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Journal Article
The Fiscal Stance of U.S. States
We study the fiscal stance of U.S. states through the lens of state reserve funds. We find that the overall rainy day and unemployment insurance funds have largely recovered since the start of the Great Recession but at an uneven pace across states. More importantly, we find that states are better prepared to meet their own budgetary shortfalls in the event of a downturn than the shortfalls of households.
Journal Article
A Slowdown in Job Vacancies Is Likely to Coincide with Higher Unemployment and Slower Wage Growth
Recently, some market observers have proposed that job vacancies could decline, and ease wage growth, without a commensurate increase in the unemployment rate. However, we find that the typical relationship of declining job vacancies and higher unemployment holds even at exceptionally low levels of the unemployment rate. A notable decline in job postings will likely coincide with an easing of tightness in the labor market, a higher unemployment rate, and slowing wage growth.
Working Paper
Credit Guarantee and Fiscal Costs
This paper studies the effectiveness of government-backed credit guarantees to the infrastructure sector, a policy tool adopted by a range of countries during recessions. We proposea two-sector model with financial intermediary frictions so that infrastructure producers relyon bank loans to finance their risky production. Governments can intervene in the credit market by providing a partial guarantee on those bank loans. We find that a credit guaranteeincreases infrastructure production, leading to a high fiscal multiplier in the longer run. In thenear term, however, higher wages in the ...
Journal Article
Corporate Interest Expenses Are Expected to Increase Further
Although firm leverage has fallen from pandemic highs, rising interest rates have raised firms’ interest expenses. The effects of this monetary policy tightening are likely to continue unfolding over the next few years. As low-yield, fixed-rate corporate debt issued during the pandemic matures, firms may need to refinance this debt at higher rates, further increasing their interest expenses. However, most corporations are well-positioned to carry these interest expenses so long as their earnings remain stable.
Working Paper
Public Pension Reforms and Fiscal Foresight: Narrative Evidence and Aggregate Implications
We explore the evolution of pension policy across countries and investigate the macroeconomic effects of pension structural reforms in recent decades, in particular those with implementation delays. We first document chronological changes in pension policy for 10 OECD countries between 1962 and 2017. The new data set shows that pension systems rapidly expanded between the 1960s and 1980s, followed by a wave of retrenchments since the 1990s. Structural pension reforms, which are motivated by long-run fiscal sustainability concerns, often come with significant implementation delays. We find ...
Working Paper
Sovereign Risk and Fiscal Information: A Look at the U.S. State Default of the 1840s
This paper examines how newspaper reporting affects government bond prices during the U.S. state default of the 1840s. Using unsupervised machine learning algorithms, the paper first constructs novel ``fiscal information indices'' for state governments based on U.S. newspapers at the time. The impact of the indices on government bond prices varied over time. Before the crisis, the entry of new western states into the bond market spurred competition: more state-specific fiscal news imposed downward pressure on bond prices for established states in the market. During the crisis, more ...
Working Paper
Flight to Liquidity or Safety? Recent Evidence from the Municipal Bond Market
We examine the effects of the COVID-19 pandemic and subsequent monetary and fiscal policy actions on municipal bond market pricing. Using high-frequency trading data, we estimate key policy events at the peak of the crisis by focusing on a sample of bonds within a narrow window before and after each policy event. We find that policy interventions, in particular those with explicit credit backstops, were effective in alleviating municipal bond market stress. Next, we exploit daily variation in traded municipal bonds and virus exposure across U.S. counties. We find a shift in how bond investors ...
Journal Article
Implementation Delays in Pension Retrenchment Reforms
As the global population ages, public spending on pensions has increased dramatically. As a result, policymakers have increasingly focused on pension retrenchment reforms to keep their systems solvent. These reforms usually involve long implementation delays to provide retirees time to adjust their retirement plans. However, long implementation delays also slow the rollback of governments? pension spending, potentially raising long-run fiscal risks. {{p}} {{p}} Huixin Bi, Kevin Hunt, and Sarah Zubairy collect a new data set that tracks implementation delays during pension retrenchment reforms ...
Working Paper
Fiscal Implications of Interest Rate Normalization in the United States
This paper studies the fiscal implications of interest rate normalization from the zero lower bound (ZLB) in the United States. At the ZLB, the decline in tax revenues and the real bond price drives up government debt. During normalization, interest payments continue to rise higher than they would have had rates not reached the ZLB, potentially increasing government debt even as output and tax revenues recover. We find that against the yardstick of ability to pay, interest rate normalization is unlikely to pose an immediate threat to debt sustainability at the current net federal debt level ...
Working Paper
Sovereign Default and Monetary Policy Tradeoffs
The paper is organized around the following question: when the economy moves from a debt-GDP level where the probability of default is nil to a higher level?the ?fiscal limit?? where the default probability is non-negligible, how do the effects of routine monetary operations designed to achieve macroeconomic stabilization change? We find that the specification of the monetary policy rule plays a critical role. Consider a central bank that targets the risky rate. When the economy is near its fiscal limit, a transitory monetary policy contraction leads to a sustained rise in inflation, even ...