Economic Consequences of the Conflict in Ukraine

Andres Rodríguez-Clare, Mauricio Ulate, Jose P. Vasquez, 17 May 2022

Concerns about international trade have grown, as recent studies document a negative effect of Chinese import competition on US labour markets. This column provides a new framework to explain this observation, which relies on the presence of downward nominal wage rigidity in US labour markets. The increased competition from China improves US terms of trade, but nominal wage frictions prevent the labour market from adjusting, so that both employment and labour force participation fall in the short run. The welfare implications vary substantially across states, but the favourable terms-of-trade shock drives a positive overall effect.

Borağan Aruoba, Thomas Drechsel, 17 May 2022

The recent surge in inflation has put central banks back into the spotlight. This column proposes a novel method to determine exogenous changes in monetary policy. Using information in the language of documents that economists at the Federal Reserve Board prepare for Federal Open Market Committee meetings, it predicts changes in the target interest rate and obtains a measure of monetary policy shocks as the residual. The dynamic responses of macroeconomic variables to the identified shock measure are consistent with the theoretical consensus, and the estimated shocks are not contaminated by the ‘Fed information effect’.

Renjie Bao, Jan De Loecker, Jan Eeckhout, 17 May 2022

Since the 1980s, the pay of superstar workers has increased sharply, closely linked to the performance of the superstar firms that hire them. This column examines the contribution of monopoly power to manager pay. As firms grow in size, the contribution of the manager to the value of a firm increases, and firms are willing to bid higher to poach the best manager. Top managers are hired disproportionately by firms with market power in their sectors, and they get rewarded for it because better managers help increase the rents from market power.

Oleg Itskhoki, Dmitry Mukhin, 16 May 2022

Despite an increasing number of sanctions imposed on the Russian economy since its invasion of Ukraine in February 2022, the ruble has appreciated back to its pre-war level. This column argues that the prevalence of import over export sanctions and the financial repression imposed in Russia, which lowered the local demand for foreign currency, have driven the appreciation. Despite the opposite effects on the exchange rate, the sanctions on imports and exports are equivalent in terms of their impact on consumption, welfare, and government fiscal losses. Nonetheless, the level of the exchange rate remains relevant for imports, savings, and monetary policy.

Bo Cowgill, Andrea Prat, Tommaso Valletti, 16 May 2022

Industry concentration leads to increased market power, but can it also lead to increased political power? This question, first asked by Brandeis in 1914, is receiving renewed attention. This column investigates the effect of a merger on the amount of political activity of the merging firms. While theoretical predictions are ambiguous, US data from the past 20 years indicate that the average merger involving listed companies is associated with a 30% increase in lobbying spending. 

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