FEBRUARY 5 2016

Fernando Eguren-Martin, Karen Mayhew, BoE: How important are interest rates for exchange rates? Many would say that when domestic interest rates rise (relative to abroad) the domestic currency will appreciate. But is it right to think like this? In this blog we use exchange rate theory to inform this discussion and to assess the importance of relative interest rates in accounting for past exchange rate moves. We find that relative interest rates typically move in the same direction as exchange rates but most of the time they account for a small share of exchange rate variation. However, academics might question our use of such a theory as its failure to forecast exchange rates is well documented. We show that this is somewhat unfair, as even if the framework is not very useful in terms of forecasting it is still a useful tool for decomposing past moves in exchange rates.

Robert Hall, Nicolas Petrosky-Nadeau, FED San Fransisco: Changes in Labor Participation and Household Income. A decline in labor force participation, particularly among workers in their prime, is a significant concern for policymakers. Over the past 15 years, the labor force participation (LFP) rate in the United States has fallen significantly. Various factors have contributed to this decline, including the aging of the population (Daly et al., 2013) and changes in welfare programs (Burkhauser and Daly, 2013). In this Economic Letter, we look at another potential contribution, the changing relationship between household income and the decision to participate in the labor force.

Kenneth Rogoff, Project Syndicate: The Great Escape from China. Since 2016 began, the prospect of a major devaluation of China’s renminbi has been hanging over global markets like the Sword of Damocles. No other source of policy uncertainty has been as destabilizing. Few observers doubt that China will have to let the renminbi exchange rate float freely sometime over the next decade. The question is how much drama will take place in the interim, as political and economic imperatives collide.

Lawrence Summers, Prospects: Will our children really not know economic growth? Not so fast, Robert Gordon. While as already noted, I find Gordon persuasive in his claim that the slowdown in productivity growth is not a figment of mis-measurement, the fact that measured median incomes will be stagnant does not mean that most people will not see rising standards of living over time. Incomes rise as people get further into their careers. And quality improvements and new products are improving life in ways that do not show up in economic statistics, though possibly less so than in the past. So it would be a mistake to regard our children as condemned to economic stasis even before considering Gordon’s various ideas for accelerating growth.

Ariel Kalil et al, Demography: Diverging destinies: maternal education and the developmental gradient in time with children. More highly educated mothers spent more time in all four parenting categories compared to less-educated mothers. College-educated mothers spent 67 more minutes in total care time with their children aged 0 to 2 compared to mothers with only a high school diploma. For children aged 3 to 5, the total care time increase was 21 more minutes and 22 minutes more for children aged 6 to 13. College-educated mothers spent 42 percent more time in basic care and 94 percent more time in play compared to mothers with a high school education. Highly educated mothers also invested 130 percent more time in management activities when their children were 6 to 13 years of age compared to mothers with a high school education.

Raj Chetty et al, NBER: Childhood Environment and Gender Gaps in Adulthood. The traditional gender gap in employment rates is reversed for children growing up in poor families: boys in families in the bottom quintile of the income distribution are less likely to work than girls. Second, these gender gaps vary substantially across counties and commuting zones in which children grow up. The degree of variation in outcomes across places is largest for boys growing up in poor, single-parent families. Third, the spatial variation in gender gaps is highly correlated with proxies for neighborhood disadvantage. Low-income boys who grow up in high-poverty, high-minority areas work significantly less than girls. These areas also have higher rates of crime, suggesting that boys growing up in concentrated poverty substitute from formal employment to crime. Together, these findings demonstrate that gender gaps in adulthood have roots in childhood, perhaps because childhood disadvantage is especially harmful for boys.

Jörg Claussen, Eszter Czibor, Mirjam C. van Praag, IZA: Women Do Not Play Their Aces: The Consequences of Shying Away. The underrepresentation of women at the top of hierarchies is often explained by gender differences in preferences. We find support for this claim by analyzing a large dataset from an online card game community, a stylized yet natural setting characterized by self-selection into an uncertain, competitive and male-dominated environment. We observe gender differences in playing behavior consistent with women being more averse towards risk and competition. Moreover, we demonstrate how "shying away" makes female players less successful: despite no gender gap in playing skills, women accumulate lower scores than men due to their relative avoidance of risky and competitive situations.

Orion Jones, Big Think: Iceland Is Officially Worshiping Norse Gods Again. For the first time since the Vikings sailed, the Icelandic publicare worshiping classical Norse gods like Odin, Thor, and Frigg at a public temple built in their honor. The worship of Odin, Thor, Freya and the other gods of the old Norse pantheon became an officially recognized religion exactly 973 years after Iceland’s official conversion to Christianity.