MARCH 5 2010

Jan Hatzius et al, Chicago University: Financial Conditions Indexes: A Fresh Look after the Financial Crisis. This report explores the link between financial conditions and economic activity. We first review existing measures, including both single indicators and composite financial conditions indexes (FCIs). We then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, our use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes. Third, we control for past GDP growth and inflation and thus focus on the predictive power of financial conditions for future economic activity. During most of the past two decades for which comparisons are possible, including the last five years, our FCI shows a tighter link with future economic activity than existing indexes, although some of this undoubtedly reflects the fact that we selected the variables partly based on our observation of the recent financial crisis. As of the end of 2009, our FCI showed financial conditions at somewhat worse-than-normal levels. The main reason is that quantitative credit measures (e.g. asset-backed securities issuance) remain very weak, especially once we control for past economic growth. Thus, our analysis is consistent with an ongoing modest drag from financial conditions on economic growth in 2010.

Alberto Musso, Stefano Neri, Livio Stracca, ECB: Housing, consumption and monetary policy how different are the US and the euro area? The paper presents evidence from Structural Vector Autoregressions (SVAR) by focusing on the e¤ects of three structural shocks, (i) monetary policy, (ii) credit supply and (iii) housing demand shocks on the housing market and the broader economy. We find that similarities overshadow differences as far as the role of the housing market is concerned. We find evidence pointing in the direction of a stronger role for housing in the transmission of monetary policy shocks in the US, while the evidence is less clearcut for housing demand shocks. We also find that credit supply shocks matter more in the euro area.

Lorenzo Cappiello et al, VoxEU: The effect of bank loans and credit standards on output. How important is credit availability to the real economy? This column examines evidence from the Eurozone and suggests that a change in loan availability has a positive and statistically significant effect on GDP. This provides support for the policies taken by central banks to alleviate pressures on the banking system.

Martin Feldstein, Project Syndicate: How Safe Are Your Dollars? Chinese officials and private investors around the world have been worrying aloud about whether their dollar investments are safe. Since the Chinese government holds a large part of its $2 trillion of foreign exchange in dollars, they have good reason to focus on the future value of the greenback. And investors with smaller dollar holdings, who can shift to other currencies much more easily than the Chinese, are right to ask themselves whether they should be diversifying into non-dollar assets – or even shunning the dollar completely.

Behzad Kianian, Kei-Mu Yi, Philadelphia Fed: China’s Emergence as a Manufacturing Juggernaut: Is It Overstated? The wages of China’s manufacturing workers are rising rapidly; and China’s production of export goods relies heavily on imported inputs and the final exported goods face large mark-ups in their destination markets. The first theme implies that China will lose global market share in some categories of goods. The second implies that China’s trading relationship with many countries is complementary, not competitive, and that the omnipresence of China’s goods exaggerates the extent of its manufacturing performance. China’s emergence as a global manufacturing power should not be overstated, and concerns that China will “take over” all manufacturing markets are unfounded.

Egbert L.W. Jongen, CPB: Child care subsidies revisited. Public spending on child care has taken a high flight in the Netherlands. One of the key policy goals of child care subsidies is to stimulate labour participation. We study the impact of child care subsidies on labour participation using a general equilibrium model. Next to the labour supply choice, we also model the choice over formal and informal care. The choice between formal and informal care plays an important role in the overall impact of child care subsidies on labour participation. The model is calibrated to Dutch data. Our analysis shows that existing child care subsidies have promoted labour participation. However, at the current average subsidy rate of almost 80%, a further increase in the subsidy rate is a rather ineffective way to promote formal participation, the main effect being substitution of informal for formal care.

