Money Supplies
Monetary Policy According to Households: Perceptions, Reactions and Channels
Francesco Grigoli et al.
NBER Working Paper, April 2026
Abstract:
This paper studies how households perceive the transmission of monetary policy and how these perceptions affect their decisions. Using a large-scale survey of over 25,000 U.S. households combined with randomized information treatments, we measure how households expect changes in the federal funds rate to affect economic conditions and their own behavior. Households report that higher interest rates lead them to reduce their spending, particularly on durable goods. However, the mechanisms underlying this response differ markedly from those in standard macroeconomic models. Respondents expect monetary tightening to raise borrowing costs and inflation. In turn, consumption function estimates identified using information treatments reveal that households respond to higher expected inflation by reducing consumption. Household inflation expectations also emerge as a central driver of portfolio reallocations following monetary policy changes.
U.S. Treasury Investors Are Long in AI
Howard Kung, Hanno Lustig & James Paron
Stanford Working Paper, April 2026
Abstract:
Based on the composition of the federal government's spending and the U.S. tax code, U.S. bondholders have a long position in AI with option-like payoffs. The U.S. federal government's tax revenue is highly sensitive to long-run productivity growth but its spending commitments are not. As a result, U.S. Treasury investors have acquired a long position in AI. Using the CBO's 30-year budget projections, elasticities, and interest rate pass-through estimates, we find that 0.1 percentage points of extra productivity growth raises the fundamental value of U.S. Treasurys by $1.3 trillion (4.2% of the market value), implying a 71 basis point decline in nominal Treasury yields. Increased uncertainty about long-run growth as a result of AI also lowers nominal Treasury yields, as investors face a convex payoff schedule.
Credit Crunches and the Great Stagflation
Itamar Drechsler, Alexi Savov & Philipp Schnabl
NBER Working Paper, April 2026
Abstract:
We argue that severe credit crunches in the banking system contributed to the Great Stagflation of the 1970s. The credit crunches were due to Regulation Q, a banking law that capped deposit rates. Under Reg Q, Fed tightening triggered large deposit outflows that led banks to contract lending. The credit crunches line up closely with stagflation in the time series. To explain this, we add Reg Q to a standard model where firms use bank loans to finance working capital. When Reg Q binds and credit contracts, working capital becomes more expensive, leading firms to raise prices and shrink output. The model implies an augmented Phillips curve where monetary tightening reduces aggregate supply in addition to demand. The impact on supply is increasing in the severity of the credit crunches, firms' external finance dependence, and their working capital intensity. We test all three predictions in the cross section of manufacturing industries. In each case, we find that more exposed industries raise prices and cut output relative to others. Our results imply that under severe financial frictions monetary policy affects aggregate supply and not just demand.
The Macroeconomic Effects of Bank Regulation: New Evidence from a High-Frequency Approach
Thomas Drechsel & Ko Miura
NBER Working Paper, April 2026
Abstract:
Bank regulation supports financial stability, but might constrain economic activity. This paper estimates the macroeconomic effects of bank regulation using a high-frequency identification approach. We measure market surprises in a bank stock price index during a narrow time window around Federal Reserve speeches that discuss the US banking system and its regulation. We then develop a sign restriction procedure to elicit the variation in these market surprises that can be interpreted as news about bank regulation. News that bank regulation will be tighter than expected mitigates risk in the banking sector, but reduces economic activity by increasing banks' funding costs and tightening loan supply. A 10 basis point regulation-induced peak reduction in bank risk premiums is accompanied by a 15 basis point peak increase in the unemployment rate. Compared to previous studies, these magnitudes suggest a relatively high macroeconomic cost of tightening bank regulation, at least in the short run.
Corporate taxpayer responses to size-based enforcement and disclosure thresholds
Jason DeBacker, Erin Towery & Bibek Adhikari
Journal of Public Economics, May 2026
Abstract:
This study uses administrative tax return and audit data to examine the effects of three Internal Revenue Service (IRS) enforcement policies focused on large corporations. The IRS Large Business and International Division's monitoring threshold increased from $5 million in 2000 and 2001 to $10 million in assets starting in 2002. Starting in tax year 2004, the IRS requires C corporations with at least $10 million in assets to file Schedule M-3, which reconciles book and taxable incomes. In the same year, audit rates jumped discretely at the $10 million asset threshold. We find that C corporations strategically bunch below this threshold in most years from 2004 to 2010. Using variation in audit rates around the $10 million asset threshold over time and the staggered Schedule M-3 implementation dates for C corporations and S corporations, our evidence collectively suggests C corporations bunch below the threshold primarily to avoid higher audit rates. A triple difference estimator shows that the enforcement notch at $10 million in assets has persistent effects on corporation size.
