Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “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
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, December 1, 2022

AI Summary. US applications for new businesses dropped early in the COVID-19 pandemic and then rose to record levels, remaining historically elevated, including among applications with characteristics likely to result in hiring and growth. Business applications have historically tracked actual business formation closely.

Ryan Decker and John Haltiwanger Federal Reserve Bank Of Boston
Date Posted:

Applications to start new businesses, including firms that are likely employers, surged during the pandemic. @UpdatedPriors @JHaltiwanger_UM

Did the pandemic surge in business applications lead to real business formation?

Core argument: US applications for new businesses hit an all-time high in July 2020 after dropping in March and April of that year, and remained historically elevated through the fall of 2022.

A striking feature of the US economic experience during the COVID-19 pandemic has been a surge in applications for new businesses. After initially dropping in March and April of 2020, applications rose to record levels, an all-time high in July 2020 and remaining historically elevated through the fall of 2022 (Figure 1.) The surge was apparent even among “likely employers,” that is, applications with characteristics that are likely to result in the hiring of workers and growth. Historically, there has been a tight relationship between business applications and true business formation, but questions have remained about the degree to which the pandemic’s surging applications would translate into actual employer businesses with broader labor market implications.

Takeaways by Macro Roundup® AI

  1. US applications for new businesses hit an all-time high in July 2020 after dropping in March and April of that year, and remained historically elevated through the fall of 2022.
  2. The pandemic surge in US business applications extended to "likely employers," applications with characteristics that are likely to result in the hiring of workers and growth.
  3. Business applications have historically tracked true business formation closely, leaving open the question of how far the pandemic's application surge would translate into actual employer businesses with broader labor market implications.

AI Summary. The Federal Reserve signaled it may moderate the pace of interest rate increases to 0.5 percentage points after four consecutive 0.75-point hikes, while warning it has a long way to go in fighting inflation. It also indicated the endpoint of the tightening cycle would probably need to be higher than its earlier projection of 4.6%.

Colby Smith Financial Times
Date Posted:

In a speech yesterday, Jay Powell signaled the pace of rate increases would slow but that the terminal rate will likely be higher than the 4.6% rate that Fed officials had projected in their last quarterly forecast. @ft

In a speech yesterday, Jay Powell signaled the pace of rate increases would slow but that the terminal rate will likely be...

Will the Fed slow rate increases while raising its endpoint?

Core argument: Fed chair Jay Powell said "the time for moderating the pace of rate increases may come as soon as the December meeting," suggesting a downshift to a 0.5 percentage point increase after four consecutive 0.75 point rises.

Jay Powell has sent a strong signal that the Federal Reserve will slow the pace of interest rate rises next month in an otherwise hawkish speech warning that the US central bank has a long way to go in its fight against inflation. “The time for moderating the pace of rate increases may come as soon as the December meeting,” the Fed chair said. The remarks from Powell suggest the Fed is preparing to “downshift” to a 0.5 percentage point increase when it meets in two weeks after it raised rates by 0.75 percentage points at each of its past four meetings. He reiterated that the endpoint of the tightening cycle would probably need to be higher than forecasted in projections released in September, which suggested most officials anticipated a so-called terminal rate of 4.6%. Most economists have penciled in the fed funds rate topping 5%.

Takeaways by Macro Roundup® AI

  1. Fed chair Jay Powell said "the time for moderating the pace of rate increases may come as soon as the December meeting," suggesting a downshift to a 0.5 percentage point increase after four consecutive 0.75 point rises.
  2. Powell reiterated that the endpoint of the tightening cycle would probably need to be higher than September's projections, which suggested most officials anticipated a terminal rate of 4.6%.
  3. Most economists have penciled in the fed funds rate topping 5%, above the 4.6% terminal rate indicated in the Federal Reserve's September projections.

AI Summary. An analysis of American stock market performance over a roughly three-year span found energy the best-performing sector of the S&P 500, followed by information technology, with the index up 23% overall and health care also performing well. On this measure, market leadership shifted away from big technology firms toward old-economy industries.

Economist Staff The Economist
Date Posted:

Over the past three years, the best-performing sectors of the S&P 500 have been energy and IT, outpacing the Technology sector. @TheEconomist

Has stock market leadership shifted from big technology to old-economy industries?

Core argument: The S&P 500 has risen 23% since January 1st, 2020, with energy the best-performing industry sector, followed by information technology.

We have examined which American industries and firms have done best over the past three years based on stock market performance. The headline is that market leadership has flipped dramatically. The digital hares have given ground to old-economy tortoises. Big tech is no longer running away with the race. Firms once derided as obsolete and sluggish suddenly look vital again. We have chosen January 1st, 2020, as the starting date for our analysis. Since then, the S&P 500 index of leading American shares has risen by 23%. The best-performing industry sector is energy, followed by information technology (IT). Health care has done well, as might be expected during a public-health crisis: the second-best-performing company in the S&P 500 is Moderna, a leading vaccine maker, whose share price is up by nearly 800%.

Takeaways by Macro Roundup® AI

  1. The S&P 500 has risen 23% since January 1st, 2020, with energy the best-performing industry sector, followed by information technology.
  2. Moderna, a leading vaccine maker, is the second-best-performing company in the S&P 500 since January 1st, 2020, with its share price up by nearly 800%.
  3. Market leadership in American equities has flipped since January 1st, 2020, with big tech giving ground to old-economy firms once derided as obsolete and sluggish.

AI Summary. Bank of America estimates household deposits would take 12 to about 40 months, depending on income quartile, to return to 2019 levels at their recent rate of decline, while Goldman Sachs projects US households will hold under $1tn in excess savings and JPMorgan warns those savings could be depleted.

Megan Greene Financial Times
Date Posted:

.@economistmeg argues in @ft that by mid-2023, consumers and corporations will have depleted the excess savings they built up during the pandemic, and the long-awaited recession will get underway.

.@economistmeg argues in @ft that by mid-2023, consumers and corporations will have depleted the excess savings they built...

How quickly are household excess savings being drawn down?

Core argument: Bank of America expects household deposits, at their current three-month average rate of decline, to take between 12 and about 40 months depending on income quartile to return to 2019 levels.

Bank of America expects that at the current three-month average rate of decline of household deposits, it would take between 12 and about 40 months (depending on income quartile) to return to 2019 levels. Goldman Sachs estimates US households will have less than $1T in excess savings by the end of 2023. JPMorgan recently warned excess savings could be completely depleted by the second half of next year. There are many reasons to fall on the pessimistic side of these estimates. The personal savings rate jumped from 8.3% at the end of 2019 to 26.3% at the height of Covid-19 in March 2021. In September, it had fallen back to 3.1%, well below the historical average. And for all the cash still left in aggregate household bank accounts, consumers are not feeling very confident. The Conference Board’s consumer confidence index has been declining since mid-2021.

Takeaways by Macro Roundup® AI

  1. Bank of America expects household deposits, at their current three-month average rate of decline, to take between 12 and about 40 months depending on income quartile to return to 2019 levels.
  2. Goldman Sachs estimates US households will hold less than $1tn in excess savings by the end of 2023, while JPMorgan warns excess savings could be completely depleted by the second half of next year.
  3. The US personal savings rate rose from 8.3% at the end of 2019 to 26.3% in March 2021 before falling to 3.1% in September, well below its historical average.

AI Summary. US consumer prices excluding food and energy rose a below-forecast 0.2% month over month, one of the smallest increases of the year, while consumer spending accelerated. The saving rate fell to 2.3%, its lowest since 2005, according to Commerce Department data.

Reade Pickert Bloomberg
Date Posted:

The PCE inflation measure rose 0.2% in October, under the forecast, while the personal savings rate fell to 2.3%, the lowest since 2005. @bloomberg

Is core inflation cooling while consumer spending accelerates?

Core argument: The core personal consumption expenditures price index, excluding food and energy, rose a below-forecast 0.2% in October from a month earlier, the second-smallest increase this year, according to Commerce Department data.

A key gauge of US consumer prices posted the second-smallest increase this year while spending accelerated, offering hope that the Federal Reserve’s interest-rate hikes are cooling inflation without sparking a recession. The personal consumption expenditures price index, excluding food and energy, which Fed Chair Jerome Powell stressed this week is a more accurate measure of where inflation is heading, rose a below-forecast 0.2% in October from a month earlier, Commerce Department data showed Thursday. The saving rate fell to 2.3% in October, the lowest since 2005, the Commerce Department report showed.

