We use cookies on our website to give you the best online experience. Please know that if you continue to browse on our site, you agree to this use. You can always block or disable cookies using your browser settings. To find out more, please review our privacy policy.


Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

Comment Standards:
Comments are moderated and will not appear until the moderator has approved them.

Please submit appropriate comments. Inappropriate comments include content that is abusive, harassing, or threatening; obscene, vulgar, or profane; an attack of a personal nature; or overtly political.

In addition, no off-topic remarks or spam is permitted.

July 6, 2022

Workshop on Monetary and Financial History: Day Two

In yesterday's post, I discussed the first day of the Atlanta Fed's two-day virtual workshop on monetary and financial history. In today's post, I'll discuss the workshop's second day, which began with presentations by Maylis Avaro (University of Pennsylvania) and Caroline Fohlin (Emory University).

Avaro's paper Adobe PDF file format, coauthored with Vincent Bignon (Banque de France), examined the historical (19th-century) credit policies of the Banque de France using a comprehensive dataset of credits that the Banque extended during one year (1898). In its credit operations, the Banque attempted to offset regional economic shocks by providing directed credit to the affected regions. It provided credit only against collateral, and it intensely monitored counterparties, especially for riskiness of their business model. Econometric analyses show that the Banque tended to extend credit at branches experiencing regional shocks, but usually only to parties judged to be sufficiently prudent. This analysis also shows that the Banque favored banks over nonfinancial firms and existing over new counterparties. Avaro concluded by arguing that this historical example illustrates the potential benefits of central bank credit operations when appropriate risk management can limit moral hazard.

The discussant for this paper was Angela Redish (University of British Columbia). Redish argued Adobe PDF file format that the credit operations documented in the paper were somewhat different from what might be expected in other lender-of-last-resort situations, in which market disruptions might hinder assessments of risk and impair the value of collateral. Redish also questioned why private banks did not lend against the same sorts of collateral as the Banque, suggesting that some of the Banque's lending success might have been the result of its market power as the monopoly issuer of banknotes within France.

Fohlin's presentation Adobe PDF file format described a research program, undertaken with Stephanie Collet (Deutsche Bundesbank), to construct a comprehensive dataset of interwar German stock prices. Fohlin's presentation focused on data from the 1920s. These data span a number of major disruptions to the German economy, including the 1921–23 hyperinflation, the 1927 stock market crash, and the rise of the Nazi party. Volatility of individual stock prices and bid-ask prices were high during this unsettled period. Despite this volatility, micro analysis of the data shows that the German stock market was surprisingly liquid for most of the sample, with buy orders typically exceeding sell orders. Another surprise was that shares of new companies were as liquid as those of existing companies. Market illiquidity increased during the late 1920s, however, in the wake of the 1927 stock market bubble and ensuing market crash.

The discussant was Eugene White (Rutgers University), who suggested that the data collected by the authors could be applied to a number of interesting research topics. For example, the data could provide additional perspective on the performance of the interwar stock market if its performance were contrasted with the pre-1913 market. A greater understanding of the institutional background of the market—for example, regulatory structure and stock voting rights—would also be useful. White also questioned how much the release from wartime capital controls in1919 was behind the apparent vitality of the 1920s market. Finally, White suggested that the authors investigate the impact of Reichsbank regulatory policy, margin requirements in particular, on market liquidity.

Looking back, and ahead
The fourth session of the workshop consisted of a panel discussion of the past and future of money. The panelists were François Velde (Federal Reserve Bank of Chicago), Gary Gorton (Yale University), and Marc Flandreau (University of Pennsylvania),

Velde's presentation Adobe PDF file format considered possible roles for central bank digital currencies (CBDC) in the context of historical examples of monetary innovation. Velde observed that central banks arose from earlier, coin-based monetary systems, to fill gaps in those systems, first through giro transfers (a type of payment transfer between banks) and later through circulating currency. Originally most central banks only dealt with large-value payments, and even today most central banks are not retail-oriented. That could change with CBDCs, Velde noted, especially if future CBDCs incorporate innovative features such as smart contracts, although the property rights of information collected on CBDC users will be a contentious policy issue. Another unresolved issue regarding CBDCs is their role with respect to private digital currencies. Velde argued that competition between public and private moneys could be beneficial. Velde concluded by noting the monetary innovations are often the product of accidents or strong underlying trends, rather than conscious policy choices.

Gorton's presentation Adobe PDF file format focused on new forms of private money and associated policy issues. Gorton argued that all private money inherently has the problem of information asymmetry and that the classic solution to this problem is to create money with a par value so that its value does not have to constantly be reassessed in market transactions. Typically, par money is debt that is backed by other debt. This solution creates another problem, Gorton argued, which is that debt-backed money can be subject to runs and sudden loss of value when confidence is lost in the money's backing. Stablecoins—digital tokens that have safe asset backing—are susceptible to the same problems as paper-based forms of private money, as recent runs on stablecoins show. Gorton concluded by drawing on the history of paper currency to suggest that the only viable long-term solution to the run problem will be central bank monopoly of digital token issue.

Flandreau's presentation considered the impact of monetary innovations on international currency competition. Flandreau rejected the "unipolar" and "multipolar" interpretations of monetary history literature (basically, a tendency to converge toward one or more dominant currencies), instead arguing that the true nature of monetary evolution has been one of currency competition regimes. As an example, he cited a currency competition regime that centered around the bill of exchange, an important international payment instrument from the 14th through the early 20th centuries. Major European currencies competed for international status within this regime by developing dense markets for bills of exchange. However, latecomers to this currency competition (Germany, Japan, and the United States) increased their competitiveness through new infrastructure, such as international branch banking, and new payment instruments, such as telegraphic transfers. These innovations supported the rise of the US dollar as an international currency when bills of exchange fell from use during the 1930s. Flandreau saw this history as illustrating the idea that currency regimes depend on their underlying financial infrastructure and monetary instruments.

The conference's fifth session featured paper presentations by Sasha Indarte (University of Pennsylvania) and Marc Weidenmier (Chapman University). Indarte's paper Adobe PDF file format analyzed a dataset of sovereign bond defaults from 1869 to 1914, which was matched to a dataset of sovereign bond prices during the same period. Indarte described how a critical aspect of sovereign bond issue during this period was the reputation of the party underwriting the bond in the London financial markets. Econometric analyses show the presence of underwriter-related spillovers. More specifically, default of one sovereign bond issue typically depressed the prices of bonds with the same underwriter, after taking into account other observable factors. The reputation spillover effect is economically significant and evident for at least two years following a default. Indarte concluded by observing that this same pattern of underwriter spillover effects might be present in modern contexts such as syndicated lending.

Jonathan Rose (Federal Reserve Bank of Chicago) provided the discussion Adobe PDF file format . Rose noted that the effect of underwriter reputation, while well documented in the paper, was perhaps more critical in historical than modern contexts (citing mortgage-backed securities as an example), due to the sovereign bonds' lack of regulation or credit enhancement features. Rose also raised the possibility of self-selection in the data sample, with weaker bond issuers seeking out underwriters who were more willing to risk their reputations.

Weidenmier presented Adobe PDF file format new data series of US industrial production in the decades surrounding the Civil War (1840–1900), taken from a recent paper coauthored with Joseph David (Vanguard Group). The data series uses hand-collected, city-level data and are separated by Northern and Southern states. The data show that growth in Northern-state industrial production was little affected by the war. Southern-state industrial production, on the other hand, fell precipitously during the war and did not return to prewar levels until about 1875. Capital-intensive industrial production in Southern states was especially slow to recover. However, rapid growth resumed in the 1880s, perhaps because of the resolution of uncertainty regarding investor property rights following the end of Reconstruction.

The discussant for this paper was Mark Carlson (Board of Governors), who noted Adobe PDF file format that some of the regional differences documented in the paper might have been the result of the population's westward expansion, which was more pronounced in the North. He also suggested that the quality of some of the immediate postwar data in the South might have been poor, possibly biasing statistical results. Those concerns aside, a striking feature of the data is that the North did not see a postwar contraction, as occurred in the United States after World War II. Finally, Carlson proposed that the observed regional differentials might be attributable to the disruption of the banking system that the South experienced during the Civil War and its immediate aftermath.

The conference's final panel was a discussion of the evolution of the Fed's mission and governance. The panelists were Sarah Binder (George Washington University), Lev Menand (Columbia University), and Ned Prescott (Federal Reserve Bank of Cleveland).

Binder began the panel with an analysis Adobe PDF file format of the Fed's political independence drawn from her recent book with Mark Spindel. Binder proposed that the conventional view of the Fed as an agency insulated from short-term political pressures is incorrect, arguing that this view is overly rooted in struggles to control inflation during the 1970s and 1980s. Moreover, it overlooks both the historical importance of financial crises in shaping the Fed and the partisan context in which the Fed operates. Under this view, the Fed and Congress display interdependence, the Fed gaining political support and the Congress gaining the Fed's ability to quickly react in crises, as well as to absorb blame for unfavorable economic outcomes. Binder went on to argue that this interdependence has driven the structural evolution of the Fed, in the form of cycles whereby successive crises result in Congressional reforms of the Fed. Sensitivity of Fed policymakers to this cycle of reform has influenced many Fed policy decisions, Binder noted, its structural independence notwithstanding.

Menand's presentation Adobe PDF file format focused on the role of the Fed within the broader legal framework of the US monetary system. Although some legal scholars see the Fed as a "hodgepodge agency" with many unrelated functions, Menand argued that the Fed's role is a coherent one within the US monetary tradition, which "outsources" money creation to independent entities, including chartered commercial banks but, since 1913, also the Fed. The structure of the Fed also resonates with the US tradition of geographic diffusion of banking, as well as the tradition of bank supervision. In addition, independence of the Fed from the executive branch coheres with the general US tradition of outsourcing the task of money creation. However, Menand proposed that more recently, the Fed has ventured beyond its traditional boundaries through its interactions with shadow banks, which are entities that issue deposit-like liabilities but lack bank charters. Menand concluded by arguing that Fed actions to support shadow banks during financial disruptions in 2008 and 2020 have eroded traditional political limits regarding what the Fed is expected to accomplish.

Prescott's presentation Adobe PDF file format focused on the evolution of the research function at the Reserve Banks, drawing on a recent paper Adobe PDF file format coauthored with Michael Bordo. Prescott described how research was not emphasized at the Reserve Banks until the 1951 Treasury-Fed Accord, which granted the Federal Open Market Committee more independence in setting monetary policy. Prescott noted that during the 1950s and 1960s, this independence led to an increased emphasis on research, in part because more economists had become Reserve Bank presidents. During this period, the St. Louis Fed assumed the role of a "dissenting Reserve Bank," articulating policy positions based on monetarist ideas. During the 1970s, research conducted at the Minneapolis Fed fostered new approaches to monetary policy that incorporated the concept of rational expectations. Later, ideas promoted by researchers at the Richmond Fed (policy transparency) and the Cleveland Fed (inflation targeting) also came to influence Fed policymaking. Prescott concluded with the observation that these historical examples illustrate the value of the Fed's decentralized structure, in which alternative approaches to policy can be formulated and incorporated into the policy process.

July 5, 2022

Workshop on Monetary and Financial History: Day One

On May 23 and 24, the Federal Reserve Bank of Atlanta hosted a workshop on monetary and financial history. The workshop was organized by Atlanta Fed economist William Roberds, in cooperation with Michael Bordo (Rutgers University) and Warren Weber (Federal Reserve Bank of Minneapolis, retired). The workshop featured seven paper presentations, along with three panel discussions and a keynote lecture.

Exploring fiscal-monetary interaction
The first session of day one of the workshop featured three papers that examine interactions between monetary and fiscal policy.

The first paper Adobe PDF file format of the session was presented by Michael Bordo and Oliver Bush (Bank of England) and coauthored with Ryland Thomas (Bank of England). Their paper examines causes of the 1970s inflation in the United Kingdom, which was higher than in other advanced economies at the time. Bordo and Bush presented structural decompositions of the 1970s UK inflation. These decompositions suggest that a combination of fiscal responses to external shocks and passive monetary policy was the principal causal factor. The same decompositions suggest that fiscal reforms enacted during the 1980s and early 1990s enabled the Bank of England to reduce inflation to more acceptable levels.

In the discussion Adobe PDF file format, Joshua Hausman (University of Michigan) proposed that the authors emphasize narrative aspects of this historical episode. What economic models were most conducive to policies that led to double-digit inflation? Given that other countries were using the same models, why did reliance on these models result in worse inflation outcomes in the UK than elsewhere? Hausman also noted that the lower inflation rates achieved from the 1980s onward did not lead to uniformly better economic outcomes, in the form of higher trend economic growth, lower unemployment, and higher growth of real wages.

The fiscal-monetary theme continued with the second paper Adobe PDF file format of the session, which was presented by George Hall (Brandeis University) and co-authored with Thomas Sargent (New York University). Their paper compares the financing of US government expenditures associated with the COVID-19 pandemic to the financing of World Wars I and II, which gave rise to expenditures of comparable magnitude. Hall presented an accounting framework that decomposes wartime financing into three main components: taxes, debt, and money creation. This decomposition indicates that in contrast to expenditures during the two world wars, COVID-19 expenditures have been funded very little by taxes and largely by debt. Also different from the world wars is the fact that much of the COVID-19 debt has taken the form of monetary assets, interest-bearing Fed reserves, and reverse repos. Hall suggested that the experience of the world wars indicates that inflation will eventually amortize much of the debt induced by COVID-19.

The Hall and Sargent paper was discussed Adobe PDF file format by Chris Meissner (University of California, Davis). Meissner argued that the COVID-19 shock was different from the world wars insofar as it was largely unanticipated, simultaneously global, and associated with widespread financial market disruptions. For this reason, reliance on debt funding might have been a more appropriate policy than for either of the war episodes. However, Meissner also suggested that reliance on debt financing might have significantly reduced the United States' ability to respond to future external shocks.

The final paper Adobe PDF file format of the first session was presented by Eric Leeper (University of Virginia) and coauthored with Margaret Jacobson (Board of Governors) and Bruce Preston (University of Melbourne). Their paper focuses on the performance of the US economy during the Great Depression and argues that the economy's initial recovery in the early years of the Roosevelt administration can be attributed to fiscal expansion combined with the repeal of the gold standard. Leeper argued that latter policy enabled the Fed to finance much of Roosevelt's fiscal expansion via unbacked bonds, but that the recovery was then paused by more restrictive fiscal policies adopted after 1937.

Kris Mitchener (Santa Clara University) discussed Adobe PDF file format this paper in the context of the large literature on the Great Depression, which has generally emphasized monetary rather than fiscal policy as a driving force in the initial Roosevelt recovery. Mitchener noted that for this reason, the paper's fiscal-monetary focus represents a new explanation of the post-1933 recovery. However, Mitchener also noted that during the Depression, most individual Treasury bond holdings were limited to higher-income households and that this heterogeneity would matter for the paper's arguments. In addition, banks held many bonds, and it would be desirable to model the effects of fiscal expansion on banks' balance sheets. Additionally, Mitchener recommended that the authors consider the effects of US policies on its international trade.

Putting inflation into historical perspective
The second session of the conference featured a panel discussion of the current inflationary outlook in the context of earlier inflationary episodes. The panelists were Robert Hetzel (Federal Reserve Bank of Richmond, retired), Jeremy Rudd (Board of Governors), and Mickey Levy (Berenberg Capital Markets).

