In my latest curated list of macro articles, we find of how monetary policy fuels inequality, weak housing markets stop new firm formation and some better inflation forecasting models. On markets, some clever ways of looking at equity volatility to forecast equity returns, how Asian credit markets have further to grow and estimates of much US real rates have been weighed down by central bank buying. On the lighter side, we have some charts on tech unicorns, some stats on US labour markets you didn’t know and how to use satellites to map retail sales. Enjoy!
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In my latest curated list of macro articles, we find of how monetary policy fuels inequality, weak housing markets stop new firm formation and some better inflation forecasting models. On markets, some clever ways of looking at equity volatility to forecast equity returns, how Asian credit markets have further to grow and estimates of much US real rates have been weighed down by central bank buying. On the lighter side, we have some charts on tech unicorns, some stats on US labour markets you didn’t know and how to use satellites to map retail sales. Enjoy!
Politics
The Politics of CEOs “CEOs donate disproportionately more to the Republican Party and its candidates…57% of CEOs are Republicans , 19% are Democrats , and the rest are Neutral”
What if You Could Vote for President Like You Rate Uber Drivers? Social choice theorist Annick Laruelle, “While ranking all candidates appears to be difficult … participants enjoy the possibility of choosing a grade for each candidate … [and] ballots with three grades are preferred to those … with two grades.”
Devolution at 20 On the 20th anniversary of UK devolution, Brexit has put the relationship between the UK nations under serious pressure – but there are other big unresolved questions too. The report is a comprehensive analysis of how devolution has worked in the UK. [I’d argue devolution is factor behind Brexit as it left England behind]
How the Intercept Is Fueling the Democratic Civil War The national security site has found fresh energy as a savvy, progressive attack dog in national politics. But is it undermining its own side?
Growth Issues
Germany, Startups, and Inflation Some useful perspectives on Germany
Did the euro change the nature of FDI flows among member states? Flows are not more likely be directed towards euro area countries with larger domestic markets but rather to countries that are close to large euro area markets and that have higher quality institutions
The Eurozone’s Long Depression Collapsing corporate investmentis the real story of the Eurozone crisis… But European corporations didn’t stop investing. They simply looked elsewhere…. It flowed out of the Eurozone to the rest of the world.
The implications of non-tariff measures for developing countries’ exportsDeveloping countries often struggle to access international markets. Column discusses how developing countries need to use measures outside of traditional trade policy.
Predicting Future RecessionsFed builds some recession forecasting models based on Survey of Professional Forecasters forecast data. They find the probability of a recession within four hits a high between 35 and 40 percent in 2019:Q3.
Labour Market
Improving Labor Force Participation Between 2015 and 2019, the labor force participation (LFP) rate among US prime-age workers (25 – 54 years old) increased by about 1.5 percentage points, adding about 2 million workers more than if the participation rate had not increased.
Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit Focusing on the restaurant industry, Harvard finds restaurants with lower ratings are closer to the margin of exit are disproportionately driven out of business by increases to the minimum wage
How to Report the Monthly Employment Number excluding Temporary Census Hiring The Census Bureau will soon start hiring temporary workers for the 2020 Census… it makes sense to adjust the headline monthly Current Employment Statistics (CES) by Census hiring to determine the underlying employment trend. [Good point, I missed this factor]
Examining the Discrepancy Between Jobs and Employment “In the payroll survey, three part-time jobs count as three jobs.”
Inflation Matters
The Fiscal Roots of Inflation The author argues that unexpected inflation corresponds entirely to a rise in interest rates, rather than changes in expected future surpluses.
Improving the Phillips Curve with an Interaction Variable San Fan Fed finds that modifying the Philips Curve with a multiplicative combination of lagged inflation and the lagged output gap better forecasts inflation.
Using Brexit to Identify the Nature of Price Rigidities San Fran Fed looks at how the pound weakness transmitted to prices after the referendum. They find the “increase in prices is mostly driven by an increase in the magnitude of price adjustments rather than the incidence of price changes” and “price dispersion does not change very much”
Explaining Inflation Inertia What can governments do to influence inflation expectations when central banks’ policies prove insufficient to the task? Reinhart argues that “In the case of Japan, …requires a break from the current practice of indexing public-sector wages to the previous year’s inflation. Bold increases in public-sector wages may provide the official signal [to the private sector] that has been lacking”
Housing Sector
Risk sharing, flexibility and the future of mortgages Bank of Canada Governor Poloz talks amongst other things about shared equity mortgages, which are being launched in Canada
Pockets of risk in European housing markets: then and now ECB finds evidence of a considerable change in borrower characteristics since 2010: new borrowers are older and have higher incomes than before the crisis
Second-Home Buying and the Housing Boom and Bust Second-home buying could explain about 30 percent and 10 percent of the run-up in construction employment and house prices, respectively, from 2000 to 2006.
Housing market and bank lending effects on young firms and local economies Young firms often rely on housing gains to access capital, therefore weak housing especially hurts young firms. This impacts the labour market as young firms account for a disproportionate share of newly created job positions (esp younger and less educated workers)
Monetary policy
All eyes on the Fed Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. Bruegel review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.
Models, Markets, and Monetary Policy Fed’s Clarida gives a good survey of how to conduct monetary policy. He also notes “when there is a divergence between the path for the policy rate implied by the [economists] surveys and a straight read of interest rate derivatives prices, I place at least as much weight on the survey evidence as [market prices]” [I tend to agree with him on this, and I think many investors don’t correctly account for term premium in short-term rates markets]
Euro Area monetary and economic policy challenges Bundesbank President Weidmann talks supply side of the economy and the problems with low interest rates “very favourable financing conditions can keep afloat unprofitable firms” and “low interest rates could be a potential feeding ground for higher market concentration”
Market power and monetary policy BoE finds “ market power [in the UK] measured by markups estimated at the firm level have clearly increased in recent years” and “a rise in both the trend and volatility of mark-ups may lead to a significant rise in inflation variability”
Targeting financial stability: macroprudential or monetary policy? ECB paper finds that deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens
Tying Down the Anchor: Monetary Policy Rules and the Lower Bound on Interest Rates Amongst among things, this Fed paper finds that “the central bank can eliminate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained.”
Inequality
The economy isn’t getting better for most Americans. But there is a fix “Restoring worker power does not mean trying to go back in time to the trade unions of old. Rather, it means creating modern mechanisms. [such as] a global labor agreement …modeled on the Paris climate accords.”. Worth reading with Why the Labor Movement Has Failed—And How to Fix It
The Great Divide: Regional Inequality and Fiscal Policy Growing regional inequality within countries has raised the perception that “some places and people” are left behind. IMF analysis finds regional disparity in per-capita GDP is large, persistent, and widening over time. The rise in inequality is related to declining incentives for interregional labor mobility, especially for poor households in lagging regions.
Monetary policy and the top one percent: Evidence from a century of modern economic history The obtained results indicate that expansionary monetary policy strongly increases the share of national income held by the top one percent. Our findings also suggest that this effect is arguably driven by higher asset prices, and holds irrespective of the state of the economy.
Banking and lending
Do Distressed Banks Really Gamble for Resurrection? Title of the paper is a bit misleading, it actually looks at how distressed banks behaved over two different regulatory regimes (1985-1994 vs 2005-2014). They found that over both periods banks take actions to reduce leverage and risk. Despite large differences in regulation between periods, the extent of deleveraging is similar.
Mapping bank securities across euro area sectors: comparing funding and exposure networks ECB provides network analysis on interconnectedness of banks in Euro-area.
Credit risk-taking and maturity mismatch: the role of the yield curve Bank of Italy finds Italian bank risk-taking is negatively related to the short end of the yield curve but positively to the long end.
BIS global liquidity indicators at end-December 2018 The annual growth rate of US dollar credit outside the United States declined for a fourth consecutive quarter. Euro credit outside the euro area and yen credit outside Japan continued to expand rapidly. The annual growth rate of credit to emerging market and developing economies declined across all three major currencies.
Rates markets
Official demand for US debt: implications for US real rates Bank of England builds a model to determine US real rates in the face of price-insensitive purchases by foreign central banks and the Fed. They also incorporate a TIPS liquidity factor that improves the model.
