“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“A full-throated defense of economic dynamism.” - The Wall Street Journal
AI Summary.An analysis of federal aid recipients' tax-reported earnings finds the highest-earning bachelor's programs are concentrated at highly selective schools and in computer science, mathematics and electrical engineering. Nursing programs at several California schools produce graduates earning around $150,000 annually, placing them in the top 100 of nearly 25,000 programs analyzed.
Arfa Momin and Ron LieberNew York Times
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A HEA Group analysis of the earnings of 2018 and 2019 college graduates four years after graduation finds earnings are widely dispersed across schools in higher-earning fields such as computer science and economics and have a narrow dispersion in lower-earning fields such as English and drama.
Which college majors and schools produce the highest-earning graduates?
Core argument: HEA Group’s analysis of nearly 25,000 bachelor’s programs found computer science, mathematics and electrical engineering majors top the earnings list, with graduates of highly rejective schools including the Ivies, M.I.T., Stanford and U.C.L.A. dominating.
HEA Group tracked students who received federal financial aid and graduated during the 2017-18 and 2018-19 periods. The top of the earnings list is dominated by graduates of highly rejective schools — the Ivies and others, like M.I.T., Stanford and U.C.L.A. The majors that top the list are computer science, mathematics and electrical engineering. The income data come from whatever people reported on their federal tax returns. That means certain stock awards and other potential deferred compensation aren’t part of the totals. Nursing programs at a handful of California schools, including California State University, East Bay; San Francisco State University; and Samuel Merritt University, produce graduates earning around $150,000 annually, putting them in the top 100 out of the nearly 25,000 bachelor’s programs the HEA Group analyzed nationwide. They stick out amid quantitative and science majors from institutions like the California Institute of Technology and Cornell.
Takeaways by Macro Roundup® AI
HEA Group’s analysis of nearly 25,000 bachelor’s programs found computer science, mathematics and electrical engineering majors top the earnings list, with graduates of highly rejective schools including the Ivies, M.I.T., Stanford and U.C.L.A. dominating.
Nursing graduates of California State University, East Bay; San Francisco State University; and Samuel Merritt University earn around $150,000 annually, placing those programs in the top 100 amid quantitative and science majors from institutions like the California Institute of Technology and Cornell.
HEA Group tracked federal financial aid recipients who graduated during the 2017-18 and 2018-19 periods, using income reported on federal tax returns, which excludes certain stock awards and other potential deferred compensation.
Related Articles:
Do Adults Have the Skills They Need to Thrive in a Changing World?— An international assessment of adult skills describes numeracy proficiency levels ranging from counting objects and adding small whole numbers at the lowest level, to extracting information from tables and graphs and performing basic arithmetic with money and percentages at Level 1, up to analysing complex mathematical information and critically evaluating whether data support a claim at Level 5.
Have Humans Passed Peak Brain Power?— The share of Americans reporting they read a book in the past year has fallen below half, alongside declining performance in numeracy and problem-solving in most countries. The share of adults unable to use mathematical reasoning to evaluate the validity of statements averages 25% in high-income countries and 35% in the US.
Standardized Test Scores and Academic Performance at a Public University System— A study of a large public urban university system finds that high school grade point average is a far stronger predictor of student academic success than SAT scores, contrasting with analyses of highly selective colleges that found the SAT superior. Under-represented minority students were less likely to graduate within six years at every grade point average level.
AI Summary.Corporate profit margins, long regarded as one of the economy's most reliably mean-reverting series, have risen continuously so far this century. Measured through the national income accounts used in calculating GDP, profits now take a larger share of the economy than on the eve of the 1929 crash.
John AuthersBloomberg
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Since 2000, post-tax corporate profits as a share of GDP have trended upward across cyclical setbacks and are now near an all time high, above their 1929 level.
Have corporate profit margins stopped reverting to the mean?
Core argument: Corporate profits measured in the National Income and Product Accounts take a larger share of the U.S. economy than on the eve of the 1929 Great Crash.
Throughout the 20th century, profit margins were regarded as one of the purest mean-reverting series in the economy. So far this century, however, margins have done nothing but rise. Measured with the National Income and Product Accounts, part of the GDP calculation, profits are currently taking a bigger share of the economy even than on the eve of the Great Crash in 1929. The series comes with a lag, so we can assume the profit share on this basis is comfortably at a record by now.
Takeaways by Macro Roundup® AI
Corporate profits measured in the National Income and Product Accounts take a larger share of the U.S. economy than on the eve of the 1929 Great Crash.
Profit margins were regarded throughout the 20th century as one of the purest mean-reverting series in the economy, yet so far this century they have done nothing but rise.
The National Income and Product Accounts profits series comes with a lag, so the profit share on this basis can be assumed to be comfortably at a record.
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US Focus: The Effect Of Soaring Profits— US nominal pre-tax corporate profits in the national accounts grew 23% over the past year, a pace not seen outside post-recession spikes since the mid-2000s. Wider margins were the key driver, as domestic profit growth far exceeded the 8% rise in corporate value added, pushing margins near all-time highs while the labor share hit new lows.
The Post‑COVID Decline in the Labor Share— The share of US national income paid to workers fell 1.6 percentage points below its pre-pandemic level, reaching a post-war low. The authors find this decline stems mainly from changes within industries rather than shifts in activity across sectors, following cyclical patterns seen in earlier recessions.
Are US Corporate Profit Margins Too High?— US after-tax non-financial corporate profit margins remain elevated by historical standards, estimated at 7.6% versus a post-1949 high of 8.2%, while employee pay as a share of non-financial corporate gross value added has fallen from 66% to 56%. One argument holds that subdued demographic growth leads companies to prioritize maximizing margins over expanding capacity.
AI Summary.US consumer prices have risen almost 29% over the past six years, about 3x the pace of the prior six years, and on average prices have risen faster than wages over that period.
Owen Tucker-SmithWall Street Journal
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Inflation outpaced real year-over-year average hourly earnings growth in the 5 months through August.
Have prices risen faster than wages over the past six years?
Core argument: U.S. consumer prices, as measured by the consumer-price index, have risen almost 29% over the past six years, about three times the pace of the preceding six years.
Overall prices, as measured by the consumer-price index, have risen almost 29% in the past six years. During the six years before that, prices crept up at a third of that pace. Over the past six years, prices have, on average, risen faster than wages. The trend has been pronounced recently: In both July and August, inflation outpaced average hourly wage growth.
Takeaways by Macro Roundup® AI
U.S. consumer prices, as measured by the consumer-price index, have risen almost 29% over the past six years, about three times the pace of the preceding six years.
Prices have on average risen faster than wages over the past six years, with inflation outpacing average hourly wage growth in both July and August.
Related Articles:
Sticky Wage Norms and the Real Wage Cost of Unexpected Inflation— Firms set nominal wage increases by round-number rules—about 42% of increases below 6% fell within 0.01 percentage points of a whole or half number—and these rules rose only from about 2.7% to 3.5% as inflation peaked near 7%, contributing to falling real wages for job stayers.
Do Voters Punish Inflation or Pay Cuts? Inflation and Real Wages in U.S. Elections— An analysis of U.S. counties estimates that where wages grew faster than prices, voters supported the incumbent party more, while counties with larger real wage losses than average shifted more toward the opposition. A one-standard-deviation larger real wage loss is associated with shifts of roughly 0.10 and 0.19 percentage points in vote share and margin.
The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly— Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.
AI Summary.Federal Reserve Bank of New York researchers estimate that about 26% of a uniform tariff passes through into non-oil consumer goods prices over twelve months, with roughly 64% of that effect coming directly from higher import prices and the rest through domestic producers' input costs and markups. Pass-through into import prices is nearly immediate, while domestic price responses build gradually.
Mary Amiti,Sebastian Heise and David WeinsteinFederal Reserve Bank of New York
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FRBNY estimates that a uniform 10% tariff raised consumer-goods prices 2.6% after 12 months: 1.7pp directly via imported final goods, and 0.9pp mainly via higher imported-input costs for domestically produced goods, with the latter effect building over 9–12 months.
How much of a tariff reaches consumer prices within a year?
Core argument: Amiti, Heise, and Weinstein estimate that a uniform tariff passes through to non-oil consumer goods prices at roughly 26 percent over twelve months, with a 10 percent tariff raising prices 2.6 percentage points, 1.7 points of it via the direct import channel.
Tariff pass-through into U.S. import prices is nearly complete. Instrumenting realized duty rates with statutory tariffs to account for endogenous sourcing and exemptions, tariff pass-through into consumer-goods import prices is about 90.5%; a 10% increase in the duty rate raises import prices about 9.1%. At twelve months, a uniform 10% tariff raises consumer-goods prices 2.639%: 1.694pp through the direct channel, 0.770pp through marginal costs, and 0.175pp through strategic complementarity. Import-price pass-through is essentially immediate, while domestic prices adjust gradually; the contribution of the two indirect channels roughly doubles between six and twelve months, with much of the overall adjustment occurring within nine to twelve months. For the actual 2025–26 tariffs, the direct channel accounts for about 70% of the estimated effect; the marginal-cost channel accounts for about 22%, with strategic complementarity accounting for the remainder. Because the regressions include date fixed effects, the tariff contribution is identified relative to less-exposed goods and should be read as illustrative rather than as the absolute contribution to aggregate goods CPI.
Takeaways by Macro Roundup® AI
Amiti, Heise, and Weinstein estimate that a uniform tariff passes through to non-oil consumer goods prices at roughly 26 percent over twelve months, with a 10 percent tariff raising prices 2.6 percentage points, 1.7 points of it via the direct import channel.
The two indirect channels — marginal costs from imported inputs (0.77 percentage points) and strategic complementarity in domestic markups (0.17 points) — account for 36 percent of the total effect and roughly double between six and twelve months after tariff implementation.
Applied to the actual 2025–26 tariff schedule, the authors estimate the cumulative tariff contribution to goods CPI reached about 2.9 percentage points by February 2026, with import-price pass-through near 90 percent and retail pass-through of 0.56.
Related Articles:
The State of U.S. Tariffs July 24, 2026— The average statutory US tariff rate stands at 11.1% and, under current law including scheduled increases, is projected to reach 11.8% by year-end. The authors estimate current-law tariffs will raise consumer prices by about 0.7% and generate roughly $1.9tn over ten years, with revenue somewhat lower after accounting for tariffs' negative effect on economic output.
Who Is Paying for the 2025 U.S. Tariffs?— The authors estimate that 94% of U.S. tariff costs were borne domestically over the first eight months of 2025, with a 10% tariff associated with only a 0.6 percentage point decline in foreign export prices. Pass-through into U.S. import prices later declined to 86%, shifting more of the burden to foreign exporters.
Demand-Driven Inflation— Demand and supply curves estimated from pre-pandemic data imply relatively flat demand curves in the US and euro area, so adverse supply shifts would produce large output losses but comparatively little inflation. The authors argue explaining the observed combination of high inflation and output requires outward demand shifts, including accommodative monetary policy alongside fiscal expansion.
AI Summary.Incorporating tariffs into the standard cost-of-capital framework, researchers estimate US tariffs raised the economy-wide marginal effective tax rate on new investment by 4.2 percentage points to 17.0%, with equipment hit hardest at 26.1 percentage points. That increase offsets the 3.5 percentage point reduction from the One Big Beautiful Bill Act.
Kyle Pomerleau, Thomas Brosy, Robert McClelland and John WongAmerican Enterprise Institute
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The IEEPA tariffs through January 2026 raised equipment’s user cost of capital 9%, from 17.7% to 19.3%. With depreciation unchanged, the required pre-tax net return rose 1.6pp, 4.3% to 5.9%, a tax at purchase that expensing cannot eliminate.
Do tariffs raise the effective tax rate on new investment?
Core argument: Tariffs in force before the February 20, 2026 Supreme Court ruling in Learning Resources v. Trump raised the economy-wide marginal effective tax rate on new US investment by 4.2 points, from 12.8 percent to 17.0 percent, and the cost of capital by 2.7 percent, the AEI authors estimate.
The standard Hall-Jorgenson user cost of capital framework defines the minimum gross required return on an additional unit of capital. The service price of capital (SS) is the minimum pretax gross return required on a new investment; the minimum pretax net return (ρrho) equals SS minus economic depreciation. Consider imported equipment requiring a 25% gross return: 20% to cover depreciation and 5% shareholders’ demanded return. A 10% tariff raises the cost of capital to 27.5%. [Thus the minimum pretax net return—the hurdle rate—rises from 5% to 7.5%]. For equipment, tariffs raise the cost of capital 9%, from 17.7% to 19.3%: 86% of the burden is direct, 14% indirect. 100% bonus depreciation reduced the equipment METR from 19.1% to 4.1%; tariffs raised it to 30.3%, more than offsetting the tax cut.
