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1. Why Diagnostic Expectations Cannot Replace REH

Author:
Roman Frydman and Halina Frydman
Publication Date:
01-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Gennaioli and Shleifer (GS) have proposed diagnostic expectations (DE) as an empirically-based approach to specifying participants’ expectations, which, like REH, can be applied in every model. Beyond its supposedly general applicability, GS’s formalization of DE implies that participants systematically and predictably overreact to news. Here, we present a formal argument that Kahneman and Tversky’s compelling empirical findings, and those of other behavioral economists, do not provide a basis for a general approach to specifying participants’ “predictable errors.” We also show that the overreaction of participants’ expectations is not a regularity, but rather an artifact of GS’s particular specification of DE.
Topic:
Economics, Models, and Predictability
Political Geography:
Global Focus

2. Why Diagnostic Expectations Cannot Replace REH

Author:
Roman Frydman and Halina Frydman
Publication Date:
01-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Gennaioli and Shleifer (GS) have proposed diagnostic expectations (DE) as an empirically-based approach to specifying participants’ expectations, which, like REH, can be applied in every model. Beyond its supposedly general applicability, GS’s formalization of DE implies that participants systematically and predictably overreact to news. Here, we present a formal argument that Kahneman and Tversky’s compelling empirical findings, and those of other behavioral economists, do not provide a basis for a general approach to specifying participants’ “predictable errors.” We also show that the overreaction of participants’ expectations is not a regularity, but rather an artifact of GS’s particular specification of DE.
Topic:
Economics, Academia, and Models
Political Geography:
Global Focus

3. After the Allocation: What Role for the Special Drawing Rights System?

Author:
Tobias Pforr, Fabian Pape, and Steffen Murau
Publication Date:
03-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
In August 2021, the IMF made a new SDR allocation to help ease pandemic-induced financial strains in the Global South. This paper assesses the potential of the SDR system to address debt- related problems in global finance. We analyze the SDR system as a web of interlocking balance sheets whose members can use SDR holdings—the system’s tradable assets—for conversion into usable currency as a perpetual low-interest loan or to make payments to each other. Using original IMF data, we study how the system has been practically used since 1990. Though widely perceived as a solution in search of a problem in the post-Bretton Woods era, we find that the SDR system provides three mechanisms through which IMF members borrow and lend usable currency to each other, with different strings attached: first, transactions by agreement; second, the IMF’s core lending facilities for which the SDR system offers additional resources; and third, IMF-sponsored Trusts which seek to harness the SDR system for development purposes and are the basis for the current idea of ‘voluntary channeling’. Overall, given the SDR system’s idiosyncratic accounting rules, the new allocation can improve the liquidity position of a country and offer some limited avenues for sovereign debt restructuring but comes with new interest and exchange rate risks. Voluntary channeling cannot happen without a wealth transfer, neither the SDR allocation nor the use of Trusts can overcome this problem. Still, Trusts can be a useful instrument to help with debt forgiveness and to ensure that borrowed funds are used for their intended purpose.
Topic:
Economics, International Cooperation, Finance, and IMF
Political Geography:
Global Focus

4. An Economic Defense of Multiple Antitrust Goals: Reversing Income Inequality and Promoting Political Democracy

Author:
Mark Glick
Publication Date:
03-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Two recent papers by prominent antitrust scholars argue that a revived antitrust movement can help reverse the dramatic rise in economic inequality and the erosion of political democracy in the United States. Both papers rely on the legislative history of the key antitrust statutes to support their case. Not surprisingly, their recommendations have been met with alarm in some quarters and with skepticism in others. Such proposals by antitrust reformers are often contrasted with the Consumer Welfare Standard that pervades antitrust policy today. The Consumer Welfare Standard suffers from several defects: (1) It employs a narrow, unworkable measure of welfare; (2) It excludes important sources of welfare based on the assumption that antitrust seeks only to maximize wealth; (3) It assumes a constant and equal individual marginal utility of money; and (4) It is often combined with extraneous ideological goals. Even with these defects, however, if applied consistent with its theoretical underpinnings, the consideration of the transfer of labor rents resulting from a merger or dominant firm conduct is supported by the Consumer Welfare Standard. Moreover, even when only consumers (and not producers) are deemed relevant, the welfare of labor still should consistently be considered part of consumer welfare. In contrast, fostering political democracy—a prominent traditional antitrust goal that was jettisoned by the Chicago School—falls outside the Consumer Welfare Standard in any of its constructs. To undergird such important broader goals requires that the Consumer Welfare Standard be replaced with the General Welfare Standard. The General Welfare Standard consists of modern welfare economics modified to accommodate objective analyses of human welfare and purged of inconsistencies.
Topic:
Economics, Democracy, Income Inequality, and Antitrust Law
Political Geography:
Global Focus

5. Government Deficits and Interest Rates: A Keynesian View

Author:
Brett Palatiello and Philip Pilkington
Publication Date:
04-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We test the neoclassical loanable funds model which postulates that, ceteris paribus, government borrowing increases the long-term rate of interest. The empirical literature exploring such a connection remains largely mixed. We clarify the conflicting results by deploying an ARDL model to decompose the relationship in the United States into long and short-run effects across multiple measures of the government deficit and long-term interest rate. We find a tendency for changes in the deficit to increase long-term interest rates in the short run but the effect is reversed in the long run. We argue that these results are consistent with John Maynard Keynes’ view of the long-term rate as being heavily influenced by monetary policy, central bank credibility and market convention.
Topic:
Economics, Governance, Economic Theory, Keynes, and Deficit
Political Geography:
Global Focus

6. Setting the Record Straight on the Libertarian South African Economist W. H. Hutt and James M. Buchanan

Author:
William Darity Jr., M'Balou Camara, and Nancy MacLean
Publication Date:
06-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
In their stormy response to Nancy MacLean’s book Democracy in Chains, some academics on the libertarian right have conducted a concerted defense of Nobel Laureate James Buchanan’s credentials as an anti-racist, or at least a non-racist. An odd component of their argument is a claim of innocence by association: the peripatetic South African economist and Mont Pelerin Society founding member William Harold Hutt was against apartheid; Buchanan was a friend and supporter of Hutt; therefore, Buchanan could not have been abetting segregationists with his support for public funding of segregationist private schools. At the core of this chain of argument is the inference that Hutt’s opposition to apartheid proves that Hutt himself was committed to racial equality. However, just as there were white supremacists who opposed slavery in the United States, we demonstrate Hutt was a white supremacist who opposed apartheid in South Africa. We document how Hutt embraced notions of black inferiority, even in The Economics of the Colour Bar, his most ferocious attack on apartheid. Whether or not innocence by association is a sound defense of anyone’s ideology or conduct, Hutt, himself, was not innocent of white supremacy.
Topic:
Economics, Discrimination, Racism, and Libertarianism
Political Geography:
Global Focus

7. Inflation in the Time of Corona and War

Author:
Servaas Storm
Publication Date:
06-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Reliance on established macroeconomic thinking is not of much use in trying to understand what to do in response to the constellation of forces driving up inflation in these times of COVID-19 and war. This paper attempts to reduce the heat and turn up the light in the debate on the return of high inflation and looming stagflation—by providing evidence-based answers to the main (policy) questions concerning the return of high inflation: is the increased inflation due to (global) supply and/or demand factors? Is the inflation in the US exceptional or are other OECD and emerging economies experiencing similar inflationary pressures? Is the increase in inflation permanent or transitory? Can the Fed safely bring down inflation? Is fiscal policy the underlying cause of inflation? Are there alternative, less socially costly, ways to bring inflation down? And what will happen to inflation in the longer run, when the US and other economies will face the impacts of global warming?
Topic:
Economics, War, Inflation, and COVID-19
Political Geography:
Global Focus

8. Working Paper Permanent Scars: The Effects of Wages on Productivity

Author:
Claudia Fontanari and Antonella Palumbo
Publication Date:
07-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper explores how stagnating real wages may have contributed to the slowdown of US productivity. Through shift-share analysis, we find that after a sharp change in distribution against wages, some historically high-productivity sectors (like manufacturing) switched towards slower productivity growth. This supports our hypothesis that the anemic growth of productivity may be partly due to the trend toward massive use of cheap labor. Our estimation of Sylos Labini’s productivity equation confirms the existence of two direct effects of wages, one acting through the incentive to mechanization and the other through the incentive to reorganize labor use. We also show that labor ‘weakness’ may exert a further negative effect on labor productivity. On the whole, we find that a persistent regime of low wages may determine very negative long-term consequences on the economy.
Topic:
Economics, Labor Issues, Economic Theory, and Wages
Political Geography:
Global Focus

9. Monetary Policy for the Climate? A Money View Perspective on Green Central Banking

Author:
Jakob Vestergaard
Publication Date:
07-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Central banks can potentially influence the investment decisions of private financial institutions, which in turn will create incentives towards green technology adoption and development of lower emission business models. This paper examines how monetary policies can be deployed to promote a greening of finance. To guide the efforts, the paper mobilizes the Money View literature. This enables a comparative assessment of different monetary policy options. The main finding is that a promising way forward for green monetary policy is to adopt a strategy of expanding collateral eligibility through positive screening and widening haircut spreads to change relative incentives in favor of green over brown assets.
Topic:
Climate Change, Economics, Monetary Policy, Banking, and Green Transition
Political Geography:
Global Focus

10. The Role of Public REITs in Financialization and Industry Restructuring

Author:
Rosemary Batt, Eileen Appelbaum, and Tamar Katz
Publication Date:
07-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Real Estate Investment Trusts (REITs) are important but little studied financial actors that control over $3.5 trillion in gross assets and over 500,000 properties in the U.S. Yet they have been largely ignored because tax rules define them as ‘passive investors.’ The evidence in this report shows that they are actually financial actors that aggressively buy up property assets and manage them to extract wealth at taxpayers’ expense. This study identifies the powerful impact that REITs, as owners of the real estate that houses productive enterprises, have had on operating companies and on the US economy more generally. It draws on case study evidence from markets where REITs have a major presence – nursing homes, hospitals, and hotels. The tax treatment of REITs has facilitated a growing and worrying influence on health care markets in particular at taxpayer expense.
Topic:
Health Care Policy, Finance, Tax Systems, and Banking
Political Geography:
Global Focus

11. Navigating the Crises in European Energy

Author:
Michael Grubb
Publication Date:
09-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The energy crisis engulfing Europe is a crisis of both gas and electricity markets, with huge cost impacts on consumers across all European countries. In Britain, half of typical household energy expenditure arises from electricity. This paper examines how the cost of gas-powered generation feeds through to electricity bills, on the principle of marginal cost pricing, setting the price for most of the time though it accounts for only about 40% of GB generation. Combined with the steep decline in wind and solar costs over the past decade, this has resulted in an unprecedented degree of ‘cost inversion’ in the electricity system. We offer estimates of the increase of revenues across the wholesale market, and outline five principles for reform for addressing the combined challenges of energy costs and accelerating low-carbon transition.
Topic:
Climate Change, Energy Policy, Environment, Green Technology, and Energy Crisis
Political Geography:
Global Focus

