Economic Booms, Uncertainty, and Growth
Paper Session
Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)
- Chair: Oliver Pfäuti, University of Texas-Austin
Credit Smoothing
Abstract
In standard economic models, agents borrow using unsecured, high-interest, short-term debt -- credit cards and bank overdrafts -- to smooth consumption in the event of transitory income decreases. This paper shows that -- on average -- individuals do not use such borrowing to smooth consumption when they experience a transitory income shock due to unemployment. Instead, individuals smooth their credit card debt and overdrafts by adjusting consumption. We first use detailed longitudinal information on debit and credit card transactions, account balances, and credit limits from a financial aggregator in Iceland to document that unemployment does not induce a borrowing response at the individual level. We then replicate this finding in a representative sample of U.S. credit card holders, instrumenting local changes in employment using a Bartik-style instrument. The absence of a borrowing response occurs even when credit supply is ample and liquidity constraints, which we observe in our data, do not bind. Demand for credit is thus procyclical and not countercyclical, which may deepen business cycle fluctuations.Geopolitical Risk and Global Banking
Abstract
This paper shows that internationally active banks play a significant role in propagating foreign geopolitical risk to the domestic economy. Using multiple supervisory data on U.S. bank lending over the past four decades, we document that banks tighten domestic lending standards and reduce lending to U.S. firms in response to rising geopolitical risk abroad. This effect is driven by banks with high geopolitical risk exposure through foreign operations. In particular, the mode of banks' foreign operations influences the strength of the spillover effect. While U.S. banks reduce cross-border lending to countries of increasing geopolitical risk, their lending through branches and subsidiaries in those countries continues, even though the riskiness of their loan portfolios increases. These results indicate that difficulties with divesting foreign assets exacerbate spillovers of foreign geopolitical risk to U.S. domestic credit.Sentiment, Productivity, and Economic Growth
Abstract
Previous research finds correlation between sentiment and future economic growth, but disagrees on the channel that explains this result. In this paper, we shed new light on this issue by exploiting cross-country variation in sentiment and market efficiency. We find that sentiment shocks in G7 countries increase economic activity, but only temporarily and without affecting productivity. By contrast, sentiment shocks in non-G7 countries predict prolonged economic growth and a corresponding increase in productivity. The results suggest that sentiment can indeed create economic booms, but only in less advanced economies where noisy asset prices make sentiment and fundamentals harder to disentangle.Time Use and Macroeconomic Uncertainty
Abstract
We estimate the effects of uncertainty on time use and discuss its macroeconomic implications. Using data from the American Time Use Survey, we first infer cyclical variation in home production and leisure time. We then document that higher uncertainty increases housework and reduces market hours worked, with modest effects on leisure. Finally, we propose a model of housework with time-varying uncertainty that quantitatively accounts for these results. We use the model to demonstrate that substitution between market and nonmarket work provides an additional insurance margin to households, weakening precautionary savings and labor sup- ply. However, time-use reallocation also lowers aggregate demand, ultimately amplifying the contractionary effects of uncertainty. Policies that reallocate time use towards housework (e.g., lockdown policies) amplify the recessionary effects of uncertainty and can result in aggregate dynamics consistent with a supply-side shock.JEL Classifications
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit