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Alex Cukierman

Alex Cukierman

Alex Cukierman is Professor emeritus at Tel Aviv University, Professor of Economics at the Interdisciplinary Center and Research Fellow at CEPR. He got his Phd in Economics from MIT in 1972. Cukierman is author or co-author of four books and over a hundred scientific articles in the areas of macroeconomics, monetary economics, political economy and monetary policy and institutions.



Articles by Alex Cukierman

DSGE Models in the Conduct of Policy: Use as intended

April 28, 2017

Dynamic stochastic general equilibrium (DSGE) models are in wide use yet have come under sharp criticism, given their complex nature and the assumptions they rely on. However, many central banks use them in policy analysis. Is this a misguided use of economists’ and policy makers’ time? This eBook reviews the use of DSGE models in policy institutions, the lessons learned, and the desirable ways forward.

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Contents
Foreword 
Introduction: Are DSGE models useful for policymakers? Refet S. Gürkaynak and Cédric Tille
Section I: How do DSGE models fit in the toolbox?
DSGE models: A cup half full John C. Williams
Bridging the gap between structural VAR and DSGE modelsKatrin Assenmacher
DSGE models in monetary policy committeesStefan Gerlach
Section II:  Lessons from DSGE use in policy analysis
Using dynamic stochastic general equilibrium models at the New York FedMarco Del Negro and Marc Giannoni
Empirical DSGE Models: from the Great Moderation, to the Great Recession and beyondAlejandro Justiniano, Giorgio Primiceri, Andrea Tambalotti
Policy packages: Challenge and opportunity for DSGE researchFabio Ghironi
DSGE models and counterfactual analysisGünter Coenen, Roberto Motto, Massimo Rostagno, Sebastian Schmidt and Frank Smets
Section III:  What next?
Some scattered thoughts on DSGE

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The limits to “whatever it takes”: Lessons from the gold standard

August 30, 2016

Economists generally agree that Mario Draghi’s London speech on 26 July 2012 was crucial in stopping the self-fulfilling Eurozone crisis (Rebooting Consensus Authors 2015). While markets were awed by the ECB President’s pledge to do “whatever it takes” to preserve the euro, only a few observers paid attention to the limitations attached to this vow—“within our mandate”.
As always, the devil is in the details. In 2012, markets apparently chose not to test the limits of the ECB’s new commitment. No doubt, it would have been difficult to contend that the Eurosystem did not possess enough firepower to make its pledge credible. However, even in case the economic sustainability of a given monetary policy is unquestionable, its political sustainability is not necessarily so. Central bankers’ actions are embedded into a specific institutional context, and such a context is crucial in determining to what extent the pursuit of monetary targets is going to be effective.
The institutional constraints to central bankers’ actions
Textbooks assume that the right to issue cash allows the central bank to expand liabilities at will, thus subtracting it from the basic constraints to which all other banks are subjected. The strength of such an organisation (i.e. the sustainability of its monetary policy) is theoretically infinite.

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Investment and Protectionism: A pre-G20 summit briefing

August 30, 2016

In July, G20 trade ministers adopted nine ‘Guiding Principles for Global Investment Policymaking’. This column introduces the latest GTA report, which shows how well the G20’s track record stacks up against these new growth-promoting goals.

While global trade stagnates, the spotlight shifted to foreign direct investment (FDI) during China’s G20 Presidency (ITCSD 2016). Two recent developments brought FDI to the forefront of international deliberations:

In July 2016, G20 trade ministers endorsed the G20’s nine Guiding Principles for Global Investment Policymaking1. 

In June 2016, UNCTAD’s flagship World Investment Report showed that FDI flows "soared" in 2015 to its highest level since the crisis (UNCTAD 2016). To be fair, UNCTAD officials were cautious about the prospects for FDI in 2016.
The latest Global Trade Alert report – released in advance of the G20 Leaders’ Summit in Hangzhou, China – critically evaluates the recovery of FDI, the G20’s contribution to that recovery, the coherence of G20 trade and investment policies, and ultimately, the new G20 Guiding Principles.
Has FDI recovered?
There is less to FDI recovery in 2015 than meets the eye. Specifically, using UNCTAD FDI data, in this report we show:
While global FDI inflows have reached a crisis-era peak, FDI into G20 nations has yet to break out of a narrow range witnessed since 2009.

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Inequality made the Great Recession worse (especially for the poor)

August 30, 2016

The Great Recession of 2007-2009 was the major macroeconomic downturn of the postwar period. It happened when several measures of household inequality were at a postwar high. Is there a connection between these two observations? Did the high level of household inequality amplify and propagate the Great Recession? How are the welfare losses in an economic downturn, such as the 2007-09 crisis, distributed across households, and can social insurance policies mitigate these losses?
In a well-known paper published in 1998, Krusell and Smith concluded that household income and wealth inequality had little impact on the aggregate dynamics of consumption, investment, and output. Their model economy had heterogeneous agents and incomplete markets, and it behaved much like a model that used a representative household. This result has reinforced the continued use of representative agents when studying the macroeconomy.
In a recent study, we revisited the importance of household heterogeneity for aggregate consumption and output dynamics (Krueger et al. 2016a). Unlike Krusell and Smith, we found that inequality has a significant impact on business cycle fluctuations. In other words, we find that micro heterogeneity is important for macro outcomes  We also explored (Krueger et al.

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Spain in the wake of the crisis: Reforms versus adjustment

August 29, 2016

Have the recent structural reforms implemented in Spain delivered? Can the country’s current economic condition be attributed to the effects of these reforms, or is it more the outcome of ‘automatic’ adjustments in the public and private sectors?
By examining the stylised facts of Spain’s recovery, I seek to answer these questions and to contribute to the wider debate concerning the validity of existing economic models for predicting the impact of structural reforms. The goal is not to formally evaluate the impact of the reforms adopted in Spain since 2012, nor is it to establish claims of causality. More modestly, the goal is to examine the changes that have occurred in a set of economic indicators following the introduction of this set of reforms.
Background
The standard approach when evaluating the impact of structural reforms is to ‘translate’ them into shocks or parameter changes that can then be plugged into a model. Bouis and Duval (2011) is the classic reference in this regard. The European Commission (2016) – admittedly following a discussion of some of the method’s limitations – applies it when measuring the impact of actual reform measures in Italy, France, Spain, and Portugal.

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Taxation, corruption, and growth

August 29, 2016

The relationship between taxation and economic growth is complex, and relies in large part on the efficiency with which taxes are used. This column examines the impact of corruption on this relationship. The boost to welfare from reducing corruption is substantially larger than the marginal gains from optimising the tax rate for an existing level of government efficiency.

Despite a public rhetoric about taxation that can be shockingly simplistic – good versus bad! – the relationship between taxation and economic growth is very complex. A short list of important factors includes disincentives of taxation for effort; the provision of education, infrastructure, and other public goods; redistribution effects and financing constraints; and so on. Moreover, the impact of taxation certainly depends on the quality of the hands that handle it – the benevolent dictator of our economic models, or the real life Robert Mugabe. This moderating role of government efficiency and corruption can help explain why the efficient governments of Scandinavia are prosperous despite top marginal income tax rates of 60% to 70% (Kleven 2014).
We explore how the relationship between taxation and growth is governed by levels of corruption. We construct an endogenous growth model that builds upon Klette and Kortum (2004).

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Oil booms leave the poor in the dark

August 28, 2016

One of the biggest challenges in fighting poverty is to know where it is. This column describes a new way to measure poverty by using satellites to count people who live in darkness at night. This shows that the economic benefits of oil booms don’t trickle down to the very poor.

Measuring poverty is expensive. It involves running surveys in faraway places, which are slow and have bad coverage. The global standard, the World Bank Poverty Rate (World Bank 2016), covers less than one third of countries in any given year.
In a recent working paper, we use satellites to measure rural poverty, by counting how many people live in darkness at night (Figure 1) (Smith and Will 2016). This is fast, cheap, accurate and covers the whole world with a 1km2 resolution at regular intervals.
Figure 1 Rural poverty map: Tanzania, 2010

Note: For more examples of rural poverty maps see: https://samuelwills.wordpress.com/poverty-and-darkness/Source: Image by Thomas McGregor.
Darkness and poverty
We use two types of satellites to count people living in darkness. The first, from the US Defence Meteorological Satellite Program, measures the amount of light emitted at night. The second, called LandScan, estimates population using images of roads, buildings and land cover.

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The hidden productivity benefits of energy-saving technology: Evidence from LEDs in Indian factories

August 27, 2016

Energy-efficient technologies are an increasingly relevant policy priority, given growing consensus on the need to tackle climate change. This column examines the productivity benefits of adopting one such technology – LED lighting – for manufacturing firms in India. It finds that improved productivity resulting from LED lighting’s lower heat emissions makes adopting such technology far less costly than previous anticipated, particularly for labour-intensive firms in hot climates. 

Innovations in energy efficiency have been cited as a primary means to curb the acceleration of climate change. Despite this promise, energy-efficient technologies are consistently adopted at low rates. Given the repercussions of rising global temperatures due to climate change, and the startling rate of growth of global energy demand, achieving high adoption rates of technologies that mitigate climate change is a key policy priority. Recent research points to information frictions, or a lack of salience of information, as key determinants of this ‘efficiency gap’ – if individuals and firms knew the true returns to investment in energy efficiency, or if information were made more salient, widespread adoption of these technologies would occur more quickly (Allcott and Greenstone 2012).

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Stagnating median incomes despite economic growth? Explaining the divergence in 27 OECD countries

August 27, 2016

Increasing inequality and stagnating incomes for ordinary workers and their families are now at the centre of economic and political debate across the rich countries. Against that backdrop, the fact that median household income has lagged so far behind growth in GDP per capita in the US – widely attributed to growing inequality – has reinforced concerns about relying on GDP as the core measure of economic prosperity (Stiglitz et al. 2012, Oulton 2012, Van Reenen 2012, Boehm 2014, Coyle 2015, Furman 2015).
In a new paper, we analyse the extent of the divergence between growth in GDP per head and household incomes in 27 rich economies over recent decades (Nolan et al. 2016). We also assess the extent to which divergence between their trajectories is attributable to rising inequality versus other factors. We base our analysis on a new database of income levels across the distribution drawing on the Luxembourg Income Study (LIS) micro surveys and made publicly available (Thewissen et al. 2016).
The United States: A clear outlier
We find that while GDP per capita has outpaced the median in most OECD countries, the US is a clear outlier in the extent of that divergence. We also find wide variation across countries in the factors explaining this divergence, with decreases in household size being the most consistent contributor across countries.

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Economic growth with stagnating median incomes: New analysis

August 27, 2016

Stagnating median incomes despite economic growth: Explaining the divergence in 27 OECD countries
Increasing inequality and stagnating incomes for ordinary workers and their families are now at the centre of economic and political debate across the rich countries. Against that backdrop, the fact that median household income has lagged so far behind growth in GDP per capita in the US – widely attributed to growing inequality – has reinforced concerns about relying on GDP as the core measure of economic prosperity (Stiglitz et al. 2012, Oulton 2012, Van Reenen 2012, Boehm 2014, Coyle 2015, Furman 2015).
In a new paper, we analyse the extent of the divergence between growth in GDP per head and household incomes in 27 rich economies over recent decades (Nolan et al. 2016). We also assess the extent to which divergence between their trajectories is attributable to rising inequality versus other factors. We base our analysis on a new database of income levels across the distribution drawing on the Luxembourg Income Study (LIS) micro surveys and made publicly available (Thewissen et al. 2016).
The United States: A clear outlier
We find that while GDP per capita has outpaced the median in most OECD countries, the US is a clear outlier in the extent of that divergence.

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Hidden productivity benefits from energy-saving technology

August 27, 2016

The hidden productivity benefits of energy-saving technology: Evidence from LEDs in Indian factories
Energy-efficient technologies are an increasingly relevant policy priority, given growing consensus on the need to tackle climate change. This column examines the productivity benefits of adopting one such technology – LED lighting – for manufacturing firms in India. It finds that improved productivity resulting from LED lighting’s lower heat emissions makes adopting such technology far less costly than previous anticipated, particularly for labour-intensive firms in hot climates. 

Innovations in energy efficiency have been cited as a primary means to curb the acceleration of climate change. Despite this promise, energy-efficient technologies are consistently adopted at low rates. Given the repercussions of rising global temperatures due to climate change, and the startling rate of growth of global energy demand, achieving high adoption rates of technologies that mitigate climate change is a key policy priority.

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Brexit and other harbingers of a return to the dangers of the 1930s

August 26, 2016

The vote for Brexit was seen by some as a vote of ignorance, laced with xenophobia. This column argues that it was not an irrational vote of the ignorant, but a highly rational vote by the same losers from trade as elsewhere across the world. To compensate them, efforts should be made to upskill displaced workers and build them affordable homes to rent in places where the new jobs are. Ignoring this rise of trade nationalism would be far more dangerous than leaving the EU.

In a national referendum on 23 June, Britons voted to leave the EU by 52% to 48%. The EU is a borderless area for the movement of goods, services, investment, labour, and more across 28 European countries. Those who voted for Brexit, the catchphrase for Britain’s exit, were often described as angrily rejecting the national and international elites that were rolled out in support of Britain remaining. These elites responded that this was a vote of ignorance, laced with xenophobia that would have enormous negative economic consequences. Confirming everybody’s prejudices, Michael Gove, a leading supporter of Brexit, said in the middle of the campaign, “people in this country have had enough of experts”. Despite that, misreading the vote in favour of Brexit as a vote of the ignorant and trying to blame the Labour Party leader for the result is far more dangerous than leaving the EU.

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Investor beliefs and stock market outcomes in emerging economies

August 26, 2016

The ‘excess co-movement puzzle’ in financial markets refers to the correlation of asset returns beyond what could be expected based on the common movements in fundamentals. Using international data, this column links excess co-movement in firm-level stock returns to the correlated beliefs of sophisticated investors. Co-movement is largely explained by investors’ reliance on common information – in other words, their lack of firm-specific information. This gives rise, in part, to the higher degree of aggregate market-wide volatility.

Why do firm-level stock returns co-move more than firm fundamentals would suggest? A number of researchers have identified the excess co-movement ‘puzzle’, (e.g. Veldkamp 2006, Pindyck and Rotemberg 1993, Morck et al. 2000) which has important implications for investment incentives on the part of firms, portfolio choice decisions on the part of investors, and ultimately, the efficiency of the allocation of capital. In a recent paper, we link excess co-movement to common beliefs on the part of investors (David and Simonovska 2016). We show that across a number of countries, the correlation of investor beliefs about firm performance is strongly related to the correlation of firm-level returns and that both exceed the level justified by firm fundamentals.

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Newspapers in times of low advertising revenues: Towards a decline in the quality of information at the media outlet level

August 26, 2016

Advertisers are deserting newspapers. Using the impact of television advertising on print media in 1968, this column argues that a reduction in advertising revenues will reduce the quality of newspapers. Ultimately, this may result in a less well-informed public.

The year 2015 was perhaps the worst for the newspaper industry since the recession. According to the Pew Research Center (2016), in the US total advertising revenues (print and digital) among publicly traded companies declined by nearly 8%. 
In a recent paper (Angelucci and Cagé 2016), we investigate the consequences of the collapse in advertising revenues on newspaper pricing and quality choices. These choices are important because they help determine how well-informed individuals are. This in turn influences voter turnout, political accountability, and social norms (Ferraz and Finan 2008, Jensen and Oster 2009, Gentzkow, Shapiro and Sinkinson 2011).
Specifically, we analyse the consequences of a decline in the advertisers’ willingness to pay for newspaper readers’ attention triggered by the arrival of new advertising platforms. In 2015 Google and Facebook had captured almost two-thirds of the $60 billion online advertising market. This shift in advertising revenues toward social media has contributed to a collapse in newspaper advertising revenues.

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Smoothing economic shocks in the Eurozone: The untapped potential of the financial union

August 25, 2016

The prime objective of Europe’s Economic and Monetary Union (EMU) is to foster stability and economic growth. But for this to happen, the EMU needs to be able to: first, better prevent crises by fostering sustainable fiscal and economic policies in each of the participating member states; and second, better absorb shocks – individually and collectively – whenever they occur.
The importance of resilience to shocks in the Eurozone
Most idiosyncratic economic shocks need to be smoothed through the normal operation of national fiscal stabilisers. This requires suitably resilient economies, and the maintenance of appropriate fiscal buffers over the economic cycle. However, when large shocks occur, market pressure can deprive individual countries of their fiscal stabilisers, as was the case during the recent debt crisis, which in turn affects the Eurozone as a whole. This is the reason all mature monetary unions also involve mechanisms for cross-border shock absorption. These stabilisation mechanisms can take the form of temporary fiscal transfers (public risk sharing) or of financial flows linked to the operation of credit and capital markets (private risk sharing).

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The Fed and Lehman Brothers

August 24, 2016

Much of the damage from the Great Recession is attributed to the Federal Reserve’s failure to rescue Lehman Brothers when it hit troubled waters in September 2008. It has been argued that the Fed’s decision was based on legal constraints. This column questions that view, arguing that the Fed did have the legal authority to save Lehman, but it did not do so due to political considerations.

In 2008, liquidity crises threatened the survival of many of the large financial institutions in the US. The Federal Reserve rescued firms such as Bear Stearns and AIG with emergency loans, but it did not rescue Lehman Brothers when a run on that firm left it without enough cash to operate. Lehman declared bankruptcy on 15 September 2008, leading to a dramatic acceleration of the Global Crisis.
Why didn’t the Fed rescue Lehman?
Students of the financial crisis have suggested a number of factors, including political opposition to ‘bailout’ of Wall Street firms, policymakers’ concern that moral hazard was encouraging reckless risk-taking, and failure to anticipate the damage that Lehman’s bankruptcy would do to the financial system and economy.
Yet Fed officials insist that none of these factors is relevant.

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Precision versus bias in multiple choice exams

August 24, 2016

Exams have been used for millennia to evaluate the ability of the test takers, allocate workers to jobs, and grant educational opportunities to students. A widely used form is the multiple choice exam, where the takers simply select one of a finite list of possible answers. This style of exam is attractive to educators due to the speed and precision with which exams can be graded. However, it is often criticised due to the fact that test takers can guess – a correct answer does not necessarily indicate understanding. This reduces the precision of the test – guessing behaviour adds noise to the exam score, which impedes the efficiency of the allocation process (Baker et al. 2010).
One approach to reducing such noise in the exam score is to have penalties for the wrong answer – students are allowed to skip a question, but should they answer incorrectly, they lose points.1,2 This discourages guessing when the student is unsure of the correct answer, and more so the more risk averse the student is. If a student is not risk averse and the penalty is such that a random guess gives zero, he will guess if he thinks one answer is the best, no matter how sure he is of the answer. However, a more risk-averse student will only guess if he is ‘sure enough’ of the best answer, and will skip otherwise.

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Lessons on inequality, labour markets, and conflict from the Gilded Age

August 23, 2016

Back to the future? Lessons on inequality, labour markets, and conflict from the Gilded Age, for the present
Phenomenal increases in income and wealth inequality in the US and other rich economies have been observed over the last four decades, driven by skill-biased technological change (Autor et al. 2008), increased trade (Autor et al. 2013), and institutional and policy changes that have allowed the rich to earn/extract a greater share of the economic pie (Alvaredo et al. 2013, Piketty 2014). An associated rise of populist politicians suggests a link between economic inequality and political polarisation (McCarty et al. 2006, Autor et al. 2016), and potential for costly conflict (Esteban and Ray 2011, Bowles and Jayadev 2006).
Moreover, there is every reason to believe that past trends will continue –technological change seems to continually enhance the return to capital and the earnings of the most skilled (while displacing the less skilled); it is increasingly easy to hire workers across borders in online labour markets; and greater numbers of workers are now part of the ‘gig economy’, with employment relationships replaced by contractor relationships offering workers limited collective bargaining rights and fewer legal protections (Horton 2010, Brynjolfsson and McAfee 2014).

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Financial market development is economic development

August 23, 2016

In theory, firms in developing countries benefit from viable, well-used, stable, and efficient local financial markets as a source of investment for local firms. Financial markets in the home countries of multinationals can also act as a source of FDI to the developing world when local financial markets are weak. This column discusses recent empirical data that support both arguments, and argues that advocates of tighter regulation for financial markets should consider the wider impact on developing country economies.

The liberalisation of financial markets in the 1990s and 2000s is considered to have contributed to the 2007/2008 Global Crisis. But we can forget the important contribution of financial markets to economic development. In poor countries, investment, even foreign direct investment (FDI), is costly. Well-developed financial markets may help to fund such investment.
To achieve this, financial markets require depth, access, efficiency and stability (World Bank 2016c). ‘Depth’ means that financial institutions and financial markets are a sufficient size. ‘Access’ reflects the degree to which economic agents use financial services. ‘Efficiency’ means that financial institutions are able to successfully intermediate financial resources, and to facilitate transactions.

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How domestic trade frictions shape welfare gains

August 23, 2016

In international trade theory, countries are often treated as homogenous regions, with no account taken of their internal geography. This column uses evidence from China’s Treaty Port Era to show how domestic trade frictions shape welfare gains from trade. Gains from new technologies that lower trade costs are shared, but the gains are not evenly distributed. Lower trade costs can also mean lower welfare for productivity leaders, who may be replaced by low-cost suppliers from less productive regions as the costs of transport decline.

We all know that countries are not dimensionless points in space, even if the assumption is one often made in international trade theory.  A more realistic model might incorporate the internal geography of a country within the analysis of international trade. With perhaps the exception of Paul Krugman’s seminal work in economic geography that emphasised intra-national barriers to trade and worker mobility (beginning with Krugman 1991), little progress has been made to date on this front.  Conceptually, the challenge is simple—instead of treating the US as a homogenous region, treat each US state, or regional unit, as a separate country.1 With California having the gross product of France and Oregon that of Pakistan, as Figure 1 shows, this is plausible in terms of economic size.

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Unity in diversity: The way forward for Europe

August 22, 2016

After decades of ever closer integration, the British vote for Brexit marks the first step of disintegration in Europe. Yet, if pursued wisely, this does not have to mean that the integration process is terminated. European integration still carries the promise of enduring peace and growing prosperity if European policymakers take Europe’s defining adage “unity in diversity” seriously and foster a fruitful contest of ideas and approaches, as originally intended by the internal market’s founding fathers.
The overarching principle guiding this process should be the concept of subsidiarity: deeper integration should happen only in those areas where joint action effectively leads to better results. One should expect security policy, asylum policy and climate policy to be candidates for such a joint approach. In other areas – notably fiscal policy, labour market and social policy – European citizens tend to display too diverse preferences. Thus, they expect their governments to accept responsibility for policy choices rather than to give up national sovereignty.
The background of the Brexit decision
The small margin leading to the Brexit vote is proof of a deep division of the British society. Obviously, some fundamental sources of discontent allowed the shallow arguments of the populist Brexiteers to become so successful.

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Human development, inequality and long working hours

August 22, 2016

By GDP or GNI per capita, the US was for a long time the undisputed front-runner of the world economy, surpassed only recently by a few small countries that became rich due to their oil wealth (Kuwait and Norway, for example) or their financial prowess (Luxembourg). Per-capita GDP or GNI continue to be prevalent in economic policy analysis, apparently because of convention and easy availability of data. When GDP and GNI at market prices and exchange rates were seen to significantly overstate the income differences between rich countries and poor, economists promptly made adjustments for purchasing power. The Penn World Tables adjust national accounts, country by country, in their own currencies by using detailed price data to produce real national accounts in a common currency (US dollars), covering 182 countries from 1950 to 2014. Even so, PPP-adjusted national accounts data as reported by the World Bank and the IMF reach back only to 1990. Thus World Bank and IMF national income data between 1960 and 1990 is not PPP-adjusted.
Stocks matter for flows, and vice versa
To improve their national accounts, some countries have made adjustments for home production and the informal economy (Schneider, 2007).

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Equity is cheap for large financial institutions: International evidence

August 21, 2016

Around the world, governments and regulators are commonly perceived to offer special protections to the depositors, bondholders and even shareholders of large financial institutions in times of financial distress. A key question for policymakers and regulators is how to measure the distortions and the costs of implicit guarantees extended to financial institutions. We look for the signature of these guarantees in the returns that investors expect to earn on financial stocks. 
Most studies use ex post data to estimate the fiscal cost of the subsidies provided to large financial institutions in the aftermath of a financial crisis. For example, after the recent credit crisis, Veronesi and Zingales (2010) estimate the costs of these subsidies to be $21-44 billion for financial institutions in the US. However, estimating the entire ex post realised cost of the various measures implemented by local and international regulators in the face of a recent crisis is a challenging endeavour. In a new paper, we set out to measure the ex ante effect of these implicit shareholder guarantees by closely examining the returns that stock market investors expect to earn on the stocks of large financial institutions for a sample of 31 developed and emerging market countries from 1980 to 2013 (Gandhi et al. 2016).

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The problem of public sector absenteeism

August 21, 2016

Government employees not showing up for work is a major problem in developing countries. Chaudhury et al. (2006) provide examples of how stark the problem is – rates of absenteeism for government doctors are 25% in Peru, 37% in Uganda, and 40% in Indonesia. Activated by the urgency of the problem, policymakers are trying a range of innovative solutions, from simply asking teachers to take a picture of themselves in the classroom (Duflo et al. 2012) to remote biometric monitoring stations in India (Dhaliwal and Hanna 2016). Yet, in many cases, such reforms are gradually undone over time (Banerjee et al. 2008, Olken and Pande 2012). This creates a clear problem for policy. How do we get these reforms to stick?
We developed a project to try to understand the roots of government absenteeism. Punjab, Pakistan, provided an ideal environment to work on this question for a number of reasons. First, absenteeism is a severe problem – we found 68.5% of doctors to be absent during normal working hours. Second, the government was planning an innovative reform, called the ‘Monitoring the Monitors’ programme. It wanted to provide smartphones to government inspectors in order to geostamp and timestamp their inspections of government clinics. This also allowed for the real-time transmission of data on doctor absence.

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Eurozone stability still under threat of a ‘bad shock’

August 20, 2016

The glass is still half-empty: Eurozone stability under threat of a ‘bad shock’
On 25 June, Vox published a column –  “Making the Eurozone more resilient: What is needed now and what can wait”, signed by an impressive list of ‘Resiliency Authors’ – arguing that the Eurozone now has an adequate financial architecture for coping with another ‘bad shock’, and that what needs to be done “mostly [is] to make sure that the rules in place can be enforced” (Resiliency Authors 2016).1 I would like to explain why I feel that this view may prove optimistic and, more importantly, that the careless implementation of existing rules may become the very source of a new bad shock.
Is the glass half-full or is it half empty? 
The Resiliency Authors share the view that the Eurozone has not resolved the problem of risk sharing that lay at the root of the sovereign debt crisis of 2010-12. They recognise that the ESM is too small to provide sufficient resources in case of a shock hitting the sovereign debt of a large country such as Italy, while its decision-making procedures would not ensure the prompt action needed to stop a financial market rout.

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Global Crisis in the US vs the Eurozone: Banks and monetary policy

April 16, 2016

Although it started in the US, the Global Crisis had non-negligible repercussions in Europe as well due to substantial purchases of subprime securities by European banks and financial institutions. Those problems were subsequently amplified by European sovereign debt crises experienced by countries with weak fiscal institutions. Both the Fed and the ECB reacted to their respective crises by injecting liquidity and generally loosening monetary policy. But due to structural and institutional differences as well as timing differences between the peaks of the US subprime crisis and the Eurozone sovereign debt crisis, there are noticeable differences between the policy responses of the Fed and the ECB. 
This column compares the behaviour of banking credit and banks’ reserves following major crisis triggers in the US and the Eurozone. Although the downfall of Lehman Brothers constitutes such a trigger for both the US and Eurozone, the latter was hit only by the blast waves of that event. An important, internally generated crisis trigger in the Eurozone was the November 2009 announcement by Greek Prime Minister George Papandreou that Greece’s annual budget deficit will be more than double the previously announced figure (Rebooting Consensus authors 2015). For the US, Lehman’s downfall obviously constitutes a clear watershed.

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The conquest of Israeli inflation, its benefits, and current policy dilemmas

April 1, 2016

There is currently a wide consensus that, excluding episodes of financial crisis, the main objective of a modern central bank is price stability and that, to achieve this objective, the central bank should be sufficiently independent from political authorities. The Bank of Israel was founded in 1954 and was dominated by political authorities at least during its first 30 years of its existence. In parallel, the first four to five decades following the Bank’s foundation were characterised by inflation rates above the current 2% international norm, at times very much above.
Following a successful heterodox stabilisation programme in July 1985, and after a prolonged gradual stabilisation that followed, Israel finally reached the current 2% price stability benchmark at the beginning of the 21st century. From 1985 the actual independence of the Bank of Israel gradually increased. During those years, legal independence lagged behind actual independence (Cukierman 2007). This gap was finally closed by a substantial increase in the legal independence of the Bank in 2010.
During the first 45 years of the Bank’s existence, both the average level and the variability of inflation went through dramatic changes in both upward and downward directions.

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Money and inflation: US 2008 vs German 1920s

March 30, 2016

Lessons from money growth and inflation in the US since 2008 and the post-WWI German hyperinflation
The famous 1963 dictum “Inflation is always and everywhere a monetary phenomenon”, by Milton Friedman succinctly summarises a basic implication of the quantity theory of money for the relation between money and prices. It has been an empirical beacon for generations of students of inflation as well as for central bankers. Translated into more precise terms, it implies that a necessary condition for sustained inflation is a sustained increase in the quantity of money. But it does not imply that all persistent increases in the quantity of money are necessarily inflationary. In particular, when increases in money supply are matched by increases in money demand even the simple quantity theory implies that the price level should not change.  More generally whether persistent monetary expansion induces persistent inflation depends on a number of additional economic and institutional factors that transcend the run of the mill quantity theory of money.1  
This column illustrates and discusses those issues, first by documenting the dramatic difference between US inflation since Lehman’s collapse and inflation during the first half of the post-WWI German hyperinflation for identical rates of expansion of high-powered money, and second, by analysing the reasons for this difference.

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