12. Inflation in the Time of Corona and War: The Plight of the Developing Economies

Author:
Servaas Storm
Publication Date:
11-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Reliance on established macroeconomic thinking is not of much use in trying to understand what to do in response to the constellation of forces driving up inflation and slowing down growth in these times of COVID-19 and war. This paper attempts to reduce the heat and turn up the light in the debate on the return of high inflation and looming stagflation—by providing evidence-based answers to key (policy) questions concerning the return of high inflation: How close are the parallels between the current conjuncture and the 1970s? What are the differences? Does what is currently happening already amount to stagflation? Can central bankers engineer a ‘soft landing’ of their economies or are we already poised for a deep (global) recession? What are the likely spill- over effects of monetary tightening in the US on the emerging economies? What, if anything, can we learn from the monetary and fiscal policy experiences and policy mistakes of the 1970s? And, finally, are there alternative, less socially costly, ways to bring inflation down?
Topic:
Economics, War, Conflict, Inflation, Pandemic, and COVID-19
Political Geography:
Global Focus

13. Zombies at Large? Corporate Debt Overhang and the Macroeconomy

Author:
Oscar Jorda, Martin Kornejew, Moritz Schularick, and Alan Taylor
Publication Date:
11-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
What are the macroeconomic consequences of business credit booms? Are they as dangerous as household credit booms? If not, why not? We answer these questions by collecting data on non- financial business liabilities (primarily bank loans and corporate bonds) for 17 advanced economies over the past 150 years. Unlike household credit, business credit booms are rarely followed by macroeconomic hangovers. Data on debt renegotiation costs—instrumented by a country’s legal tradition—show that frictions to debt resolution make recessions deeper and longer—an important factor in explaining the differences with household credit booms.
Topic:
Debt, Economics, Macroeconomics, and Corporations
Political Geography:
Global Focus

14. Central Banks Caught Between Market Liquidity and Fiscal Disciplining: A Money View Perspective on Collateral Policy

Author:
Jakob Vestergaard and Daniela Gabor
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Despite much attention to unconventional monetary policies after the financial crisis, the collateral policies of central banks are rarely discussed. And when they are, the haircuts applied to assets pledged to access central bank liquidity tend not to be analyzed. An exception to these trends is the recent work by Nyborg (2017), who argues that the collateral policies adopted by the European Central Bank (ECB) aggravated the sovereign debt crisis and put the survival of the euro at risk. Taking our point of departure in the money view literature (Mehrling 2011), we argue however that Nyborg’s critique of the ECB’s crisis response is misguided and that his proposal to deepen and reinforce the ECBs role in the fiscal disciplining of member states would be procyclical and destabilizing. Through our analysis of Nyborg’s work and the ECBs crisis response, we identify core principles for countercyclical collateral policies suitable for market-based financial systems.
Topic:
Monetary Policy, Financial Crisis, Finance, and Banking
Political Geography:
Global Focus

15. Can Panel Data Methodologies Determine the Impact of Climate Change on Economic Growth?

Author:
Richard A. Rosen
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Several major papers have been published over the last ten years claiming to have detected the impact of either annual variations in weather or climate change on the GDPs of most countries in the world using panel data-based statistical methodologies. These papers rely on various multivariate regression equations which include the annual average temperatures for most countries in the world as one or more of the independent variables, where the usual dependent variable is the change in annual GDP for each country from one year to the next year over 30-50 year time periods. Unfortunately, the quantitative estimates derived in these papers are misleading because the equations from which they are calculated are wrong. The major reason the resulting regression equations are wrong is because they do not include any of the appropriate and usual economic factors or variables which are likely to be able to explain changes in GDP/economic growth whether or not climate change has already impacted each country’s economy. These equations, in short, exhibit suffer from “omitted variable bias,” to use statistical terminology.
Topic:
Climate Change, Economics, Economic Growth, and Methodology
Political Geography:
Global Focus

16. Asset Prices Under Knightian Uncertainty

Author:
Roman Frydman, Søren Johansen, Anders Rahbek, and Morten Tabor
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We extend Lucas’s classic asset-price model by opening the stochastic process driving dividends to Knightian uncertainty arising from unforeseeable change. Implementing Muth’s hypothesis, we represent participants’ expectations as being consistent with our model’s predictions and formalize their ambiguity- averse decisions with maximization of intertemporal multiple-priors utility. We characterize the asset-price function with a stochastic Euler equation and derive a novel prediction that the relationship between prices and dividends undergoes unforeseeable change. Our approach accords participants’ expectations, driven by both fundamental and psychological factors, an autonomous role in driving the asset price over time, without presuming that participants are irrational.
Topic:
Economics, Models, and Price
Political Geography:
Global Focus

17. Cordon of Conformity: Why DSGE models Are Not the Future of Macroeconomics

Author:
Servaas Storm
Publication Date:
02-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The Rebuilding Macroeconomic Theory Project, led by David Vines and Samuel Wills (2020), is an important, albeit long overdue, initiative to rethink a failing mainstream macroeconomics. Professors Vines and Wills, who must be congratulated for stepping up to the challenge of trying to make mainstream macroeconomics relevant again, call for a new multiple-equilibrium and diverse (MEADE) paradigm for macroeconomics. Their idea is to start with simple models, ideally two-dimensional sketches, that explain mechanisms that can cause multiple equilibria. These mechanisms should then be incorporated into larger DSGE models in a new, multiple-equilibrium synthesis – to see how the fundamental pieces of the economy fit together, subject to it being ‘properly micro-founded’. This paper argues that the MEADE paradigm is bound to fail, because it maintains the DSGE model as the unifying framework at the center of macroeconomic analysis. The paper reviews 10 fundamental weaknesses inherent in DSGE models which make these models irreparably useless for macroeconomic policy analysis. Mainstream macroeconomics must put DSGE models, once and for all, in the Museum of Implausible Economic Models – and learn important lessons from non-DSGE macroeconomic approaches.
Topic:
Economics, Economic Growth, Macroeconomics, Money, Demand, and Models
Political Geography:
Global Focus

18. Lessons for the Age of Consequences: COVID-19 and the Macroeconomy

Author:
Servaas Storm
Publication Date:
03-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Based on comparative empirical evidence for 22 major OECD countries, I argue that country differences in cumulative mortality impacts of SARS-CoV-2 are largely caused by: (1) weaknesses in public health competence by country; (2) pre-existing country-wise variations in structural socio-economic and public health vulnerabilities; and (3) the presence of fiscal constraints. The paper argues that these pre-existing conditions, all favorable to the coronavirus, have been created, and amplified, by four decades of neoliberal macroeconomic policies – in particular by (a) the deadly emphasis on fiscal austerity (which diminished public health capacities, damaged public health and deepened inequalities and vulnerabilities); (b) the obsessive belief of macroeconomists in a trade-off between ‘efficiency’ and ‘equity’, which is mostly used to erroneously justify rampant inequality; (c) the complicit endorsement by mainstream macro of the unchecked power over monetary and fiscal policy-making of global finance and the rentier class; and (d) the unhealthy aversion of mainstream macro (and MMT) to raising taxes, which deceives the public about the necessity to raise taxes to counter the excessive liquidity preference of the rentiers and to realign the interests of finance and of the real economy. The paper concludes by outlining a few lessons for a saner macroeconomics.
Topic:
Global Recession, Economic Inequality, Macroeconomics, Austerity, Public Health, COVID-19, Health Crisis, and Public Spending
Political Geography:
Global Focus

19. On the Non-Inflationary effects of Long-Term Unemployment Reductions

Author:
Walter Paternesi Meloni, Davide Romaniello, and Antonella Stirati
Publication Date:
04-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The paper critically examines the New Keynesian explanation of hysteresis based on the role of long-term unemployment. We first examine its analytical foundations, according to which rehiring long-term unemployed individuals would not be possible without accelerating inflation. Then we empirically assess its validity along two lines of inquiry. First, we investigate the reversibility of long-term unemployment. Then we focus on episodes of sustained long-term unemployment reductions to check for inflationary effects. Specifically, in a panel of 25 OECD countries (from 1983 to 2016), we verify by means of local projections whether they are associated with inflationary pressures in a subsequent five-year window. Two main results emerge: i) the evolution of the long-term unemployment rate is almost completely synchronous with the dynamics of the total unemployment rate, both during downswings and upswings; ii) we do not find indications of accelerating or persistently higher inflation during and after episodes of strong declines in the longterm unemployment rate, even when they occur in country-years in which the actual unemployment rate was estimated to be below a conventionally estimated Non-Accelerating Inflation Rate of Unemployment (NAIRU). Our results call into question the role of long-term unemployment in causing hysteresis and provide support to policy implications that are at variance with the conventional wisdom that regards the NAIRU as an inflationary barrier.
Topic:
Inflation, Macroeconomics, Unemployment, and Labor Market
Political Geography:
Global Focus

20. Country Risk

Author:
Tarek A. Hassan, Jesse Schreger, Markus Schwedeler, and Ahmed Tahoun
Publication Date:
03-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We construct new measures of country risk and sentiment as perceived by global investors and executives using textual analysis of the quarterly earnings calls of publicly listed firms around the world. Our quarterly measures cover 45 countries from 2002-2020. We use our measures to provide a novel characterization of country risk and to provide a harmonized definition of crises. We demonstrate that elevated perceptions of a country's riskiness are associated with significant falls in local asset prices and capital outflows, even after global financial conditions are controlled for. Increases in country risk are associated with reductions in firm-level investment and employment. We also show direct evidence of a novel type of contagion, where foreign risk is transmitted across borders through firm-level exposures. Exposed firms suffer falling market valuations and significantly retrench their hiring and investment in response to crises abroad. Finally, we provide direct evidence that heterogeneous currency loadings on global risk help explain the cross-country pattern of interest rates and currency risk premia.
Topic:
Economics, Employment, Investment, Risk, and Contagion
Political Geography:
Global Focus

21. The Updated Okun Method for Estimation of Potential Output with Broad Measures of Labor Underutilization: An Empirical Analysis

Author:
Claudia Fontanari, Antonella Palumbo, and Chiara Salvatori
Publication Date:
05-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper extends to different indicators of labor underutilization the Updated Okun Method (UOM) for estimation of potential output proposed in Fontanari et al (2020), which, from a demand-led growth perspective, regards potential output as an empirical approximation to fullemployment output, as in A.M.Okun’s (1962) original method. Based on the apparent incapability of the official rate of unemployment to fully account for labor underutilization, in this paper we offer estimates of Okun’s law both with broad unemployment indicators and with an indicator of ‘standardized hours worked’ which we propose as a novel measure of the labor input. The paper reflects on the possible different empirical measures of full employment. The various measures of potential output that we extract from our analysis show greater output gaps than those produced by standard methods, thus highlighting a systematic tendency of the latter to underestimate potential output. Output gaps that underestimate the size of the output loss or that tend to close too soon during recovery, may produce a bias towards untimely restriction.
Topic:
Economics, Labor Issues, Economic Growth, Demand, and Unemployment
Political Geography:
Global Focus

22. Bagehot for Central Bankers

Author:
Laurent Le Maux
Publication Date:
02-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Walter Bagehot (1873) published his famous book, Lombard Street, almost 150 years ago. The adage “lending freely against good collateral at a penalty rate” is associated with his name and his book has always been set on a pedestal and is still considered as the leading reference on the role of lender of last resort. Nonetheless, without a clear understanding of the theoretical grounds and the institutional features of the British banking system, any interpretation of Bagehot’s writings remains vague if not misleading—which is worrisome if they are supposed to provide a guideline for policy makers. The purpose of the present paper is to determine whether Bagehot’s recommendation remains relevant for modern central bankers or whether it was indigenous to the monetary and banking architecture of Victorian times.
Topic:
Economics, History, Central Bank, and Lending
Political Geography:
Global Focus

23. Why do Sovereign Borrowers Post Collateral? Evidence from the 19th Century

Author:
Marc Flandreau, Stefano Pietrosanti, and Carlotta E. Schuster
Publication Date:
10-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper explores the reasons why sovereign borrowers post collateral. Such behavior is paradoxical because conventional interpretations of collateral stress repossession of the assets pledged as the key to securing lenders against information asymmetries and moral hazard. However, repossession is generally difficult in the case of sovereign debt and in some cases impossible. Nevertheless, such sovereign “hypothecations” have a long history and are again becoming very popular today in developing countries. To explain sovereign collateralization, we emphasize an informational channel. Posting collateral produces information on opaque borrowers by displaying borrowers’ behavior and resources. We support this interpretation by examining the hypothecation “mania” of 1849-1875, when sovereigns borrowing in the London Stock Exchange pledged all kinds of intangible revenues. Yet, at that time, sovereign immunity fully protected both sovereigns and their assets and possessions. Still, we show that hypothecations significantly decreased the cost of sovereign debt. To explain how, we stress the pledges’ role in documenting sovereigns’ wealth and the management of revenue streams. Based on an exhaustive library of bond prospectuses collected from primary sources, matched with a panel of sovereign bond yields and an innovative measure of sovereign fiscal transparency, we show that collateral minutely described in debt covenants served to document and monitor sovereign resources and development prospects. Encasing this information in contracts written by lawyers served to certify the quality of the resulting data disclosure process, explaining investors’ readiness to pay a premium.
Topic:
Economics, Finance, History, Innovation, Contracts, Sovereign Debt, and Collateral
Political Geography:
Global Focus

24. Ambivalence About International Trade in Open- and Closed-ended Survey Responses

Author:
Arturo Chang, Thomas Ferguson, Jacob Rothschild, and Benjamin I. Page
Publication Date:
09-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Spontaneous, open-ended survey responses can sometimes better reveal what is actually on people’s minds than small sets of forced-choice, closed questions. Our analysis of closed questions and trade-related open-ended responses to 2016 ANES “likes” and “dislikes” prompts indicate that Americans held considerably more complex, more ambivalent, and – in many cases – more negative views of international trade than has been apparent in studies that focus only on closed-ended responses. This paper suggests that contrast between open- and closed-question data may help explain why the effectiveness of Donald Trump’s appeals to trade resentments surprised many observers.
Topic:
International Trade and Finance, Public Opinion, Free Trade, Donald Trump, and Data
Political Geography:
Global Focus and United States of America

25. Inflation? It’s Import Prices and the Labor Share!

Author:
Lance Taylor and Nelson H. Barbosa-Filho
Publication Date:
01-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Recognizing that inflation of the value of output and its costs of production must be equal, we focus on a cost-based macroeconomic structuralist approach in contrast to micro-oriented monetarist analysis. For decades the import and profit shares of cost have risen, while the wage share has declined to around 50% with money wage increases lagging the sum of growth rates of prices and productivity. Conflicting claims to income are the underlying source of inflationary pressure. Inflation affects income (labor’s spending power) and wealth. Monetarist theory around 1900 concentrated on the latter (Bryan and the “Cross of Gold)” leading to the standard Laffer curve. It was replaced by the Friedman-Phelps model which has incorrect dynamics (labor payments do not fall during an expansion – they go up). Samuelson and Solow introduced a version of the Phillips curve that violates macroeconomic accounting. Rational expectations replaced Friedman but was immediately falsified by output drops after the Volcker shock treatment around 1980. There followed a complicated transition from rational expectations to inflation targeting, anchored by economists’ misunderstanding of the physical meaning of ergodicity and ontological blindness. It did not help that the real balance effect is irrelevant because money makes up a small part of wealth. Rather than issuing veiled threats of disaster if its policy advice is not followed, the Fed now announces inflation targets which it cannot meet. Contemporary structuralist theory suggests that conflicting income claims set the inflation rate. Firms can mark up costs but workers have latent bargaining power over the labor share that they can exercise. Import costs and policy repercussions complicate the picture, but a simple vector error correction model and visual analysis suggest that money wages would have to grow one percentage point faster than prices plus productivity for several years if the Fed is to meet a three percent inflation target. The results pose a Biden policy trilemma: (i) the only path toward a more egalitarian size distribution of income is through a rising labor share (money wage growth exceeds price plus productivity growth), (ii) which would provoke faster inflation with feedback to rising interest rates, and (iii) the resulting asset price deflation likely facing political resistance from Wall Street and affluent households.
Topic:
Economics, Labor Issues, Inflation, Imports, and Structuralism
Political Geography:
Global Focus

26. Artificial Intelligence, Globalization, and Strategies for Economic Development

Author:
Anton Korinek and Joseph E. Stiglitz
Publication Date:
02-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Progress in artificial intelligence and related forms of automation technologies threatens to reverse the gains that developing countries and emerging markets have experienced from integrating into the world economy over the past half century, aggravating poverty and inequality. The new technologies have the tendency to be labor-saving, resource-saving, and to give rise to winner-takes-all dynamics that advantage developed countries. We analyze the economic forces behind these developments and describe economic policies that would mitigate the adverse effects on developing and emerging economies while leveraging the potential gains from technological advances. We also describe reforms to our global system of economic governance that would share the benefits of AI more widely with developing countries.
Topic:
Development, Globalization, Science and Technology, Inequality, Artificial Intelligence, and Redistribution
Political Geography:
Global Focus

27. The Erroneous Foundations of Law and Economics

Author:
Mark Glick and Gabriel A. Lozada
Publication Date:
02-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The fundamental originating principle of law and economics (L&E) is that legal decisions should be (and are) based on maximizing efficiency. But L&E proponents do not define “efficiency” in the way agreed to by most economists, as Pareto Efficiency. A Pareto optimal condition is obtained when no one can be made better off without making someone worse off. Pareto Improvements are win-win changes where no losers exist. In the judicial system, however, there are always winners and losers, because under Article III § 2 of the Constitution a legal case does not exist unless there is a justiciable “case or controversy” in need of resolution. Unable to use Pareto Efficiency, L&E scholars have been forced to adopt alternative definitions of efficiency. Most L&E scholars claim to define “efficiency” based on the work of Kaldor and Hicks, but (perhaps unwittingly) instead use a definition of “efficiency” derived from the 19th century idea of consumer surplus, which encompasses L&E notions such as “wealth maximization,” and “consumer welfare” in antitrust. Neither of these alternative definitions is viable, however. Outside of L&E, the Kaldor-Hicks approach has long been recognized to be riddled with logical inconsistencies and ethical failures, and the surplus approach is even more deficient. Remarkably, virtually none of the numerous L&E textbooks even hint at such problems. Critically, all definitions of efficiency improvements in economics are biased in favor of wealthy individuals or firms, either because they are dependent on the status quo ante distribution of assets, or because they bestow large advantages on parties with political influence or who can afford to bring lawsuits quickly. Many L&E practitioners treat efficiency improvements instead as being objectively good, an error revealing that L&E is primarily motivated by its neoliberal policy agenda.
Topic:
Economics, Law, Neoliberalism, and Efficiency
Political Geography:
Global Focus

28. Inclusive American Economic History: Containing Slaves, Freedmen, Jim Crow Laws, and the Great Migration

Author:
Trevon Logan and Peter Temin
Publication Date:
01-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper records the path by which African Americans were transformed from enslaved persons in the American economy to partial participants in the progress of the economy. The path was not monotonic, and we organize our tale by periods in which inclusiveness rose and fell. The history we recount demonstrates the staying power of the myth of black inferiority held by a changing white majority as the economy expanded dramatically. Slavery was outlawed after the Civil War, and blacks began to participate in American politics en masse for the first time during Reconstruction. This process met with white resistance, and black inclusion in the growing economy fell as the Gilded Age followed and white political will for black political participation faded. The Second World War also was followed by prosperity in which blacks were included more fully into the white economy, but still not completely. The Civil Rights Movement proved no more durable than Reconstruction, and blacks lost ground as the 20th century ended in the growth of a New Gilded Age. Resources that could be used to improve the welfare of whites and blacks continue to be spent on the continued repressions of blacks.
Topic:
Economics, Race, History, Capitalism, and Slavery
Political Geography:
United States and Global Focus

29. International Financial Regulation: Why It Still Falls Short

Author:
William White
Publication Date:
07-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
While recent reforms are welcome in many ways, there are still significant reasons to doubt that the post-crisis tightening of international financial regulation guarantees future financial and economic stability. The most important reason is that the reforms have focused too narrowly on ensuring that an unstable financial sector will not aggravate downturns by restricting the supply of credit. More attention needs to be paid to ensuring that an overly exuberant financial system does not weaken other parts of the economy by encouraging a rapid buildup of debt during upturns. Some combination of time-varying monetary and regulatory policies (a macrofinancial stability framework) will be required to do this. In addition, many of the individual regulatory measures taken to date, both macroprudential and microprudential, have shortcomings. Their coherence as a package has also been questioned.
Topic:
Political Economy, Financial Crisis, Reform, Banks, and Subsidies
Political Geography:
Global Focus

30. Government as the First Investor in Biopharmaceutical Innovation: Evidence From New Drug Approvals 2010–2019

Author:
Ekaterina Cleary, Matthew J. Jackson, and Fred D. Ledley
Publication Date:
04-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The discovery and development of new medicines classically involves a linear process of basic biomedical research to uncover potential targets for drug action, followed by applied, or translational, research to identify candidate products and establish their effectiveness and safety. This Working Paper describes the public sector contribution to that process by tracing funding from the National Institutes of Health (NIH) related to published research on each of the 356 new drugs approved by the U.S. Food and Drug Administration from 2010-2019 as well as research on their 218 biological targets. Specifically, we describe the timelines of clinical development for these products and proxy measures of their importance, including designations as first-inclass or expedited approvals. We model the maturation of basic research on the biological targets for drugs to determine the initiation and established points of this research, and demonstrate that none of the 232 products modelled were approved before this enabling research passed the established point. This body of essential research comprised 2 million publications, of which 409 thousand were supported by 317 thousand Funding Years of NIH Project support totaling $156 billion. Research on the 356 drugs comprised 229 thousand publications, of which 36 thousand were supported by 42 thousand Funding Years of NIH Project support totaling $31 billion. Overall, NIH funding contributed to research associated with every new drug approved from 2010-2019, totaling $187 billion. This funding supported investigator-initiated Research Projects, Cooperative Agreements for government-led research on topics of particular importance, as well as Research Program Projects and Centers and training to support the research infrastructure. This NIH funding also produced 22 thousand patents, which provided marketing exclusivity for 27 (8.6%) of the drugs approved 2010-2019. These data demonstrate the essential role of public sector-funded basic research in drug discovery and development, as well as the scale and character of this funding. It also demonstrates the limited mechanisms available for recognizing the value created by these early investments and ensuring appropriate public returns. This analysis demonstrates the importance of sustained public investment in basic biomedical science as well as the need for policy innovations that fully realize the value of public sector investments in pharmaceutical innovation that ensure that these investments yield meaningful improvements in health.
Topic:
Science and Technology, Research, Public Policy, Innovation, State Funding, Pharmaceuticals, and Funding
Political Geography:
North America, Global Focus, and United States of America

31. Masters of Illusion: Bank and Regulatory Accounting for Losses in Distressed Banks

Author:
Edward J. Kane
Publication Date:
08-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This essay is part of a larger work on the history of Federal Reserve policymaking entitled Banking on Bull. The study seeks to explain why the instruments of central banking inevitably break down over time. A big part of the explanation is that policymakers want accounting measures of bank net worth to be flexible enough to allow bankers and regulators to slow the release of adverse information about distressed banks, particularly very large ones. Modern regulatory frameworks focus on maintaining what can be described as the adequacy of accounting capital. But this framework is bull, because in tough times, bank accountants know how to make losses disappear.
Topic:
Federal Reserve, Regulation, Central Bank, and Banking
Political Geography:
Global Focus

32. Carbon Pricing and the Elasticity of CO2 Emissions

Author:
Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis
Publication Date:
10-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We study the impact of carbon pricing on CO2 emissions across five sectors for a panel of 39 countries over 1990-2016. Using newly constructed sector-level carbon price data, we implement a novel approach to estimate the changes in CO2 emissions associated with (i) the introduction of carbon pricing regardless of the price level; (ii) the implementation effect as a function of the price level; and (iii) post-implementation marginal changes in the CO2 price. We find that the introduction of carbon pricing has reduced growth in CO2 emissions by 1% to 2.5% on average relative to counterfactual emissions, with most abatement occurring in the electricity and heat sector. Exploiting variation in carbon pricing to explain heterogeneity in treatment effects, we find an imprecisely estimated semi-elasticity of a 0.05% reduction in emissions growth per average $1/metric ton (hereafter abbreviated as: ton) of CO2. After the carbon price has been implemented, each marginal price increase of $1/tCO2 has temporarily lowered the growth rate of CO2 emissions by around 0.01%. These are disappointingly small effects. Simulating potential future emissions reductions in response to carbon price paths, we conclude that – in the absence of complementary non-pricing policy interventions – carbon pricing alone, even if implemented globally, is unlikely to be sufficient to achieve emission reductions consistent with the Paris climate agreement.
Topic:
Climate Change, Carbon Tax, Carbon Emissions, and Decarbonization
Political Geography:
Global Focus

33. Modeling Myths: On the Need for Dynamic Realism in DICE and other Equilibrium Models of Global Climate Mitigation

Author:
Claudia Wieners and Michael Grubb
Publication Date:
01-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We analyze and critique how optimizing Integrated Assessment Models, and specifically the widely-used DICE model, represent abatement costs. Many such models assume temporal independence –abatement costs in one period are not affected by prior abatement. We contrast this with three dimensions of dynamic realism in emitting systems: inertia, induced innovation, and path dependence. We extend the DICE model with a stylized representation of such dynamic factors. By adding a transitional cost component, we characterize the resulting system in terms of its capacity to adapt in path-dependent ways, and the transitional costs of accelerating abatement. We formalize a resulting metric of the pliability of the system, and the characteristic timescales of adjustment. With the resulting DICE-PACE model, we show that in a system with high pliability, the optimal strategy involves much higher initial investment in abatement, sustained at roughly constant levels for some decades, which generates an approximately linear abatement path and emissions declining steadily to zero. This contrasts sharply with the traditional formulation. Characteristic transition timescales of 20-40 years result in an optimum path which stabilizes global temperatures around a degree below the traditional DICE behavior; with otherwise modest assumptions, a pliable system can generate optimal scenarios within the goals of the Paris Agreement, with far lower long run combined costs of abatement and climate damages. We conclude that representing dynamic realism in such models is as important as – and far more empirically tractable than – continued debate about the monetization of climate damages and ‘social cost of carbon’.
Topic:
Climate Change, Economics, Paris Agreement, and Models
Political Geography:
Global Focus

34. Who’s Responsible Here? Establishing Legal Responsibility in the Fissured Workplace

Author:
Tanya Goldman and David Weil
Publication Date:
02-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The nature of work is changing, with workers enduring increasingly precarious working conditions without any safety net. In response, this Article proposes a new “Concentric Circle framework” which would improve workers’ access to civil, labor, and employment rights. Many businesses, including app-based platforms, have restructured toward “fissured workplace” business models. They treat workers like employees (specifying behaviors and closely monitoring outcomes) but they classify workers as independent contractors (engaging them at an arms-length and cutting them off from rights and benefits tied to employment). These arrangements confound legal classifications of “employment” and expose deficiencies with existing workplace protections, which are based on “employment relationships.” As a result, a growing number of workers lack both bargaining power and critical workpalce rights and benefits. We propose a Concentric Circle framework to better govern workers’ rights in the modern era. At the core, we maintain that certain rights and protections should not be tethered to an employment relationship, but to work itself. Thus, the right to be compensated for work and paid a minimum wage; freedom from discrimination and retaliation; access to a safe working environment, and the right to associate and engage in concerted activity should belong to all workers, not just employees. Second, as a middle circle, we argue for a rebuttable presumption of employment to address those rights that remain exclusive to employees (and not independent contractors), and we propose an updated legal test of employment. Finally, at the outer ring of the framework, we suggest policies that could enhance workers’ access to benefits that promote worker mobility and social welfare. Other scholarship has focused exclusively on either independent contractors or employees, or it has proposed a new category of worker altogether. We contend that this comprehensive framework better assigns rights, responsibilities, and protections in the modern workplace than do current legal doctrines or alternative proposals.
Topic:
Economics, Labor Issues, Law, Legal Theory, Civil Rights, Legal Sector, and Workforce
Political Geography:
Global Focus

35. Firm-Level Exposure to Epidemic Diseases: Covid-19, SARS, and H1N1

Author:
Tarek A. Hassan, Stephan Hollander, Laurence van Lent, and Ahmed Tahoun
Publication Date:
04-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Using tools described in our earlier work (Hassan et al., 2019, 2020), we develop text- based measures of the costs, benefits, and risks listed firms in the US and over 80 other countries associate with the spread of Covid-19 and other epidemic diseases. We identify which firms expect to gain or lose from an epidemic disease and which are most affected by the associated uncertainty as a disease spreads in a region or around the world. As Covid-19 spreads globally in the first quarter of 2020, we find that firms’ primary concerns relate to the collapse of demand, increased uncertainty, and disruption in supply chains. Other important concerns relate to capacity reductions, closures, and employee welfare. By contrast, financing concerns are mentioned relatively rarely. We also identify some firms that foresee opportunities in new or disrupted markets due to the spread of the disease. Finally, we find some evidence that firms that have experience with SARS or H1N1 have more positive expectations about their ability to deal with the coronavirus outbreak.
Topic:
Economics, Infectious Diseases, Global Markets, Finance, Pandemic, and COVID-19
Political Geography:
Global Focus

36. The Political Economy of Europe since 1945: A Kaleckian perspective

Author:
Joseph Halevi
Publication Date:
06-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes the early stages of the formation of the Common Market. The period covered runs from the end of WW2 to 1959, which is the year in which the European Payments Union ceased to operate. The essay begins by highlighting the differences between the prewar political economy of Europe and the new dimensions and institutions brought in by the United States after 1945. It focuses on the marginalization of Britain and on the relaunching of French great power ambitions and how the latter determined, in a very problematical way, the European complexion of France. Because of France’s imperial aspirations, France, not West Germany, emerged as the politically crisis prone country of Europe acting as a factor of instability thereby jeopardizing the process of European integration, Among the large European nations, Germany and Italy appear, for opposite economic reasons, as the countries most focused on furthering integration. Germany expressed the strongest form of neomercantilism while Italy the weakest.
Topic:
Economics, Political Economy, Global Political Economy, World War II, and Common Market
Political Geography:
United States, Europe, Germany, and Global Focus

37. From the EMS to the EMU and...to China

Author:
Joseph Halevi
Publication Date:
11-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The paper highlights the position of German authorities, showing that they were quite lucid about the fundamental weaknesses inherent in a process that separated monetary from fiscal policies by giving priority to the centralization of the former. Instead of repeating the well known critiques levelled against the EMU – for which readers are referred to the unsurpassed treatment by Stiglitz, the essay highlights the splintering of Europe in the way in which it has unfolded during the 1990s and in the first decade of the present millennium. In particular the early economic and political origins of the terminal crisis of Italy are located between the late 1980s and the 1990s. France is shown to belong increasingly to the so-called European periphery by virtue of a weakening industrial structure and persistent balance of payments deficits. The paper argues that France regains its central role by political means and through its weight as an active nuclear military power centered on maintaining its imperial interests and posture especially in Africa. The first decade of the present millennium is portrayed as the period in which a distinct German economic area had been formed in the midst of Europe with a strong drive to the east with an increasingly powerful gravitational pull towards the People’s Republic of China.
Topic:
Economics, International Political Economy, Political Economy, History, and Macroeconomics
Political Geography:
Africa, China, Europe, Asia, Germany, and Global Focus

38. Macroeconomic Management Meets the New Economy

Author:
Commission on Global Economic Transformation
Publication Date:
05-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Finance and the macroeconomy, both policy and industry practices as well as academic research, have evolved substantially in recent years. While the old questions of business cycles, macroeconomic management, financial regulation, and social protection are still being debated, we are now confronted with new developments in the economy, characterized by digital technology, new modes of production and business models, and changing employment relations. Macroeconomics and finance need urgent rethinking as the global economy transforms. Our gathering on March 5, 2019 brought together economists, policymakers, financial regulators, and industry practitioners from around the world. We heard diverse perspectives on multilateralism, pension and labor market reform, international trade, and risks in the world economy, and we grappled with issues on stagnant wages, public debt, fiscal and monetary policy, and banking reforms. Our discussion was by no means exhaustive or conclusive, but we attempted to harness the group’s collective wisdom to address some of the most prominent questions of our day. This document is intended to inform our commissioners as they develop CGET’s final report and to share our timely conversation with policymakers and the general public. Fomenting multidisciplinary, critical discourse is one of the most important responsibilities of this initiative, and we sincerely thank the staff at the Institute for New Economic Thinking (INET), our dedicated Commissioners, and our outside experts for helping us to promote this dialogue.
Topic:
Economics, Industrial Policy, Regulation, Digital Economy, Economic Theory, and Macroeconomics
Political Geography:
United States and Global Focus

39. Demand-determined potential output: a revision and update of Okun’s original method

Author:
Claudia Fontanari, Antonella Palumbo, and Chiara Salvatori
Publication Date:
05-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper challenges the mainstream view of potential output, and enquires into the supposed effects of Great Recession on potential growth. We identify in the demand-led growth perspective a more promising theoretical framework both to define the notion and to gauge the long-term effects of a demand slow down. Based on the poor reliability of standard estimates of potential output, we also propose an alternative calculation. This is based on an update of Arthur M. Okun’s original method for estimating potential output, which, differently from the estimation methods currently in use, does not rely on the notion of NAIRU, thus being immune to its theoretical and empirical shortcomings. Our calculation, based on a re-estimation of Okun’s Law on US quarterly data, shows both how far an economy generally operates from its production possibilities, and how much potential growth is affected by the actual growth of demand over time. These wide margins for expansion of actual and potential output growth imply that a determined policy of demand expansion would create, given time, the very capacity that justifies it.
Topic:
Economics, Global Recession, Economic Growth, Macroeconomics, and Demand
Political Geography:
United States and Global Focus