The Seniority Structure of Sovereign Debt Finds official bilateral (government-to-government) debt is junior, or at least not senior, to private sovereign debt such as bank loans and bonds. They confirm that multilateral institutions such as the IMF and World Bank are senior creditors.
Decomposing changes in the functioning of the sterling repo market BoE finds changes in gilt repo market functioning over the past five years have been driven by changes in the supply of repo market intermediation by dealers, rather than by changes end-user demand. The introduction of the UK leverage ratio may have reduced dealers’ ability to act as repo market intermediaries.
Determinants of Asia-Pacific government bond yields BIS finds the credit risk premium component is, unsurprisingly, mostly affected by a factor that reflects local sovereign credit risk, while the currency risk premium component is affected by the credit factor as well as by the difference in the interest rate level between the local and US yield curves.
The rise of benchmark bonds in emerging Asia Such bonds are now more prevalent according to BIS. They focus on Indonesia, Malaysia, Philippines and Thailand.
Corporate bond markets
The Turning Tide: How Vulnerable are Asian Corporates? IMF fuses new firm-level dataset with comprehensive information on Asian firms’ FX liabilities and shows that Asia’s nonfinancial corporate sector is vulnerable to a tightening of global financial conditions.
Credit rating dynamics: evidence from a natural experiment ECB finds that after the launch of the corporate QE policy, rating upgrades were mostly noticeable for bonds initially located below, but close to, the eligibility frontier.
Corporate bond use in Asia and the United States BIS writes that firm characteristics account for only a very small portion of the difference in corporate bond use between Asian and US firms. Asian firms are simply less likely to issue bonds than US firms. Likely due to weak infrastructure, ie markets and institutions
Equity and commodity markets
Variance Risk Premium Components and International Stock Return Predictability Fed paper finds that decomposing variance premium (VP) into its downside and upside components significantly improves domestic and international stock return predictability. Downside VP is a robust predictor at 4-6 months, whereas upside VP performs the best at very short horizons.
Stock Picks From Space Investors are using real-time satellite images to predict retailers’ sales. Is that cheating?
Risk premium in the era of shale oil Central bank paper that finds that hedging pressure of shale producers has become more important than that of conventional producers in explaining the oil futures risk premium.
Why the new ‘solar superpowers’ will probably be petro-states in the Gulf The International Renewable Energy Agency set up its headquarters in Abu Dhabi, and the region has no shortage of ambitious solar projects promising extremely cheap electricity. However only a small amount of capacity has actually been deployed so far.
The global impact of risk-off shocks BIS finds that the unconventional policies adopted by the main central banks were effective in containing asset price declines following risk-off episodes. These policies impacted long rates and inspired confidence in a policy-put framework that reduced the persistence of risk-off shocks.
A Tax That Could Fix Big Tech Nobel laureate Paul Romer argues that taxing ad revenues of Facebook and Google could give them a real incentive to change their dangerous business models.
Visualizing the Unicorn Landscape in 2019
China
China’s vast fleet is tipping the balance in the Pacific China now rules the waves in what it calls the San Hai, or “Three Seas”: the South China Sea, East China Sea and Yellow Sea. In these waters, the United States and its allies avoid provoking the Chinese navy.
When China and India Went to War: How This 1 Conflict Still Haunts Asia Useful history lesson on the 1962 war between the two countries.
Chinese banks quietly lower daily limit on foreign-currency cash withdrawals Lenders have reduced the ‘scrutiny benchmark’ for US dollar withdrawals to US$3,000 from US$5,000 on the instructions of the central bank
China says to further open up banking and insurance sectors So says the country’s top banking and insurance regulator
The Two-Pillar Policy for the RMB Atlanta Fed findings suggest that a “two-pillar policy” is in place, aiming to balance RMB index stability and exchange rate flexibility
Massive Saudi wealth fund zeros in on China, plans to open new Asia office A [Saudi] Public Investment Fund spokesman said the fund is planning to open a new office in Asia “to focus on China.”. PIF has $300 billion in assets under management
China agrees to restructure Republic of Congo’s debt It starts.
How does capital buffer affect bank risk-taking? New evidence from China using quantile regression Authors use quantile regression methods on a data set of 135 Chinese banks during 2004–2017. Their results suggest that bank capital buffer has a robust U-shaped association with bank risk-taking.
Bilal