Examining the effect of changes in mortgage payments when mortgage rates are linked to the short-term policy rate in Australia, from Matthew Elias, Christian Gillitzer, @GregWKaplan, Gianni La Cava, and Nalini V. Prasad https://t.co/4ot69ZZlbz

Had so much fun chatting with Greg Kaplan (@GregWKaplan) and Michael Brennan of @E61Institute about Australia's stagnant productivity growth and how to fix it. The 2010s saw Australia's weakest productivity growth in 60 years. It was in many ways a lost decade. And it's dragging

Liquid wealth defined as total financial assets excluding certificates of deposits, savings bonds, life insurance, annuities, trusts, retirement accounts, less lines of credit and credit card balances. Data from SCF Summary Extract Public Data

Hand-to-mouth households are defined as those with liquid wealth or net worth less than two weeks of earnings. Earnings defined as wage, salary, social security and pension income.

Here is my update of *very simple* hand-to-mouth calculations for the USA from the Survey of Consumer Finances, updated to 2022. The fraction of both wealthy and poor HtM continue to decline from their 2010 peak:

🥁🥁Call for papers! As part of the NBER's Summer Institute, @ErikHurstEcon @GregWKaplan and I are holding the "Micro Data and Macro Models" workshop on July 15-18, 2024 Deadline: March 21, submit here: https://t.co/Gcl5YQsDTi

Today NSW’s year 12 students will receive their ATAR results. For many, today’s results will give them an indicator of what university degrees they can enroll in. But what do ATARs mean for future earnings? 1/n

This morning, the Bureau of Economic Analysis (BEA) released its latest benchmark revisions for the national income and product accounts. 🧵on the work that goes into BEA's efforts to measure the economy: 1/14

For famed investor Warren Buffet, the most important thing for a prospective investment is its economic moat, ie the way in which a business makes itself impervious to new competitors. New e61 research raises a vital query: are these moats trapping us in economic stagnation? 1/10

Taking stock: We extend the Fiscal Theory of the Price Level to Bewley models. Our results illustrate the importance of household heterogeneity, redistribution and precautionary saving in determining inflation dynamics. END

Policy lesson #3: Redistribution amplifies fiscal inflation. In the RA model, unfunded fiscal transfers that expand deficits by 10%, generate 10% of cumulative inflation. In our model, redistribution to high-MPC households generates higher inflation. Sounds familiar?

Note, if deficits are here to stay, this is the opposite of conventional wisdom, e.g. @WSJ here:

Policy lesson #2: Expanding deficits permanently [b(r) shifts down] generates a burst of inflation (as in the RA model) and pushes real rates down permanently (unlike in the RA model). New story for secular stagnation: irresponsible government spending!

Our calibration implies that if we were to expand uniform lump-sum transfers to households, the maximum sustainable level of permanent deficits would be 4.6% of GDP, starting from 3.3% (US average over in the 5 years pre-covid)

Policy lesson #1: Expanding deficits in a more progressive manner (e.g. higher transfers) reduces fiscal space (i.e. reduces the max sustainable level of deficit) more quickly! The reason is that it lowers the precautionary saving motive and hence household demand for bonds.

Result #3: High-r SS is saddle-path unstable (good!), but low-r SS is stable. Bad news for price level determination! There is a continuum of real equilibria and associated paths for prices and inflation. We show how to eliminate the low-r SS and restore a unique price level.

Result #2: A rise in uninsurable risk (or wealth concentration) which boosts household saving [a(r) curve shifts down] leads to an *increase* in r. Opposite comparative statics of standard Bewley models! Why? b=surplus/r. Higher b, same surplus<0, r<0 must be closer to zero.

If deficits are too large, no equilibria exist where government debt is valued (more on this later!)

In both steady states, r<g. Households are willing to pay interest to the government in order to hold a nominal risk-free liquid asset that allows them to smooth income shocks. Since the nominal rate is the same in both, the high-r steady-state (top-right) has low inflation.

Result #1: If deficits aren’t too large, this economy has two steady states (SS) where the stationary household demand for wealth a(r) and the government supply of bonds b(r)=surplus/r cross each other. Graphically: