Roundup: China’s Housing Boom, Volcker’s Pivot, AI Inflation Forecasting, and Wage Gains

Today, we are highlighting economic research recently produced by the St. Louis Fed that you may have missed. The following work appeared in the publication Review.

Was China’s Housing Boom a Bubble?

China’s economy has transformed rapidly over the past several decades, shifting toward manufacturing and services. Urbanization there, however, hasn’t matched these changes. Given this landscape, was China’s housing boom in the 2000s and 2010s a bubble, or can fundamental economic factors account for rising house prices in its cities during this period? The authors find that fundamentals—specifically income and population growth from migration—can largely explain house price appreciation in China nationally and in most urban centers, with Beijing and Shanghai being notable exceptions.

The Volcker Tightening Cycle: Explaining the 1982 Course Reversal

When Paul Volcker was confirmed as Fed Chair in August 1979, the Federal Reserve began a cycle of monetary policy tightening in response to a more than decade-long period of high and volatile inflation. But what prompted the Fed to reverse course and begin easing monetary policy in mid-1982, after inflation had fallen but while it was still more than double its average from before the “Great Inflation” of the late 1960s and 1970s? The author examines three factors: economic pains caused by recession, the prospect of a financial crisis and—potentially—political pressure.

Artificial Intelligence and Inflation Forecasts

Accurately forecasting inflation is a difficult task. Can AI do the job better? This article uses a large language model (LLM) AI platform to construct retrospective inflation forecasts, which the authors then compare against the Survey of Professional Forecasters (SPF) and actual inflation data. They found the LLM’s forecasts had lower mean-squared errors overall in most years and at almost all horizons than SPF forecasts—suggesting LLM’s may offer a complementary approach to estimating future inflation.

Closing Small and “Sufficiently” Large Open Economies with Different Asset Structures

In a model of an open economy, differences across two dimensions—the size of the economy and its asset market structure—affect conditions for the existence and uniqueness of equilibrium. To help illustrate these differences from a theoretical standpoint, this article explores conditions for equilibrium in various circumstances, including complete and incomplete market versions of a small open economy and a sufficiently large open economy.

Nominal Wage Adjustments during High Inflation and Tight Labor Markets

Following the onset of the COVID-19 pandemic, high inflation and low unemployment characterized the U.S. economy. And while consumer prices increased faster from 2020 to 2023 than they did from 2016 to 2019, so did wages (as measured by average hourly earnings for private workers). Given the later period’s larger-than-usual aggregate wage growth, the authors examine whether the frequency and magnitude of wage changes at the individual level also differed during these years of high inflation and tight labor markets.

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