By Lorena Hernandez Barcena, Manuel Alcalá Kovalski, Nasiha Salwati, Louise Sheiner

What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Fluctuations in the unemployment rate have a lasting effect on the labor market  

Using data on 29 advanced economies over the 2002-2019 period, Laurence Ball of Johns Hopkins University and Joern Onken of University College London find that transitory changes in the unemployment rate shift the natural rate of unemployment (the rate that is consistent with full employment and stable inflation). The authors estimate that, on average, there is a 0.16 percentage point increase (or decrease) in the natural rate of unemployment if the unemployment rate runs 1 percentage point higher (or lower) than its natural rate over a year. The authors also find that the natural rate is more sensitive to transitory decreases in the unemployment rate than increases. The results imply that shifts in aggregate demand have long-lived responses in the labor market and that “a ‘high pressure’ economy has permanent benefits,” the authors conclude.    

Fintech lenders are more likely than traditional banks to issue PPP loans to Black-owned businesses   

The Paycheck Protection Program (PPP) was introduced during the pandemic to provide government-backed loans to small businesses. Sabrina Howell of New York University and co-authors find that, controlling for business characteristics, Black-owned businesses were about 12 percentage points more likely to receive a PPP loan from a fintech lender than a traditional bank. The authors find that this disparity is not primarily explained by differences in pre-existing relationships between borrowers and banks or by borrower application behavior. Instead, they find that the gap in lending is larger in areas with larger racial animus, such as the South, suggesting that the disparity may have been driven by racial discrimination. When small banks increase automation, reducing human involvement in the lending decisions, their rate of PPP lending to Black-owned businesses increases, they find. Fintech lenders and larger banks already implement automated underwriting processes, which may account for the discrepancy.  

Increases in federal highway grants lead to small decreases in state-financed highway spending  

Using state-level data from 1994-2015, Sheila Campbell and Chad Shirley from the Congressional Budget Office find that, for every dollar in annual federal highway grants, state and local governments spent 26 cents less of their own funds on highways than they would have otherwise. This finding suggests a smaller degree of crowd-out than in much of the literature. Furthermore, for each dollar of ARRA highway grants—temporary federal grants provided during the Great Recession—state and local governments increased their own highway spending by 13 cents, although the response was smaller for state and local governments with larger deficits. The authors note that the response to ARRA grants might have been different because states had to spend the grants much more quickly and were required to maintain their previously planned level of spending for highways.   

Chart of the week: Labor force participation declined sharply over the COVID-19 recession and remains far below pre-pandemic levels 

Source: The Wall Street Journal 

Quote of the week: 

“Amid the prolonged and painful pandemic, financial stability risks have been contained so far. Financial conditions have eased since the start of the pandemic. This reflects the continuing monetary and fiscal support for the economy which helped spur a rebound from 2020. Yet the sense of optimism which had propelled markets in the first half of the year has faded somewhat. Uneven vaccine access along with the mutations of the virus have led to a resurgence of infections. Investors are increasingly worried about the economic outlook amid greater uncertainty about the strength of the recovery. Anxiety about the inflationary pressures has recently pushed yields higher. A sudden and sustained repricing of risk could interact with underlying vulnerabilities that could lead to tightening of financial conditions which could put growth at risk in the medium term,” says Tobias Adrian, Financial Counsellor of the International Monetary Fund. 

“Policymakers are now confronted with a difficult tradeoff. They must continue to provide near-term support to the global economy, yet they must simultaneously try to avoid the buildup of medium-term financial stability risks. After more than a year, complacency appears as a real risk. Asset valuations remain stretched and risk-taking persists. If left unchecked, such vulnerabilities could become structural legacy issues. Policymakers should formulate action plans that would guard against unintended consequences. Monetary and fiscal policy support should be more targeted and tailored to country-specific circumstances given the varying pace of the recoveries across countries. Central banks should provide clear guidance about the future approach to monetary policy and remain vigilant to avoid an unwarranted and abrupt tightening of financial conditions. If price pressures turn out to be more persistent than anticipated, they should act decisively to avoid an unmooring of inflation expectations. Policymakers should take early action and tighten select macroprudential tools to target pockets of elevated vulnerabilities.”  


The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation. 

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