Tapping the Brakes: Are Less Active Markets Safer and Better for the Economy?

From Joe Stiglitz and summarized by Felix Salmon: Continue reading

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The Euro and the Geography of International Debt Flows

From Galina Hale and Maurice Obstfeld:

Greater financial integration between core and peripheral EMU members had an effect on both sets of countries. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems. We analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro’s introduction, Core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery.

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Weekend Links: Understanding Piketty, Falling Interest Rates, Secular Stagnation, etc

  1. Brad Delong has a great post that provides an analytical framework for understanding the historical narrative in Piketty’s new book.
  2. Barry Eichengreen has a nice piece on declining interest rates
  3. Larry Summers gave a talk at INET (starts at 45 min and goes to 1:38 or so) with some especially interesting hypotheses about the changing structure of investment (from GE’s high capital investment model to Google’s abundance of cash) and reflections on the agriculture transition (around 1:21) and the associated difficulties with large shifts in the industrial composition of employment.

 

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Banks as Patient Fixed Income Investors

From Sam Hanson, Andrei Shleifer, Jeremy Stein, and Robert Vishny:

We examine the business model of traditional commercial banks in the context of their co- existence with shadow banks. While both types of intermediaries create safe “money-like” claims, they go about this in very different ways. Traditional banks create safe claims with a combination of costly equity capital and fixed income assets that allows their depositors to remain “sleepy”: they do not have to pay attention to transient fluctuations in the mark-to-market value of bank assets. In contrast, shadow banks create safe claims by giving their investors an early exit option that allows them to seize collateral and liquidate it at the first sign of trouble. Thus traditional banks have a stable source of cheap funding, while shadow banks are subject to runs and fire-sale losses. These different funding models in turn influence the kinds of assets that traditional banks and shadow banks hold in equilibrium: traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk, but are relatively illiquid and have substantial transitory price volatility.

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Inputs in the Production of Early-childhood Human Capital: Evidence from Head Start

From Chris Walters:

Studies of small-scale “model” early-childhood programs show that high-quality preschool can have transformative effects on human capital and economic outcomes. Evidence on the Head Start program is more mixed. Inputs and practices vary widely across Head Start centers, however, and little is known about variation in effectiveness within Head Start. This paper uses data from a multi-site randomized evaluation to quantify and explain variation in effectiveness across Head Start childcare centers. I answer two questions: (1) Is there meaningful variation in short-run effectiveness across Head Start programs? and (2) Is variation in Head Start effectiveness related to observed inputs? To answer the first question, I develop an empirical Bayes instrumental variables procedure that measures variation in local average treatment effects (LATE), accounting for non-compliance with experimental assignments. I estimate that the cross-center standard deviation of cognitive effects is 0.3 test score standard deviations, which is substantially larger than typical estimates of variation in teacher or school effectiveness. Next, I assess the role of inputs in generating this variation, focusing on inputs commonly cited as drivers of the success of small-scale model programs. My results show that Head Start centers offering full-day service boost cognitive skills more than other centers, while Head Start centers offering frequent home visiting are especially effective at raising non-cognitive skills. Other key inputs, including the High/Scope curriculum, teacher education and certification, and class size, are not associated with increased effectiveness in Head Start. Together, observed inputs explain a small share of the variation in Head Start effectiveness. These findings suggest that replicating the effects of successful programs may be difficult, as the factors responsible for their success are largely unidentified.

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A Model of Secular Stagnation

From two of my favorite macroeconomists, Gauti Eggertsson and  Neil Mehrotra:

In this paper we propose a simple overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self-correcting force to full employment. The trigger for the slump is a deleveraging shock which can create an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem are a drop in population growth and an increase in income inequality. High savings, in turn, may require a permanently negative real interest rate. In contrast to earlier work on deleveraging, our model does not feature a strong self-correcting force back to full employment in the long-run, absent policy actions. Successful policy actions include, among others, a permanent increase in inflation and a permanent increase in government spending. We also establish conditions under which an income redistribution can increase demand. Policies such as committing to keep nominal interest rates low or temporary government spending, however, are less powerful than in models with temporary slumps. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession.

HT: Paul Krugman

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Christy Romer: After A Financial Crisis, Economic Disaster Is Not Inevitable

Bonnie Kavoussi’s Blog: Christina Romer: After A Financial Crisis, Economic Disaster Is Not Inevitable.

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