JANUARY 21 2011

Paul Krugman, NYT Magazine: Can Europe Be Saved? The United States works as a currency union in large part precisely because it is also a transfer union, in which states that haven’t gone bust support those that have. And it’s hard to see how the euro can work unless Europe finds a way to accomplish something similar. Nobody is yet proposing that Europe move to anything resembling U.S. fiscal integration; the Juncker-Tremonti plan would be at best a small step in that direction. But Europe doesn’t seem ready to take even that modest step. In any case, the odds are that the current tough-it-out strategy won’t work even in the narrow sense of avoiding default and devaluation — and the fact that it won’t work will become obvious sooner rather than later. At that point, Europe’s stronger nations will have to make a choice.

Andrew Leonard, Salon: Alan Greenspan's housing bubble coffee break. On Friday, the Federal Reserve released the transcripts of its 2005 Open Market Committee meetings -- the gatherings in which the Fed's Board of Governors takes the pulse of the economy and then decides upon the appropriate interest rate policy. The warning signs were written in blazing Day-Glo orange on the Fed temple walls. Greenspan ignored them, and the U.S. economy hurtled directly into the worst economic disaster since the Great Depression.

Adam Ozimek, Modeled Behavior: Why do forecasters have such disagreement? One might expect that over time economic forecasters should converge in methodologies, and thus in forecasts, as the competitive market for forecasters creates a natural selection that weeds out unsuccessful strategies and pushes forecasters towards the most successful strategy. However there is still a wide divergence in economic forecasts, which begs the question what part of that natural selection is failing? ….A third, and I believe most important, explanation is the failure of the  assumption that the competitive market for forecasters creates incentives to have the most accurate forecasts possible. A great example of the lack of a direct relationship between accuracy and incentives is Nouriel Roubini.

Joseph W. Gruber, Steven B. Kamin, Fed: Fiscal Positions and Government Bond Yields in OECD Countries. We examine the impact of fiscal positions, both the level of debt and the fiscal balance, on long-term government bond yields in the OECD. In order to control for the endogenity of fiscal positions to the business cycle we utilize forward projections of fiscal positions from the OECD’s Economic Outlook. In a panel regression over the period from 1988 to 2007, we find a robust and significant effect of fiscal performance on long-term bond yields. Our estimates imply that the marginal effect of the projected deterioration of fiscal positions associated with the recent financial crisis is to add about 60 basis points to U.S. bond yields by 2015, with effects on other G7 bond yields generally being smaller.

Anna Iara, Guntram Wolff, VoxEU: Sovereign risk: The impact of national numerical fiscal rules. The Eurozone crisis has whetted the appetite for economic governance reform in the EU, with one high-profile proposal aiming to strengthen national fiscal frameworks. With a unique data set, this column shows that stronger fiscal rules in Eurozone member states reduce sovereign risk, especially in times of high uncertainty. If followed, these rules could reduce sovereign yield spreads by up to 100 basis points.

Maurizio Michael Habib, Livio Stracca, ECB: Getting Beyond Carry Trade. What Makes A Safe Haven Currency?  The main objective of this paper is to find out what the fundamentals of safe haven currencies are. We analyse a large panel of 52 currencies in advanced and emerging countries over almost 25 years of data. We find that only a few factors are robustly associated to a safe haven status, most notably the net foreign asset position, an indicator of external vulnerability, and to a lesser extent the absolute size of the stock market, an indicator of market size and development. The interest rate spread against the US is significant only for advanced countries, whose currencies are subject to carry trade. More generally, we find that it is hard to predict what currencies would do when global risk aversion is high, as estimates are imprecise and often not stable or robust. This suggests caution in over-interpreting exchange rate movements during financial crises.

Gadi Barlevy, Jonas D.M. Fisher, Chicago Fed: Mortgage Choices and Housing Speculation. We describe a rational expectations model in which speculative bubbles in house prices can emerge. Within this model both speculators and their lenders use interest-only mortgages (IOs) rather than traditional mortgages when there is a bubble. Absent a bubble, there is no tendency for IOs to be used. These insights are used to assess the extent to which house prices in US cities were driven by speculative bubbles over the period 2000-2008. We find that IOs were used sparingly in cities where elastic housing supply precludes speculation from arising. In cities with inelastic supply, where speculation is possible, there was heavy use of IOs, but only in cities that had boom-bust cycles. Peak IO usage predicts rapid appreciations that cannot be explained by standard correlates and this variable is more robustly correlated with rapid appreciations than other mortgage characteristics, including sub-prime, securitization and leverage. Where IOs were popular, their use does not appear to have been a response to houses becoming more expensive. Indeed, their use anticipated future appreciation.