40. Technological Disruption in the Global Economy

Author:
Commission on Global Economic Transformation
Publication Date:
04-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Technology has become the most powerful disruptive force in our economy. It bears on the future of work, competition, market power, and national security, and it binds the other major areas of our commission’s investigation: macroeconomics and finance, globalization, and climate change. In essence, technological progress propels global economic transformation. Our gathering on February 6, 2019 brought economists together with leading voices from academia, labor, private industry, and the nonprofit/NGO sector. We heard from industry leaders with deep roots and history in the Silicon Valley technology revolution, academics who have also spent time in the policy arena, and from individuals who are already considering new models and approaches to digital rights and the future of work. Our discussion was by no means exhaustive or conclusive, but we attempted to harness the group’s collective wisdom to address some of the most vexing questions of our day. This document is intended to inform our commissioners as they develop CGET’s final report and to share our timely conversation with policymakers and the general public. Fomenting multidisciplinary, critical discourse is one of the most important responsibilities of this initiative, and we sincerely thank the staff at the Institute for New Economic Thinking (INET), our dedicated commissioners, and our outside thought leaders for helping us to promote this dialogue.
Topic:
Economics, Science and Technology, Global Markets, Digital Economy, Global Political Economy, and Macroeconomics
Political Geography:
United States and Global Focus

41. Estimates of the Natural Rate of Interest and the Stance of Monetary Policies: A Critical Assessment

Author:
Enrico Sergio Levrero
Publication Date:
01-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
After briefly mentioning the determinants of the natural rate of interest in the New Keynesian models, the paper discusses the different notions of it that we find in these models and the problems encountered when the natural rate is estimated. It states that these problems are not only related to the difficulties in distinguishing the kind and persistency of economic shocks, but pertain to theory, namely to model specification and the alleged independence of the average or normal interest rate from monetary policy. Following Keynes’s suggestion regarding the monetary nature of interest rates, some final remarks will thus be advanced on their effects on prices and income distribution as well as on the objectives and stance of monetary policies.
Topic:
Economics, Monetary Policy, Income Inequality, Macroeconomics, and Keynes
Political Geography:
United States and Global Focus

42. Labor Institutions and Development Under Globalization

Author:
Servaas Storm and Jeronim Capaldo
Publication Date:
07-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Labor market regulation is a controversial area of public policy in both developed and developing countries. After decades of de-regulatory advice, international financial institutions have recently come to a less extreme position. But any concessions to labor regulation are based on concerns for social stability or for short-term support to aggregate demand, while regulation continues to be viewed as harmful to economic efficiency. In this paper we take a deeper look at the impact of labor institutions on economic development in two ways. First, we propose a macroeconomic model with balance-of-payments constraint for a “small” developing country open to trade and foreign capital. This helps us clarify the importance of a dynamic view of economic efficiency, as opposed to the static view embedded in mainstream policy advice. Secondly, we discuss the political economy of labor regulation. We argue that labor institutions promote economic development though positive effects on aggregate demand, labor productivity and technology.
Topic:
Economics, Labor Issues, Regulation, Labor Market, and Labor Cost
Political Geography:
Global Focus

43. Industrial Structure and Party Competition in an Age of Hunger Games: Donald Trump and the 2016 Presidential Election

Author:
Thomas Ferguson, Paul Jorgensen, and Jie Chen
Publication Date:
01-2018
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The U.S. presidential election of 2016 featured frontal challenges to the political establishments of both parties and perhaps the most shocking election upset in American history. This paper analyzes patterns of industrial structure and party competition in both the major party primaries and the general election. It attempts to identify the genuinely new, historically specific factors that led to the upheavals, especially the steady growth of a “dual economy” that locks more and more Americans out of the middle class and into a life of unsteady, low wage employment and, all too often, steep debts. The paper draws extensively on a newly assembled, more comprehensive database of political contributions to identify the specific political forces that coalesced around each candidate. It considers in detail how different investor blocs related to the Republican Party and the Trump campaign as the campaign progressed and the role small contributors played in the various campaigns, especially that of Vermont Senator Bernie Sanders. It also critically evaluates claims about the final weeks of the election in the light of important overlooked evidence.
Topic:
Economics, Political Economy, Elections, Finance, Donald Trump, Political Parties, and Banking
Political Geography:
North America, Global Focus, and United States of America

44. Inequality in the 21st century: A critical analysis of Piketty’s work

Author:
Nadia Garbellini
Publication Date:
01-2018
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Thomas Piketty’s (2014) Capital in the XXI Century aims to analyze distributions of income and wealth and their determinants, in a set of developed countries from the nineteenth century to the present. The objective is a bold one, made even more so by the fact that Piketty pursues it not only from a theoretical, but also, from an empirical point of view. The task is particularly impressive not only because of the enormous effort required in collecting and organising data, but also because the work entails attaching a deterministic interpretation to facts and figures from radically different countries over a time span that covers almost two centuries, thereby forcing comparison between numbers coming from clearly incommensurable contexts. These difficulties are not lost to Piketty, who states that “[w]ithout precisely defined sources, methods, and concepts, it is possible to see everything and its opposite.” (Piketty, 2014, pp.2-3) This study argues that the empirical ‘methods and concepts’ adopted by Piketty are not always consistent with those coming from his reference theoretical framework, nor from National Accounts (United Nations, 2009).
Topic:
Economics, Inequality, Income Inequality, Economic Growth, and Capital
Political Geography:
Global Focus

45. Persistent Effects of Autonomous Demand Expansions

Author:
Daniele Girardi, Walter Paternesi Meloni, and Antonella Stirati
Publication Date:
02-2018
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The prevailing wisdom that aggregate demand shocks determine short-run cyclical fluctuations around a supply-determined equilibrium growth rate and an associated equilibrium unemployment rate (or NAIRU) has been called into question by various strands of literature over the last few decades. Specifically, a recently revived literature on hysteresis finds significant persistence in the effects of negative aggregate demand shocks (e.g. Blanchard et al. 2015; Fatás and Summers 2016; Martin et al. 2015). This paper aims to assess this tendency to return to a supply-determined potential output, independent of aggregate demand, after episodes of demand expansion. In line with the hysteresis literature, we assess the persistence of aggregate demand effects on key macroeconomic outcomes. However, in contrast with much of that literature, we assess whether persistence is detected also in instances of demand expansion. We study 94 episodes of demand expansion in 34 OECD countries between 1960 and 2015. We look at the sum of primary public expenditure and exports, a variable we call 'autonomous demand'. We define an expansion as a large yearly percentage increase in autonomous demand, ‘large’ meaning greater than a standard deviation above the country mean. We analyze the impact of these expansions on key macroeconomic outcomes in the subsequent decade, using various techniques to deal with endogeneity. We employ two main approaches: a dynamic two-way fixed-effects model, analogous to a standard difference-in-differences estimation; and a propensity score-based specification which explicitly models selection bias. We find a highly significant persistent effect on the GDP level: a one-off expansion in our autonomous demand variable by (an average of) 5% is associated 10 years later with a GDP level around 3% higher than in the control group, with no sign of mean reversion. We also document strong persistent effects on capital stock, employment and participation rates. Effects on productivity and the unemployment rate are also strong and quite persistent, but evidence regarding their permanence is more mixed. We do not find that expansions, on average, cause high or accelerating inflation. Our results lead us to ask whether hysteresis should be considered a distortion in the working of market economies that holds only in specific circumstances – as the mainstream literature has generally suggested – or whether it is, in fact, a pervasive phenomenon which holds most of the time.
Topic:
Economics, Inflation, Unemployment, and Capital Formation
Political Geography:
Global Focus

46. The Focus of Academic Economics: Before and After the Crisis

Author:
Ernest Aigner, Matthias Aistleitner, Florentin Glötzl, and Jakob Kapeller
Publication Date:
05-2018
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Has the global financial crisis of 2007ff had a visible impact on the economics profession? To answer this question we employ a bibliometric approach and compare the content and orientation of economic literature before and after the crisis with reference to two different samples: A large-scale sample consisting of more than 440,000 articles published between 1956 and 2016 and a smaller sample of 400 top-cited papers before and after the crisis. Our results suggest that – unlike the Great Depression of the 1930s – the current financial crisis did not lead to any major theoretical or methodological changes in contemporary economics, although the topic of financial instability received increased attention after the crisis.
Topic:
Economics, Academia, and Economic Crisis
Political Geography:
Global Focus

47. Citation Patterns in Economics and Beyond

Author:
Matthias Aistleitner, Jakob Kapeller, and Stefan Steinerberger
Publication Date:
11-2018
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
In this paper we comparatively explore three claims concerning the disciplinary character of economics by means of citation analysis. The three claims under study are: (1) economics exhibits strong forms of institutional stratification and, as a byproduct, a rather pronounced internal hierarchy, (2) economists strongly conform to institutional incentives and (3) modern mainstream economics is a largely selfreferential intellectual project mostly inaccessible to disciplinary or paradigmatic outsiders. The validity of these claims is assessed by means of an interdisciplinary comparison of citation patterns aiming to identify peculiar characteristics of economic discourse. In doing so, we emphasize that citation data can always be interpreted in different ways, thereby focusing on the contrast between a ‘cognitive’ and an ‘evaluative’ approach towards citation data.
Topic:
Economics, Sociology, Academia, Citation, and Hierarchy
Political Geography:
Global Focus

48. Economic Growth and Carbon Emissions: The Road to ‘Hothouse Earth’ is Paved with Good Intentions

Author:
Miriam Schröder and Servaas Storm
Publication Date:
11-2018
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
All IPCC (2018) pathways to restrict future global warming to 1.5°C (and well below an already dangerous 2°C) involve radical cuts in global carbon emissions. Such decarbonization, while being technically feasible, may impose a ‘limit’ or ‘planetary boundary’ to growth, depending on whether or not human society can decouple economic growth from carbon emissions. Decoupling is regarded viable in global and national policy discourses on the Paris Agreement—and claimed to be already happening in real time: witness the recent declines in territorial CO2 emissions in a group of more than 20 economies. However, some scholars argue that radical de-carbonization will not be possible while increasing the size of the economy. This paper contributes to this debate as well as to the larger literature on climate change and sustainability. First, we develop a prognosis of climate-constrained global growth for 2014-2050 using the Kaya sum rule. Second, we use the Carbon-Kuznets-Curve (CKC) framework to empirically assess the effect of economic growth on CO2 emissions using measures of both territorial (production-based) emissions and consumption-based (tradeadjusted) emissions. We run panel data regressions using OECD ICIO CO2 emissions data for 61 countries during 1995-2011; to check the robustness of our findings we construct and use panel samples sourced from alternative databases (Eora; Exio; and WIOD). Even if we find evidence suggesting a decoupling of production-based CO2 emissions and growth, consumption-based CO2 emissions are monotonically increasing with per capita GDP (within our sample). We draw out the implications of these findings for climate policy and binding emission reduction obligations.
Topic:
Climate Change, Economic Growth, Carbon Emissions, and Paris Agreement
Political Geography:
Global Focus

49. Corporate Scandals and Regulation

Author:
Luzi Hail, Ahmed Tahoun, and Clare Wang
Publication Date:
12-2017
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Are regulatory interventions delayed reactions to market failures or can regulators proactively pre-empt corporate misbehavior? From a public interest view, we would expect “effective” regulation to ex ante mitigate agency conflicts between corporate insiders and outsiders, and prevent corporate misbehavior from occurring or quickly rectify transgressions. However, regulators are also self-interested and may be captured, uninformed, or ideological, and become less effective as a result. In this registered report, we develop a historical time series of corporate (accounting) scandals and (accounting) regulations for a panel of 26 countries from 1800 to 2015. An analysis of the lead-lag relations at both the global and individual country level yields the following insights: (i) Corporate scandals are an antecedent to regulation over long stretches of time, suggesting that regulators are typically less flexible and informed than firms. (ii) Regulation is positively related to the incidence of future scandals, suggesting that regulators are not fully effective, that explicit rules are required to identify scandalous corporate actions, or that new regulations have unintended consequences. (iii) There exist systematic differences in these lead-lag relations across countries and over time suggesting that the effectiveness of regulation is shaped by fundamental country characteristics like market development and legal tradition.
Topic:
Economics, Law, Regulation, Finance, Capital, and Fraud
Political Geography:
Global Focus

50. The Functions of the Stock Market and the Fallacies of Shareholder Value

Author:
William Lazonick
Publication Date:
06-2017
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Conventional wisdom has it that the primary function of the stock market is to raise cash for companies for the purpose of investing in productive capabilities. The conventional wisdom is wrong. Academic research on sources of corporate finance shows that, compared with other sources of funds, stock markets in advanced countries have been insignificant suppliers of capital for corporations. The purpose of this essay is to build a rigorous and relevant conception of the evolving role of the stock market in the U.S. corporate economy. In fact, the functions of the stock market go well beyond “cash” to include four other functions, which can be summarized as “control,” “creation,” “combination,” and “compensation.” In this paper, I argue, based on historical evidence, that in the growth of the U.S. economy the key function of the stock market was control. Specifically, the stock market enabled the separation of managerial control over the allocation of corporate resources from the ownership of the company’s shares. Yet, assuming that the key function of the stock market is cash, economists known as agency theorists see this separation of control from ownership as the “original sin” of American capitalism, and argue that the evils of managerial control can be overcome by compelling corporate managers as “agents” to maximize the value of corporate shareholders as “principals.” What is missing from the agency-theory argument is a theory of the value-creating firm, or what I call a “theory of innovative enterprise.” The value-creation process requires three social conditions of innovative enterprise: strategic control, organizational integration, and financial commitment. The functions of the stock market may support the types of strategic control, organizational integration, and financial commitment that can result in the generation of high-quality products at low unit costs—the economic definition of innovative enterprise. It is possible, however, that the functions of the stock market may undermine the types of strategic control, organizational integration, and financial commitment that the innovation process requires. In this paper, I provide a brief overview of the role of the control function of the stock market in supporting innovative enterprise in the historical rise to dominance of U.S. managerial capitalism from the early decades of the twentieth century. Then I elaborate the five functions of the stock market—control, cash, creation, combination, and compensation—in terms of the ways in which, from the perspective of the theory of innovative enterprise, each function can support value creation or, alternatively, empower value extraction. I then turn to a discussion of the evolving roles of the five functions of the stock market in major U.S. business corporations over the past century. The concluding section draws on the history of the actual functions of U.S. stock markets to critique the dominant ideology that, for the sake of superior economic performance, a company should be run to “maximize shareholder value” (MSV). I indicate how MSV undermines the social conditions of innovative enterprise: strategic control, organizational integration, and financial commitment.
Topic:
Economics, Economic Growth, Stock Markets, and Shareholder Democracy
Political Geography:
Global Focus

51. ‘Many-Citedness’: Citations Measure More Than Just Scientific Impact

Author:
Carlo D'Ippoliti
Publication Date:
05-2017
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Citation indexes are increasingly used to measure the scientific impact of researchers and institutions, though their application is often criticized. Most authors agree that citations do not measure only scientific quality; there is disagreement however on what else they do capture. We study the network of citations of all publications indexed in Web of Science authored or coauthored by Italian tenured academic economists between 2011 and 2015. By estimating the determinants of the probability that any author is cited by any other author in the sample, we find those factors to involve not only similarity in methods and topics but also, significantly, various measures of social community as well as of ideological proximity. We conclude that, at least in the case of economics, citations cannot be interpreted as unbiased proxies of scientific impact, and their use to produce indexes and rankings may require careful rethinking.
Topic:
Science and Technology, Research, Academia, Community, and Citation
Political Geography:
Global Focus

52. On Historical Household Budgets

Author:
Brian A'Hearn, Nicola Amendola, and Giovanni Vecchi
Publication Date:
05-2016
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The paper argues that household budgets are the best starting point for investigating a number of big questions related to the evolution of the living standards during the last two-three centuries.
Topic:
Budget, Fiscal Policy, Homeownership, and Housing
Political Geography:
Global Focus

53. A Method for Agent-Based Models Validation

Author:
Mattia Guerini and Alessio Moneta
Publication Date:
03-2016
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper proposes a new method to empirically validate simulation models that generate artificial time series data comparable with real-world data. The approach is based on comparing structures of vector autoregression models that are estimated from both artificial and real-world data by means of causal search algorithms. This relatively simple procedure is able to tackle both the problem of confronting theoretical simulation models with the data and the problem of comparing different models in terms of their empirical reliability. The paper also provides an application of the validation procedure to the Dosi et al. (2015) macro-model.
Topic:
Economics, Economic Theory, Data, and Models
Political Geography:
Global Focus

54. Luigi Pasinetti and the Political Economy of Growth and Distribution

Author:
Joseph Halevi
Publication Date:
03-2016
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper provides a careful and synthetic overview of his contributions as well as a reconstruction of Pasinetti’s philosophical approach to economics as a science meant to serve humanity. Luigi Pasinetti’s work has deeply affected modern economic theory. His papers on the Cambridge Capital Controversy are world renowned. But he has made many other contributions to the economic debates of the last half century, offering not only detailed criticisms of mainstream economic theory, but also the elaboration of an alternative, more complete, and coherent framework for understanding growth and income distribution, structural change, and trade relations. He has also made notable contributions to discussions of economic policy. Pasinetti’s papers are very clearly written, but many are formidably technical and often build cumulatively on his previous work. This paper arises from a set of notes I wrote in July 2014 for Thomas Ferguson, the Research Director of the Institute for New Economic Thinking in New York, as he prepared for a series of meetings with Professor Luigi Pasinetti in Milan. Both he and Professor Geoffrey Harcourt strongly encouraged me to expand these. In the present paper the sequence is kept as in the original notes with some important additions while the text has been changed into a more discursive style.
Topic:
Political Economy, Economic Growth, Economic Policy, and Economic Theory
Political Geography:
Global Focus

55. Carbon Emissions and Economic Growth: Production-based versus Consumption-based Evidence on Decoupling

Author:
Goher-Ur-Reham Mir and Servaas Storm
Publication Date:
03-2016
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Working Paper Carbon Emissions and Economic Growth: Production-based versus Consumption-based Evidence on Decoupling MAR 2016 | ENERGY | ENVIRONMENT SHARE WORKING PAPER SERIES BY Goher-Ur-Rehman Mir Ecofys Consulting Servaas Storm Senior Lecturer of Economics, Delft University of Technology DOWNLOAD PAPER We assess the Carbon-Kuznets-Curve hypothesis using internationally consistent and comparable production-based versus consumption-based CO2 emissions data for 40 countries (and 35 industries) during 1995-2007 from the World Input Output Database (WIOD). The estimates for per capita CO2 emissions are truly comprehensive as these include all carbon emissions embodied in international trade and global commodity chains. Even if we find evidence suggesting a decoupling of production-based CO2 emissions and growth, consumption- based CO2 emissions are monotonically increasing with per capita GDP. We draw out the implications of these findings for climate policy and binding emission reduction obligations.
Topic:
Climate Change, Energy Policy, Environment, Economic Growth, and Carbon Emissions
Political Geography:
Global Focus

56. Full Employment, Open Economy Macroeconomics, and Keynes’ General Theory: Does the Swan Diagram Suffice?

Author:
Paul Davidson
Publication Date:
02-2016
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper provides critical comments on the Peter Temin - David Vines promotion of the basic Swan Diagram as (1) a policy tool to encourage any individual debtor nation experiencing balance of payment deficits to reduce its exchange rate in order to expand exports and reduce imports and (2) the Swan Diagram as a simple model for understanding Keynes’s General Theory for an Open Economy. This paper explains that the Swan Diagram is completely incompatible with Keynes’s analysis. Instead Keynes advocated that the onus should be placed on creditor nations to correct international payments imbalances and thereby promote economic expansion internationally. Keynes warned against any deficit nation adopting a policy that tries to achieve a balance in its international payments by following any policy designed to reduce imports and increase exports. Such a policy sends a contractionary force onto the international economy and tends to injure all trading partners.
Topic:
Economics, Employment, Economic Theory, Macroeconomics, Unemployment, and Job Creation
Political Geography:
Global Focus

57. Household Borrowing and the Possibility of “Consumption- Driven, Profit-Led Growth”

Author:
Mark Setterfield and Yun K. Kim
Publication Date:
01-2016
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We first show that, with a Kaleckian structure that is consistent with Pasinetti (1962), the relationship between distribution and growth is more robust than conventional wisdom suggests. Next, we extend our model by incorporating borrowing and emulation effects into workers’ consumption behavior, under different assumptions about how debt is serviced. Our results demonstrate that borrowing and emulation transform the relationship between distribution and growth, giving rise to the possibility of a “consumption-driven, profit-led” growth regime (Kapeller and Schütz, 2015) and what we call the “paradox of inequality.” A key conclusion is that the wage-or -profit led characteristics of the growth process, rather than being invariant, can be altered by social constructs such as borrowing and consumption norms that change over time.
Topic:
Economics, Economic Growth, Economic Theory, Profit, Homeownership, and Consumerism
Political Geography:
Global Focus

58. Stock-Market Expectations: Econometric Evidence that both REH and Behavioral Insights Matter

Author:
Roman Frydman and Josh Stillwagon
Publication Date:
06-2016
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Behavioral finance views stock-market investors’ expectations as largely unrelated to fundamental factors. Relying on survey data, this paper presents econometric evidence that fundamentals are a major driver of investors’ expectations. Although expectations are also in part extrapolative, this effect is transient. The paper’s approach underscores the central importance of opening models to structural change and imposing discipline on econometric analysis through specification testing. Our findings support the novel hypothesis that rational market participants, faced with unforeseeable change, base their forecasts on both fundamentals - the focus of the REH approach - and the psychological and technical considerations underlying behavioral finance.
Topic:
Markets, Economic Theory, Survey, and Stock Markets
Political Geography:
Global Focus

59. Understanding the Great Recession

Author:
Mario Seccareccia and Marc Lavoie
Publication Date:
12-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Some Fundamental Keynesian and Post-Keynesian Insights, with an Analysis of Possible Mechanisms to Achieve a Sustained Recovery Fears of deflation and long-term stagnation have become more commonplace since the Great Recession. Yet, within the mainstream, economists are divided into two camps: those who see the benefits of downward wage and price adjustment, as a private sector stabilizer, and those who fear deflationary pressures because of their destabilizing consequences. This paper reviews this theoretical literature using a simple “New Consensus” framework of analysis and it also seeks to describe how mainstream and heterodox economists analyzing the consequences of deflationary pressures come to very different conclusions on the nature of private sector stabilizers in a recessionary environment. After reviewing the different perspectives, the paper undertakes a comparative analysis of the experience of both the Great Depression and the Great Recession by looking at the behavior of certain key variables in three countries: Canada, the United States and the United Kingdom. The paper concludes that, if it was not for the quick actions of governments in stabilizing the economy through activist macroeconomic policies during the Great Recession, private sector stabilizers were actually less significant during the recent crisis than they were during the 1930s.
Topic:
Economics, Global Recession, Economic Theory, Sustainability, and Economic Recovery
Political Geography:
Global Focus

