerbate costly economic outcomes.
By design, official budget estimates for legislative proposals generally exclude the proposals' likely effects on labor, capital, productivity, and output, as well as any feedback from such effects to the federal budget. Policymakers would benefit from knowing the expected sizes of those effects, and advances in research and in the estimating agencies' tools and experience have made such analysis more feasible. If Congress requested that those effects be included more often in official budget estimates-so-called dynamic scoring of legislation-the advantages and disadvantages would vary across policy areas. For some areas, the estimated budgetary impact of the currently excluded effects would be significantly different from the impact of the included effects. But dynamic scoring would be substantially more time-consuming than conventional scoring, and in some areas, the research base is insufficient for credible estimation.
Using newly digitized unemployment insurance claims data, we construct historical monthly unemployment series for US states going back to January 1947. We validate our series, showing that they are highly correlated with the Bureau of Labor Statistics' state-level unemployment data, which are only available since January 1976, and capture consistent business cycle dynamics. We use our claims-based unemployment rates to study the postwar evolution of labor market adjustments to local demand shocks and state unemployment fluctuations around national recessions. We document: (1) a trend decrease in the dispersion of relative employment growth and unemployment across states; (2) an attenuation of relative employment, unemployment, and population responses to state-specific demand shocks in recent decades; and (3) a convergence across states in both the speed and degree to which unemployment recovers after recessions. These trends show the emergence of a national business cycle experienced more uniformly across US states, particularly since the 1960s. We present evidence suggesting that a convergence in states' industrial composition helps explain why a more uniform business cycle emerged when it did. And states' increasingly similar experience in recessions may help explain why interstate migration became a weaker adjustment mechanism in recent decades.