Lorenzo Bini Smaghi, ECB: Slaves of defunct economists. The economist John Maynard Keynes is back in fashion”, writes Robert Skidelsky. A question that comes to mind in reading these words is why Keynes had to make a comeback in the first place, why the General Theory was forgotten and its prescriptions abandoned. There are two possible answers to the question. The first is that the Theory is not general, and thus cannot apply to all economic states of the world. The second is that Keynes’ famous admonition in the last page of his General Theory – according to which “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist” – has been turned upside down. In other words, defunct economists – and their theories – are usually enslaved by practical men who do not fully understand them.

Alfonso Arpaia, Nicola Curci, ECFIN: EU labour market behaviour during the Great Recession. At this juncture, the major risks concern the possibility that unemployed people become disenfranchised from the labour market and, thus, that high unemployment does not curb the growth of real wages (i.e. becomes structural unemployment). Apart from being a constraint to the recovery in the short term, a decline in the labour supply may heavily affect the potential output. However, reforms in many countries have strengthened the labour market attachment of most vulnerable groups and a large reduction in the overall activity rate is less likely now than in the past.

Ayşegül Şahin, Joseph Song, Bart Hobijn, NY Fed: The Unemployment Gender Gap during the 2007 Recession. Women fared decidedly better than men during the most recent recession. By August 2009, the unemployment rate for men had hit 11.0 percent, while that for women held at 8.3 percent. This 2.7 percentage point unemployment gender gap—the largest in the postwar era—appears to reflect two factors: First, men were much more heavily represented in the industries that suffered the most during the downturn. Second, there was a much sharper increase in the percentage of men who—prompted, perhaps, by a decline in household liquidity—rejoined the labor force but failed to find a job.

Nuria Rodriguez-Planas, IZA: Longer-Term Impacts of Mentoring, Educational Services, and Incentives to Learn: Evidence from a Randomized Trial. This paper is the first to use a randomized trial in the US to analyze the short- and long-term educational and employment impacts of an after-school program, the Quantum Opportunity Program, that offered disadvantaged high-school youth: mentoring, educational services, and financial rewards with the objective to improve high-school graduation and post-secondary schooling enrollment. Average impacts reveal that the hefty beneficial educational outcomes quickly faded away. Heterogeneity matters. While encouraging results are found for the younger youth; detrimental long-lived outcomes for males suggest that extrinsic rewards may be crowding out intrinsic motivation. Evidence by sites' funding source, which led to implementation differences, supports this hypothesis.

Xavier Sala-i-Martin, Maxim Pinkovskiy , NBER: African Poverty is Falling...Much Faster than You Think! We estimate income distributions, poverty rates, and inequality and welfare indices for African countries for the period 1970-2006. We show that: (1) African poverty is falling and is falling rapidly; (2) if present trends continue, the poverty Millennium Development Goal of halving the proportion of people with incomes less than one dollar a day will be achieved on time; (3) the growth spurt that began in 1995 decreased African income inequality instead of increasing it; (4) African poverty reduction is remarkably general: it cannot be explained by a large country, or even by a single set of countries possessing some beneficial geographical or historical characteristic.

Bockerman, Petri et al, MPRA: Does physical capacity explain the height premium? The paper examines the role of physical capacity in the determination of the height premium by using the “Health 2000 in Finland” data that contain both self-reported information on the physical strenuousness of work, and information on muscle mass from medical examinations. Our results show that the height premium does not vary according to the physical strenuousness of work. We also find that muscle mass is not related to wages. Furthermore, we observe that the shortest men do physically very demanding work and the tallest do sedentary work, even after controlling for the effects of age and education.

Alex Tabarrok, Marginal Revolution Blog: The Philosophical Cow. Suppose that you are a cow philosopher contemplating the welfare of cows. In the world today there are about 1.3 billion of your compatriots. It would be a fine thing for cows if all cows were well treated and if none were slaughtered for food. Nevertheless, being a clever cow, you understand that it's the demand for beef that brings cows to life. How do you regard such a trade off? If each cow brought to life adds even some small bit of cow utility to the grand total of cow welfare must not beef eaters be lauded, at least if they are hungry enough?