Economic Booms, Uncertainty, and Growth
Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)
- Chair: Oliver Pfäuti, University of Mannheim
Expecting More Tomorrow
AbstractIn this paper, we analyze how individuals respond to fully certain, expected, and permanent 2X wage increases. Our setting is brought about by the German apprenticeship or vocational training system. An apprentice (Azubi) is a student/worker in training at a company for two to four years. Around two thirds of all apprentices are eventually taken over by the company and start as full-time employees. That results in approximately 2X permanent wage increases, which are fully expected as any terminations have to be notified at least one quarter in advance by German regulation. In standard economic models, any apprentice would increase their spending ahead of the wage increase and also consider taking on short-term unsecured debt. By German regulations, apprentices can overdraw their checking accounts by at least twice their monthly incomes.
We use transaction-level bank account data to analyze what fraction and by how much apprentices actually increase their spending and borrowing ahead of the wage increase. We find that the majority of apprentices wait until the actual wage increase before increasing their spending by any measurable amount.
Geopolitical Risk and International Banking
AbstractThis paper shows that internationally-active banks play a significant role in propagating foreign geopolitical risk to the domestic economy. Using multiple supervisory data on cross-border and domestic lending by U.S. banks over the past four decades, we document that banks reduce cross-border lending to countries of increasing geopolitical risk but not the local lending of their global operations in those countries because of divestiture frictions. In turn, the banks with high geopolitical risk exposure tighten domestic lending standards and reduce lending to U.S. firms. In addition to the long-run analysis, we show that, in the specific instance of the Russia-Ukraine war, banks with high geopolitical risk exposure through their operations in Russia and Ukraine especially reduce lending to U.S. firms in industries in which these countries specialize.
Sentiment, Productivity, and Economic Growth
AbstractPrevious research finds correlation between sentiment and future economic growth, but disagrees on the channel that explains this result. In this paper, we shed new light on this issue by exploiting cross-country variation in sentiment and market efficiency. We find that sentiment shocks in G7 countries increase economic activity, but only temporarily and without affecting productivity. By contrast, sentiment shocks in non-G7 countries predict prolonged economic growth and a corresponding increase in productivity. The results suggest that sentiment can indeed create economic booms, but only in less advanced economies where noisy asset prices make sentiment and fundamentals harder to disentangle.
Time Use and Macroeconomic Uncertainty
AbstractWe estimate the effects of uncertainty on time use and discuss its macroeconomic implications. Using data from the American Time Use Survey, we first infer cyclical variation in home production and leisure time. We then document that higher uncertainty increases housework and reduces market hours worked, with modest effects on leisure. Finally, we propose a model of housework with time-varying uncertainty that quantitatively accounts for these results. We use the model to demonstrate that substitution between market and nonmarket work provides an additional insurance margin to households, weakening precautionary savings and labor sup- ply. However, time-use reallocation also lowers aggregate demand, ultimately amplifying the contractionary effects of uncertainty. Policies that reallocate time use towards housework (e.g., lockdown policies) amplify the recessionary effects of uncertainty and can result in aggregate dynamics consistent with a supply-side shock.
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit