Value for Money

Kevin Lewis

June 12, 2024

People's Understanding of Inflation
Alberto Binetti, Francesco Nuzzi & Stefanie Stantcheva
NBER Working Paper, May 2024

This paper studies people's understanding of inflation -- their perceived causes, consequences, trade-offs -- and the policies supported to mitigate its effects. We design a new, detailed online survey based on the rich existing literature in economics with two experimental components -- a conjoint experiment and an information experiment -- to examine how well public views align with established economic theories. Our key findings show that the major perceived causes of inflation include government actions, such as increased foreign aid and war-related expenditures, alongside rises in production costs attributed to recent events like the COVID-19 pandemic, oil price fluctuations, and supply chain disruptions. Respondents' anticipate many negative consequences of inflation but the most noted one is the increased complexity and difficulty in household decision-making. Partisan differences emerge distinctly, with Republicans more likely to attribute inflation to government policies and foresee broader negative outcomes, whereas Democrats anticipate greater inequality effects. Inflation is perceived as an unambiguously negative phenomenon without any potential positive economic correlates. Notably, there is a widespread belief that managing inflation can be achieved without significant trade-offs, such as reducing economic activity or increasing unemployment. These perceptions are hard to move experimentally. In terms of policy responses, there is resistance to monetary tightening, consistent with the perceived absence of trade-offs and the belief that it is unnecessary to reduce economic activity to fight inflation. The widespread misconception that inflation rises following increases in interest rates even leads to support for rate cuts to reduce inflation. There is a clear preference for policies that are perceived to have other benefits, such as reducing government debt in progressive ways or increasing corporate taxes, and for support for vulnerable households, despite potential inflationary effects.

Using Grocery Data for Credit Decisions
Jung Youn Lee, Joonhyuk Yang & Eric Anderson
Management Science, forthcoming

Many consumers across the world struggle to gain access to credit due to the lack of credit scores. This paper explores the potential of a new type of alternative data source, namely grocery transaction data, to assess consumers' creditworthiness. Our analysis takes advantage of a unique, individual-level match of credit card data and supermarket loyalty card data, which enables us to build a credit scoring algorithm that incorporates grocery data. We show that incorporating signals derived from grocery data improves the accuracy of credit risk prediction, above and beyond traditional data sources such as income and credit scores. Through simulations of different credit extension decision rules, we illustrate that the distributional impact of using grocery data relies heavily on how lenders utilize the predictions, with contrasting effects on the likelihood of credit approval for lower-income consumers. Together, our findings highlight that grocery data can serve as a channel through which traditionally underserved consumer groups in credit markets can signal their creditworthiness to lenders, provided that lenders harness the data appropriately.

Stimulus on the Home Front: The State-Level Effects of WWII Spending
Gillian Brunet
Review of Economics and Statistics, forthcoming

I use newly-digitized contract data on U.S. war production spending over 1940-1945 to analyze the macroeconomic effects of U.S. military spending in World War II. I find personal income multipliers of 0.34 over two years and 0.49 over three years. Personal income multipliers may substantially understate GDP multipliers, perhaps by as much as 50%. Employment estimates imply costs per job-year over the same time horizons of $405,013 and $232,268 in 2015 dollars, suggesting job creation was limited. I also find evidence of negative scale effects: larger positive spending shocks are associated with systematically smaller multiplier estimates.

Estimating the Effects of Political Pressure on the Fed: A Narrative Approach with New Data
Thomas Drechsel
NBER Working Paper, May 2024

This paper combines new data and a narrative approach to identify shocks to political pressure on the Federal Reserve. From archival records, I build a data set of personal interactions between U.S. Presidents and Fed officials between 1933 and 2016. Since personal interactions do not necessarily reflect political pressure, I develop a narrative identification strategy based on President Nixon's pressure on Fed Chair Burns. I exploit this narrative through restrictions on a structural vector autoregression that includes the personal interaction data. I find that political pressure shocks (i) increase inflation strongly and persistently, (ii) lead to statistically weak negative effects on activity, (iii) contributed to inflationary episodes outside of the Nixon era, and (iv) transmit differently from standard expansionary monetary policy shocks, by having a stronger effect on inflation expectations. Quantitatively, increasing political pressure by half as much as Nixon, for six months, raises the price level more than 8%.

Softening the Blow: U.S. State-Level Banking Deregulation and Sectoral Reallocation after the China Trade Shock
Mathias Hoffmann & Lilia Ruslanova Habibulina
Journal of Political Economy Macroeconomics, forthcoming

U.S. state-level banking deregulation during the 1980's facilitated the sectoral reallocation of labor after the China trade shock. Early-deregulated states and commuting zones were financially more integrated by the 1990's which allowed households to better smooth consumption by borrowing against their housing equity. This stabilized demand, kept the price of housing up, and thus facilitated the sectoral reallocation of labor away from import-exposed manufacturing towards the housing sector. Using granular bank-county-level data, we show that early deregulation led to a stronger presence of geographically diversified ('integrated') banks which responded more elastically than local banks to household's increased borrowing demand. Our findings show how household access to finance matters for adjustment after asymmetric terms-of-trade shocks in monetary unions, in particular when the geographical mobility of labor is limited.

Credit Market Conditions and Mental Health
Qing Hu et al.
Management Science, forthcoming

Research offers conflicting predictions about the impact of credit conditions on mental health. We first assess how bank regulatory reforms that improved credit conditions, for example, by enhancing the efficiency of credit allocation and lowering lending rates, impacted mental health. We discover that among low-income individuals, these regulatory reforms reduced mental depression, boosted labor market outcomes, eased access to mortgage debt, and reduced the ranks of the "unbanked." We also find that mergers of large regional banks that led to branch closures and tighter credit constraints in affected counties harmed the mental health of lower-income individuals in treated counties.

Taxing ride-sharing: Which neighborhoods pay more?
Mario Leccese
Journal of Regional Science, forthcoming

I examine the short-run impact of taxing ride-sharing trips on the price and usage of ride-sharing across different neighborhoods of Chicago and investigate whether the tax had unequal effects on neighborhoods with different racial compositions. I document significant heterogeneity in price increases due to the tax across neighborhoods of departure, showing that this was correlated with their differential access to alternatives to ride-sharing, such as public transit. Clustering neighborhoods based on their racial composition reveals that Black areas experienced particularly high price increases and reductions in usage. Overall, the burden of the tax fell more heavily on minority-concentrated areas.

Taxes Depress Corporate Borrowing: Evidence from Private Firms
Ivan Ivanov, Luke Pettit & Toni Whited
NBER Working Paper, May 2024

We use variation in state corporate income tax rates to re-examine the relation between taxes and corporate leverage. Contrary to prior research, we find that corporate leverage rises after tax cuts for small private firms. An estimated dynamic equilibrium model shows that tax cuts make capital more productive and spur borrowing. Tax cuts also produce more distant default thresholds and lower credit spreads. These effects outweigh the lower interest tax deduction and lead to higher optimal leverage choices, especially for firms with flexible investment policies. The presence of the interest tax deduction raises consumer welfare in equilibrium.

Rise of the Machines: The Impact of Automated Underwriting
Mark Jansen, Hieu Quang Nguyen & Amin Shams
Management Science, forthcoming

Using a randomized experiment in auto lending, we find that algorithmic underwriting outperforms the human underwriting process, resulting in 10.2% higher loan profits and 6.8% lower default rates. The human and machine underwriters show similar performance for low-risk, less complex loans. However, the performance of human underwritten loans largely declines for riskier and more complex loans, whereas the machine performance stays relatively stable across various risk dimensions and loan characteristics. The performance difference is more pronounced at underwriting thresholds with a high potential for agency conflict. These results are consistent with algorithmic underwriting mitigating agency conflicts and humans' limited capacity for analyzing complex problems.

Initial Public Offerings and the Local Economy: Evidence of Crowding Out
Jess Cornaggia et al.
Review of Finance, forthcoming

We test the effect of going public on economic growth in the areas surrounding IPO firms. We compare the effects of IPO filers that complete their IPOs with those that do not, using post-filing stock market fluctuations as an instrument for IPO completion. We show that IPOs that are large relative to the size of their counties lead to a 1.1 percentage point relative reduction in annual county-level establishment growth, with similar effects for employment and population growth. There are no corresponding effects for relatively small IPOs. These negative effects appear to be driven by a crowding out of local sector peers, but the crowding out also disrupts local agglomerations and slows down growth among other businesses that rely on local demand. Overall, our results indicate that macroeconomic gains from IPOs trade off against disruptions in local agglomeration economies where public firms originate.


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