Barry Eichengreen, Project Syndicate: Europe’s Inevitable Haircut. This simple fact creates a fundamental contradiction for the internal devaluation strategy: the more that countries reduce wages and costs, the heavier their inherited debt loads become. And, as debt burdens become heavier, public spending must be cut further and taxes increased to service the government’s debt and that of its wards, like the banks. This, in turn, creates the need for more internal devaluation, further heightening the debt burden, and so on, in a vicious spiral downward into depression. So, if internal devaluation is to work, the value of debts, where they already represent a heavy burden, must be reduced. Government debt must be restructured. Bank debts have to be converted into equity and, where banks are insolvent, written off. Mortgage debts, too, must be written down.
Edward L. Glaeser, NYT Blog: Does Economic Inequality Cause Crises? The Nobel Laureate Joseph Stiglitz’s theory is that “growing inequality in most countries of the world has meant that money has gone from those who would spend it to those who are so well off that, try as they might, they can’t spend it all. Jean-Paul Fitoussi and Francesco Saraceno have made similar arguments. A related view, called the Stiglitz hypothesis, by Sir Anthony Atkinson and Salvatore Morelli, is that “in the face of stagnating real incomes, households in the lower part of the distribution borrowed to maintain a rising standard of living,” and “this borrowing later proved unsustainable, leading to default and pressure on over-extended financial institutions.” Another view, associated with Raghuram Rajan, former chief economist of the International Monetary Fund, is that “the political response to rising inequality – whether carefully planned or the path of least resistance – was to expand lending to households, especially low-income households.”
Michael Kumhof, Romain Rancière, IMF: Inequality, Leverage and Crises. The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction.
Oscar Jorda, Moritz Schularick, Alan M. Taylor, NBER: Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons. We study the experience of 14 developed countries over 140 years (1870-2008). We exploit our long-run dataset in a number of different ways. First, we apply new statistical tools to describe the temporal and spatial patterns of crises and identify five episodes of global financial instability in the past 140 years. Second, we study the macroeconomic dynamics before crises and show that credit growth tends to be elevated and natural interest rates depressed in the run-up to global financial crises. Third, we show that recessions associated with crises lead to deeper recessions and stronger turnarounds in imbalances than during normal recessions. Finally, we ask if external imbalances help predict financial crises. Our overall result is that credit growth emerges as the single best predictor of financial instability, but the correlation between lending booms and current account imbalances has grown much tighter in recent decades.
Luiz de Mello, Pier Carlo Padoan, Linda Rousová, VoxEU: Monitoring global imbalances: Determinants and policy implications of current-account reversals. Are global imbalances sustainable? This column analyses nearly 160 current-account reversals across 101 countries between 1971 and 2007. It argues that with the right policy framework, external imbalances can be monitored and, to some extent, managed.
Rémi Bazillieryand, Yasser Moullan, Université d’Orléans: Employment Protection and Migration. Empirically, we show that employment protection differential between source and destination countries is an important determinant of bilateral migration. Bilateral migration of workers is negatively affected by this differential of employment protection. This effect is stronger for high-skilled workers. We also find that the effect of the differential is largely explained by the level of employment protection in destination countries. This factor does not have a significant impact in origin countries. These results are obtained controling econometrically for the high proportion of zero using Heckman two steps procedure. Overall, we find that, contrary to the conventional wisdom, migrants are not attracted by protective legislation. On the contrary, they tend to move where this protection is closer to the one of their origin country.
Pedro Carneiro, Katrine V. Loken, Kjell G. Salvanes: A Flying Start? Long Term Consequences of Maternal Time Investments in Children During Their First Year of Life. We study the impact on children of increasing the time that the mother spends with her child in the first year by exploiting a reform that increased paid and unpaid maternity leave in
Andreas Peichl, Sebastian Siegloch, IZA: Accounting for Labor Demand Effects in Structural Labor Supply Models. When assessing the effects of policy reforms on the labor market, most studies only focus on labor supply. The interaction of supply and demand side is not explicitly modeled, which might lead to biased estimates of potential labor market outcomes. This paper proposes a straightforward method to remedy this shortcoming. We use information on firms’ labor demand behavior and feed them into a structural labor supply model, completing the partial analysis of the labor market on the microdata level. We show the performance and relevance of our extension by introducing a pure labor supply side reform, the workfare concept, in
Cara Buckley, NYT: To Test Housing Program, Some Are Denied Aid. It has long been the standard practice in medical testing: Give drug treatment to one group while another, the control group, goes without. Now,
Chris Dillow, Stumbling and Mumbling Blog: Egonomics. When I was young and stupid - ills of which I am now half-cured - I thought that wealth and fame arose from merit. As I got older, I thought they were more due to luck. But now I think I was wrong. They arise instead from ego. Whether it is the desire to think well of oneself, or to believe that others do so, or the belief that one’s talents entitle one to a “distinguished” position, it is, I suspect, ego that is the motive force, rather than a desire for wealth. What I’m getting at here is that the bog-standard economistic view that we are motivated by money is horribly incomplete - except at a (perhaps narrow) margin. It is instead vanity and ego that drives many of us.
Mulholland, Sean, Tomic, Aleksandar, Sholander, Samuel, Stonehill College: The Faculty Flutie Factor: Does Football Performance Affect a University’s US News and World Report Peer Assessment Score? Analyzing the peer assessment portion of the US News and World Report’s college rankings, we find that administrators and faculty rate more highly universities whose football team receives a greater number of votes in either the final Associated Press or Coaches Poll. Controlling for unobserved heterogeneity, our estimates suggest that a one standard deviation increase in the number of votes received in either the Associated Press or USA Today Coaches’ Football Poll is viewed as positively as a forty point increase in a school’s SAT score at the 75th percentile.
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