Mostly Economics

This paper studies the effects of artificial intelligence (AI) on sectoral and aggregate employment, output and inflation in both the short and long run. We construct an index of industry exposure to AI to calibrate a macroeconomic multi-sector model. Building on studies that find significant increases in workers’ output from AI, we model AI as a permanent increase in productivity that differs by sector.

We find that AI significantly raises output, consumption and investment in the short and long run. The inflation response depends crucially on households’ and firms’ anticipation of the impact of AI. If they do not anticipate higher future productivity, AI adoption is initially disinflationary. Over time, general equilibrium forces lead to moderate inflation through demand effects. In contrast, when households and firms anticipate higher future productivity, inflation rises immediately.

Inspecting individual sectors and performing counterfactual exercises we find that a sector’s initial exposure to AI has little correlation with its long-term increase in output. However, output grows by twice as much for the same increase in aggregate productivity when AI affects sectors producing consumption rather than investment goods, thanks to second round effects through sectoral linkages. We discuss how public policy should foster AI adoption and implications for central banks.

IMF’s Global Financial Stability Report – April 2024 has a chapter on private credit:

Chapter 2 assesses vulnerabilities and potential risks to financial stability in private credit, a rapidly growing asset class—traditionally focused on providing loans to mid-sized firms outside the realms of either commercial banks or public debt markets—that now rivals other major credit markets in size. The chapter identifies important vulnerabilities arising from relatively fragile borrowers, a growing share of semi-liquid investment vehicles, multiple layers of leverage, stale and potentially subjective valuations, and unclear connections between participants. If private credit remains opaque and continues to grow exponentially under limited prudential oversight, these vulnerabilities could become systemic.

Given the potential risks posed by this fast-growing and interconnected asset class, authorities could consider a more proactive supervisory and regulatory approach to private credit. It is key to close data gaps and enhance reporting requirements to comprehensively assess risks. Authorities should closely monitor and address liquidity and conduct risks in funds—especially retail—that may be faced with higher redemption risks.

Matthew Wells of Richmond Fed looks at origins of Fed’s 2 percent target:

Eight times a year, the Federal Open Market Committee (FOMC) meets to conduct monetary policy, and, regardless of what actions it takes, this seemingly straightforward line has appeared in each of its post-meeting statements since September 2020. By now, many Fed watchers may take it for granted.

But the committee — the Federal Reserve Board’s seven governors, the president of the New York Fed, and a rotating set of four presidents from the other Reserve Banks — has not always been so transparent and precise on this subject. For decades, it did not aim for a target inflation number; even when it appeared to settle behind the scenes on a 2 percent target in 1996, it wasn’t made public and explicit until 2012 – 16 years later.

The 2012 pronouncement was the result of a decades-long deliberation, as members first raised the issue in the mid-1990s. Policy change moved slowly, however, as committee turnover brought new preferences and ideas into a dynamic economic and political environment. Along the way, the Richmond Fed’s leadership played an important role in bringing these changes about, from being among the first to raise the idea of a target to providing the intellectual leadership that shaped discourse about the benefits of a public inflation target for price stability.

How did tipping become an American ritual?

Tim Sablik looks at this interesting history of tipping in Richmond Fed ‘s EconFocus:

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Agustín Carstens and Nandan Nilekani in this BIS paper lay out a new vision for the financial system:

This paper lays out a vision for the Finternet: multiple financial ecosystems interconnected with each other, much like the internet, designed to empower individuals and businesses by placing them at the centre of their financial lives. It advocates for a user-centric approach that lowers barriers between financial services and systems, thus promoting access for all.

The envisioned system leverages innovative technologies such as tokenisation and unified ledgers, underpinned by a robust economic and regulatory framework, to dramatically expand the range and quality of financial services. This integration aims to foster greater participation, offer more personalised services and improve speed and reliability, all while reducing costs for end users. Most of the technology needed to achieve this vision exists and is fast improving, driven by efforts around the world.

This paper provides a blueprint for how key technical characteristics like interoperability, verifiability, programmability, immutability, finality, evolvability, modularity, scalability, security and privacy can be incorporated, and how varied governance norms can be embedded. Delivering this vision requires proactive collaboration between public authorities and private sector institutions. The paper serves as a call for action for these entities to establish a strong foundation. This would pave the way for a user-centric, unified and universal financial ecosystem brought into the digital era that is inclusive, innovative, participatory, accessible and affordable, and leaves no one behind.

Beverly Hirtle and Anna Kovner says supervision is distint from regulation. Eco research focuses on regulation but not much on supervision:

In the economic literature on banking and in discussions of the banking industry, the terms “supervision” and “regulation” are often used interchangeably, but in fact these are distinct activities. “Regulation” is the process of establishing the rules under which banks operate: who can own banks, permissible and impermissible activities, and minimum capital and liquidity requirements. Regulations are subject to public comment and input before they are adopted, and they are published for all to see.

“Supervision” involves oversight and monitoring of banks to ensure that they are operating in a safe and sound manner. A key part of supervision is ensuring that banks are in compliance with regulations, but supervision also involves qualitative assessments of banks’ internal processes, controls, governance and risk management—and taking enforcement actions when weaknesses are discovered. While some enforcement actions are public, much of supervisory activity is confidential and not publicly disclosed.

A large body of economic research has focused on the goals and impacts of regulation, but much less research has been conducted on the objectives and impacts of supervision, perhaps reflecting the limited information available on supervisory outcomes. Still, a growing body of empirical research is assessing the impact of supervision on banks and examining how supervision affects the risk-taking, lending, and profitability of supervised banks.

They summarise some recent work on Supervision.

Maurice Obstfeld of PIIE reflects on 8o years of Bretton Woods: