The ECB Is Talking, and the Public Is Hearing the Message

Central bank stories in newspapers match up with actions, research shows

Central banks may be data-dependent in making decisions, but they're increasingly word-dependent when it comes to managing the economy.

Ever since the global financial crisis and ensuing recession forced monetary authorities to cut their interest rates to zero, they've been using speeches, releases and other new communication tools to convince markets that they'll shore up growth and instill confidence. In Europe, the message seems to be coming through loud and clear, new research suggests. 

That's the first study in this week's economic research wrap, which also looks at the economic and cultural reasons for different flavors of populism and digs into the longer- and near-term drivers of tepid U.S. pay growth. Check back each Tuesday for new and interesting findings from around the globe. 

The ECB uses its words

The news media gets what the European Central Bank is trying to tell it, based on a new analysis out of the central bank. The researchers went through 9,000 articles published between January 1999 and March 2016 and used textual analysis to rate them on a hawk-dove scale. They found that adding their analysis to an expanded Taylor rule — a model for setting interest rates based on how much inflation and growth are deviating from their target rates —created a line that better fit actual policy. Relevant, the authors say, because it confirms that central bankers are successfully communicating their plans with the public.

Between hawks and doves: measuring central bank communication
Published July 2017
Available on the ECB website

Supply and demand in populism

Why is Europe experiencing a right-wing variant of populism, while Latin America  has historically seen the left-wing variety? The answer lies in supply and demand, according to Harvard University's Dani Rodrik.

On the demand side, economic fault lines created by globalization create potential public support for movements that are outside the political mainstream and promise to challenge the status quo. On the supply-side, populist movements succeed when they can provide a narrative and someone or some group to blame for their economic decline. Right-wing populists place that blame based on identity (think: immigrants), whereas left-wing populists point to elites and corporations.

"What may look like a racist or xenophobic backlash may have its roots in economic anxieties and dislocations," Rodrik writes. While immigrant inflows made the identity narrative salient in Europe and the U.S., rapid trade opening, International Monetary Fund programs and the entry of foreign corporations into the domestic market opened the door for a more economic, left-wing populism in Latin America. 

Populism and the Economics of Globalization
Published June 2017
Available on the NBER website 

U.S. wage gains flatten

Lifetime earnings gains have been flattening out: life-cycle pay growth for workers in the 1980 cohort has been slower than what workers in the 1940 cohort enjoyed.  

Why is this happening? It boils down in large part to education, based on a Federal Reserve Bank of St. Louis analysis. More people are going to college, and they're learn more skills while they're there. Because the college-educated are starting out the gate with more abilities, they see lower benefits from accumulating on-the-job experience, and their wages don't climb as much as they age.

On the other side of the coin, people who go to college are typically better at learning skills, making them more likely to experience skill-based wage growth. The group that skips college is made up of people for whom learning and wage growth is the least likely, which could be why their gains have moderated.

Why Are Life-Cycle Earnings Profiles Getting Flatter?
Published July 5
Available on the St. Louis Fed website

Weak industry signal on pay 

On a more short-term note, Morgan Stanley researchers aren't seeing a lot of reasons to feel optimistic about a pay pickup. Wage pressures are "narrow and isolated," economist Robert Rosener writes. Only 31 percent of industries are posting above-trend wage growth, versus a recent high of 62 percent in August 2016, with high-wage occupations staying on trend while middle-wage industries come in weak. Wage growth also seems to have peaked across a number of low-wage industries. 

Financial activities, transportation and warehousing and information services are among industries where the June wage gain marked an improvement over last year, while utilities, mining and retail saw the biggest slumps, based on Rosener's analysis. The takeaway? "With the diffusion of wage pressures across industries near lows since mid-2015, we see limited near-term momentum for wage growth." 

Wage Growth: Stuck in the Middle
Published July 7
Available to Morgan Stanley subscribers

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