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Public Policy Brief No.128
20 April 2013
From Safety Nets to Economic Empowerment
AbstractSocial protection systems comprise public policies designed to prevent or alleviate economic insecurity and poverty. Throughout the developing world, social protection strategies and the dialogue surrounding them have recently been undergoing an important evolution. In this policy brief, Senior Scholar and Director of the Gender Equality and the Economy program Rania Antonopoulos highlights the opportunities and challenges for promoting gender equality and empowerment within this shifting policy landscape. Developed with financial support from the United Nations Development Programme, this brief is intended as an advocacy tool in the service of amplifying gender-informed policy considerations in country-level social protection debates.Download Public Policy Brief No. 128, 2013 PDF (453.64 KB) -
Book Series
16 April 2013
Ending Poverty: Jobs, Not Welfare
AbstractAlthough Hyman P. Minsky is best known for his ideas about financial instability, he was equally concerned with the question of how to create a stable economy that puts an end to poverty for all who are willing and able to work. This collection of Minsky’s writing spans almost three decades of his published and previously unpublished work on the necessity of combating poverty through full employment policies—through job creation, not welfare.
Minsky was an American economist who studied under Joseph Schumpeter and Wassily Leontief. He taught economics at Washington University, the University of California–Berkeley, Brown University, and Harvard University. Minsky joined the Levy Economics Institute of Bard College as a distinguished scholar in 1990, where he continued his research and writing until a few months before his death in October 1996. His two seminal books were Stabilizing an Unstable Economy and John Maynard Keynes, both of which were reissued by the Levy Institute in 2008.
Minsky held a B.S. in mathematics from the University of Chicago (1941) and an M.P.A. (1947) and a Ph.D. in economics (1954) from Harvard. He was a recipient in 1996 of the Veblen-Commons Award, given by the Association for Evolutionary Economics in recognition of his exemplary standards of scholarship, teaching, public service, and research in the field of evolutionary institutional economics.
This book was made possible in part through the generous support of the Ford Foundation and Andrew Sheng of the Fung Global Institute.
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Policy Notes No.3
15 April 2013
Employment Recovery(?) after the Great Recession
AbstractThis policy note discusses the prospects for job creation in the US based on the most recent Levy Economics Institute Strategic Analysis report, Is the Link between Jobs and Output Broken? The results of our analysis confirm the continued weakness of the US economy in terms of job creation—a phenomenon that has come to be known as a “jobless recovery.” We argue that to understand the problem we must look beyond the unemployment rate, which can conceal changes in the labor force. A prolonged recession can discourage workers, causing them to drop out of the labor market, thus lowering the unemployment rate without increasing employment. Therefore, the total number of people employed should be considered in tandem with the unemployment rate.
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Working Paper No.762
12 April 2013
On the Franco-German Euro Contradiction and Ultimate Euro Battleground
AbstractHighlighting that France and Germany held largely contradicting hopes and aspirations for Europe’s common currency, this paper analyzes how the resulting euro contradiction conditioned the ongoing euro crisis as well as current strategies to resolve it. While Germany generally prevailed in hammering out the design of the euro policy regime, the German authorities have failed to see the inconsistency in their policy endeavors: the creation of a model whose workability presupposes that others behave differently cannot be made to work by forcing everyone to behave like Germany. This fundamental misunderstanding has made Germany the main culprit in the euro crisis, but it has yet to face the full consequences of its actions. Germany had sought every protection against the much-dreaded euro “transfer union,” but its own conduct has made that very outcome inevitable. Conversely, having been disappointed in its own hopes for the euro, France is now facing the prospect of a lost generation—a prospect, shared with other debtor nations in the union, that has undermined the Franco-German alliance and may soon turn it into the ultimate euro battleground.
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Working Paper No.762
12 April 2013
Μια ανάλυση για την γαλλογερμανική αντίφαση γύρω από το ευρώ και την τελική μάχη στην ευρωζώνη
AbstractΥπογραμμίζοντας τις αντικρουόμενες ελπίδες και προσδοκίες μεταξύ Γαλλίας και Γερμανίας για το ευρωπαϊκό κοινό νόμισμα, το κείμενο αναλύει τον τρόπο με τον οποίον συνέβαλε αυτή η κατάσταση στη συνεχιζόμενη ευρωκρίση καθώς και στην αδυναμία της διαμόρφωσης στρατηγικών για την επίλυση της κρίσης στην ευρωζώνη. Η πραγματικότητα είναι ότι ενώ στην ουσία επικράτησε η γερμανική άποψη για τον αρχιτεκτονικό σχεδιασμό του ευρώ και για την κατάλληλη πολιτική που θα εφαρμόζεται στη ζώνη του ευρώ, οι γερμανικές αρχές δεν μπόρεσαν να δουν την ασυνέπεια στη στρατηγική πολιτική που χάραξαν: η δημιουργία ενός μοντέλου του οποίου η λειτουργικότητα προϋποθέτει ότι οι υπόλοιποι εταίροι της ευρωζώνης συμπεριφέρονται διαφορετικά δεν μπορεί να λειτουργήσει μέσω του εξαναγκασμού να συμπεριφέρονται όλοι όπως η Γερμανία. Αυτή η θεμελιώδης παρανόηση έχει μετατρέψει τη Γερμανία στον κύριο ένοχο της κρίσης του ευρώ, χωρίς ωστόσο να έχει ακόμη συνειδητοποιήσει τις συνέπειες των πράξεών της. Η Γερμανία έχει προσπαθήσει με κάθε τρόπο να εμποδίσει τη δημιουργία μιας «μεταβιβαστικής ένωσης», την οποία απεχθάνεται, αλλά η ίδια της η συμπεριφορά έχει κάνει αυτή την έκβαση αναπόφευκτη. Από την άλλη μεριά, η Γαλλία, έχοντας δει να απογοητεύονται οι δικές της ελπίδες για το ευρώ, βρίσκεται τώρα αντιμέτωπη, όπως και οι υπόλοιπες υπερχρεωμένες χώρες, με την προοπτική μιας χαμένης γενιάς — μια προοπτική η οποία υπονομεύει τη γαλλογερμανική συμμαχία με αποτέλεσμα να ενδέχεται να μετατραπεί σύντομα η ευρωζώνη σε πεδίο μάχης.
Download Επιστημονική εργασία υπό εξέλιξη (Working Paper) No. 762 PDF (967.17 KB) -
Research Project Report
10 April 2013
The Lender of Last Resort: A Critical Analysis of the Federal Reserve’s Unprecedented Intervention after 2007
AbstractThis monograph is part of the Levy Institute’s Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis, a two-year project funded by the Ford Foundation.
“Never waste a crisis.” Those words were often invoked by reformers who wanted to tighten regulations and financial supervision in the aftermath of the global financial crisis that began in late 2007. Many of them have been disappointed, since the relatively weak reforms adopted (for example, in Dodd-Frank) appear to have fallen far short of what is needed. But the same words can be invoked in reference to the policy response to the crisis—that is, to the rescue of the financial system. To date, the crisis was wasted in that area, too. If anything, the crisis response largely restored the deeply flawed system that existed on the eve of the crisis.But it may not be too late to use the crisis, and the crisis response, to formulate a different approach to dealing with the next financial crisis—and another crisis is inevitable—by learning from the policy mistakes made in reaction to the last crisis, and by looking to successful policy responses around the globe.
Download Research Project Report, April 2013 PDF (2.10 MB) -
Working Paper No.761
29 March 2013
Currency Concerns under Uncertainty
AbstractThe recent declines in China’s financial account balance ended the “twin surplus” era and led to a modest decline in the stock of official reserves, which reflects a reversal in expectations for the Chinese currency. Negative balances, which have been visible in China’s financial balances since the last quarter of 2011, have heightened fears/anxiety in markets. These deficits stand in sharp contrast to the typical financial account surplus that existed until 2010. The announcement in September 2011 by Chinese monetary authorities of a “two-way floating” RMB in the foreign exchange market has unsettled market expectations and has led to a sharp fall in the financial balance. The latter brought a change in the expectations regarding the RMB-USD exchange rate. This change was reflected in the drop in foreign exchange assets, which was caused by a jump in short-term trade credits to prepay (for imports) in dollars, a rise in dollar advances from banks, and a withdrawal of dollar deposits. These changes have, of late, been a cause of concern relating to the future of China’s economic relations vis-à-vis trading and financial partners, which include the United States.
The experience of China, in a changing world beset with deregulation and with speculation affecting her external balance in recent years, provides further confirmation of John Maynard Keynes’s observation, in 1937, regarding uncertainty in markets: “About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.”
Download Working Paper No. 761 PDF (129.13 KB) -
Working Paper No.760
26 March 2013
Indirect Domestic Value Added in Mexico’s Manufacturing Exports, by Origin and Destination Sector
AbstractAs domestic exports usually require imported inputs, the value of exports differs from the domestic value added contained in exports. The higher the domestic value added contained in exports, the higher the domestic national income created by exports will be. In this case, exports will expand the domestic market. Therefore, exports will push economic growth in two ways: through their direct effect on aggregate demand, and through their effect on the domestic market. For these reasons, the estimate of the magnitude of the domestic value added contained in exports helps explain the capacity of exports to lead economic growth.
Domestic exports may be classified as direct and indirect exports. Direct exports are the goods sold to other countries; indirect exports are the domestically produced inputs incorporated in direct exports. The distinction between direct and indirect exports leads to a distinction between direct and indirect domestic value added contained in exports. The income of the factors directly involved in the production of exports constitutes direct domestic value added; the income contained in domestically produced inputs incorporated into exports constitutes the indirect domestic value added. Therefore, the magnitude of indirect value added depends on the density of the domestic intersectorial linkages.
The aim of this paper is to present an estimation of the domestic indirect value added contained in Mexico’s manufacturing exports in two ways. The first derives from the fact that a direct exporting sector may be the vehicle through which other sectors export in an indirect way; this leads us to estimate the indirect value added contained in exports by sector of origin. The second refers to the destination of this indirect value added—that is, to the direct exporting sectors in which the value added contained in indirect exports of each sector appears.
Based on the input-output table for Mexico (National Institute of Statistics and Geography–INEGI 2008), we estimate the domestic value added contained in inputs used to produce Mexican manufacturing exports. We show separately the domestic value added from maquiladoraexports and from exports produced by the rest of the manufacturing sector. In order to distinguish the indirect value added in exports by sector of origin and destination of the intermediate inputs, we work with square matrices of indirect domestic value–added multipliers.
Download Working Paper No. 760 PDF (342.86 KB) -
Strategic Analysis
19 March 2013
Ισχύει ακόμη η σύνδεση παραγωγής και δημιουργίας θέσεων εργασίας;
AbstractΚαθώς ετοιμάζεται να δημοσιευθεί η παρούσα έκθεση, η ανεργία παραμένει σε εξαιρετικά υψηλά επίπεδα ακόμη και σε σχέση με ανάλογα χρονικά σημεία από προηγούμενες περιόδους οικονομικής ανάκαμψης. Η οικονομία των ΗΠΑ φαίνεται να βιώνει για άλλη μια φορά μια «άνεργη» ανάκαμψη—αν και τα ποσοστά της ανεργίας μειώνονται σταθερά εδώ και χρόνια. Ταυτόχρονα, η δημοσιονομική λιτότητα έκανε την εμφάνισή της με τις αυτόματες περικοπές στον προϋπολογισμό, ύστερα από μια αύξηση των φόρων και την κατάργηση των ειδικών επιδομάτων ανεργίας μόλις πριν δύο μήνες.
Η νέα μας έκθεση παρουσιάζει μεσοπρόθεσμες προβολές για την απασχόληση και την ανάπτυξη κάτω από τέσσερα διαφορετικά σενάρια. Το βασικό σενάριο υποθέτει το ίδιο ποσοστό ανάπτυξης και δημοσιονομικών ελλειμμάτων με αυτό που προβλέπει το Γραφείο Προϋπολογισμού του Κογκρέσου. Το αποτέλεσμα είναι η εκτίναξη της ανεργίας σχεδόν στο 8% το τρίτο τρίμηνο του τρέχοντος έτους, ενώ στη συνέχεια θα υπάρξει μια νέα σταδιακή ανάκαμψη. Τα σενάρια 1 και 2 επιδιώκουν να φτάσουν ποσοστά ανεργίας της τάξης του 6.5% και 5.5%, αντίστοιχα, έως το τέλος του 2014, με τη χρήση δημοσιονομικών κινήτρων.
Ανακαλύπτουμε από τις προσομοιώσεις ότι η επίτευξη αυτών των στόχων απαιτεί μεγαλύτερα δημοσιονομικά κίνητρα σε σχέση με το βασικό σενάριο του Γραφείου Προϋπολογισμού του Κογκρέσου. Για παράδειγμα, για να φτάσουμε το ποσοστό ανεργίας της τάξης του 5,5% το 2014, το σενάριο 2 υποθέτει ρυθμούς ανάπτυξης της τάξης του 11%.
Ως εναλλακτική λύση, το σενάριο 3 υποθέτει επίσης αύξηση στους ρυθμούς ανάπτυξης στο εξωτερικό καθώς και στα επίπεδα ιδιωτικού δανεισμού, μαζί με την ίδια δόση δημοσιονομικών κινήτρων όπως στο σενάριο 1. Σε αυτό το τελευταίο σενάριο της έκθεσης, το ποσοστό ανεργίας φτάνει τελικά στο 5,5% κατά τη διάρκεια του τρίτου τριμήνου του 2015. Ολοκληρώνουμε την έκθεση με μερικές σκέψεις σχετικά με το πώς θα μπορούσε ρεαλιστικά να επιτευχθεί αύξηση της ζήτησης και από τον κρατικό τομέα, και από τον ιδιωτικό τομέα, και από τις ξένες αγορές.
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Strategic Analysis
19 March 2013
Is the Link between Output and Jobs Broken?
AbstractAs this report goes to press, the official unemployment rate remains tragically elevated, compared even to rates at similar points in previous recoveries. The US economy seems once again to be in a “jobless recovery,” though the unemployment rate has been steadily declining for years. At the same time, fiscal austerity has arrived, with the implementation of the sequester cuts, following tax increases and the ending of emergency extended unemployment benefits just two months ago.
Our new report provides medium-term projections of employment and economic growth under four different scenarios. The baseline scenario starts by assuming the same growth rates and government deficits as the Congressional Budget Office’s (CBO) baseline projection from earlier this year. The result is a new surge of the unemployment rate to nearly 8 percent in the third quarter of this year, followed by a very gradual new recovery. Scenarios 1 and 2 seek to reach unemployment-rate goals of 6.5 percent and 5.5 percent, respectively, by the end of next year, using new fiscal stimulus.
We find in these simulations that reaching the goals requires large amounts of fiscal stimulus, compared to the CBO baseline. For example, in order to reach 5.5 percent unemployment in 2014, scenario 2 assumes 11 percent growth in inflation-adjusted government spending and transfers, along with lower taxes.
As an alternative, scenario 3 adds an extra increase to growth abroad and to private borrowing, along with the same amount of fiscal stimulus as in scenario 1. In this last scenario of the report, the unemployment rate finally pierces the 5.5 percent threshold from the previous scenario in the third quarter of 2015. We conclude with some thoughts about how such an increase in demand from all three sectors—government, private, and external—might be realistically obtained.
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Working Paper No.759
18 March 2013
Wages, Exchange Rates, and the Great Inflation Moderation
AbstractSeveral explanations of the “great inflation moderation” (1982–2006) have been put forth, the most popular being that inflation was tamed due to good monetary policy, good luck (exogenous shocks such as oil prices), or structural changes such as inventory management techniques. Drawing from Post-Keynesian and structuralist theories of inflation, this paper uses a vector autoregression with a Post-Keynesian identification strategy to show that the decline in the inflation rate and inflation volatility was due primarily to (1) wage declines and (2) falling import prices caused by international competition and exchange rate effects. The paper uses a graphical analysis, impulse response functions, and variance decompositions to support the argument that the decline in inflation has in fact been a “wage and import price moderation,” brought about by declining union membership and international competition. Exchange rate effects have lowered inflation through cheaper import and oil prices, and have indirectly affected wages through strong dollar policy, which has lowered manufacturing wages due to increased competition. A “Taylor rule” differential variable was also used to test the “good policy” hypothesis. The results show that the Taylor rule differential has a smaller effect on inflation, controlling for other factors.
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Working Paper No.758
14 March 2013
How the Fed Reanimated Wall Street
AbstractWalter Bagehot’s putative principles of lending in liquidity crises—to lend freely to solvent banks with good collateral but at penalty rates—have served as a theoretical basis for thinking about the lender of last resort for close to 100 years, while simultaneously providing justification for central bank real-world intervention. If we presume Bagehot’s principles to be both sound and adhered to by central bankers, we would expect to find the lending by the Fed during the global financial crisis in line with such policies. Taking Bagehot’s principles at face value, this paper aims to examine one of these principles—central bank lending at penalty rates—and to determine whether it did in fact conform to this standard. A comprehensive analysis of these rates has revealed that the Fed did not, in actuality, follow Bagehot’s classical doctrine. Consequently, the intervention not only generated moral hazard but also set the stage for another crisis. This working paper is part of the Ford Foundation project “A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis” and continues the investigation of the Fed’s bailout of the financial system—the most comprehensive study of the raw data to date.
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Policy Notes No.2
12 March 2013
Toward a Post-Keynesian Political Economy for the 21st Century
AbstractThe global economy is in trouble. Indeed, the era of global neoliberalism, while still supreme, is fraught with serious problems and contradictions, as evidenced by both the recent global financial crisis and the inability of advanced economies to maintain steady growth and improve the condition of citizens. Global neoliberalism suppresses wages, increases inequality, and destroys the social fabric. It is a socioeconomic system in dire need of a replacement—and the responsibility falls clearly on progressive economics to chart a full-fledged alternative course.
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Working Paper No.757
11 March 2013
Expanding Social Protection in Developing Countries
AbstractThis paper discusses social protection initiatives in the context of developing countries and explores the opportunities they present for promoting a gender-equality agenda and women’s empowerment. The paper begins with a brief introduction on the emergence of social protection (SP) and how it is linked to economic and social policy. Next, it reviews the context, concepts, and definitions relevant to SP policies and identifies gender-specific social and economic risks and corresponding SP instruments, drawing on country-level experiences. The thrust of the paper is to explore how SP instruments can help or hinder the process of altering rigid gendered roles, and offers a critical evaluation of SP interventions from the standpoint of women’s inclusion in economic life. Conditional cash transfers and employment guarantee programs are discussed in detail. An extensive annotated bibliography accompanies this paper as a resource for researchers and practitioners.
An extensive annotated bibliography accompanies this paper as a resource for researchers and practitioners.
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Policy Notes No.1
04 March 2013
The Tragedy of Greece
AbstractThe crisis in Greece reflects the deep structural problems of the country’s economy, its bureaucratic inefficiency, and a pervasive culture of corruption. But it also reflects the deadly failure of the neoliberal project, which has become institutionalized throughout the European Union’s operational framework—with the International Monetary Fund the world’s single most powerful enforcer of market fundamentalism.
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Working Paper No.755
14 February 2013
The Economics of Inclusion
AbstractThis paper presents a review of the literature on the economics of shared societies. As defined by the Club de Madrid, shared societies are societies in which people hold an equal capacity to participate in and benefit from economic, political, and social opportunities regardless of race, ethnicity, religion, language, gender, or other attributes, and where, as a consequence, relationships between the groups are peaceful. Our review centers on four themes around which economic research addresses concepts outlined by the Club de Madrid: the effects of trust and social cohesion on growth and output, the effect of institutions on development, the costs of fractionalization, and research on the policies of social inclusion around the world.
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Working Paper No.754
11 February 2013
Growth Trends and Cycles in the American Postwar Period, with Implications for Policy
AbstractDo all types of demand have the same effect on output? To answer this question, I estimate a cointegrated vector autoregressive (VAR) model of consumption, investment, and government spending on US data, 1955–2007. I find that: (1) economic growth can be decomposed into a short-run (transitory) cycle gravitating around a long-run (permanent) trend made of consumption shocks and government spending; (2) the estimated fluctuations are investment dominated, they coincide remarkably with the business cycle, and they are highly correlated with capacity utilization in both labor and capital; and (3) the long-run multipliers point to a large induced-investment phenomenon and to a smaller, but still significantly positive, government spending multiplier, around 1.5. The results cover a lot of theoretical ground: Paul Samuelson’s accelerator principle, John Kenneth Galbraith’s stress on consumption and government spending, Jan Tinbergen’s investment-driven business cycle, and Robert Eisner’s inquiries on the investment function. The results are particularly useful to distinguish between economic policies for the short and long runs, albeit no attempt is made at this point to inquire into the effectiveness of specific economic policies.
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Working Paper No.753
07 February 2013
The Missing Macro Link
AbstractThis paper addresses the critique of the aggregational problem attached to the financial instability hypothesis of Hyman Minsky. The core of this critique is based on the Kaleckian analytical framework and, in very broad terms, states that the expenditure of ï¬rms for investment is at the same time a source of income for the ï¬rms producing capital goods. Hence, even if investments are debt ï¬nanced, as in Minsky’s analysis, the overall level of indebtedness of the ï¬rm sector remains unchanged, since the debts of investing ï¬rms are balanced by the income of capital goods–producing ï¬rms. According to the critics, Minsky incurs a fallacy of composition when he does not take this dynamic into account when applying his micro analysis of investment at the macro level. The aim of this paper is to clarify the consequences of debt-ï¬nanced investments over the ï¬nancial structure of an aggregate economy. Starting from the works of MichaÅ‚ Kalecki and Josef Steindl, we developed a stock-flow consistent analysis of a highly simpliï¬ed economy under four different ï¬nancial regimes: (1) debt-ï¬nanced with no distributed profits, (2) debt-ï¬nanced with distributed proï¬ts, (3) internally ï¬nanced with no distributed proï¬ts, and (4) internally ï¬nanced with distributed proï¬ts. The results of our investigation show that debt-ï¬nanced investments do not lead to a worsening of the ï¬nancial position of the ï¬rm sector only if specific assumptions are taken into account.
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Working Paper No.752
07 February 2013
Η ανισότητα και η χρηματοοικονομική συμπεριφορά των νοικοκυριών στην «εποχή των καταναλωτών»
AbstractΘα μπορούσε να περιμένει κανείς ότι η διόγκωση της εισοδηματικής ανισότητας στις ΗΠΑ θα μείωνε την αύξηση της ζήτησης και θα δημιουργούσε τροχοπέδη στην οικονομική ανάπτυξη της χώρας λόγω του ότι τα υψηλότερα εισοδηματικά στρώματα ξοδεύουν μικρότερο ποσοστό του εισοδήματος τους. Ωστόσο, παρά το γεγονός ότι αυξήθηκε η ανισότητα κατά τη διάρκεια των τελευταίων εικοσιπέντε ετών, τα επίπεδα ανάπτυξης και απασχόλησης στις ΗΠΑ ήταν αρκετά ισχυρά με βάση τα ιστορικά δεδομένα μέχρι και τη Μεγάλη Κάμψη. Η εργασία αναλύει αυτό το παράδοξο διαχωρίζοντας τις δαπάνες των νοικοκυριών, το εισόδημα, τις αποταμιεύσεις και το χρέος ανάμεσα στο εισοδηματικά ανώτερο 5% και το εισοδηματικά χαμηλότερο 95%. Ανακαλύπτουμε ότι το εισοδηματικά ανώτερο 5% δαπανούσε πράγματι μικρότερο ποσοστό του εισοδήματος, αλλά αυτό δεν επηρέασε τη ζήτηση επειδή αυξήθηκε το μερίδιο των καταναλωτικών δαπανών του εισοδηματικά χαμηλότερου 95%, το οποίο συνοδεύτηκε από ιστορικά επίπεδα δανεισμού. Η μη βιώσιμη αύξηση της μόχλευσης των νοικοκυριών που ήταν συγκεντρωμένη στο 95% του εισοδηματικού κλιμακίου προκάλεσε τελικά τη Μεγάλη Κάμψη. Η αρνητική επίπτωση της αυξανόμενης ανισότητας στη ζήτηση θα μπορούσε να αποτελέσει μια εξήγηση για τη στάσιμη ανάκαμψη της οικονομίας μετά το τέλος της ύφεσης.
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Working Paper No.752
07 February 2013
Inequality and Household Finance during the Consumer Age
AbstractOne might expect that rising US income inequality would reduce demand growth and create a drag on the economy because higher-income groups spend a smaller share of income. But during a quarter century of rising inequality, US growth and employment were reasonably strong, by historical standards, until the Great Recession. This paper analyzes this paradox by disaggregating household spending, income, saving, and debt between the bottom 95 percent and top 5 percent of the income distribution. We find that the top 5 percent did indeed spend a smaller share of income, but demand drag did not occur because the spending share of the bottom 95 percent rose, accompanied by a historic increase in borrowing. The unsustainable rise in household leverage concentrated in the bottom 95 percent ultimately spawned the Great Recession. The demand drag of rising inequality could be one explanation for the stagnant recovery in the recession’s aftermath.
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Working Paper No.751
04 February 2013
Arresting Financial Crises
AbstractNineteenth-century British economists Henry Thornton and Walter Bagehot established the classical rules of behavior for a central bank, acting as lender of last resort, seeking to avert panics and crises: Lend freely (to temporarily illiquid but solvent borrowers only) against the security of sound collateral and at above-market, penalty interest rates. Deny aid to unsound, insolvent borrowers. Preannounce your commitment to lend freely in all future panics. Also lend for short periods only, and have a clear, simple, certain exit strategy. The purpose is to prevent bank runs and money-stock collapses—collapses that, by reducing spending and prices, will, in the face of downward inflexibility of nominal wages, produce falls in output and employment.
In the financial crisis of 2008–09 the Federal Reserve adhered to some of the classical rules—albeit using a credit-easing rather than a money stock–protection rationale—while deviating from others. Consistent with the classicals, the Fed filled the market with liquidity while lending to a wide variety of borrowers on an extended array of assets. But it departed from the classical prescription in charging subsidy rather than penalty rates, in lending against tarnished collateral and/or purchasing assets of questionable value, in bailing out insolvent borrowers, in extending its lending deadlines beyond intervals approved by classicals, and in failing both to precommit to avert all future crises and to articulate an unambiguous exit strategy. Given that classicals demonstrated that satiating panic-induced demands for cash are sufficient to end crises, the Fed might think of abandoning its costly and arguably inessential deviations from the classical model and, instead, return to it.
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Working Paper No.750
31 January 2013
Endogenous Bank Credit and Its Link to Housing in OECD Countries
AbstractThe relevant economic literature frequently focuses on the impact of credit shocks on housing prices. The doctrine of the “New Consensus Macroeconomics” completely ignores bank credit. The “Great Recession,” however, has highlighted the significance of bank credit. The purpose of this contribution is to revisit this important macroeconomic variable. We propose to endogenize the volume of bank credit by paying special attention to those variables that are related to the real estate market, which can be considered key to the evolution of bank credit. Our theoretical hypothesis is tested by means of a sample of 15 Organisation for Economic Co-operation and Development (OECD) economies from 1970 to 2011. We apply the cointegration technique for the latter purpose, which permits the modeling of the long-run equilibrium relationship and the dynamics of the short run, along with an error-correction term.
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Working Paper No.749
30 January 2013
Weak Expansions
AbstractUsing two standard cycle methodologies (classical and deviation cycle) and a comprehensive sample of 83 countries worldwide, including all developing regions, we show that the Latin American and Caribbean cycle exhibits two distinctive features. First, and most important, its expansion performance is shorter and, for the most part, less intense than that of the rest of the regions considered; in particular, that of East Asia and the Pacific. East Asia’s and the Pacific’s expansions last five years longer than those of Latin American and the Caribbean, and its output gain is 50 percent greater. Second, the Latin American and Caribbean region tends to exhibit contractions that are not significantly different from those other regions in terms of duration and amplitude. Both these features imply that the complete Latin American and Caribbean cycle has, overall, the shortest duration and smallest amplitude in relation to other regions. The specificities of the Latin American and Caribbean cycle are not confined to the short run. These are also reflected in variables such as productivity and investment, which are linked to long-run growth. East Asia’s and the Pacific’s cumulative gain in labor productivity during the expansionary phase is twice that of Latin American and the Caribbean. Moreover, the evidence also shows that the effects of the contraction in public investment surpass those of the expansion, leading to a declining trend over the entire cycle. In this sense, we suggest that policy analysis needs to increase its focus on the expansionary phase of the cycle. Improving our knowledge of the differences in the expansionary dynamics of countries and regions can further our understanding of the differences in their rates of growth and levels of development. We also suggest that, while the management of the cycle affects the short-run fluctuations of economic activity and therefore volatility, it is not trend neutral. Hence, the effects of aggregate demand management policies may be more persistent over time, and less transitory, than currently thought.
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One Pager No.37
30 January 2013
Lessons from an Unconventional Central Banker
AbstractThe global financial crisis has generated renewed interest in the 1951 Treasury – Federal Reserve Accord and its lessons for central bank independence. A broader interpretation of the Accord and of Marriner S. Eccles’s role at the Federal Reserve should teach central bankers that independence can be crucial for fighting inflation, but also encourage them to be more supportive of government efforts to fight deflation and mass unemployment.
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