The Center for Advancing Women in Economics: A Conference Recap

Economists from the Richmond Fed, research universities and other institutions met in Richmond for the Center for Advancing Women in Economics (AWE) conference in November. Women researchers presented papers on a variety of topics, including unconventional monetary and fiscal policy, global inflation patterns, worker responses to labor shocks, capital flows and risk, changes in U.S. supply chains, and the dynamics of official lending.

The conference concluded with a panel discussion on the challenges and opportunities for academic research to inform policy. AWE Director Marina Azzimonti served as the moderator, and panel speakers were Anna Kovner of the Richmond Fed, Era Dabla-Norris of the International Monetary Fund, and Ricardo Correa of the Federal Reserve Board of Governors.

The following summarizes the paper presentations.

Unconventional Monetary and Fiscal Policy

In responses to both the Great Recession and the COVID-19 pandemic, the Federal Reserve expanded its balance sheet through quantitative easing (QE) from $0.9 trillion in August 2008 to $9 trillion by early 2022, while the recent battle with inflation led to aggressive increases in the policy rate between 2022 and 2023. Along with these monetary policy actions, the Treasury Department provided fiscal stimulus during the pandemic of about $1.6 trillion through the Paycheck Protection Program and Economic Impact Payments. In "Unconventional Monetary and Fiscal Policy" — co-authored with Yinxi Xie of the Bank of Canada — Jing Cynthia Wu of the University of Illinois discusses the relative macroeconomic impacts of four policy instruments: the policy rate, QE, lump-sum fiscal transfers and government expenditures.

Wu and Xie develop a New Keynesian model to conduct their analysis, which yields four primary findings:

• Tax-financed fiscal policies like transfers and government spending have aggregate effects like those that result from QE.
• Conventional monetary policy done through the relaxing of the policy rate is more inflationary than the other policy tools, although tightening conventional policy and stimulative fiscal policy can lower inflation without impacting activity in the real economy.
• While government spending and policy rate adjustments do not have redistribution effects, QE and tax-financed transfers do.
• Contrary to the idea that government spending financed from current taxes has equivalent effects to debt-financed spending, tax-financed fiscal policies are more expansive than debt-financed policies.

Wu and Xie conclude with a discussion of the optimal policy coordination for stabilizing both inflation and output gaps. They find that adjustments to the policy rate along with either QE or fiscal transfers can best stabilize inflation swings and limit the output gap, as well as limit consumption inequality across groups.

Pandemic-Era Inflation Drivers and Global Spillovers

What factors drove the global inflationary shock following the pandemic? In her paper "Pandemic-Era Inflation Drivers and Global Spillovers," — co-authored with Julian di Giovanni of the New York Fed, Alvaro Silva of the Boston Fed and Muhammed Yildirim of Harvard University — Şebnem Kalemli-Özcan of Brown University seeks to quantify the relative importance of different factors across the U.S., the eurozone, Russia, China and the rest of the world. Specifically, Kalemli-Özcan and her colleagues look at four sectors (durables, non-durables, services and energy) and a set of four shocks (sectoral supply, sectoral demand, aggregate demand and energy). They conduct a counterfactual analysis, exploring the effects of each shock in each sector individually.

The authors look year by year beginning with 2020 and find negative supply shocks to factors of production for that year, namely falling labor supply and increased inflationary pressures in the U.S. and eurozone, both of which experienced the fastest rise in prices among the areas studied. These supply shocks contributed 2.02 and 0.72 percentage points, respectively, to annual inflation.

A year later, the ongoing negative supply shocks kept upward pressure on inflation, and significant fiscal stimulus created a positive aggregate demand shock, which also increased inflation by 8.53 and 5.79 percentage points in the U.S. and eurozone, respectively, as did increased sectoral demand shocks (although to a lesser degree). In 2022, still-strong aggregate demand fostered ongoing inflationary pressure, contributing 8.81 and 9.99 percentage points to annual inflation in the U.S. and eurozone, respectively. Sectoral supply shocks receded in 2023, which resulted in negative inflationary pressure, but energy price increases due to Russian supply shocks had an impact everywhere, especially in the eurozone, leading to a 1.32 percentage point increase in inflation.

Unemployment, Labor Mobility and Regional Economic Shocks

Do workers migrate in response to negative regional labor demand shocks? Research since the Great Recession has found little empirical evidence of a connection, but Linda Tesar of the University of Michigan takes a fresh look at the question. In "Unemployment, Labor Mobility, and Regional Economic Shocks," Tesar suggests the presence of a causal relationship: People move in response to local labor shocks at the business cycle frequency.

Tesar uses a basic regression model to examine the effect of a region's unemployment rate on its level of migration. Using state-to-state level data in the U.S. from 1977-2018 and assuming a labor force participation rate of 65 percent, she finds an increase of 100 unemployed people is correlated with 40 people moving away. Using the same model on data from 1995-2018 in the eurozone, she finds an increase of 100 unemployed workers is linked to 12 people moving.

Tesar uses a series of instrumental variable tests to establish a causality among these observed correlations: a region's share in a particular industry (autos, in this case) and its share in military spending, the degree to which Chinese imports have penetrated the market, and the Great Recession. Tesar separates out-migration and in-migration (a step previous analyses have not taken) and, in doing so, provides evidence that labor responds to regional unemployment differentials: Workers will move to areas where there is more demand for labor. This labor mobility has important implications for economies: It can reduce the costs of a common currency across countries (as in the eurozone), and it is an effective way to reduce unemployment.

Financial Regulation, Risk Migration, and Global Liquidity Flows

How do international capital flows respond to risk conditions? To answer this question, Linda Goldberg of the Federal Reserve Bank of New York presented the paper "Financial Regulation, Risk Migration, and Global Liquidity Flows." The paper is co-authored with Stefan Avdjiev and Leonardo Gambacorta, both of the Bank for International Settlements, and Stefano Schiaffi of the Bank of Italy. The paper documents how global risk sensitivities vary across borrowing countries, borrowing sectors (banks versus non-banks) and global liquidity components such as exchangeable bond loans and other international bonds.

Goldberg and her co-authors posit two central conjectures:

• The risk sensitivity of international funding flows is determined by the tightness of the balance sheet constraints faced by the lending (bank and nonbank) financial institutions.
• The relative tightness of financial regulation and supervision drives risk migration from banks to nonbanks and within the nonbank sector.

To test these conjectures, the authors use a panel regression framework that improves upon previous models by incorporating a compositional shift that came about through regulatory changes stemming from the global financial crisis (GFC). Instead of a framework with only advanced economies and emerging market economies, they break down developed advanced economies into safe havens (where capital flows into) and other advanced economies (where risk sensitivity looks more like that which is present in emerging market economies).

They find that, following the GFC, the previously most volatile form of exchangeable bond loans looks tamed from borrower perspectives, while nonbank sensitivities are dampened. Compared to before the GFC, there is now much more variation when it comes to financing international debt, especially by nonbanks. When risk conditions deteriorate, capital flows contract, but safe haven economies may be insulated from those contractions. At the same time, banks have become more stable lenders, but they no longer engage with risky borrowers. Finally, they note that regulation and supervision in both source and destination countries play a key role, as tighter lending rules for banks have led to an increased share of lending by nonbank financial institutions.

The Great Reallocation (2.0)

The trade relationship between China and the U.S. has evolved in recent years, as the latter's supply chains have become far less reliant on direct imports from the former. In "The Great Reallocation (2.0)," Laura Alfaro of Harvard University details recent shifts in trade flows and the implications of the reallocation currently taking place.

Using data on trade flows, Alfaro first shows that, following the imposition of tariffs on Chinese goods in 2017, Chinese market share in the U.S. decreased by almost 8 percent between 2018 and 2023. In its place, Vietnam and Mexico gained the most market share, particularly in the auto, auto parts, semiconductors and electronics sectors. This is due primarily to lower labor costs in Vietnam and the practice of friend-shoring or near-shoring with respect to Mexico.

Alfaro sounds two notes of caution, however, about whether this observed reallocation is as durable as many might suggest:

• As China's market share declined, the price on imports from Vietnam increased by 20 percent, and the price on Mexican imports increased by 7 percent.
• Even though China's market share in the U.S. has decreased, China has increased its foreign direct investment into both Mexico and Vietnam, and it has increased its market share among several of the U.S.'s top trading partners, including the eurozone and Canada.

Alfaro acknowledged that, given the complexity of global economic activity and of control and ownership of global firms, it can be difficult to tease out China's role in these countries. It remains to be seen whether the U.S. has truly reduced its dependence on Chinese manufacturing.

Additionally, Alfaro also examines the motivations behind this policy-driven turn away from Chinese imports. In a series of experimental surveys of the American public between 2018 and 2022, she finds that Americans' trade policy preferences are not informed by the expected gains and losses from trade in terms of prices. Rather, they are influenced by their existing political beliefs, as well as the state of U.S.-China relations and concerns about manufacturing jobs in the U.S. being lost to China.

A Theory of International Official Lending

International official lending provided through multilateral institutions such as the World Bank and International Monetary Fund and bilateral agreements between governments can serve as a lifeline to countries in desperate need of money and resources. Yet, these agreements can be fraught with difficulty, as borrowing countries have incentives to direct those resources to other uses while lenders can have difficulty monitoring their behavior. In her paper "A Theory of International Official Lending," — co-authored with Qing Liu and Zanhui Liu, both of Tsinghua University — Vivian Yue of Emory University develops a formal model explaining how lenders can mitigate the moral hazard problem on the part of sovereign borrowers.

Yue and her colleagues begin by showing that, in addition to the risk of default, a moral hazard problem plagues international official lending, as sovereign borrowers have incentives to use the lent funds to engage in consumption activities rather than export production. At the same time, productivity and resource allocations are private information unknown to the lenders, who receive noisy signals about these unobservable actions. These concerns constrain multilateral and bilateral lending, preventing it from achieving full efficiency, as the lender reduces its ongoing aid as punishment when receiving what it sees as signals of the sovereign borrower diverting aid away from export production towards consumption.

Constrained optimal allocation can, however, be implemented through a combination of private lenders, official bilateral lenders and official multilateral lenders. In the model, both types of official lenders act as monitors: Official bilateral lenders tailor their punishments based on the signals they receive, while multilateral lenders provide cheap credit and serve as liquidity providers to the sovereign borrower. Also, borrowers cannot default on official multilateral lending, which restricts their future consumption during economic downturns. Further analysis by the authors demonstrates that official debt is countercyclical, while private market debt is procyclical.

Matthew Wells is a senior economics writer in the Research Department at the Federal Reserve Bank of Richmond.

To cite this Economic Brief, please use the following format: Wells, Matthew. (December 2024) "The Center for Advancing Women in Economics: A Conference Recap." Federal Reserve Bank of Richmond Economic Brief, No. 24-40.

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