After decades of decline in natural interest rates, a key question is whether the low- r^* era is ending. We estimate natural rates for 16 advanced economies since the 1870s using the Laubach and Williams approach, providing the longest and broadest set of comparable r^* estimates to date. We show that r^* differs substantially from observed real interest rates—a disconnect with implications for policy. Population aging and productivity growth are the determinants most robustly associated with r^* , while inequality and the relative price of capital are not. Higher public debt-to-GDP ratios are associated with lower natural rates. These relationships vary over time, cautioning against mechanical extrapolation. Our decomposition reveals that the demographic headwinds facing advanced economies are unprecedented in our 150-year sample, suggesting that a sustained reversal of the decline is far from assured—even if the green transition or artificial intelligence eventually raise productivity growth.
The Dominant Currency Paradigm is widely acknowledged, and it is well known that the U.S. dollar (USD) plays a key role in Japan’s trade. We present new evidence showing that small Japanese firms prefer invoicing exports in the Japanese yen (JPY), while large Japanese firms—only the top 10 percent by firm size—tend to invoice exports more often in USD than in JPY, based on Japan Customs export declaration data. Using fixed-effect panel estimation and the most comprehensive Japanese firm-level survey data, we demonstrate that intra-firm and arm’s-length export transactions are invoiced differently. Specifically, parent companies in a multinational corporate group tend to invoice their exports to overseas subsidiaries in USD to insulate them from exchange rate risk and to centralize the group-wide foreign exchange management through operational hedging that offsets USD-denominated import payments with export revenues within the group. Smaller firms with fewer overseas subsidiaries are likely to continue opting for JPY-invoiced exports because of their limited capacity for financial hedging.
Recent studies exploit the response date in survey data to identify the causal effects of monetary policy announcements on individuals and firms. While the identification scheme is credible, so far, the effects could have been estimated only on a limited set of outcome variables. This study extends the evidence on the causal relations of monetary policy announcements and firms’ adjustments by estimating the effect on firms’ employment plans measured by employment expectations. I observe economically significant effects of monetary policy announcements on one-year-ahead employment expectations. Moreover, using the comprehensive nature of the data, I show that firms’ employment expectations are strong predictors of actual employment changes. This makes expectations not vague sentiments but concrete plans for future employment adjustments. I therefore conclude that firms indeed report their adjusted employment plans after a monetary policy announcement. These findings suggest that firms not only pay attention to such announcements but also attribute to unexpected monetary policy shocks serious economic impacts such that firms plan to adjust their employment levels despite potentially high labor adjustment costs. Thus, firms perceive monetary policy shocks as having lasting effects on the economy.
Large stocks of public and external debt tempt policymakers to extract resources from their creditors. This article characterizes three broad forms of financial repression that serve this purpose. The first consists of direct taxation of the financial sector through levies on financial transactions, banks’ income, or pension-fund assets. The second is a sudden and sufficiently persistent devaluation of the currency. The third raises the demand for the non-monetary services provided by different types of government liabilities while keeping their supply scarce, thereby creating yield discounts. Reviewing historical experience, including recent years, the article concludes that each of the three often fails to deliver sustained revenues, even if they can sometimes be temporarily large. Financial repression is an alluring temptation with illusory gains: yielding to it may generate substantial efficiency losses and produce only limited revenue.
Do the effects of local fiscal multipliers vary based on the type of government purchases? We find that government purchases of services generate larger increases in local employment, labor income, and output than purchases of goods. This variation stems from key factors: differences in sectoral characteristics—particularly centrality and markups—between good-producing and service-producing industries, and distinct impacts on business turnover and productivity. Service purchases generate larger aggregate productivity gains than goods purchases because firm turnover is concentrated in high-growth sectors, suggesting that extensive-margin reallocation and productivity improvements amplify fiscal responses more strongly for services. Our results highlight that fiscal policy effectiveness depends not only on scale but also on the composition of spending, with important implications for the design of government purchase programs.
