The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors.     

Efficient markets and Bayes’ rule

Summary. A series of financial anomalies motivated the development of new theories that modify the rational expectations ideal. Two possibilities have been systematically explored. The literature on behavioral finance relaxes the assumption that agents form beliefs according to the laws of probability and assume, instead, that simpler heuristic rules are used. Another stream of the literature assumes that agents process information according to Bayes rule, but do not posses sufficient information to know the true data generating process. In this paper, Bayesian and Behavioral agents coexist and trade in a standard dynamic asset pricing model. A long-standing conjecture is demonstrated. It is shown that, under suitable assumptions, Bayesian agents drive Behavioral, non-Bayesian agents out of the market. Hence, asset prices are eventually determined under the Bayesian paradigm.Received: 3 June 2004, Revised: 17 September 2004, JEL Classification Numbers: D83.Preliminary versions have circulated under the titles Markets Favor Bayesian Models and Market Selection of Empirical Models under Limited Information. I thank Larry Blume, David Easley, Larry Epstein, Armando Gomes, Bruce Hansen, Lars Hansen, Richard Kihlstrom, Grace Koo, George Mailath, Werner Ploberger, Andrew Postlewaite and Shakeeb Khan for useful comments. I also thank participants at the NBER GE meetings, Evolutionary Finance conference in Zurich, Latin American Meetings of the Econometric Society, Stanford Institute for Theoretical Economics, the Instituto de Matematica Pura e Aplicada, the theory seminar at Brown, Chicago, Harvard-MIT, Minnesota, Penn and Wisconsin. I gratefully acknowledge the financial support from the National Science Foundation Grant SES 0109650.     

The Euroland crisis and Germany’s euro trilemma

This paper investigates the causes behind the Euroland crisis, particularly Germany’s role in it. It is argued that the crisis is not primarily a ‘sovereign debt crisis’, but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage restraint on Germany’s part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all – perpetual export surpluses, a no transfer/no bailout monetary union, and a ‘clean,’ independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro’s survival. The crisis in Euroland poses a global ‘too big to fail’ threat, and presents a moral hazard of perhaps unprecedented scale to the global community.     

The Confidence Trap: Japan’s Past Bubble and China’s Recent Bubble

This paper explores the origin of China’s recent credit and asset boom by comparing it with the Japanese bubble economy in the late 1980s by focusing on the asymmetric pattern of financial liberalisation under high savings. It argues that (1) both cases show a ‘confidence trap’ in that policy-makers of the government shared a complacent mindset that they can achieve the optimal mix of market liberalisation and repression, while believing that their political economic system is fundamentally different from others; (2) Such complacent confidence precipitated the supply-side driven financial reforms, in which both governments tried to diversify the credit channels of bank deposits by promoting non-bank financial intermediaries; (3) Exogenous shocks played a pivotal role in enforcing the government to take aggressive monetary easing and fiscal expansionary measures. But the Chinese case is different from the Japanese case in that (1) local politics has promoted a ‘too secure to fail’ situation in which rent-seeking activities are difficult to be detected, thus aggravating the hidden systemic risks; (2) China needs to liberalise its capital account with the more strengthened macroprudential regulatory governance, as the global foreign exchange markets have drastically changed from the period of the 1980s.     

The Financial Stability Board and Switzerland’s WiR-Credit Mechanism

Abstract:

The incentives banks face, such as the Basel Capital Accords, motivate them to favor lending with collateralized assets, rather than lending to Small-Medium Enterprises (SMEs), with associated profound economic consequences for society. Since the 1970s there has not been any direct oversight of whether or not credit contributes to GDP. We need a macroeconomic policy tool that can discriminate among different categories of credit extended to curb speculation in existing assets (non-GDP) and promote new business investment (GDP).

Government money creation and private credit growth are often presumed the only two ways to enhance nominal demand, yet the Swiss Economic Circle (Wirtschaftsring-Genossenschaft or WIR) is a Swiss Bank whose creation of purchasing power for SMEs has counter-cyclically stabilized the Swiss economy for over 80 years. The Financial Stability Board (FSB) should create localized credit-creation architectures utilizing a Swiss-WIR type currency to funnel credit that reflects systemic and macroeconomic risks that individually will never be rational for banks left to themselves.     

HBO’s Two Frontiers: Deadwood and The Wire

The Wire (five seasons, 2002–2008) takes place in Baltimore, an urban venue that is distinguished by diverse modes of violence and alienation – the colour line, tensions between governmental bureaucracy and citizen, between policing executives and investigators, between corporate-oriented drug dealers and individual (take-no-prisoners) dealers, and in general between aspiring change-agents and entrenched power holders. And most significantly for this analysis, The Wire explores what Robert Crooks identifies as the new “urban frontier.” The older frontier (in “the West”) is depicted in Deadwood (three seasons, 2004–2006). That frontier, as Cronon, Miles, and Gitlin point out, was, at the outset of the Euro American–Native American encounter, a space of negotiation, a space in which institutionalised regionalisation had not yet been installed.     

Credible enough? Forward guidance and perceived National Bank of Poland’s policy rule

Forward guidance effectiveness is conditional upon its credibility. This policy, when taken as credible, should reduce the perceived impact of macroeconomic variables on the interest rate. Using the Taylor rule framework and employing micro-level data set, we test the perception of monetary policy in Poland among professional forecasters. Our results show that the Taylor principle is violated in the forward guidance period, which provides evidence for forward guidance credibility.     

The Social Psychological Underpinnings of Commons’s Institutional Economics: The Significance of Dewey’s Human Nature and Conduct

The institutional environment of science differs across countries. Its particularities have an impact on productivity of scientific enterprise in terms of both research and teaching. Reform of the system of higher education occupies an important place in programs of catch-up modernization. Attempts to replicate Western institutional arrangements and organizational designs in this area have been undertaken in Russia since the very beginning of economic and political reforms of the 1990s. This paper considers a particular transplant, the Higher School of Economics (HSE) established in 1992, and its subsequent evolution. A structural analysis shows its divergence from the organizational patterns that served as a model. The HSE case is compared with several "representative" Western universities as well as other Russian universities. When explaining divergent patterns between the HSE and the Western counterparts, special attention is paid to the issue of power relationships and their role in the functioning of the scientific organization. The paper aims to contribute to the discussion of "cultural entrepreneurs" and their motivation.     

The effects of old and new media on children’s weight

Childhood obesity rates have recently been rising in many countries. It has been suggested in the literature that changes in children’s media exposure may contribute to explaining this trend. I investigate whether or not this hypothesis is supported by data. I contribute to the literature by focusing not only on television but also on new media – computers and video games. The Child Development Supplement to the Panel Study of Income Dynamics is used for the analysis. To address the endogeneity of children’s media exposure, I use dynamic and panel data models. This is another improvement upon the existing literature. Additionally, an extensive list of control variables is included in the regressions. I find that video game playing or computer use has no effect on children’s body weight. On the other hand, television viewing may increase children’s body weight slightly.     

The Crisis of America’s Cities

This paper aims to show how state intervention within the European Monetary Union can have positive effects not only on growth but also on public balances and debt. The relation between centralized monetary policy and decentralized fiscal policy partly solves the lack of coordination between the two. Each time a fiscal expansion in an EU country is not accompanied by a Central Bank interest rate increase, the expansionary effect of public spending, initially financed through the emission of public bonds, will be reinforced by endogenous money creation due to the increase in growth. The final result, if growth exceeds the rate of interest, is not only an increase in equilibrium income, but also a reduction in debt.     

The myth of China’s monetization

This article develops a simple model of M2/GDP based on the money demand function of Milton Friedman. This model proves that M2/GDP is positively related to the expected wealth and negatively related to the opportunity costs of holding money. China’s extremely high monetization ratio as measured by M2/GDP is the result of a decades-long rapid economic growth and a depressed financial system. Fast economic growth leads to high expected wealth. A depressed financial system leads to low opportunity costs of holding money. The combination of those two factors increases money demand and leads to very high M2/GDP. The model is verified indirectly by testing two implied testable hypothesizes. The study of this article raises questions on the accuracy of M2/GDP as a measure of monetization.     

The 2020 US Presidential election and Trump’s wars on trade and health insurance

The trade war initiated by the Trump administration is the largest since the US imposed the Smoot-Hawley tariffs in the 1930s and was still raging when he left office. We analyze how the trade war impacted the 2020 US Presidential election. Our results highlight the political salience of the trade war: US trade war tariffs boosted Trump’s support but foreign retaliation hurt Trump. In particular, the pro-Trump effects of US trade war tariffs were crucial for Trump crossing the recount thresholds in Georgia and Wisconsin. Even more important politically, voters abandoned Trump in counties with large expansions of health insurance coverage since the Affordable Care Act, presumably fearing the roll-back of such expansion. Absent this anti-Trump effect, Trump would have been on the precipice of re-election by winning Georgia, Arizona, Nevada, and only losing Wisconsin by a few thousand votes. These effects of the trade war and health insurance coverage expansion cross political and racial lines, suggesting the mechanism operates through the impact on local economies rather than political polarization.     

The Goals of Carbon Peaking and Carbon Neutrality and China’s New Energy Revolution

Based on the full consideration of both domestic and global environments and conditions, the adherence to the conviction that lucid waters and lush mountains are invaluable assets, and the comprehensive weighing of pros and cons, the Chinese government has made a major strategic decision to achieve the goals of carbon peaking and carbon neutrality, which is crucial to the overall green transformation of the economy and society and the long-term benefits of the Chinese nation. With the new energy revolution and energy mix diversification driven by the carbon peaking and carbon neutrality goals, nonfossil energy sources centered on photovoltaic energy will gradually dominate the energy mix, while the status of electricity and hydrogen energy will be significantly enhanced and the consumption of coal and petroleum will decline significantly. Carbon peaking and carbon neutrality goals are both challenges and opportunities for China. Specific challenges are embodied in the large pressure of economic and energy restructuring, the rising manufacturing costs, the difficulties in withdrawing coal-fired power stations, the possibility of unstable grid operations due to large-scale integration of photovoltaic and wind power into the power distribution network, and the supply risks of key metals, while specific opportunities are emerging in the strong competitiveness of photovoltaic and wind power equipment, lower dependence on foreign petroleum and gas supply and accelerated low-carbon green transformation. China should strengthen the top-level design of the path to achieve carbon peaking and carbon neutrality, encourage innovation of green low-carbon technologies, accelerate economic and energy restructuring, strictly restrict the construction of new high-emission and energy-intensive projects, and steadily promote the adjustment and withdrawal of the existing high-emission and energy-intensive projects.     

The impact of targeting policy on spouses’ demand for public goods,labor supplies and sharing rule

This paper studies the impact of targeted unconditional cash transfers on the spouses’ demand for public goods, labor supplies and sharing of resources. We estimate a collective labor supply model with distributional factors which is extended to include preferences over marketable public goods (including child goods). In this way, unlike previous research, we consider the impact of such transfers on the intrahousehold allocation of resources and distinguish between the labeling and recipient effects. We exploit the UK experience and find evidence in favor of the collective model with separable preferences over labor supplies and public goods. This finding implies a recipient effect and not a labeling effect of child benefits. Given the household’s unearned income, the bigger the wife’s bargaining power, the more the resources allocated to public goods (including child goods) and the wife’s private consumption. The results can be useful in the design of family policy which aims to improve the relative welfare of children within the family and alleviate any intrahousehold consumption inequalities.     

Women’s Employment and Childcare Choices in Spain Through The Great Recession

The Great Recession (2008–13) changed patterns in women’s employment and the use of formal and informal external childcare among mothers of young children in Spain. This paper analyzes these changes using an analytical strategy that takes into account interdependencies across the outcomes under study. The results show that the economic crisis has resulted in interesting changes in the use of external childcare across mothers’ and fathers’ employment status; for example, as men’s unemployment increased, the use of informal non-parental childcare declined, which might be related to (unobserved) changes in fathers’ involvement in childcare during the recession. These results further indicate the need for policies that improve access to formal childcare, as well as policies that provide men and women with employment stability.     

Producing Airpower: The Rise and Fall of Neo-Liberalism’s Defence Agenda

ABSTRACT

Few policy issues are more challenging than complex weaponry’s procurement and employment. Technology drives weapon costs upwards faster than economies are growing and militaries struggle to maintain increasingly sophisticated arms. Certain governments have adopted a reform agenda rooted in neo-liberal economic theory to address these challenges. Two broad policies – enhancing inter-firm competition for contracts and outsourcing activities to the private sector – emerged as central to this reform agenda. Although rarely presented as such, these reforms present a significant intellectual challenge to the hitherto predominant statist model for military power’s provision. Surprisingly, in light of neo-liberal policies’ adoption by militarily active states, no study has systematically examined these reforms’ content and impact. My article fills this lacuna by examining the state – the United Kingdom – that most consistently enacted neo-liberal defence reforms. To preview the conclusion, neo-liberal reforms initially generated small initial efficiencies, but then produced significant adverse consequences when pursued beyond a certain minimal level. Britain’s competition policy, for example, ultimately incentivized firms to consolidate into monopolies, which narrowed the scope for future competition and prevented the state from upholding fixed price contracts. Outsourcing, likewise, proved detrimental once policymakers sought to extend its scope beyond a limited range of simple services.     

Austrian economics and development: The case of Sudha Shenoy’s analysis

The aim of this paper is to describe Sudha Shenoy’s use of Menger, Mises, and Hayek (she explicitly called them ‘the older Austrians’) to explain development and growth. Her aim was to show that the application of Austrian economics, based on the notions of capital structure and division of labor, embedded in a specific legal framework (common law), historically promoted development and growth (as in early modern England); and can promote development and growth in underdeveloped countries (her specific focus was India). Shenoy also claimed that any policymaking as well as government’s intervention are either useless or dangerous, having two main dysfunctional effects, which are often interrelated; namely, make development slower (or even stop it), and increase corruption.