Takeaways by Macro Roundup® AI
Tariffs in force before the February 20, 2026 Supreme Court ruling in Learning Resources v. Trump raised the economy-wide marginal effective tax rate on new US investment by 4.2 points, from 12.8 percent to 17.0 percent, and the cost of capital by 2.7 percent, the AEI authors estimate.
Equipment bore the largest estimated burden, with its marginal effective tax rate rising 26.1 points from 4.1 percent to 30.3 percent and its cost of capital up 9.0 percent, while mainframes and PCs saw a 26.6 percent cost-of-capital increase.
The estimated 4.2 point tariff-driven increase in the marginal effective tax rate offset the One Big Beautiful Bill Act’s 3.5 point reduction, leaving a net 0.8 point rise economy-wide and an 11.1 point net increase for equipment.
Related Articles:
Blunt Tariffs Undermine Efforts To Reshore High-Tech Manufacturing— Computer and electronic products manufacturers import 37% of their intermediate inputs and capital equipment, chemical manufacturers 33%, and transportation equipment manufacturers 27%. Broad tariffs may push some sourcing domestically over time, but many inputs will simply cost more, making American manufacturers less competitive globally.
Help for the Heartland? The Employment and Electoral Effects of the Trump Tariffs in the United States— The authors find that the combined effect of U.S.-China trade war import tariffs, retaliatory tariffs, and farm subsidies on employment in exposed U.S. locations was at best a wash and possibly mildly negative, while residents of tariff-protected areas became less likely to identify as Democrats and more likely to vote Republican.
Tariffs are Dumb Enough to (Almost) Work— A universal 15% tariff on imported goods could raise roughly $300–$400bn annually, a fraction of what a value-added tax would generate but real revenue given U.S. imports of about $4tn. The author argues tariffs are a poorly designed form of consumption tax that could build political groundwork for replacing them with a more efficient value-added tax.
AI Summary.Analysis of English genealogical records and marriage registries estimates that the underlying correlation in social status across generations is close to 0.8, with status correlation detectable even among relatives nine generations apart. The authors find this persistence unchanged over four centuries, concluding that policies aimed at raising social mobility have not altered it.
Gregory ClarkSouthern Denmark University
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Clark estimates that the intergenerational correlation of relative socioeconomic status in England remained ~0.8 btw 1600 and 2026. The pattern of correlations across near and distant relatives fits a model of genetic inheritance with strong assortative mating.
How persistent is social status across generations in England?
Core argument: Drawing on a genealogical database of 436,185 English people spanning 1600–2026 and records of about 1.7 million English marriages from 1837–2022, the authors estimate the underlying intergenerational correlation in social status at close to 0.8, higher than conventional measures indicate.
A large genealogical database of [436,185] English people 1600-2026, as well as detailed records of [~1.7mn marriages] in England 1837-2022, [reveals] social status is much more persistent across generations than conventionally measured. The [inferred] underlying correlation in status across generations is close to 0.8, implying that even relatives as distant as nine generations apart still show correlation in social status. [Ratios of correlations among siblings, parents, aunts/uncles and cousins cancel common measurement-error attenuation: raw parent-child correlations average .39, versus .77 for inferred underlying persistence. Independently, surnames selected as elite by 1858-87 wealth yield a per-generation status persistent coefficient of b=.82 for occupational status and .80 for house value]. The strength of status persistence remains unchanged 1600-2026.
Takeaways by Macro Roundup® AI
Drawing on a genealogical database of 436,185 English people spanning 1600–2026 and records of about 1.7 million English marriages from 1837–2022, the authors estimate the underlying intergenerational correlation in social status at close to 0.8, higher than conventional measures indicate.
The estimated correlation in social status implies that relatives as distant as nine generations apart still show correlated status, with the strength of persistence unchanged from 1600 to 2026.
The authors argue that the Industrial Revolution, the Demographic Transition, the emancipation of women, universal voting, and the modern welfare state have not increased English social mobility rates, and that resources poured into raising mobility have achieved nothing.
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The Inheritance Of Social Status: England, 1600 to 2022— Using a genealogical database of 422,374 English people with rarer surnames, the authors find social status persists strongly even among distant relatives, with status correlations declining by a constant factor of 0.79 per step in the lineage across all status measures and eras studied. The authors argue this constancy suggests social interventions have modest effects.
The Myth of Nordic Mobility: Social Mobility Rates in Modern Denmark and Sweden— Correcting for measurement error by using relative rather than absolute correlations among relatives, the authors estimate that educational intergenerational mobility in Denmark and Sweden is much lower than conventionally measured, with parent-child and sibling correlations much higher. They argue Nordic education spending and income compression have at best modestly reduced families' role in children's educational outcomes.
For Whom the Bell Curve Tolls: A Lineage of 400,000 English Individuals 1750-2020 Shows Genetics Determines Most Social Outcomes— A study of 402,000 English individuals across 1750–2020 estimates an intergenerational occupational status correlation of 0.88 and a genetic correlation between spouses of 0.76, which the authors interpret as a strong genetic basis for the persistence of social status. The authors argue that highly assortative mating around status genetics limits what policy can do to raise social mobility.
AI Summary.The authors estimate AI capital spending of $560bn in 2026 and, in a high-investment case, $3.5tn of net AI capital in service by 2030, requiring roughly $1.3tn in annual infrastructure revenue once depreciation, operating costs and a 15% return are covered. That implies 7.4x growth from current annualized revenues, with downstream revenues of $1.9–2.6tn.
William Gildea and Azeem AzharExponential View
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Beginning with capex projections, Gildea/Azhar derive for their high-growth case a $1.3T annual AI-infrastructure revenue hurdle for 2030. This covers $771B of depreciation and operating costs, plus a 15% return on $3.5T of net capital in service.
How much annual revenue must AI infrastructure generate to justify investment?
Core argument: In a high investment case with $3.5tn of net AI capital in service, the authors estimate AI infrastructure must generate $1.3tn of annual revenue by 2030, requiring 7.4x growth (59% CAGR) from today’s annualized revenues.
We estimate AI CapEx to be $560B in 2026, 64% of the total declared by the hyperscalers. Unfinished facilities can’t generate revenue, so the investment bill and the productive asset base will grow at different speeds. [In the high investment case], by 2030 we see $3.5T of net AI capital in service. The largest component [of the revenue hurdle] is the $555B in compute depreciation. We model lifespans at the current 5-6 years. Shell depreciation and OpEx combined contribute about a further $216B to the required revenue hurdle. [Adding a 15% return on net capital brings required annual infrastructure revenue to $1.3T]. Reaching the $1.3T hurdle would represent 7.4x growth (59% CAGR) from today’s annualized revenues. For its customers to earn 30-50% gross margins, downstream revenues need to be $1.9-2.6T. [Editor’s note: Van Nieuwerburgh’s far larger figure of $3.7T covers mature revenues from projects completed through 2032, using commissioning capital and a 50% infrastructure operating cash-flow margin. This estimate instead charges depreciation and operating costs plus 15% on net capital in service in 2030. Different horizons and cost conventions prevent a direct comparison. Van Nieuwerburgh also has a much higher capex estimate.]
Takeaways by Macro Roundup® AI
In a high investment case with $3.5tn of net AI capital in service, the authors estimate AI infrastructure must generate $1.3tn of annual revenue by 2030, requiring 7.4x growth (59% CAGR) from today’s annualized revenues.
Compute depreciation of $555bn, modeled on 5-6 year lifespans, is the largest component of the 2030 revenue hurdle, with shell depreciation and operating expenses adding about $216bn and a 15% return on net capital completing the $1.3tn total.
Related Articles:
Financing the AI Buildout— The authors estimate roughly 57 gigawatts of operating US data center capacity against a planned development pipeline of about 509 gigawatts, which is not a completion forecast since projects may be delayed, scaled back, or abandoned. Their central scenario has 182.8 gigawatts of added capacity becoming operational through 2032, 117.2 gigawatts completed later, and 226.9 gigawatts never completed.
