MAY 24 2017

Jeremy Chiu, Richard Harris, Evarist Stoja, BoE: Do core and transitory volatilities matter for the economy? Financial markets are intrinsically volatile, constantly fluctuating in response to a wide variety of news. Often, these shocks to volatility are short-lived, perhaps reflecting a one-off adjustment in asset prices or the market’s overreaction to news, and have a tendency to dissipate rapidly. But sometimes they lead to a sustained increase in market volatility, reflecting a deeper uncertainty over the future macroeconomy that can take time to resolve itself.  Indeed, a considerable body of empirical evidence suggests that financial market volatility is made up of two components: a slowly varying ‘core’ component and a ‘transitory’ component that dissipates quickly. We develop a way to identify each type and estimate how they affect the broader economy.

Larry Summers: Gap between what is widely believed and market evidence. There is distressingly little evidence in favor of the proposition that banks that are measured as better capitalized by their regulators are less likely to fail than other banks. Financial logic embodied in the celebrated Modigliani Miller theorem and suggested by common sense holds that substantial reductions in leverage, if achieved, should be associated with reduced volatility, reduced sensitivity to shocks and lower risk premiums. The data suggest that on a market value of equity basis, major financial institutions are no less levered than they were over the period before the crisis.

Dani Rodrik, Harvard: Is Global Equality the Enemy of National Equality? The bulk of global inequality is accounted for by income differences across countries rather than within countries. Expanding trade with China has aggravated inequality in some advanced economies, while ameliorating global inequality. But the “China shock” is receding and other low-income countries are unlikely to replicate China’s export-oriented industrialization experience. Relaxing restrictions on cross-border labor mobility might have an even stronger positive effect on global inequality. However it also raises a similar tension. While there would likely be adverse effects on low-skill workers in the advanced economies, international labor mobility has some advantages compared to further liberalizing international trade in goods. I argue that none of the contending perspectives -- national-egalitarian, cosmopolitan, utilitarian -- provides on its own an adequate frame for evaluating the consequences.

Peter Dizikes, MIT News: Darwin visits Wall Street. EMH assumes that individuals always maximize their expected utility — they find the optimal way to spend and invest, all the time. Lo’s adaptive markets hypothesis relaxes this dictum on two counts. First, a successful investing adaptation doesn’t have to be the best of all possible adaptations — it just has to work fairly well at a given time. Lo’s adaptive markets hypothesis does not hold that people will constantly be finding the best possible investments. Instead, as he writes in the book, “consumer behavior is highly path-dependent,” based on what has worked well in the past. Given those conditions, the market equivalent of natural selection weeds out poor investment strategies.

Alberto Alesina, Bryony Reich, Alessandro Riboni, NBER: Nation-Building, Nationalism and Wars. The increase in army size observed in early modern times changed the way states conducted wars. Starting in the late 18th century, states switched from mercenaries to a mass army by conscription. In order for the population to accept to fight and endure war, the government elites began to provide public goods, reduced rent extraction and adopted policies to homogenize the population with nation-building. This paper explores a variety of ways in which nation-building can be implemented and studies its effects as a function of technological innovation in warfare.

Markus Gehrsitz, IZA: Speeding, Punishment, and Recidivism: Evidence from a Regression Discontinuity Design. This paper estimates the effects of temporary driver's license suspensions on driving behavior. A little known rule in the German traffic penalty catalogue maintains that drivers who commit a series of speeding transgressions within 365 days should have their license suspended for one month. My regression discontinuity design exploits the quasi-random assignment of license suspensions caused by the 365-days cut-off and shows that 1-month license suspensions lower the probability of recidivating within a year by 20 percent. This is largely a specific deterrence effect driven by the punishment itself and not by incapacitation, information asymmetries, or the threat of stiffer future penalties.