JUNE 10 2016

Gauti B. Eggertsson, Neil R. Mehrotra, Sanjay R. Singh, Lawrence H. Summers, NBER: A Contagious Malady? Open Economy Dimensions of Secular Stagnation. Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.

Mikhail Golosov, Guido Menzio, Princeton University. Agency Business Cycles. We propose a new business cycle theory. Firms need to randomize over firing or keeping workers who have performed poorly in the past, in order to give them an ex-ante incentive to exert effort. Firms have an incentive to coordinate the outcome of their randomizations, as coordination allows them to load the firing probability on states of the world in which it is costlier for workers to become unemployed and, hence, allows them to reduce overall agency costs. In the unique equilibrium, firms use a sunspot to coordinate the randomization outcomes and the economy experiences endogenous and stochastic aggregate fluctuations.

Nicola Fuchs-Schündeln, Paolo Masella, VOX: Long-Lasting effects of socialist education: Evidence from the German Democratic Republic. There are strong links between the nature of education in a country and its political institutions, and an individual’s education can impact their lifetime labour market choices. This column examines how being educated under a socialist regime impacts individuals in a free labour market. Using data on students from East and West Germany in the 1970s, it finds that a socialist regime education led to a larger spread in labour market outcomes – more of these individuals were not employed, but conditional on being employed, had higher wages and a higher probability of achieving a professional status in the East.

Iliev R., Axelrod R., PubMed.gov:Does Causality Matter More Now? Increase in the Proportion of Causal Language in English Texts. The vast majority of the work on culture and cognition has focused on cross-cultural comparisons, largely ignoring the dynamic aspects of culture. In this article, we provide a diachronic analysis of causal cognition over time. We hypothesized that the increased role of education, science, and technology in Western societies should be accompanied by greater attention to causal connections. To test this hypothesis, we compared word frequencies in English texts from different time periods and found an increase in the use of causal language of about 40% over the past two centuries. The observed increase was not attributable to general language effects or to changing semantics of causal words. We also found that there was a consistent difference between the 19th and the 20th centuries, and that the increase happened mainly in the 20th century.

Ivan G. Lopez Cruz, Sebastian Galiani, Gustavo Torrens, VOX: Stirring up a hornets’ nest: Geographic distribution of crime. A large empirical literature has revealed the effects of preventative and punitive measures on crime. This column examines the effects of police deployment strategies, comparing geographically concentrated protection with evenly dispersed protection across a city. The results suggests that when considering changes in the geographic distribution of police forces, we should take into account the effects on house prices and on reallocation of the population, as well as the overall effect on crime in the entire city.

Tim Harford, The Undercover Economist, The odds are you won’t know when to quit. Do we tend to quit too soon or quit too late? Are we too stubborn or not determined enough? There has been much excitement recently around the idea of “grit” — a personality trait representing commitment to and enthusiasm for long-term goals, championed by psychologist Angela Duckworth. She argues, plausibly, that grit is more important than talent in predicting a successful life. The idea is appealing in principle but one must ask what Duckworth’s brief “grit” questionnaire is really measuring. While Duckworth’s work suggests that perseverance is vital, other psychological research suggests that we sometimes persevere when we should not. Nobel laureate Daniel Kahneman, with the late Amos Tversky, discovered a tendency called “loss aversion”. Loss aversion is a disproportionate dislike of losses relative to gains, and it can lead us to cling on pig-headedly to bad decisions because we hate to stop playing when we’re behind.