60. A Theory of How and Why Central-Bank Culture Supports Predatory Risk-Taking at Megabanks

Author:
Edward J. Kane
Publication Date:
12-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper applies Schein’s model of organizational culture to financial firms and their prudential regulators. It identifies a series of hard-to-change cultural norms and assumptions that support go-for-broke risk-taking by megabanks that meets the every-day definition of theft. The problem is not to find new ways to constrain this behavior, but to change the norms that support it by establishing that managers of megabanks owe duties of loyalty, competence, and care directly to taxpayers.
Topic:
Economic Theory, Central Bank, Risk, Fiscal Policy, and Banking
Political Geography:
Global Focus

61. Learning, Expectations, and the Financial Instability Hypothesis

Author:
Martin Guzman and Peter Howitt
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes what assumptions on formation of expectations are consistent with Minsky’s Financial Instability Hypothesis (FIH) and its corollaries. The FIH establishes that financial relations evolve over time turning a stable system into an unstable one. Financial crises would be more likely to occur, and more severe if they occur, the longer the previous crisis recedes into the past. We show that the hypothesis is consistent with assumptions on formation of expectations that imply learning from realization of states and inconsistent with the assumption of full information rational expectations.
Topic:
Financial Crisis, Finance, Economic Theory, and Instability
Political Geography:
Global Focus

62. Debt Servicing, Aggregate Consumption, and Growth

Author:
Mark Setterfield and Yun K. Kim
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We develop a neo-Kaleckian growth model that emphasizes the importance of consumption behavior. In our model, workers first make consumption decisions based on their gross income, and then treat debt servicing commitments as a substitute for saving. Workers’ borrowing is induced by their desire to keep up with the consumption standard set by rentiers’ consumption, reflecting an aspect of the relative income hypothesis. As a result of this consumption and debt servicing behavior, consumer debt accumulation and income distribution have effects on aggregate demand, profitability, and economic growth that differ from those found in existing models. We also investigate the financial sustainability of the Golden Age and Neoliberal growth regimes within our framework. It is shown that distributional changes between the Golden Age and the Neoliberal regimes, together with corresponding changes in consumption emulation behavior via expenditure cascades, suffice to make the Neoliberal growth regime unsustainable.
Topic:
Debt, Economics, Economic Growth, Economic Theory, Profit, Sustainability, Models, and Consumption
Political Geography:
Global Focus

63. Elasticity and Discipline in the Global Swap Network

Author:
Perry Mehrling
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper sketches the outlines of the new international monetary system that has emerged in the aftermath of the global financial crisis. At the center of the system, a network of central bank swaps between the six major central banks serves as an elastic backstop for private foreign exchange operations. Farther out on the periphery, a further network of central bank swaps operates to economize on scarce reserves of the major currencies. Meanwhile, in the private foreign exchange market, basis swaps are emerging as the central location where liquidity is explicitly priced, inside the bounds set by central bank swaps.
Topic:
Markets, Finance, Global Financial Crisis, Central Bank, Banking, and Liquidity
Political Geography:
Global Focus

64. Working Paper Exploring the Concept of Homeostasis and Considering its Implications for Economics

Author:
Antonio Damasio and Hanna Damasio
Publication Date:
09-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The reality of human homeostasis expands the views on preferences and rational choice that are part of traditionally conceived Homo economicus and casts doubts on economic models that depend only on an “invisible hand” mechanism. In its standard format, the concept of homeostasis refers to the ability, present in all living organisms, of continuously maintaining certain functional variables within a range of values compatible with survival. The mechanisms of homeostasis were originally conceived as strictly automatic and as pertaining only to the state of an organism’s internal environment. In keeping with this concept, homeostasis was, and still is, often explained by analogy to a thermostat: upon reaching a previously set temperature, the device commands itself to either suspend the ongoing operation (cooling or heating), or to initiate it, as appropriate. This traditional explanation fails to capture the richness of the concept and the range of circumstances in which it can be applied to living systems. Our goal here is to consider a more comprehensive view of homeostasis. This includes its application to systems in which the presence of conscious and deliberative minds, individually and in social groups, permits the creation of supplementary regulatory mechanisms aimed at achieving balanced and thus survivable life states but more prone to failure than the fully automated mechanisms. We suggest that an economy is an example of one such regulatory mechanism, and that facts regarding human homeostasis may be of value in the study of economic problems. Importantly, the reality of human homeostasis expands the views on preferences and rational choice that are part of traditionally conceived Homo economicus and casts doubts on economic models that depend only on an “invisible hand” mechanism.
Topic:
Economics, Regulation, Models, and Homeostasis
Political Geography:
Global Focus

65. Are Low Interest Rates Deflationary? A Paradox of Perfect- Foresight Analysis

Author:
Mariana Garcia-Schmidt
Publication Date:
09-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
A prolonged period of extremely low nominal interest rates has not resulted in high inflation. This has led to increased interest in the “Neo-Fisherian” proposition according to which low nominal interest rates may themselves cause inflation to be lower. The fact that standard models of the effects of monetary policy have the property that perfect foresight equilibria in which the nominal interest rate remains low forever necessarily involve low inflation (at least eventually) might seem to support such a view. Here, however, we argue that such a conclusion depends on a misunderstanding of the circumstances under which it makes sense to predict the effects of a monetary policy commitment by calculating the perfect foresight equilibrium consistent with the policy. We propose an explicit cognitive process by which agents may form their expectations of future endogenous variables. Under some circumstances, such as a commitment to follow a Taylor rule, a perfect foresight equilibrium (PFE) can arise as a limiting case of our more general concept of reflective equilibrium, when the process of reflection is pursued sufficiently far. But we show that an announced intention to fix the nominal interest rate for a long enough period of time creates a situation in which reflective equilibrium need not resemble any PFE. In our view, this makes PFE predictions not plausible outcomes in the case of policies of the latter sort. According to the alternative approach that we recommend, a commitment to maintain a low nominal interest rate for longer should always be expansionary and inflationary, rather than causing deflation; but the effects of such “forward guidance” are likely, in the case of a long- horizon commitment, to be much less expansionary or inflationary than the usual PFE analysis would imply.
Topic:
Economics, Monetary Policy, Inflation, and Interest Rates
Political Geography:
Global Focus

66. Tracking Variation in Systemic Risk at US Banks During 1974-2013

Author:
Edward J. Kane, Armen Hovakimian, and Luc Laeven
Publication Date:
07-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper proposes a theoretically based and easy-to-implement way to measure the systemic risk of financial institutions using publicly available accounting and stock market data. The measure models the credit enhancement taxpayers provide to individual banks in the Merton tradition (1974) as a combination put option for the deep tail of bank losses and a knock-in stop-loss call on bank assets. This model expresses the value of taxpayer loss exposure from a string of defaults as the value of this combination option written on the portfolio of industry assets. The exercise price of the call is the face value of the debt of the entire sector. We conceive of an individual bank’s systemic risk as its contribution to the value of this sector- wide option on the financial safety net. To the extent that authorities are slow to see bank losses or reluctant to exercise the call, the government itself becomes a secondary source of systemic risk. We apply our model to quarterly data over the period 1974-2013. The model indicates that systemic risk reached unprecedented highs during the financial crisis years 2008- 2009, and that bank size, leverage, and asset risk are key drivers of systemic risk.
Topic:
Banks, Institutions, Risk, Credit, and Banking
Political Geography:
Global Focus

67. Is There a Debt-threshold Effect on Output Growth?

Author:
M. Hashem Pesaran
Publication Date:
06-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness. Our contribution is both theoretical and empirical. On the theoretical side, we develop tests for threshold effects in the context of dynamic heterogeneous panel data models with cross- sectionally dependent errors and illustrate, by means of Monte Carlo experiments, that they perform well in small samples. On the empirical side, using data on a sample of 40 countries (grouped into advanced and developing) over the 1965-2010 period, we find no evidence for a universally applicable threshold effect in the relationship between public debt and economic growth, once we account for the impact of global factors and their spillover effects. Regardless of the threshold, however, we find significant negative long-run effects of public debt build-up on output growth. Provided that public debt is on a downward trajectory, a country with a high level of debt can grow just as fast as its peers.
Topic:
Debt, Economics, Economic Growth, and Public Debt
Political Geography:
Global Focus

68. Aggregating Elasticities: Intensive and Extensive Margins of Female Labour Supply

Author:
Orazio P. Attanasio, Peter Levell, Hamish Low, and Virginia Sanchez-Marcos
Publication Date:
06-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
There is a renewed interest in the size of labour supply elasticities and the discrepancy between micro and macro estimates. Recent contributions have stressed the distinction between changes in labour supply at the extensive and the intensive margin. In this paper, we stress the importance of individual heterogeneity and aggregation problems. There is a renewed interest in the size of labour supply elasticities and the discrepancy between micro and macro estimates. Recent contributions have stressed the distinction between changes in labour supply at the extensive and the intensive margin. In this paper, we stress the importance of individual heterogeneity and aggregation problems. At the intensive margins, simple specifications that seem to fit the data give rise to non linear expressions that do not aggregate in a simple fashion. At the extensive margin, aggregate changes in participation are likely to depend on the cross sectional distribution of state variables when a shock hits and, therefore, are likely to be history dependent. We tackle these aggregation issues directly by specifying a life cycle model to explain female labour supply in the US and estimate its various components. We estimate the parameters of different component of the model. Our results indicate that (i) at the intensive margin, Marshallian and Hicksian elasticities are very heterogeneous and, on average, relatively large; (ii) Frisch elasticities are, as implied by the theory, even larger; (iii) aggregate labour supply elasticities seem to vary over the business cycle, being larger during recessions.
Topic:
Gender Issues, Labor Issues, Feminism, and Labor Market
Political Geography:
Global Focus

69. Contagion Exposure and Protection Technology

Author:
Deigo Cerdeiro
Publication Date:
05-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
People adopt diverse measures to protect from contagion. I propose a taxonomy of protection technologies, and present a model to study the implications of the technology on the prevalence of infections and on welfare at different levels of exposure. People adopt diverse measures to protect from contagion. I propose a taxonomy of protection technologies, and present a model to study the implications of the technology on the prevalence of infections and on welfare at different levels of exposure. I find that the effect of aggregate exposure on prevalence and on protection inefficiencies depends crucially on the characteristics of the available protection technology. For example, under certain conditions the existence of a vaccine will lead to lower infection rates and smaller welfare costs of decentralization as the society becomes denser. I discuss the implications for disease eradication, the equilibrium consequences of antigenic drift, the desirability of interventions in the absence of universal vaccines, and coordination failures in protection.
Topic:
Health, Science and Technology, Infectious Diseases, and Medicine
Political Geography:
Global Focus

70. Too much saving... or too few financing channels?

Author:
Anton Brender and Florence Pisani
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The global financial crisis led to widespread dislocation. Understanding the forces that led to such a crisis is no easy matter. After briefly looking back at the mechanics underlying the recent episode of international transfers of saving, this paper looks at how the resulting global imbalances started to unwind and why helping promote the building of new financing channels should now be governments’ priority.
Topic:
Government, Financial Crisis, Global Financial Crisis, and Saving
Political Geography:
Global Focus

