Fast Money
The Causal Effect of News on Inflation Expectations
Carola Binder, Pascal Frank & Jane Ryngaert
NBER Working Paper, August 2025
Abstract:
This paper studies the response of household inflation expectations to television news coverage of inflation. We analyze news data from CNN, Fox News, and MSNBC alongside a daily measure of inflation expectations. Using a local projection instrumental variables approach, we estimate the dynamic causal effect of inflation news coverage on household inflation expectations at a daily frequency. Increased media coverage of inflation raises expectations, with effects peaking within a few days and fading after approximately 10 days. Additionally, we document a key nonlinearity: release days with positive CPI surprises -- i.e., inflation exceeding market expectations -- lead to stronger expectation responses than release days with negative surprises.
Optimal Fiscal Policy Under Endogenous Disaster Risk: How to Avoid Wars?
Vytautas Valaitis & Alessandro Villa
Federal Reserve Working Paper, March 2025
Abstract:
We examine the role of government investment in defense capital as a deterrence tool. Using an optimal fiscal policy framework with endogenous disaster risk, we allow for an endogenous determination of geopolitical risk and defense capacity, which we discipline using the Geopolitical Risk Index. We show both analytically and quantitatively that financing defense primarily through debt, rather than taxation, is optimal. Debt issuance mitigates present tax distortions but exacerbates them in the future, especially in wartime. However, since additional defense capital deters future wars, the expected tax distortions decline as well, making debt financing a welfare-improving strategy. Quantitatively, the optimal defense financing in the presence of heightened risk involves a twice higher share of debt and backloading of tax distortions compared to other types of government spending.
Digital Economy, Stablecoins, and the Global Financial System
Marina Azzimonti & Vincenzo Quadrini
NBER Working Paper, July 2025
Abstract:
The rise of the Digital Economy has the potential to reshape international financial markets and the role of traditional reserve assets such as the US dollar. While the creation of Stablecoins may increase the demand for safe dollar-denominated instruments due to reserve backing requirements, they may also serve as substitutes, reducing the global demand for traditional reserve assets. We develop a multicountry model featuring the US, the rest of the world, and a distinct Digital Economy to quantify the impact of the potential expansion of the digital economy. Our results show that, in the long run, the reserve demand effect dominates the substitution effect, leading to lower US interest rates and greater US foreign borrowing. We also find that the expansion of the Digital Economy increases idiosyncratic consumption volatility in the US, while reducing it in the rest of the world.
Why Care About Debt-to-GDP?
Jonathan Berk & Jules van Binsbergen
University of Pennsylvania Working Paper, May 2025
Abstract:
We construct an international panel data set comprising three distinct yet plausible measures of government indebtedness: the debt-to-GDP, the interest-to-GDP, and the debt-to-equity ratios. Our analysis reveals that these measures yield differing conclusions about recent trends in government indebtedness. While the debt-to-GDP ratio has reached historically high levels, the other two indicators show either no clear trend or a declining pattern over recent decades. We argue for the development of stronger theoretical foundations for the measures employed in the literature, suggesting that, without such grounding, assertions about debt (un)sustainability may be premature.
Credit Access in the United States
Trevor Bakker et al.
NBER Working Paper, July 2025
Abstract:
We construct new population-level linked administrative data to study households' access to credit in the United States. These data reveal large differences in credit access by race, class, and hometown. By age 25, Black individuals, those who grew up in low-income families, and those who grew up in certain areas (including the Southeast and Appalachia) have significantly lower credit scores than other groups. Consistent with lower scores generating credit constraints, these individuals have smaller balances, more credit inquiries, higher credit card utilization rates, and greater use of alternative higher-cost forms of credit. Tests for alternative definitions of algorithmic bias in credit scores yield results in opposite directions. From a calibration perspective, group-level differences in credit scores understate differences in delinquency: conditional on a given credit score, Black individuals and those from low-income families fall delinquent at relatively higher rates. From a balance perspective, these groups receive lower credit scores even when comparing those with the same future repayment behavior. Addressing both of these biases and expanding credit access to groups with lower credit scores requires addressing group-level differences in delinquency rates. These delinquencies emerge soon after individuals access credit in their early twenties, often due to missed payments on credit cards, student loans, and other bills. Comprehensive measures of individuals' income profiles, income volatility, and observed wealth explain only a small portion of these repayment gaps. In contrast, we find that the large variation in repayment across hometowns mostly reflects the causal effect of childhood exposure to these places. Places that promote upward income mobility also promote repayment and expand credit access even conditional on income, suggesting that common place-level factors may drive behaviors in both credit and labor markets. We discuss suggestive evidence for several mechanisms that drive our results, including the role of social and cultural capital. We conclude that gaps in credit access by race, class, and hometown have roots in childhood environments.
