NOVEMBER 9 2017

Christina D. Romer, David H. Romer, NBER:  Why Some Times Are Different:  Macroeconomic Policy and the Aftermath of Financial Crises. Analysis based on a new measure of financial distress for 24 advanced economies in the postwar period shows substantial variation in the aftermath of financial crises.  This paper examines the role that macroeconomic policy plays in explaining this variation.  We find that the degree of monetary and fiscal policy space prior to financial distress--that is, whether the policy interest rate is above the zero lower bound and whether the debt-to-GDP ratio is relatively low--greatly affects the aftermath of crises.  The decline in output following a crisis is less than 1 percent when a country possesses both types of policy space, but almost 10 percent when it has neither.  The difference is highly statistically significant and robust to the measures of policy space and the sample.  We also consider the mechanisms by which policy space matters.  We find that monetary and fiscal policy are used more aggressively when policy space is ample. Financial distress itself is also less persistent when there is policy space.  The findings may have implications for policy during both normal times and periods of acute financial distress.

Paul Schmelzing, BoE: Global real interest rates since 1311: Renaissance roots and rapid reversals. This post takes a longer-term view on real rates using a dataset going back over the past 7 centuries, and finds evidence that the trend decline in real rates since the 1980s fits into a pattern of a much deeper trend stretching back 5 centuries. Looking at cyclical dynamics, however, the evidence from eight previous “real rate depressions” is that turnarounds from such environments, when they occur, have typically been both quick and sizeable.

Ricardo Hausmann, Project Syndicate: The Moral Identity of Homo Economicus. Two recent books – Identity Economics by Nobel laureate George Akerlof and Rachel Kranton and The Moral Economy by Sam Bowles – indicate that a quiet revolution is challenging the foundations of the dismal science, promising radical changes in how we view many aspects of organizations, public policy, and even social life. The new revolution may have been triggered by an uncomfortable finding of the old one. Consider the so-called ultimatum game, in which a player is given a sum of money, say, $100. He must offer a share of that money to a second player. If the latter accepts the offer, both get to keep the money. If not, they both get nothing. Homo economicus would give $1 to the second player, who should accept the offer, because $1 is better than zero dollars. But people throughout the world tend to reject offers below $30. Why? The new revolution assumes that when we make choices, we do not merely consider which of the available options we like the most. We are also asking ourselves what we ought to do.

Gregory Clark, Andrew Leigh, Mike Pottenger, IZA: Immobile Australia: Surnames Show Strong Status Persistence, 1870–2017. The paper estimates long run social mobility in Australia 1870–2017 tracking the status of rare surnames. The status information includes occupations from electoral rolls 1903–1980, and records of degrees awarded by Melbourne and Sydney universities 1852–2017. Status persistence was strong throughout, with an intergenerational correlation of 0.7–0.8, and no change over time. Notwithstanding egalitarian norms, high immigration and a well-targeted social safety net, Australian long-run social mobility rates are low. Despite evidence on conventional measures that Australia has higher rates of social mobility than the UK or USA (Mendolia and Siminski, 2016), status persistence for surnames is as high as that in England or the USA. Mobility rates are also just as low if we look just at mobility within descendants of UK immigrants, so ethnic effects explain none of the immobility.

Alex Edmans, Vivian Fang, Allen Huang, VOX: The long-term consequences of short-term incentives. Worries about the dangers of short-term incentives for CEOs are rarely backed by rigorous evidence. This column uses data over a ten-year period to show that short-term contracts lead CEOs to undertake repurchases and M&A activity that have negative long-term consequences. The results suggest that the horizon of CEO incentives is a more important dimension to reform than the size of pay packets.

Pierre Cahuc, Sandra Nevoux, IZA: Inefficient Short-Time Work. This paper shows that the reforms which expanded short-time work in France after the great 2008-2009 recession were largely to the benefit of large firms which are recurrent short-time work users. We argue that this expansion of short-time work is an inefficient way to provide insurance to workers, as it entails cross-subsidies which reduce aggregate production. An efficient policy should provide unemployment insurance benefits funded by experience rated employers' contributions instead of short-time work benefits. We find that short-time work entails significant production losses compared to an unemployment insurance scheme with experience rating.

Karen Evelyn Hauge, Marte Eline Ulvestad, IZA Journal of Labor Policy: Having a bad attitude? The relationship between attitudes and sickness absence. Is sickness absence related to attitudes? Several studies point to attitudes as an important factor for sickness absence. We study the relation between sickness absence and attitudes towards possible reasons for sick leave, towards cheating and towards work, by linking a survey among Norwegian healthcare workers, aimed at identifying attitudes, to detailed data on sickness absence from the employers. We find that there is an association between sickness absence and certain attitudes but mainly for self-certified sick leave. Employees with more lenient attitudes towards sick leave have more self-certified sick leave, but not more GP-certified sick leave. Furthermore, we find no evidence of attitudes being able to explain the persistently observed differences is absenteeism between different demographic groups