MARCH 25 2011

Economics Department, OECD: The Effects of Oil Price Hikes On Economic Activity and Inflation. The effects of oil price hikes on activity and inflation can be gauged using the OECD’s Global Model. Accordingly, a $10 increase in the price of oil could reduce activity in the OECD area in the second year after the shock by two tenths of a percentage point and raise inflation by roughly two tenths of a percentage point in the first year and by another one-tenth in the second year.1 These multipliers exclude dynamic effects, such as the impact of ongoing balance-sheet repair on the response of household saving to a fall in real incomes. Higher oil prices are also likely to take a toll on potential growth, due to higher input costs and the detrimental effect of increased price volatility on business investment. The recent oil price hikes may have a modest impact on activity in the near term. On the basis of the OECD Global Model multipliers and EO88 projections, if the $25 increase in the price of oil that has taken place since the Tunisian uprising were to be sustained, activity could be reduced by about 0.5 percentage points in the OECD area by 2012 and inflation could rise by 0.75 percentage points.

David Wessel, WSJ Blog: Barry Eichengreen on the End of Dollar Dominance. People have been predicting the demise of the dollar for half a century. I do think the world is changing now in a couple of fundamental ways. First, our children and grandchildren will live in a world where the Chinese economy is larger than the U.S. economy. Demographics, if nothing else, dictate that. It will make no sense for the dollar to be the only true global currency in a world where the U.S. accounts for 15% or 20% at most of real economic activity. Second, the technology of finance is changing. Once upon a time, you could make the argument that there was only room in the world for one true global currency. The arguments in favor of the dollar were stronger than the arguments favoring the alternatives. I think the technology of finance is becoming more open. In a world where you can compare currency values on your smartphone, it’s easier for several true international currencies to coexist. So the question is which ones?

David Aikman, Andrew G Haldane, Benjamin Nelson, VoxEU: Curbing the credit cycle. Credit booms sow the seeds of subsequent credit crunches. This column argues that these have their source in cross-bank externalities. To internalise these cross-sectional spillovers, policy should operate “across the system”. It adds that this is the essence of macro-prudential policy, which, for the first time is about to be undertaken internationally. The state of macro-prudential policy today has many similarities with the state of monetary policy just after the Second World War. Data is incomplete, theory patchy, policy experience negligible. Monetary policy then was conducted by trial and error. The same will be true of macro-prudential policy now. Mistakes will be made. But as experience with the other arms of macroeconomic policy, as well as during the credit crunch, has taught us, the biggest mistake would be not to try.

Robert J. Shiller, Commentary, Project Syndicate: Bubble Spotting. It is impossible for anyone to predict bubbles accurately. In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion. A bubble forms when the contagion rate goes up for ideas that support a bubble. But contagion rates depend on patterns of thinking, which are difficult to judge. A continuation of today’s commodity-price boom has more of a “new era” story attached to it. Increasing worries about global warming, and its effects on food prices, or about the cold and snowy winter in the northern hemisphere and its effects on heating fuel prices, are contagious stories. They are even connected to the day’s top story, the revolutions in the Middle East, which, according to some accounts, were triggered by popular discontent over high food prices – and which could themselves trigger further increases in oil prices. But my favorite dark-horse bubble candidate for the next decade or so is farmland – and not just because there have been stories in recent months of booming farmland prices in the US and the United Kingdom.

Rabah Arezki, Markus Brückner, IMF: Food Prices and Political Instability. Our main finding is that in Low Income Countries increases in the international food prices lead to a significant deterioration of democratic institutions and a significant increase in the incidence of anti-government demonstrations, riots, and civil conflict. In the High Income Countries variations in the international food prices have no significant effects on democratic institutions and measures of intra-state conflict. Our empirical results point to a significant externality of variations in international food prices on Low Income Countries' social and political stability.

Richard W. Kopcke, Zhenya Karamcheva, CRR: Equity Returns in the Coming Decade. Many forecasters have extended projections for a weak economic recovery to projections for subpar returns on stocks in coming years. According to this view, the return on stocks depends on capital gains, and the potential for capital gains is limited by businesses’ ability to expand. This brief observes, instead, that the return on stocks depends on corporations’ capacity to generate earnings and on the prices investors are willing to pay for those earnings. Stocks currently are priced near 15 times earnings, offering stockholders a potential real return of 6.5 percent provided that corporations can maintain their earnings and price-earnings ratios do not drop in the future. Over the coming decade, if earnings continue to recover as they have during past business cycles, stocks are likely to pay returns that compare favorably to their historical averages."

Lars Calmfors, CESIFO: The Role of Independent Fiscal Policy Institutions. The paper analyses how independent fiscal watchdogs (fiscal policy councils) can strengthen the incentives for fiscal discipline. By increasing fiscal transparency they can raise the awareness of the long-run costs of current deficits and increase the reputational costs for governments of violating their fiscal rules. Councils that make also normative judgements, where fiscal policy is evaluated against the government’s own pre-set objectives, are likely to be more influential than councils that do only positive analysis. To fulfil their role adequately, fiscal watchdogs should be granted independence in much the same way as central banks.

Dionissi Aliprantis, Mary Zenker, Cleveland Fed: Educational Attainment and Employment. Higher educational attainment is associated with smaller changes in unemployment. The story of unemployment duration is quite different. The recent recession caused a very large spike in the length of time workers remain unemployed, and spells of unemployment are now similar for workers at all levels of educational attainment. It is interesting that the differences in labor force participation and unemployment rates do not translate into differences for duration.

Victor Lavy, NBER: What Makes an Effective Teacher? Quasi-Experimental Evidence. This paper measures empirically the relationship between classroom teaching practices and student achievements.  Based on primary- and middle-school data from Israel, I find very strong evidence that two important elements of teaching practices cause student achievements to improve.  In particular, classroom teaching that emphasizes the instilment of knowledge and comprehension, often termed "traditional"-style teaching, has a very strong and positive effect on test scores, particularly among girls and pupils of low socioeconomic background.  Second, the use of classroom techniques that endow pupils with analytical and critical skills ("modern" teaching) has a very large positive payoff, evidenced in improvement of test scores across subgroups differentiated by gender and socioeconomic background.

Dana Chandler et al, Chicago University, Youtube: Lectures on Human Capital by Gary Becker. This series of lectures recorded during the Spring of 2010 are from ECON 343 -- Human Capital, a class taught every year by Gary Becker at the University of Chicago. In this class, Becker expounds upon the theory of Human Capital that he helped create and for which he won the Nobel Prize. In total, there are 19 lectures. Each lecture includes a short description of topics covered as well as topical keywords. The interested viewer is also provided with references to books and journal articles from Gary Becker's own original research that bear on the topics discussed in each lecture.

Justin Wolfers, Freakonomics Blog: Economic Research Wants to Be Free. If my students learn only one thing, it’s this: Price equals marginal cost. And the marginal cost of accessing a journal article is pretty much zero. The research has been written, the type has been set, and the salaries have already been paid — usually thanks to a university, think tank, or government grant. So the socially optimal price is: free.  Every time we charge a price higher than this, we risk pricing out someone who might benefit from the insights of an academic scribbler. The Brookings Papers on Economic Activity has decided to take this piece of economic wisdom seriously. The Brookings Papers are now entirely open access.

Daniela Schiller, David Carmel, Scientific American: How Free Is Your Will? Fried and his colleagues implanted electrodes in twelve patients, recording from a total of 1019 neurons. They had their patients look at a hand sweeping around a clock-face, asked them to press a button whenever they wanted to, and then had them indicate where the hand had been pointing when they decided to press the button. [A]bout a quarter of these neurons began to change their activity before the time patients declared as the moment they felt the urge to press the button. The change began as long as a second and a half before the decision. These findings are mind-boggling. They indicate that some activity in our brains may significantly precede our awareness of wanting to move. Libet suggested that free will works by vetoing: volition (the will to act) arises in neurons before conscious experience does, but conscious will can override it and prevent unwanted movements.