Hetzel proposed that there are enough commonalities of the current situation with historical episodes—particularly the inflationary acceleration experienced in the 1960s and 1970s—for the Federal Open Market Committee to consider formally integrating monetary history into the policymaking process. He argued Adobe PDF file format that this integration would lead to a more transparent statement of the FOMC's monetary standard.

Drawing on his experience at the Richmond Fed during the 1970s, Hetzel recalled the Federal Reserve's intense resistance at that time to explicitly articulating policy objectives. He argued that although there have since been improvements, the Federal Open Market Committee (FOMC) could better articulate a monetary standard through integration of historical perspectives into policymaking. More specifically, this proposal would include (1) establishment of a committee of monetary historians that would report directly to the FOMC, (2) a restructuring of the Teal Book (the briefing document prepared by the Board of Governors staff for FOMC meetings) to include a historical breakdown of how the economy got to its current state, and (3) replacement of the FOMC's current Summary of Economic Projections, which reports a collection of individual forecasts, with a consensus FOMC forecast that would be informed by consultations with the historian committee in part (1) of the proposal and the historical breakdown in part (2).

Rudd's presentation Adobe PDF file format focused on potential changes in underlying inflation dynamics observed since the start of the COVID-19 pandemic. Rudd observed that prepandemic, Fed policymakers had been able to rely on stable long-term trend inflation in the US economy, as well as a flat Phillips curve (a negative correlation between unemployment and inflation), although the factors giving rise to these favorable conditions were not well understood. This lack of understanding has hindered Fed policymaking post-COVID, when inflation has increased in part due to large relative price shocks, creating uncertainty as to whether trend inflation has now moved higher. To overcome this uncertainty, Rudd argued that it might be useful to examine historical episodes and, particularly, the increase in trend inflation observed during the late 1960s.

Rudd proposed that the underlying dynamics in the 1960s were different from those of the current economy, because of less anchored long-term inflation trends and a steeper Phillips curve. Hence, we should reject a repeat of 1960s-style overheating as an explanation for the recent pickup in inflation. A commonality with the 1960s, however, is that policies adopted then seemed reasonable at the time, and policymakers didn't foresee them as fostering persistent inflation. A major question for policymakers, then as now, is whether the recent acceleration in inflation reflects a fundamental shift in the structure of the economy. Rudd concluded by noting that by the time this question is answered, reversing any increase in trend inflation could be difficult.

Levy's discussion Adobe PDF file format focused on a recent research paper coauthored Michael Bordo. The paper surveys cyclical patterns of Fed policymaking over its entire history, from 1914 until present. Bordo and Levy argue that in these cycles, the Fed has had a general tendency to wait too long to remove monetary accommodation. They cite four factors behind this tendency: shifting doctrines about how monetary policy should be conducted, ambiguity surrounding the Fed's dual mandate, misreads of data on the state of the economy, and political pressures.

Levy proposed that these same factors have been present in the most recent policy cycle, leading to delayed removal of accommodation. Movement to a neutral level of policy interest rates will now be difficult, he argued, and—given current negative real interest rates—a hard landing has a high probability. Levy concluded with three recommendations for Fed policy going forward. First, the Fed should place more emphasis on rules-based policy (for example, a type of Taylor rule) as a benchmark. Second, the Fed should adopt a less ambiguous interpretation of its dual mandate. Third, the Fed should pay more attention to the lessons of history and incorporate these lessons into its policy doctrine.

The conference's keynote lecture Adobe PDF file format was delivered by Barry Eichengreen (University of California, Berkeley). Eichengreen's presentation surveyed the evolution of payments instruments over the past millennium, from medieval-era banknotes in China to today's digital forms of payment. A theme of the presentation was increasing technological efficiency: transactions in paper money were more efficient than the physical transfer of coins, and modern types of electronic transactions are more efficient still. The shift towards digital forms of payment has recently accelerated, Eichengreen observed, because of the COVID-19 epidemic, which led consumers to prefer online forms of payment. This shift has occurred in virtually every nation with a sufficiently advanced cellphone network, but especially in Sweden, which coincidentally was also an early adopter of printed banknotes.

Eichengreen noted that a factor that has worked against more widespread adoption of advanced digital forms of payment is that in most countries (with exceptions such as Sweden) these are not ubiquitous. Network externalities may soon lead to the emergence of dominant private forms of digital payment, however, but such dominance could result in monopoly pricing and the need for regulation. Blockchain technology alone will not by itself resolve issues with digital payments. Stablecoins have the potential to supplant paper currency for many purposes, but monetary history teaches that fractionally backed stablecoins might be susceptible to runs, again suggesting a role for regulation.

The lecture concluded with the observation that retail-level central bank digital currencies (CBDCs) might offer advantages in terms of ubiquity and stability, but CBDCs would simultaneously pose operational challenges for central banks and could encourage disintermediation of commercial banks. For these reasons, Eichengreen suggested that CBDCs are more likely to be issued at the wholesale level—for example, to commercial banks—and these banks would in turn manage CBDC transactions that their customers initiate.

In his closing remarks, Eichengreen argued that although paper currency has been a ubiquitous form of money only within a relatively short period of human history, its advantages mean that it will likely persist even as digital forms of payment become more widespread. As the latter become more prevalent, strong network externalities will necessitate government involvement, both through the provision of CBDCs and the regulation of private forms of money.

In tomorrow's post, I'll cover the presentations and discussions in the workshop's second day.

March 22, 2019

A Different Type of Tax Reform

Two interesting, and important, documents crossed our desk last week. The first was the 2019 edition of the Economic Report of the President. What particularly grabbed our attention was the following statement from Chapter 3:

Fundamentally, when people opt to neither work nor look for work it is an indication that the after-tax income they expect to receive in the workforce is below their "reservation wage"—that is, the minimum value they give to time spent on activities outside the formal labor market.

That does not strike us as a controversial proposition, which makes the second of last week's documents—actually a set of documents from the U.S. Department of Health and Human Services (HHS)—especially interesting.

In that series of documents, HHS's Nina Chien and Suzanne Macartney point out a couple of things that are particularly important when thinking about the effect of tax rates on after-tax income and the incentive to work. The first, which is generally appreciated, is that the tax rates that matter with respect to incentives to work are marginal tax rates—the amount that is ceded to the government on the next $1 of income received. The second, and less often explicitly recognized, is that the amount ceded to the government includes not only payments to the government (in the form of, for example, income taxes) but also losses in benefits received from the government (in the form of, for example, Medicaid or child care assistance payments).

The fact that effective marginal tax rates are all about the sum of explicit tax payments to the government and lost transfer payments from the government applies to us all. But it is especially true for those at the lower end of the income distribution. These are the folks (of working age, anyway) who disproportionately receive means-tested benefit payments. For low-wage workers, or individuals contemplating entering the workforce into low-wage jobs, the reduction of public support payments is by far the most significant factor in effective marginal tax rates and the consequent incentive to work and acquire skills.

The implication of losing benefits for an individual's effective marginal tax rate can be eye-popping. From Chien and Macartney (Brief #2 in the series):

Among households with children just above poverty, the median marginal tax rate is high (51 percent); rates remain high (never dipping below 45 percent) as incomes approach 200 percent of poverty.

Our own work confirms the essence of this message. Consider a representative set of households, with household heads aged 30–39, living in Florida. (Because both state and local taxes and certain transfer programs vary by state, geography matters.) Now think of calculating the wealth for each household—wealth being the sum of their lifetime earnings from working and the value of their assets net of liabilities—and grouping the households into wealth quintiles. (In other words, the first quintile would the 20 percent of households with the lowest wealth, the fifth quintile would be the 20 percent of households with the highest wealth.)

What follows are the median effective marginal tax rates that we calculate from this experiment:

Wealth percentile

Median Effective Marginal Tax Rate

Lowest quintile


Second quintile


Third quintile


Fourth quintile


Highest quintile


Note: The methodology used in these calculations is described here and here.
Source: 2016 Survey of Consumer Finances, the Fiscal Analyzer

Consistent with Chien and Macartney, the median effective marginal tax rates for the least wealthy are quite high. Perhaps more troubling, underlying this pattern of effective tax rates is one especially daunting challenge. The source of the relatively high effective rates for low-wealth individuals is the phase-out of transfer payments, some of which are so abrupt that they are referred to as benefits, or fiscal, cliffs. Because these payments differ widely across family structure, income levels within a quintile, and state law, the marginal tax rates faced by individuals in the lower quintiles are very disparate.

Note: The methodology used in these calculations is described here and here.
Source: 2016 Survey of Consumer Finances, the Fiscal Analyzer

The upshot of all of this is that "tax reform" aimed at reducing the disincentives to work at the lower end of the income scale is not straightforward. Without such reform, however, it is difficult to imagine a fully successful approach to (in the words of the Economic Report) "[increasing] the after-tax return to formal work, thereby increasing work incentives for potential entrants into the labor market."



March 23, 2018

What Are Businesses Saying about Tax Reform Now?

In a recent macroblog post, we shared some results of a joint national survey that is an ongoing collaboration between the Atlanta Fed, Nick Bloom of Stanford University, and Steve Davis of the University of Chicago, and Jose Barrero of Stanford University. (By the way, we're planning on calling this work the "Survey of Business Executives," or SBE.).

In mid-November, we posed this question to our panel of firms:

If passed in its current form, how would the Tax Cuts and Jobs Act affect your capital expenditures in 2018?

At the time, we (and perhaps others) were a little surprised to find that roughly two-thirds of respondents indicated that tax reform hasn't enticed them into changing their investment plans for 2018. Our initial interpretation was that the lack of an investment response by firms made it unlikely that we'd see a sharp acceleration in output growth in 2018.

Another interpretation of those results might be that firms were unwilling to speculate on how they'd respond to legislation that was not yet set in stone. Now that the ink has been dry on the bill for a while, we decided to ask again.

In our February survey—which was in the field from February 12 through February 23—we asked firms, "How has the recently enacted Tax Cuts and Jobs Act (TCJA) led you to revise your plans for capital expenditures in 2018?" The results shown below—restricted to the 218 firms that responded in both November 2017 and February 2018—suggest that, if anything, these firms have revised down their expectations for this year:

You may be thinking that perhaps firms had already set their capital expenditure plans for 2018, so asking about changes in firms' 2018 plans isn't too revealing—which is why we asked them about their 2019 plans as well. The results (showing all 272 responses in February) are not statistically different from their 2018 response. Roughly three-quarters of firms don't plan to change their capital expenditure plans in 2019 as a result of the TCJA:

These results contain some nuance. It seems that larger firms (those with more than 500 employees) responded more favorably to the tax reform. But it is still the case that the typical (or median) large firm has not revised its 2019 capex plans in response to tax changes.

Why the disparity between smaller and larger firms? We're not sure yet—but we have an inkling. In a separate survey we had in the field in February—the Business Inflation Expectations (BIE) survey—we asked Sixth District firms to identify their tax reporting structure and whether or not they expected to see a reduction in their tax bill as a result of the TCJA. Larger firms—which are more likely to be organized as C corporations—appear to be more sure of the TCJA's impact on their bottom lines. Conversely, smaller "pass-through" entities appear to be less certain of its impact, as shown here:

For now, we're sticking with our initial assessment that the potential for a sharp acceleration in near-term output growth is limited. However, there is some upside risk to that view if more pass-through entities start to see significantly smaller tax bills as a result of the TCJA.