SEPTEMBER 23 2011

Mark A. Wynne, Dallas Fed: The Sluggish Recovery from the Great Recession: Why There Is No ‘V’ Rebound This Time. It is striking how closely the path of U.S. real GDP trend tracks the average path of output in countries that have experienced banking crises. In that sense, the pace of the recovery is more or less in line with what we might have expected based on the historical experience of other countries that have undergone similar banking calamities.

Geert Bekaert, et al, ECB: Global Crises and Equity Market Contagion. We find evidence of systematic contagion from US markets and from the global financial sector, but the effects are very small. By contrast, there has been systematic and substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries’ economic fundamentals and policies. Consequently, we reject the globalization hypothesis that links the transmission of the crisis to the extent of global exposure. Instead, we confirm the old “wake-up call” hypothesis, with markets and investors focusing substantially more on idiosyncratic, country-specific characteristics during the crisis.

Kash, The Street Light Blog: What Really Caused the Eurozone Crisis? Putting it all together, it seems that the EZ crisis is more consistent with the systemic causes view than the local causes view. In other words, while they didn’t necessarily make the right decision every time, the peripheral EZ countries were up against powerful exogenous forces - capital flow bonanzas and sudden stops - that tended to push them toward financial crisis. They were playing against a stacked deck. It’s useful to reevaluate the macroeconomic history of peripheral Europe in light of this interpretation. Rather than large current account deficits being the result of fiscal mismanagement or excessive consumption, the current account deficits were the necessary and unavoidable counterpart to the surge in capital flows from the EZ core. Rather than above-average inflation rates and deteriorating competitiveness being signs of labor market inefficiencies or lax fiscal policies in the peripheral countries, appreciating real exchange rates were inevitable as the mechanism by which those current account deficits were effected.

Andrew Haughwout et al, NY Fed: Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis. In states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with investors. In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default. Our findings have important implications for policies designed to address the consequences and recurrence of housing market bubbles.

Stephen Burgess, BoE: Measuring financial sector output and its contribution to UK GDP. In the decade before the financial crisis, the UK financial services sector grew more than twice as fast as the UK economy as a whole. But there are many conceptual difficulties associated with measuring output in finance. This article describes the contribution of the financial sector to GDP and assesses the uncertainty around recent estimates. There is some evidence that financial services output grew less quickly over the recent past than the official data suggest, although this probably had only a small impact on the rate of growth of overall GDP.

Michael P. Keane, Richard Rogerson, NBER: Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective. The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, especially the optimal design of tax policies.  This paper surveys recent work that uses structural models and micro data to evaluate the size of this response. Whereas the earlier literature on this issue often concluded that aggregate labor supply elasticities were small, recent work has identified three key reasons that the aggregate elasticity may be quite large.  First, earlier estimates abstracted from several key features, including human capital accumulation, leading to estimates that are dramatically negatively biased.  Second, failure to understand that aggregate labor supply adjustments can occur along both the hours per worker and employment margins has led economists to misinterpret the implications of previous estimates for aggregate labor supply.  Third, structural estimation of responses along the extensive (i.e., employment) margin are typically quite large.

Paul Bingley, Lorenzo Cappellari, Niels Westergaard-Nielsen, CESifo: Flexicurity, Wage Dynamics and Inequality Over the Life-Cycle. We investigate the relationship between life-cycle wages and flexicurity in Denmark. We separate permanent from transitory wages and characterise flexicurity using membership of unemployment insurance funds. We find that flexicurity is associated with lower wage growth heterogeneity over the life-cycle and greater wage instability, changing the nature of wage inequality from permanent to transitory. While we are in general unable to formally test for moral hazard against adverse selection into unemployment insurance membership, robustness checks suggest that moral hazard is the relevant interpretation.

Naci Mocan, Duha T. Altindag, IZA: Is Leisure a Normal Good? Evidence from the European Parliament. Prior to July 2009, salaries of the members of the European Parliament were paid by their home country and there were substantial salary differences between parliamentarians representing different EU countries. Starting in July 2009, the salary of each member of the Parliament is pegged to 38.5% of a European Court judge's salary, paid by the EU. This created an exogenous change in salaries, the magnitude and direction of which varied substantially between parliamentarians. Parliamentarians receive per diem compensation for each plenary session they attend, but salaries constitute unearned income as they are independent of attendance to the Parliament. Using detailed information on each parliamentarian of the European Parliament between 2004 and 2011 we show that an increase in salaries reduces attendance to plenary sessions and an increase in per diem compensation increases it. We also show that corruption in home country has a negative effect on attendance for seasoned members of the Parliament.

Christine Dell'Amore, National Geographic News: Evolution of Narcissism: Why We're Overconfident, and Why It Works. For years, psychologists have observed that people routinely overestimate their abilities. Some experts have suggested that overconfidence can be a good thing, perhaps by boosting ambition, resolve, and other traits, creating self-fulfilling prophecies. But positive self-delusion can also lead to faulty assessments, unrealistic expectations, and hazardous decisions, according to the study—making it a mystery why overconfidence remains a key human trait despite thousands of years of natural selection, which typically weeds out harmful traits over generations. Now, new computer simulations show that a false sense of optimism, whether when deciding to go to war or investing in a new stock, can often improve your chances of winning.