Economic Perspectives
Monetary Policy, Inflation Outlook, and Recession Probabilities
Andrea Ajello, Luca Benzoni, Makena Schwinn, Yannick Timmer, and Francisco Vazquez-Grande
Why does the short-term slope of the yield curve predict recessions? In this Economic Perspectives article, we explore the economic forces underlying Treasury yields’ fluctuations and highlight the roles of a tight monetary policy stance and expectations of lower inflation in predicting downturns. While the monetary policy stance is still accommodative, indicating a low recession probability, the negative inflation slope points to higher odds of a recession within a year. We find that an aggressive removal of policy accommodation increases the recession probability to 60%.
Confessions of a Repentant Bubble Theorist
The author argues that while models of bubbles seem like a natural framework for studying asset booms, whether an asset is a bubble may not matter in determining if policymakers should intervene against the boom to mitigate the fallout should the boom turn into a bust.
The Relationship Between Race and Ethnicity, Type of Work, and Covid-19 Infection Rates
Jason Faberman and Daniel Hartley
We examine how much racial and ethnic differences and the type of work done can explain disparities in Covid infection rates. We exploit variation in infection rates across zip codes in three large U.S. cities and across counties for the entire U.S., controlling for local demographic characteristics and employment composition. We find that neighborhoods with higher Black and Hispanic population shares and neighborhoods with higher shares of workers in high social contact jobs within essential businesses had disproportionately higher Covid infection rates around the weeks of peak infections. When we jointly estimate the relationships, we find that race and ethnicity remains strongly related to infection rates, but type of work does not. The results are most pronounced during the early wave of infections during the spring and summer of 2020.
Quantitative Effects of Temporary Employment Contracts in Spain
Fernando Alvarez and Marcelo Veracierto
The authors explore the quantitative effects of introducing temporary employment contracts of various lengths after first calibrating an equilibrium search model with undirected search and an out-of-the-labor-force state to pre-1984 Spain. They find that introducing temporary contracts of three years’ duration—the same magnitude as that allowed by Spain starting in 1984—provides about half as much labor market flexibility as moving to a laissez-faire regime, with zero firing costs to firms.
