Salient to Investors:
Philippe Bacchetta at University of Lausanne and Eric van Wincoop at University of Virginia found that:
- Global trade and financial linkages weren’t strong enough by themselves to have caused the global recession in 2008 – self-fulfilling panics, not contagion, were to blame. The large losses of leveraged financial institutions and associated decline in credit were not directly responsible for the Great Recession. Rather, a deterioration of macroeconomic fundamentals, such as a negative credit shock, contributed to a panic by generating conditions that made self-fulfilling beliefs, which otherwise would not have existed, feasible.
- In the US, 86 percent of goods and services purchased are domestic, and 80 percent to 90 percent of stock, bond and bank assets are domestic holdings.
- Even with limited trade or cross-border asset holdings, it may be impossible to have a shock in the US that doesn’t spread to the rest of the world – either countries panic together or they do not panic at all.
- The self-fulfilling panic also applies to businesses. Consumers cut spending and increase savings if they believe future wages and employment prospects are weaker and more uncertain, dragging down aggregate demand, generating a recession, and weakening profits and discouraging new investment.
Jens Christensen and Glenn Rudebusch at the FRB of San Francisco said:
- Program length and communication management could be at least as important for the effectiveness of QE policies as the actual purchase amounts.
- The Bank of England should communicate better to be more successful in QE, and doesn’t need to increase asset purchases. The Fed had a greater impact on yields because its QE programs have been longer – 6 to 10 months – and it provides guidance on the near-term outlook for policy rates. The BOE’s typical duration is 3 months and it doesn’t give any official direction on the prospects for its benchmark.
- QE can push yields down in two ways. Signal that the benchmark rate will remain low longer than initially anticipated, or induce investors to add riskier assets as asset purchases reduce risk premiums.
- In the US, 60 percent of yield declines reflect lower expectations for future monetary policy and 40 percent reflects lower risk premiums. All of the yield declines in the UK were linked to a drop in risk premiums.
Jennie Bai at the New York Fed and Thomas Philippon and Alexi Savov at NYU said financial market informativeness hasn’t increased in the past half century, and earnings surprises have grown relative to total uncertainty, contradicting the view that improvements in information technology have increased the availability of low-cost information. They posit that the relevant constraint for investors lies in the ability to interpret information rather than the ability to record it, thus a rise in the quantity of data need not improve informativeness or the allocation of resources.
Santiago Acosta-Ormaechea and Jiae Yoo at the IMF said that higher income tax rates are associated with slower growth even if the overall tax burden is left unchanged by cutting property and consumption taxes. They said a shift from income to property taxes is good for growth, as is an increase in VAT and sale taxes balanced with a reduction in income taxes.