Roundup: Global Value Chains, Inflation and Local Gasoline Prices

Today, we are highlighting some research the St. Louis Fed has recently produced that you may have missed.

Review

Global Value Chains and U.S. Economic Activity During COVID-19

This article investigates the role of global value chains in the declines of manufacturing employment and output in the U.S. during COVID-19. It finds that such chains played a significant role in the decline of output and employment across U.S. manufactures. It also finds a modest impact of diversifying or renationalizing global value chains in mitigating the economy’s exposure to foreign shocks.

Regional Gasoline Price Dynamics

A large literature has argued that gasoline prices respond more rapidly to increases in oil prices than to decreases in oil prices. Moreover, some of this literature has found heterogeneous asymmetry in gas price responses across cities. This paper reconsiders the causes of heterogeneous asymmetric pass-through by looking at city-level characteristics. It finds that while city-level characteristics cannot (robustly) explain variation in the magnitudes of the asymmetries, they do seem to affect the probability that a city experiences asymmetric pass-through.

Is It Time for Some Unpleasant Monetarist Arithmetic?

Some economists have posited that a central bank may not have the power to determine the long-run rate of inflation without fiscal support. In a policy regime where the fiscal authority is non-Ricardian, an attempt on the part of the central bank to lower inflation may end up backfiring. This article offers a model that explains how low inflation, low interest rates and high primary budget deficits can coexist. The model also explains why it is easier for a central bank to lower inflation than to raise it.

Optimal Capital Taxation and Precautionary Savings

This article uses an analytical tractable heterogeneous-agent incomplete-markets (HAIM) model to show that, with no role to play for redistribution, the government bond is more suitable than capital tax for addressing the production inefficiency caused by households’ precautionary savings in the HAIM model.

Convergence to Rational Expectations in Learning Models: A Note of Caution

This article shows in a simple monetary model that the learning dynamics do not converge to the rational expectations monetary steady state. It then shows it is necessary to restrict the learning rule to obtain convergence. The article derives an upper bound on the gain parameter in the learning rule, based on economic fundamentals in the monetary model, such that gain parameters above the upper bound would imply that the learning dynamics would diverge from the rational expectations monetary steady state.

Economic Synopses

International Inflation Trends

Expected inflation rates have risen in many countries after fiscal and monetary stimulus helped economies recover from the COVID-19 lockdown.