Takeaways by Macro Roundup® AI

  1. The core personal consumption expenditures price index, excluding food and energy, rose a below-forecast 0.2% in October from a month earlier, the second-smallest increase this year, according to Commerce Department data.
  2. US consumer spending accelerated as core inflation slowed, offering hope that the Federal Reserve's interest-rate hikes are cooling inflation without sparking a recession.
  3. The US saving rate fell to 2.3% in October, the lowest since 2005, the Commerce Department reported.

Friday, December 2, 2022

AI Summary. A reassessment estimates that higher economic growth would have raised the share of children earning more than their parents from 50% to 81%, while lower inequality would have raised it only to 57% — reversing earlier findings that attributed declining absolute mobility mainly to rising inequality.

Scott Winship American Enterprise Institute
Date Posted:
Is Database:
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.@AEI’s @swinshi revisits Raj Chetty’s data and argues that contrary to Chetty’s findings, slower economic growth has been a much more important driver of the reduction of absolute mobility than the rise in inequality.

.@AEI’s @swinshi revisits Raj Chetty’s data and argues that contrary to Chetty’s findings, slower economic growth has been a...

Is slower growth, not rising inequality, behind falling absolute mobility?

Core argument: Under the author's reassessment, higher growth would have raised absolute mobility from 50% to 81%, while lower inequality would have raised it to only 57%, nearly the mirror image of Chetty et al. (2017).

Higher growth would have raised absolute mobility from 50% to 81%, while lower inequality would have increased it to just 57%. This is almost the mirror image of the Chetty findings. Chetty also reported trends looking at absolute mobility for the 1970 cohort as of age 40 rather than for the 1980 cohort at age 30 (Figure S12 in their paper.) These analyses showed that in the “high growth” counterfactual, instead of 56% of the 1970 birth cohort experiencing absolute mobility, 67.5% would have. Meanwhile, in the “low inequality” counterfactual, the rate was 74%. However, using my approach, the “high growth” scenario produced an absolute mobility rate of 78.5%, while the “low inequality” scenario featured a rate of 63%. Again, the Chetty conclusion about the importance of growth versus inequality reverses.

Takeaways by Macro Roundup® AI

  1. Under the author's reassessment, higher growth would have raised absolute mobility from 50% to 81%, while lower inequality would have raised it to only 57%, nearly the mirror image of Chetty et al. (2017).
  2. For the 1970 birth cohort measured at age 40, Chetty et al. reported absolute mobility of 56%, rising to 67.5% under a high-growth counterfactual and 74% under a low-inequality counterfactual.
  3. Applying the author's approach to the 1970 cohort yields absolute mobility of 78.5% under high growth versus 63% under low inequality, reversing the Chetty conclusion about the relative importance of growth and inequality.

Scott Winship revisits Chetty data and argues that slower economic growth has been much more important than the rise in inequality in terms of explaining the reduction of absolute mobility. Recall Chetty “found that while the vast majority of American kids born in 1940 ended up better off at age 30 than their parents fared at the same age, that was only true of half of kids born in 1980. Moreover, the paper found that rising income inequality was much more to blame for this falling “absolute mobility” than slower economic growth.”

Chetty’s claim, “…Chetty et al. report that absolute mobility fell from 91.5 percent for children born in 1940 to 50 percent for those born in 1980. In their counterfactual simulations, they found that if the economic growth rates prevailing for the 1940 cohort had been experienced by the 1980 cohort, with inequality nonetheless rising as much as it actually did, the absolute mobility rate for the 1980 cohort would have been 62 percent rather than 50 percent. However, if the adulthood inequality experienced by the 1980 cohort had been what the 1940 cohort saw, with economic growth increasing as slowly as it actually did, 80 percent of the most recent cohort would have experienced absolute mobility….”