What Investment Data Implies about the AI Transition— The five largest U.S. technology firms are scaling AI capital spending about 50% a year, from $155bn to a forecast $755bn. Embedding this in a two-sector model with rare productivity booms, the authors estimate AI adds roughly 5, 20, or 58pp to cumulative growth over a seven-year transition, depending on scenario.
Rear Window— Major cloud providers posted annual revenue growth of 37% at Amazon Web Services, 43% at Microsoft Azure and 82% at Google Cloud, with rising revenue backlogs of $514bn and $496bn respectively at Google Cloud and Amazon Web Services. Earnings growth appears highly contingent on continued hyperscaler capital spending and research, which rose from $460bn to $870bn.
AI Summary.Demand and supply curves estimated from pre-pandemic data imply relatively flat demand curves in the US and euro area, so adverse supply shifts would produce large output losses but comparatively little inflation. The authors argue explaining the observed combination of high inflation and output requires outward demand shifts, including accommodative monetary policy alongside fiscal expansion.
Domenico Giannone and Giorgio PrimiceriBookings Papers on Economic Activity
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Giannone and Primiceri revisit the relative role of supply vs. demand shocks in generating the post-Covid inflation. Because aggregate demand curves estimated from pre-pandemic data are flat, supply shocks alone would not have generated large inflation in the absence of added demand stimulus.
Did outward demand shifts, not supply shocks alone, drive recent inflation?
Core argument: Demand curves estimated from pre-pandemic US and euro-area data are relatively flat, reflecting central banks’ strong pre-pandemic responses to inflation, so adverse supply shifts produce large output losses but comparatively little inflation.
Demand and supply curve slopes are estimated from pre-pandemic data using the essentially definitional restriction that supply shocks move prices and output in opposite directions along demand curves, while demand shocks move them together along supply curves; the plotted slopes represent Bayesian posterior medians rather than uniquely identified estimates. The estimated demand curves are relatively flat in both the US and euro area [Figure 7], reflecting the central banks’ strong pre-pandemic responses to inflation. With those slopes, adverse supply shifts cause large output losses but comparatively little inflation. [To successfully explain] the combination of inflation and output observed in 2022 therefore requires demand to shift outwards too. Strong demand, including unusually accommodative monetary policy [on top of strong fiscal expansion], cushioned the output losses while increasing inflation [Figure 7]. In 2021–22, both inflation and GDP as subsequently revised exceeded forecasts in the US and euro area. That combination is suggestive of unexpectedly strong demand, whereas an adverse supply surprise alone would raise inflation but lower output. [Figure 9].
Takeaways by Macro Roundup® AI
Demand curves estimated from pre-pandemic US and euro-area data are relatively flat, reflecting central banks’ strong pre-pandemic responses to inflation, so adverse supply shifts produce large output losses but comparatively little inflation.
Explaining the 2022 combination of inflation and output requires an outward shift in demand, with strong demand — including unusually accommodative monetary policy atop fiscal expansion — cushioning output losses while raising inflation.
In 2021–22, both inflation and GDP as subsequently revised exceeded forecasts in the US and euro area, a combination suggestive of unexpectedly strong demand, since an adverse supply surprise alone would raise inflation but lower output.
Related Articles:
Are Government Bonds Safe in Times of War and Pandemic?— Government bonds severely underperform in wartime, in absolute terms and relative to equities, housing, and economic growth, unlike in financial crises when bonds tend to outperform stocks. The U.S. and U.K. reduced war-driven debt-to-GDP ratios without explicit default, using surprise inflation and financial repression that shifted fiscal burdens onto bondholders.
Why Did Inflation Rise And Fall In 2021-24? Channels And Evidence From Expectations— Across countries, unexpectedly higher government deficits relative to earlier International Monetary Fund forecasts are associated with unexpectedly higher inflation, measured by each factor's contribution to the increase in public debt, a relationship the author finds statistically significant. This evidence is consistent with a fiscal channel for inflation.
Fiscal Influences on Inflation in OECD Countries, 2020-2022— Across 21 economies, the authors find that headline and core inflation responded positively to a measure of government spending increases scaled by pre-pandemic debt-to-GDP and average debt duration. Estimated coefficients of 0.4–0.5 suggest 40–50% of the extra spending was financed through inflation, with the rest through conventional public finance.
