Free Digital Content Means Inflation Is Even Slower: Eco Pulse

Correcting official GDP for that cookie recipe you didn’t pay for
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Free content has exploded – from the game Candy Crush to online brownie recipes – yet economic data has yet to fully capture digital products. Doing so would boost growth while subtracting from already-tepid inflation, Fed research suggests.

Federal Reserve Bank of Philadelphia economist Leonard Nakamura’s analysis kicks off this week’s economic research wrap. We also look at the relationship between life expectancy and education in developed economies, at whether uncertainty alters U.K. growth, and how U.S. interest rates alter home prices around the world. Check back each week for the latest studies from around the world. 

Missing “free” growth in the U.S. 

Free digital content in the U.S. has boosted consumption in ways that official statistics often miss.

Adding in free online material – both advertising-supported and marketing-supported (think games on your phone or recipes from a cooking-product website) – increased annual real gross domestic product growth to a 1.53 percent rate from 2005 to 2015. That’s up from an official 1.42 percent rate, the new paper from Nakamura and his co-authors found. 

If their estimates are right, inflation is actually even weaker than official figures would suggest: core personal consumption expenditure deflators would have risen about 0.1 percentage point more slowly between 2005 and 2015. That’s a big deal, because inflation was already running under the Fed’s 2 percent goal for much of that period. 

This research gets a gold star for relevance – policy makers are already talking about it. Nakamura’s boss, Philadelphia Fed President Patrick Harker, has been referencing this paper during speeches and question and answer sessions with reporters, explaining that it probably exacerbates the low-inflation conundrum facing America’s central bank. 

Measuring the “Free” Digital Economy Within the GDP and Productivity Accounts
Published October 2017
Available on the Philadelphia Fed website

Weekly Demo(graphic) 

Across advanced economies, the more educated live longer, the Organization for Economic Cooperation and Development points out in a new study on inequality and retirement. A 25-year-old man with a university education can expect to live 7.5 years longer, on average, than his low-educated peer.  The gap shrinks as the population ages, but still exists for 65-year-olds. 

Preventing Ageing Unequally 
Published October 2017
Available on the OECD website

Uncertainty is not created equal

Increased financial uncertainty reduces economic activity, based on a new Bank of England analysis, but where the shock comes from is crucially important. Risks stemming from abroad shake output, while domestic shocks have little effect, the researchers find. That could be because country-specific uncertainty is automatically offset by exchange rate changes or is deliberately offset by monetary policy changes, the authors suggest. 

Does domestic uncertainty really matter for the economy?
Published Oct. 23, 2017
Available on the Bank Underground blog

How interest rates affect house prices

Homeowners around the world feel the impact of changes in short-term U.S. interest rates, new Bank for International Settlements research shows.

In the U.S., a 100 basis-point decline in short-term rates led to a 5 percentage point increase in real house prices after three years between 1970 and 1999, the analysis shows – an effect that grew even larger through 2015. In other advanced economies, a 100 basis-point fall in domestic short-term interest rates combined with an equivalent decline in the U.S. real rate came with a 3.5 percentage point increase in real house prices after three years. The effect went on to reach almost 5 percentage points after five years. “Most empirical studies assume that short-term interest rates do not influence house price growth other than through the domestic cost of borrowing,” the authors write. “The findings in this paper suggest that this view might be mistaken.” 

Interest rates and house prices in the United States and around the world
Published October 2017
Available on the Bank for International Settlements website

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