This is a relative technical debate but Winship noted a methodological flaw in Chetty’s work, “…The central point at issue here is that incorporating GDP per working-age person into the counterfactual analyses introduces potentially problematic assumptions into the Chetty analyses. Dividing average income for each percentile of the distribution of 30-year-olds by GDP per working-age person is different than dividing average income for each percentile by total income measured the same way as in the numerator. In the latter case, the ratios would sum to 100 across percentiles. The ratios Chetty et al. compute only sum to 44.3. What that means is that most GDP per working-age individual is not allocated to the incomes of 30-year olds. That is appropriate in that the Chetty team later compares the counterfactual incomes of these adults to parental income, with average parental income also smaller than GDP per working-age person in 1980. If all of GDP per working-age individual were allocated to 30-year-olds, these amounts would automatically tend to be larger than parental incomes, artificially inflating absolute mobility…“

“…Section III.B. of their paper acknowledges that “a significant portion of the increase in absolute mobility in our [lower inequality] counterfactual is driven by the fact that 30 year olds today earn a smaller fraction of GDP than in the past.” That means their counterfactual analyses must assume not only that the 1980 cohort of 30-year-olds have the within-30-year-old distribution of the 1940 cohort but that they have the 30-year-old-to-everyone-else distribution of the 1940 cohort too. In his correspondence with me, Chetty confirmed that the team prefers making this assumption and incorporating GDP per working-age person into the analyses to the alternative of simply using parental and 30-year-old incomes in their data. As they note in Section III.B., the income in their data misses an increasing share of national income, so using it alone to simulate a counterfactual of lower inequality seems unwarranted….”

His alternative approach “…There is a simpler alternative approach to modeling counterfactual absolute mobility rates for the 1980 cohort if growth had been stronger. We can look at the intergenerational increase in income (as measured in the Chetty data) for the 1940 birth cohort (comparing average 30-year-old income in 1970 to average parental income). Then we can apply that growth to the 1980 birth cohort’s parental income and assume that 30-year-old incomes would still have been distributed as unequally as they really were. The income growth calculations need only use the parental and 30-year-old income estimates from the Chetty data (not GDP per working-age person), and the income distribution of the 30-year-olds likewise need only use the 30-year-old income estimates..”

Winship’s results, “…implemented this strategy. The result? If the 1980 birth cohort had experienced the same intergenerational income growth as the 1940 cohort did (an increase of 204 percent rather than 5 percent), while the fruits of that income growth had been distributed as unequally in 2010 as really occurred, the absolute mobility rate would have been 81 percent instead of 50 percent. Again, Chetty et al. report an estimate of just 62 percent for their “higher growth” simulation.…”

Winship bottom line is that slower economic growth is much more important than inequality is understanding absolute mobility , “…my results indicate the opposite: higher growth would have raised absolute mobility from 50 percent to 81 percent, while lower inequality would have increased it to just 57 percent. This is almost the mirror image of the Chetty findings. Chetty also reported trends looking at absolute mobility for the 1970 cohort as of age 40 rather than for the 1980 cohort at age 30 (Figure S12 in their paper). These analyses showed that in the “high growth” counterfactual, instead of 56 percent of the 1970 birth cohort experiencing absolute mobility, 67.5 percent would have. Meanwhile, in the “low inequality” counterfactual, the rate was 74 percent. However, using my approach, the “high growth” scenario produced an absolute mobility rate of 78.5 percent, while the “low inequality” scenario featured a rate of 63 percent. Again, the Chetty conclusion about the importance of growth versus inequality reverses…”

What’s Robert Lucus line? “Once one starts to think about [growth] it is hard to think about anything else

Scott Winship, “Was Rising Inequality behind Falling Absolute Mobility?” American Enterprise Institute, December 1, 2022, https://www.aei.org/wp-content/uploads/2022/12/Was-Rising-Inequality-Behind-Falling-Absolute-Mobility.pdf?x91208

AI Summary. US nonfarm payrolls rose 263,000, following an upwardly revised 284,000 gain the prior month, while the unemployment rate held at 3.7% as labor force participation eased. Average hourly earnings rose 0.6% on the month and 5.1% from a year earlier, a pace inconsistent with the Federal Reserve's 2% inflation target.

Reade Pickert Bloomberg
Date Posted:

Today’s job report showed average hourly earnings rose twice what was forecast, now up 5.1% year-over-year and running at a 6% annual rate. @bloomberg

Is wage growth running too fast for the Fed's inflation target?

Core argument: U.S. nonfarm payrolls rose 263,000 in November after an upwardly revised 284,000 gain in October, while the unemployment rate held at 3.7% as labor force participation eased, according to the Labor Department.