Atif Mian, Amir Sufi, San Francisco Fed: Household Debt and the Weak U.S. Economy. The U.S. economic recovery has been weak, especially in employment growth. A microeconomic analysis of U.S. counties shows that this weakness is closely related to elevated levels of household debt accumulated during the housing boom. Counties where household debt grew moderately from 2002 to 2006 have seen a moderation of employment losses and a robust recovery in durable consumption and residential investment. By contrast, counties that experienced large increases in household debt during the boom have been mired in a severe recessionary environment even after the official end of the recession.

Sam Schulhofer-Wohl, Minneapolis Fed: Negative Equity Does Not Reduce Homeowners' Mobility. Some commentators have argued that the housing crisis may harm labor markets because homeowners who owe more than their homes are worth are less likely to move to places that have productive job opportunities. I show that, in the available data, negative equity does not make homeowners less mobile. In fact, homeowners who have negative equity are slightly more likely to move than homeowners who have positive equity.

James M. Sallee, Joel Slemrod, NBER:  Car Notches: Strategic Automaker Responses to Fuel Economy Policy. Notches --- where small changes in behavior lead to large changes in a tax or subsidy --- figure prominently in many policies, but have been rarely examined by economists. In this paper, we analyze a class of notches associated with policies aimed at improving vehicle fuel economy. We provide several pieces of evidence showing that automakers respond to notches in fuel economy policy by precisely manipulating fuel economy ratings so as to just qualify for more favorable treatment. We then describe the welfare consequences of this behavior and derive a welfare summary statistic applicable to many contexts.

Free exchange Blog: The value of college. So, do colleges actually teach students anything? A new book tracking 2,300 students at four-year universities includes some striking findings: 45 percent of students "did not demonstrate any significant improvement in learning" during the first two years of college. 36 percent of students "did not demonstrate any significant improvement in learning" over four years of college. Those students who do show improvements tend to show only modest improvements. Students improved on average only 0.18 standard deviations over the first two years of college and 0.47 over four years. What this means is that a student who entered college in the 50th percentile of students in his or her cohort would move up to the 68th percentile four years later -- but that's the 68th percentile of a new group of freshmen who haven't experienced any college learning.

Jérôme Adda, Anders Björklund, Helena Holmlund, IZA: The Role of Mothers and Fathers in Providing Skills: Evidence from Parental Deaths. We exploit a large administrative data set covering many Swedish cohorts. We develop new estimation methods to tackle the potential endogeneity of death at an early age, based on the idea that the amount of endogeneity is constant or decreasing during childhood. Our method also allows us to identify a set of death causes that are conditionally exogenous. We find that the loss of either a father or a mother on boys' earnings is no higher than 6-7 percent and slightly lower for girls. Our examination of the impact on cognitive skills (IQ and educational attainment) and on noncognitive skills (emotional stability, social skills) shows rather small effects on each type of skill. We find that both mothers and fathers are important, but mothers are somewhat more important for cognitive skills and fathers for noncognitive ones.

Edward L. Glaeser, Boston Globe: A lesson for America. Education may be the best way to reduce future unemployment. Anyone who worries about American decline must recognize that skills drive Asian economic success. In December, we learned that children in Shanghai were massively outperforming Americans on standardized tests, and President Obama understandably called for a new “Sputnik moment,’’ when America would again invest massively in its children. Now he must ensure that his party puts students ahead of teachers unions.

James D. Hamilton, UCLA: Historical Oil Shocks. As noted in the previous sections, these historical episodes were often followed by economic recessions in the United States. The last column of Table 1 reports the starting date of U.S. recessions as determined by the National Bureau of Economic Research. All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960. Likewise, all but one of the 12 oil price episodes listed in Table 1 were accompanied by U.S. recessions, the single exception being the 2003 oil price increase associated with the Venezuelan unrest and second Persian Gulf War.

Daniel A. Hartley, Cleveland Fed:  Blowing it Up and Knocking it Down: The Effect of Demolishing High Concentration Public Housing on Crime. In Chicago, which has conducted the largest public housing demolition program in the United States, I find that public housing demolitions are associated with a 10 percent to 20 percent reduction in murder, assault, and robbery in neighborhoods where the demolitions occurred. Furthermore, violent crime rates fell by about the same amount in neighborhoods that received the most displaced public housing households relative to neighborhoods that received fewer displaced public housing households, during the period when these developments were being demolished. This suggests violent crime was not simply displaced from the neighborhoods where demolitions occurred to neighborhoods that received the

former public housing residents.

St. Claire, L., Hayward, R., and Rogers, P. Interactive Effects of Caffeine Consumption and Stressful Circumstances on Components of Stress: For two men collaborating or negotiating under stressful circumstances, caffeine consumption was bad news, undermining their performance and confidence. By contrast, for pairs of women, drinking caffeine often had a beneficial effect on these same factors. The differential effect of caffeine on men and women may have to do with the fact that women tend to respond to stress in a collaborative, mutually protective style (known as 'tend and befriend') whereas men usually exhibit a fight or flight response.