Abstract Growth in household debt‐to‐income ratios reflects nominal debt changes or “Fisher dynamics” due to interest income and expenses, real income growth, and inflation. Using two decades of microdata on all Norwegian households, we decompose these channels' roles in how debt‐to‐income evolves over time and in response to monetary policy shocks. On average, debt changes outsize Fisher dynamics, except among highly leveraged households. After interest rate hikes, the channels pull in opposite directions, but the debt changes dominate, so debt‐to‐income ratios decline. This holds across subgroups, including highly indebted households, recent movers, and those facing liquidity constraints or high unemployment risk.
Abstract This paper presents evidence for the demand‐driven propagation of job losses in the context of the United States during the Great Recession. Using county‐level tradable job losses driven by aggregate shocks as an instrument, it shows that retail and restaurant (R&R) employment fell by 0.37% for every 1% of job loss in the rest of the county's economy. The finding is not driven by the house price decline or by credit supply problems. Moreover, the spillover is more severe for R&R industries that are most affected by consumer demand shocks during the Great Recession, which strengthens the argument for the demand‐driven propagation of job losses.
Abstract We study the optimal monetary policy of a New Keynesian economy on the brink of fiscal dominance. The model features a Markov switching structure to incorporate regime uncertainty. Switching probabilities can be either exogenous or endogenous. We find that a fiscal risk entails a welfare loss and breaks the “divine coincidence” because perfect price stabilization becomes counterproductive when monetary policy affects debt dynamics and agents anticipate regime changes. In this environment, the optimal inflation coefficient in the Taylor rule is decreasing on the fiscal risk, and the optimal regime choice ultimately depends on government credibility.
We use recent cross-country experiences to assess the impact of shrinking central bank balance sheets through quantitative tightening (QT). QT announcements increase government bond yields, steepening the yield curve and potentially signaling a greater commitment to raising policy interest rates, but have more limited effects on most other financial market indicators. Active QT has a larger impact than passive QT, particularly on longer maturities. Increased demand by domestic nonbanks has largely compensated for reduced central bank bond holdings. Overall, QT has (to date) had more of an impact than "paint drying," but far less than simply reversing the effects of quantitative easing programs.
This paper investigates the causal effect of tax incentives on entrepreneurship. Using a staggered Value-Added Tax (VAT) reform in China as an exogenous shock to conduct difference-in-differences estimation, we find that tax cuts have a considerable positive effect on local entrepreneurship. A plausible mechanism driving our findings is the ease of financial constraints. Our results are robust to a battery of endogeneity and robustness tests. We find that regions with high levels of institutional quality, trust, or a commercial culture undergo greater entrepreneurship after the VAT reform. Overall, this study provides a timely policy evaluation of the importance of tax incentives in promoting entrepreneurship in a typical emerging market.
