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1. Good Policy or Good Luck? Why Inflation Fell Without a Recession

Author:
Thomas Ferguson and Servaas Storm
Publication Date:
09-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes claims that the Federal Reserve is principally responsible for the decline of inflation in the U.S. We compare several different quantitative approaches. These show that at most the Fed could plausibly claim credit for somewhere between twenty and forty percent of the decline. The paper then examines claims by central bankers and their supporters that a steadfast Fed commitment to keeping inflationary expectations anchored played a key role in the process. The paper shows that it did not. The Fed’s own surveys show that low-income Americans did not believe assurances from the Fed or anyone else that inflation was anchored. Instead, what does explain much of the decline is the simple fact that most workers nowadays cannot protect themselves by bargaining for higher wages. The paper then takes up the obvious question of why steep rises in interest rates have not so far led to big rises in unemployment. We show that recent arguments by Benigno and Eggertson that shifts in vacancy rates can explain this are inconsistent with the evidence. The biggest factor in accounting for the strength in the economy is the continuing importance of the wealth effect in sustaining consumption by the affluent. This arises, as we have emphasized in several papers, from the Fed’s quantitative easing policies. Absent sharp declines in wealth, the continuing importance of this factor is likely to feed service sector inflation in particular.
Topic:
Economics, Monetary Policy, Federal Reserve, Inflation, and Macroeconomics
Political Geography:
North America and United States of America

2. Federal Reserve Monetary Policy and Wealth Inequality

Author:
Aaron Medlin and Gerald Epstein
Publication Date:
04-2023
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
This study analyzes the impact of conventional expansionary monetary policy on wealth inequality in the United States from 1976 to 2012. We use the local projections instrumental variable (LP-IV) approach for our estimation method and employ two monetary shock series to identify the causal effect. High-frequency data is obtained on the distribution of real net wealth and the Gini index from two new sources: Realtime Inequality and the Federal Reserve’s Distributional Financial Accounts (DFA). We find that expansionary monetary policy has positive and persistent effects on wealth inequality over the medium term, in contrast to previous research. Specifically, an expansionary policy of 100 basis points cut in the policy rate increases the share of wealth for the top 10 and 1 percent and reduces the share for the bottom 50 and middle 40 percent of the distribution. Overall, wealth inequality, as measured by the Gini coefficient, increases around 0.005 on the Gini scale (between 0 and 1) with Realtime data and around 0.015 using DFA data. We also find that the effect size of expansionary policy on inequality varies over prior decades; the effects between 1976 and 1980 are smaller and transient relative to the periods since. We also find that expansionary policy increases wealth inequality regardless of the business cycle. However, its effects are more substantial during economic expansions. Lastly, we estimate the historical contribution of monetary policy to the variation in wealth distribution and find that it does account for significant variations in wealth distribution during certain periods of recent U.S. history.
Topic:
Monetary Policy, Federal Reserve, Economic Inequality, and Wealth Distribution
Political Geography:
Global Focus

3. Precedents, Instruments and Targets that the Fed Has Used to Create and Support a Postcrisis Global Safety Net

Author:
Edward J. Kane
Publication Date:
09-2023
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Much has been made of the Global Safety Net that has been put into place since the Great Financial Crisis but the distributional effects of some of the Fed’s strategies are still shrouded in mystery. In supplying bailout funds at below-market terms to uninsured creditors of firms and governments that were economically insolvent, the Fed reinforced the implicit expectation that megabanks are free to take on high levels of risk and benefit from the upside while being protected from any serious downside. An important example of this is the role of currency swaps. By extending its “temporary” dollar swap lines with other central banks, including the European Central Bank, “until further notice” the Fed broadcasted its intention to act as the financial world’s “liquidity provider” of last resort. The “liquidity” support provided by the Fed to megabanks through cross-border lending in fact acted as subsidies, the costs of which were borne by ordinary US citizens. This is just one piece of an unacknowledged game plan of building global strategies of crisis prevention and crisis management based on misdirection and piles of bullsh*t.
Topic:
Economics, Monetary Policy, Federal Reserve, Central Bank, and Safety Net
Political Geography:
North America and United States of America