Refining the Definition of the Unbanked
Elena Falcettoni & Vegard Nygaard
Federal Reserve Working Paper, May 2025
Abstract:
We propose a new way to classify individuals without a bank account, accounting for their actual interest in being banked. Analogous to how unemployment statistics are defined and estimated, we differentiate the individuals that do not have a bank account and would like to have one (the "unbanked") from individuals that do not have a bank account and are not interested in having one (the "out of banking population"). Using FDIC data, we show the evolution over time of these new measures and show that the two groups differ in policy-relevant ways. While the unbanked mostly cite financial and past credit or banking history problems as reasons for not having a bank account, the out of banking population cites a growing mistrust toward the traditional banking system. Policymakers should consider these factors when designing policies aimed at increasing financial inclusion.
Lights Out: Political and Economic Determinants of Electricity Shutoffs in the United States
Srinivas Parinandi, Katherine Sevin & Tessa Provins
Publius: The Journal of Federalism, Summer 2025, Pages 512-530
Abstract:
In the United States, state governments play an essential role in balancing the interests of consumers and electricity providers. While scholars have explored how regulations are crafted, less attention has been paid to the impact of regulation, particularly on the disadvantaged. By analyzing data on over two decades of disconnections, we find that investor-owned utilities have significantly lower disconnection rates than municipal utilities, despite the latter's public-oriented mandate. We contend that the public-facing nature of municipalization makes unpopular redistribution more visible (and hence provided at lower levels) compared with private investor-owned utilities. We also find that having a renewable portfolio standard is associated with lower levels of disconnection, whereas deregulation and the direct election of commissioners have no discernible effect. These findings underscore how subnational policy variations shape essential service provision in the United States and have broad implications for regulation and human capital, given possible federal volatility in electricity policymaking.
The Effects of Local Taxes and Incentives on Entrepreneurship: Evidence from the Universe of U.S. Startups
Robert Fairlie et al.
University of California Working Paper, May 2025
Abstract:
This study presents the first causal analysis examining how a comprehensive set of local taxes and incentives affect startups, including those with and without employees. With new administrative data covering the universe of U.S. startups, we implement difference-in-differences designs around large changes in each tax or incentive. We find: (i) Tax increases reduce both the number of startups and their employment growth. (ii) Tax hikes and cuts have equal-and-opposite effects. (iii) When examining different types of taxes, corporate taxes have the most notable effect on startup activity. (iv) New tax credits stimulate startup formation and reduce exits, with R&D credits showing the largest impact. (v) Point estimates are larger in border counties, suggesting heightened geographic sensitivity and cross-state responsiveness among startups.
Revisiting the Interest Rate Effects of Federal Debt
Michael Plante, Alexander Richter & Sarah Zubairy
NBER Working Paper, July 2025
Abstract:
This paper revisits the relationship between federal debt and interest rates, which is a key input for assessments of fiscal sustainability. Estimating this relationship is challenging due to confounding effects from business cycle dynamics and changes in monetary policy. A common approach is to regress long-term forward interest rates on long-term projections of federal debt. We show that issues regarding nonstationarity have become far more pronounced over the last 20 years, significantly biasing the recent estimates based on this methodology. Estimating the model in first differences addresses these concerns. We find that a 1 percentage point increase in the debt-to-GDP ratio raises the 5-year-ahead, 5-year Treasury rate by about 3 basis points, which is statistically and economically significant and highly robust. Roughly three-quarters of the increase in interest rates reflects term premia rather than expected short-term real rates.
Venture Capital and Startup Agglomeration
Jun Chen & Michael Ewens
Journal of Finance, August 2025, Pages 2153-2198
Abstract:
This paper examines venture capital's (VC) role in the geographic clustering of high-growth startups. We exploit a rule change that disproportionately impacted U.S. regions that historically lacked VC financing via a restriction of banks to invest in the asset class. A one-standard-deviation increase in VCs' exposure to the rule led to a 20% decline in fund size and a 10% decrease in the likelihood of raising a follow-on fund. Startups were not wholly cushioned: financing and valuations declined. Startups also moved out of impacted states after the rule change, likely exacerbating existing geographic disparity in entrepreneurship.