Treasury Supply Shocks: Propagation Through Debt Expansion and Maturity Adjustment
Huixin Bi, Maxime Phillot & Sarah Zubairy
NBER Working Paper, April 2026
Abstract:
Historically high debt-to-GDP levels in the U.S. have raised concerns about future financial market stability and fiscal sustainability. We use high-frequency data and consider Treasury futures price changes within narrow windows around auction announcements in order to identify two distinct Treasury supply shocks: debt volume shocks that capture changes in the level of public debt, and maturity adjustment shocks that reflect changes in the maturity structure. We find that debt expansion shocks raise yields across the curve by increasing term premia, leading to tighter financial conditions. These shocks crowd out private sector activity by reducing investment and production, particularly during periods of rapid debt growth. In contrast, maturity extension shocks steepen the yield curve while lowering credit risk premia and fiscal uncertainty. By reducing risk premia, these shocks stimulate near-term investment and production, even as higher long-term borrowing costs weigh on longer-horizon investment. We also show that the Treasury debt management policy can meaningfully interact with the Federal Reserve's asset purchase programs.
Taxes and Financial Distress: Evidence from Establishment-Level Data
Mara Faccio & Stefano Manfredonia
NBER Working Paper, April 2026
Abstract:
We use establishment-level data to examine the relation between corporate taxes and financial distress. Using a border discontinuity design, we document that higher corporate income tax rates significantly increase financial distress, particularly for geographically concentrated firms, with sizable spillovers across establishments. We further investigate how taxes affect establishment-level financial distress by exploiting the interest limitation rule introduced by the 2017 Tax Cuts and Jobs Act. Using a difference-in-differences design, we find that affected firms experience a decline in financial distress. This occurs because the reduced tax advantage of debt induces firms to deleverage, reducing financial distress through capital structure adjustments.
Local Taxes and Suburbanization: Evidence from Philadelphia's Wage Tax
Rene Livas & Matthew Jacob
Harvard Working Paper, March 2026
Abstract:
How do local taxes affect the location of economic activity inside cities? We study Philadelphia's wage tax, which applies to residents regardless of where they work and to suburban residents who work in the city. Because city residents always pay the tax, it does not distort their workplace choices, whereas suburban residents are penalized only for working in Philadelphia. At the city boundary, rising wage tax rates should sharply reduce commuting to the city in suburban tracts relative to neighboring city tracts, while falling tax rates should increase it. Using a spatial regression discontinuity design, we find that as the wage tax rose from 1.5 to 4.3% between 1960 and 1980, the change in the proportion of residents working in the city fell sharply in suburban tracts just outside the boundary; as the tax fell to 3.4% between 2003 and 2019, the change in that proportion increased sharply in the same tracts. Similar results hold along the boundaries of other cities with wage tax variation, such as Detroit and Cleveland, but not in cities without wage taxes. In our preferred estimate, a 1% increase in the tax rate reduces suburb-to-city commuting by 6.39%, holding wages, rents, and amenities constant. We embed this elasticity in a quantitative spatial model to estimate how the wage tax affects suburbanization once wages and rents adjust. Replacing the wage tax with a non-distortionary land value tax would bring 26,000 jobs from the suburbs into Philadelphia. Such gains triple when we allow for productivity agglomeration forces.
Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance
Christopher Martin, Manju Puri & Alexander Ufier
Journal of Finance, April 2026, Pages 643-685
Abstract:
Using unique, daily, account-level data, we investigate deposit outflows and inflows in a distressed bank. We observe an outflow of uninsured depositors following bad regulatory news. Both regular and temporary deposit insurance reduce outflows. We provide important new evidence that, simultaneous with deposit outflows, deposit inflows are first order. Uninsured deposit outflows were largely offset with new insured deposit inflows as the bank approached failure, with the bank increasing term deposit rates. This phenomenon holds in a large sample of banks that faced regulatory action, suggesting that insured deposit inflows are an important mechanism that weakens depositor discipline.
The spending consequences of COVID-19 stimulus payments: The case of baseball cards
Quinn Keefer
Empirical Economics, March 2026
Abstract:
We show the COVID-19 economic stimulus payments, which represented windfall gains for many of the over 160 million recipients who were financially unaffected by the pandemic, generated large increases in spending on baseball cards. The spending increase occurred precisely when economic stimulus payments were received by households, suggesting the payments and not the pandemic itself were responsible. In the 8 weeks following receipt of the CARES Act stimulus payments, spending on professionally graded copies of the 100 baseball cards we track, the most graded cards produced before 2000, increased by $2.14 million. The spending increase was the result of increases in both daily volume and price. Using a back-of-the-envelope calculation, the CARES Act payments generated $50.6 million to $69.1 million in new spending in the overall secondary market for trading cards in the 8 weeks following receipt of the payments.