71. Social Interaction Models and Keynes’ Macroeconomics

Author:
Duncan Foley
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The central concepts of Keynes’ macroeconomic theories concerning the behavior of labor markets, aggregate demand, and asset pricing can be formulated as special cases of a general social interaction model. In its simplest form this model analyzes a system of interacting identical agents, each of whom controls the level of an action, and all of whom have the same utility functions trading off the effort required by the action with the monetary incentives for it. When the incentives include an interaction term involving the action levels of the other agents, the equilibrium outcome is in general Pareto-inefficient for the interacting agents, and multiple equilibria are possible. The expectations that lie at the heart of Keynes’ conception of macroeconomic equilibrium concern the behavior of other individuals rather than concrete forecasts of the concrete path of prices.
Topic:
Economics, Inequality, Microeconomics, Keynes, and Behavior
Political Geography:
Global Focus

72. Information and Economics: A New Way to Think About Expectations and to Improve Economic Prediction.

Author:
David Tuckett, Paul Ormerod, Rickard Nyman, and Robert Elliot Smith
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The largely unexpected arrival of the global economic crisis and the largely unpredicted slowness of the recovery from the Great Recession should be precipitating an intellectual crisis across economics and policy making. We require additional theories and additional methods to detect how an economy is evolving and to provide the basis for policy intervention (Haldane, 2014).
Topic:
Economics, Inequality, Microeconomics, and Behavior
Political Geography:
Global Focus

73. Twisting the economic tale: what literature can do that political economy can’t

Author:
Sara Thornton
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper will address the problem of how we might gain economic understanding from literature. It will look at the aesthetic form of literature as being an efficient vehicle for economic thinking.
Topic:
Economics, Political Economy, Culture, Inequality, History, and Literature
Political Geography:
Global Focus

74. Towards a Sovereign Debt Restructuring Framework

Author:
Richard A. Conn Jr.
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Initiatives to improve sovereign debt restructuring (“SDR”) began long before recent Argentine bond decisions but were redoubled in the aftermath of these rulings. At first glance, these cases identify problematic contract language that could be rectified by re-drafting critical boilerplate provisions such as the pari passu and collective action clauses (“CAC”). But given the effects of disorder, costs and delays in restructuring foreign sovereign debt upon debtor countries, creditors, and the bond market itself, it is understandable that some are uncomfortable leaving such matters solely in the hands of private parties to contracts without a framework that assists in minimizing damage to contracting and non-contracting parties alike. The creation of an agreed upon framework that facilitates the interaction among private and public parties is a good alternative to the status quo if this approach can provide greater stability and efficiency in the restructuring process while allowing for sufficient flexibility and certainty (traditional benefits of the iterative development of contract language) for market participants. There are a broad variety of options to consider and analyses to be performed, particularly relating to political feasibility, before proposing a framework. As discussed herein, given the historic context of SDR, a framework that focuses upon consensual procedures seems to be a logical starting point since it could add value to the restructuring process without treading on the political terrain of sovereigns.
Topic:
Government, Politics, History, Inequality, Finance, and Sovereign Debt
Political Geography:
Global Focus

75. Leveraging the network: a stress-test framework based on DebtRank

Author:
Stefano Battiston, Guido Caldarelli, Marco D'Errico, and Stefano Gurciullo
Publication Date:
02-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We develop a novel stress-test framework to monitor systemic risk in financial systems. The modular structure of the framework allows to accommodate for a variety of shock scenarios, methods to estimate interbank exposures and mechanisms of distress propagation. The main features are as follows. First, estimate and disentangle not only first-round effects(i.e. shock on external assets) and second-round effects (i.e. distress induced in the interbank network), but also a third-round effect induced by possible fire sales. Second, monitor at the same time the impact of shocks on individual or groups of financial institutions as well as their vulnerability to shocks on counterparties or certain asset classes. Third, estimate loss distributions, thus combining network effects with familiar risk measures such as VaR and CVaR. Fourth, in order to do robustness analyses and cope with incomplete data, generate sets of networks of interbank exposures coherent with the total lending and borrowing of each bank. As an illustration, we carry out a stress–test exercise on a dataset of listed European banks over the years 2008-2013. We find that second-round and third-round effects dominate first-round effects, therefore suggesting that most current stress-test frameworks might lead to a severe underestimation of systemic risk.
Topic:
Debt, Science and Technology, Inequality, Finance, and Innovation
Political Geography:
Global Focus

76. Pseudo-wealth Fluctuations and Aggregate Demand Effects

Author:
Martin Guzman and Joseph E. Stiglitz
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper presents a theory of pseudo-wealth in a model that displays aggregate demand externalities. With heterogeneous beliefs and a market for exploiting those differences in beliefs, pseudo-wealth will be created–i.e. the sum of expected wealth of all the individuals will be larger than what it is feasible for the society. Under some conditions, those perceptions will lead to larger levels of consumption of (tradable and non-tradable) goods, leisure, and borrowing than in a world with common beliefs. If those differences in beliefs disappear, pseudo-wealth will disappear, leading to adjustments in behavior that amplify the initial decrease in expected wealth. That is, we provide a simple general equilibrium model in which the destruction of pseudo-wealth amplifies the effects of the initial disturbance, leading to large decreases in economic activity. Importantly, this downturn is not associated with any change in the state variables that describe the economy. More generally, the paper shows that completing markets (in this case by creating a market for bets) may imply lower output both in the present and in the future, raising unsettling questions on criteria for welfare analysis.
Topic:
Markets, Inequality, Finance, Macroeconomics, Welfare, and Wealth
Political Geography:
Global Focus

77. Board Gender Diversity, Audit Fees and Auditor Choice

Author:
Judy Tsui
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Using a sample of U.S. firms spanning 2001-2011, we examine whether female directors (female audit committee members) affect audit quality in terms of audit effort and auditor choice. After correcting for endogeneity and other board, firm and industry characteristics, we find that firms with gender-diverse boards pay higher audit fees and are more likely to choose specialist auditors compared to their peers. Our findings suggest that boards with female directors are likely to demand higher audit quality, ceteris paribus.
Topic:
Economics, Gender Issues, Race, Culture, Inequality, Diversity, Private Sector, and Audit
Political Geography:
Global Focus

78. Perverse and virtuous feedbacks between inequality and innovation: Which role for public institutions and public investment?

Author:
Alberto Botta
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
In this paper, we deal with the complex relationship connecting inequality to innovation, and the ways through which public investment, in particular public participation to R&D initiatives, may affect it. We first stress that multiple different equilibria may exist in the inequality-innovation space. The positive link that part of the economic theory often assumes between (initially) rising inequality and improving innovation performances emerges as only one among many other far less virtuous dynamics. We then analyze the specific case of the US. We put emphasis on the possible perverse effects that the financialization of the US economy may induce on the inequality-innovation nexus. We also note that the US developmental State that is very often neglected by the economic literature may effectively mitigate such undesirable outcomes. According to our interpretation of recent developments in the US economy, the widespread belief in the positive proinnovation effects of fierce cutthroat remuneration systems may prove to be ungrounded.
Topic:
Development, Inequality, Innovation, Financialisation, and Public Investment
Political Geography:
Global Focus

79. A New Rational Expectations Hypothesis: What Can Economists Really Know About the Future?

Author:
Roman Frydman and Michael Goldberg
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
John Muth proposed the Rational Expectations Hypothesis (REH) to represent how the market (an aggregate of its participants) understands and forecasts outcomes. REH imposes internal consistency between the market’s forecasts and “the relevant economic theory” (Muth 1961, p. 316). In implementing REH, economists have relied on a class of models that rest on a key premise: an economist can ignore the importance of quantitative changes in the economy’s structure that he himself could not specify ex ante with a probabilistic rule. In the early 1970s, Robert Lucas pointed out that once such models are upheld as “the relevant economic theory,” it follows on purely logical grounds that REH models represent rational forecasting and its implications for market outcomes. There is ample evidence that quantitative structural change is an important driver of outcomes in real-world markets, most notably those for assets. The evidence also shows that this change often is triggered by historical events that are not exact repetitions of similar events in the past, for example, the appointment of a new Federal Reserve chair or company CEO. The timing of these events may be unknown, and their quantitative impact on the economy’s structure depends on the extent of their novelty and the particular historical context in which they occur. As such, no one can fully anticipate — even in probabilistic terms — the structural change triggered by such events.
Topic:
Economics, Inequality, Microeconomics, and Behavior
Political Geography:
Global Focus

80. Input Diffusion and the Evolution of Production Network

Author:
Vasco Carvalho and Nico Voigtlander
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The adoption and diffusion of inputs in the production network is at the heart of technological progress. What determines which inputs are initially considered and eventually adopted by innovators? We examine the evolution of input linkages from a network perspective, starting from a stylized model of network formation. The adoption and diffusion of inputs in the production network is at the heart of technological progress. What determines which inputs are initially considered and eventually adopted by innovators? We examine the evolution of input linkages from a network perspective, starting from a stylized model of network formation. Producers direct their search for new inputs along vertical linkages, screening the network neighborhood of existing suppliers to identify potentially useful inputs. A subset of these is then adopted, following a tradeoff between the benefits from input variety and the costs of customizing new inputs. Guided by this framework, we document a novel stylized fact at both the sector and the firm level: producers are more likely to adopt inputs that are already used – directly or indirectly – by their current suppliers. In particular, using disaggregated input-output data, we show that initial network proximity of a sector in 1967 significantly increases the likelihood of adoption throughout the subsequent four decades. A one-standard deviation decrease in network distance is associated with an increase in the adoption probability by one third to one half. Similarly, U.S. firms are significantly more likely to develop new input linkages among their suppliers’ network neighborhood. Our results imply that the existing production network plays a crucial role in the diffusion of inputs and the evolution of technology.
Topic:
Economics, Science and Technology, Microeconomics, and Emerging Technology
Political Geography:
Global Focus

81. Discrimination, Social Identity, and Coordination: An Experiment

Author:
Vessela Daskalova
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper presents an experiment investigating the effect of social identity on hiring decisions. The question is whether people discriminate between own and other group candidate This paper presents an experiment investigating the effect of social identity on hiring decisions. The question is whether people discriminate between own and other group candidates. Key features of the experiment are: First, to consider whether they do so in individual, as well as in joint decisions; Second, to document whether the identity of the co‐decision maker matters in joint decisions. Substantial discrimination occurs in both individual and joint decision‐making situations. In joint decisions, decision makers discriminate when deciding with someone from their own group, but not when deciding with someone from the other group.
Topic:
Economics, Race, Employment, Inequality, Discrimination, Job Creation, Social Order, and Identity
Political Geography:
Global Focus

82. An Economical Business-Cycle Model

Author:
Pascal Michaillat and Emmanuel Saez
Publication Date:
09-2014
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
In recent decades, advanced economies have experienced low and stable inflation and long periods of liquidity trap. We construct an alternative business-cycle model capturing these two features by adding two assumptions to a money-in-the-utility-function model: the labor market is subject to matching frictions, and real wealth enters the utility function. These assumptions modify the two core equations of the standard New Keynesian model. With matching frictions, we can analyze equilibria in which inflation is fixed and not determined by a forward-looking Phillips curve. With wealth in the utility, the Euler equation is modified and we can obtain steady-state equilibria with a liquidity trap, positive inflation, and labor market slack. The model is simple enough to inspect the mechanisms behind cyclical fluctuations and to study the effects of conventional and unconventional monetary and fiscal policies. As a byproduct, the model provides microfoundations for the classical IS-LM model. Finally, we show how directed search can be combined with costly price adjustments to generate a forward-looking Phillips curve and recover some insights from the New Keynesian model.
Topic:
Government, Politics, History, Finance, Business, and Macroeconomics
Political Geography:
Global Focus