Nonfarm payrolls increased 263,000 in November after an upwardly revised 284,000 gain in October, a Labor Department report showed Friday. The unemployment rate held at 3.7% as participation eased. Average hourly earnings rose twice as much as forecast after an upward revision to the prior month. The jobs report showed average hourly earnings rose 0.6% in November in a broad-based gain that was the biggest since January and was up 5.1% from a year earlier. Wages for production and nonsupervisory workers climbed 0.7% from the prior month, the most in almost a year. The pace of pay raises is inconsistent with the Fed’s 2% inflation target.

Takeaways by Macro Roundup® AI

  1. U.S. nonfarm payrolls rose 263,000 in November after an upwardly revised 284,000 gain in October, while the unemployment rate held at 3.7% as labor force participation eased, according to the Labor Department.
  2. Average hourly earnings rose 0.6% in November, twice as much as forecast and the biggest broad-based gain since January, leaving wages up 5.1% from a year earlier.
  3. Wages for production and nonsupervisory workers climbed 0.7% from the prior month, the most in almost a year, a pace of pay raises inconsistent with the Fed's 2% inflation target.

AI Summary. Upward revisions to average hourly earnings for prior months, plus a strong latest reading, lifted the three-month annualized pace of wage growth from 3.8% to about 6%, undercutting evidence that nominal wage growth was cooling. That pace is consistent with roughly 5% inflation, about the same or slightly worse than the employment cost index suggests.

Jason Furman @jasonfurman
Date Posted:

.@jasonfurman argues that the uptick in average hourly earnings should “dash hopes” for a soft landing: 6% growth is consistent with a 5% inflation rate.

Is nominal wage growth cooling?

Core argument: Average hourly earnings growth on a three-month average basis has been revised up from a 3.8% annual rate to a 6% annual rate, following large upward revisions for September and October plus a big November number, according to Jason Furman.

The biggest news in this release is large upward revisions in wage growth for September and October and a big number for November. This is the second time this year we’ve seen AHE revisions like this dashing the hopes that maybe nominal wages growth was cooling. You can’t understate how huge this is. Last month the data showed average hourly earnings grew at a 3.8% annual rate (three-month average). With revisions and one month of data, this is now a 6% annual rate. I was allowing myself to get more hopeful about a soft landing (2nd time this year), but this pretty much dashed that hope. This pace of average hourly earnings growth is consistent with about 5% inflation. About the same or slightly worse than the story the ECI is telling.

Takeaways by Macro Roundup® AI

  1. Average hourly earnings growth on a three-month average basis has been revised up from a 3.8% annual rate to a 6% annual rate, following large upward revisions for September and October plus a big November number, according to Jason Furman.
  2. Furman notes this is the second time this year that average hourly earnings revisions have dashed hopes that nominal wage growth was cooling, undercutting his own growing optimism about a soft landing.
  3. Furman argues the current pace of average hourly earnings growth is consistent with about 5% inflation, about the same or slightly worse than the story told by the Employment Cost Index.

AI Summary. The share of Americans working or actively looking for work fell to 62.1%, and the rate for prime-aged workers aged 25 to 54 fell to 82.4% from 82.5%, with both remaining below pre-pandemic levels. Participation declined for both men and women, with a larger share of female workers leaving the labor force.

Catarina Saraiva Bloomberg
Date Posted:

Prime-age labor force participation dropped to 82.4%, still under its pre-pandemic level of 83.1% in January 2020. @catarinasaraiva @bloomberg

Is labor force participation still falling below pre-pandemic levels?

Core argument: The U.S. labor force participation rate fell to 62.1% from 62.4% in August, when it had matched a post-pandemic high reached in March, and remains well below its pre-pandemic level, according to government data released Friday.

The share of Americans either working or actively looking for a job fell to 62.1%, according to government data released Friday. The rate had risen to 62.4% in August, matching a post-pandemic high reached in March, but remains significantly below where it was before the pandemic. The participation rate for so-called prime-aged workers, those aged 25 to 54, also dropped to 82.4% from 82.5%. And it, too, remains below its pre-pandemic levels. While participation declined for both men and women, a larger share of female workers left the labor force last month.

Takeaways by Macro Roundup® AI

  1. The U.S. labor force participation rate fell to 62.1% from 62.4% in August, when it had matched a post-pandemic high reached in March, and remains well below its pre-pandemic level, according to government data released Friday.
  2. Participation among prime-age workers aged 25 to 54 slipped to 82.4% from 82.5%, also remaining below pre-pandemic levels.
  3. Labor force participation declined for both men and women, with a larger share of female workers leaving the workforce.

AI Summary. Lake Powell, the second-largest US reservoir along the drought-stricken Colorado River, is already a quarter of its former size, and a further 38-foot drop would bring its surface near the intake openings of Glen Canyon Dam. Federal projections indicate the dam's turbines, which supply electricity to 4.5m people, could be forced to shut down to avoid damage.

Joshua Partlow Washington Post
Date Posted:

Due to the rapidly dropping waters level of Lake Powell, the Glen Canyon (Hoover) Dam may have to be shut down next summer due to the risk posed by whirlpool formation @partlowj

Due to the rapidly dropping waters level of Lake Powell, the Glen Canyon (Hoover) Dam may have to be shut down next summer...

Does falling reservoir water threaten hydroelectric power for millions?

Core argument: Lake Powell, the second-largest U.S. reservoir, has shrunk to a quarter of its former size, and a further 38-foot drop in its surface would approach the tops of eight underwater openings in the 710-foot Glen Canyon Dam.

The first sign of serious trouble for the drought-stricken American Southwest could be a whirlpool. It could happen if the surface of Lake Powell, a man-made reservoir along the Colorado River that’s already a quarter of its former size, drops another 38 feet down the concrete face of the 710-foot Glen Canyon Dam here. At that point, the surface would be approaching the tops of eight underwater openings that allow river water to pass through the hydroelectric dam. The normally placid Lake Powell, the nation’s second-largest reservoir, could suddenly transform into something resembling a funnel, with water circling the openings. If that happens, the massive turbines that generate electricity for 4.5 million people would have to shut down — after nearly 60 years of use — or risk destruction from air bubbles. The federal government projects that day could come as soon as July.

Takeaways by Macro Roundup® AI

  1. Lake Powell, the second-largest U.S. reservoir, has shrunk to a quarter of its former size, and a further 38-foot drop in its surface would approach the tops of eight underwater openings in the 710-foot Glen Canyon Dam.
  2. The federal government projects that as soon as July, Lake Powell's surface could fall low enough to force the shutdown of Glen Canyon Dam turbines that generate electricity for 4.5 million people after nearly 60 years of use.
  3. If Lake Powell's surface approaches the dam's underwater openings, the reservoir could resemble a funnel with water circling the openings, and air bubbles could destroy the turbines.

AI Summary. Across the US, UK, Canada, and Euro area, longer-run neutral interest rates declined by 2.1 to 2.8 percentage points before the 2008 financial crisis, with all identified drivers pushing them down. The authors estimate that rising government debt accounts for most of the recent increase in neutral rates, though this upward pressure has likely been modest.

Thiago Ferreira and Carolyn Davin Federal Reserve Board
Date Posted:

Despite a sharp increase in sovereign debt levels, the upward pressure on neutral rates has been modest. @FederalReserve

Does rising government debt explain higher neutral interest rates in advanced economies?

Core argument: Neutral rates in the US, UK, Canada, and Euro area declined by 2.1 to 2.8 percentage points in the run-up to the 2008 financial crisis, with all drivers pushing neutral rates down.

Leading up to the 2008 financial crisis, neutral rates in these four economies saw declines of between 2.1 and 2.8 percentage points, with all drivers pushing down neutral rates. Between 2008 and 2019, the positive contribution of the increased sovereign debt supply modestly offset the negative contributions from other drivers. Since the pandemic, the rise in government debt accounts for most of the recent rise in neutral rates in [the US, UK, Canada, and Euro area], with other factors exerting largely offsetting effects. All told, while the sharp rise in government indebtedness since the pandemic may have put upward pressure on neutral rates abroad, we estimate that this pressure has been likely modest.

Takeaways by Macro Roundup® AI

  1. Neutral rates in the US, UK, Canada, and Euro area declined by 2.1 to 2.8 percentage points in the run-up to the 2008 financial crisis, with all drivers pushing neutral rates down.
  2. Between 2008 and 2019, the positive contribution of increased sovereign debt supply modestly offset negative contributions from other drivers of neutral rates in the four economies.
  3. Since the pandemic, the rise in government debt accounts for most of the rise in neutral rates in the US, UK, Canada, and Euro area, with other factors largely offsetting each other and the estimated upward pressure likely modest.