Knowledge that Transforms

Compulsory licensing allows firms in developing countries to produce foreign-owned inventions without the consent of foreign patent owners. This paper uses an exogenous event of compulsory licensing after World War I under the Trading with the Enemy Act to examine the effects of compulsory licensing on domestic invention. Difference-in-differences analyses of nearly 130,000 chemical inventions suggest that compulsory licensing increased domestic invention by 20 percent.

The financial crisis of 2007-2009 has given way to the sovereign debt crisis of 2010-2012, yet many of the banking issues remain the same. We discuss a method to estimate the capital that a financial firm would need to raise if we have another financial crisis. This measure of capital shortfall is based on publicly available information but is conceptually similar to the stress tests conducted by US and European regulators. We argue that this measure summarizes the major characteristics of systemic risk and provides a reliable interpretation of the past and current financial crises.

This paper studies the limitations of monetary policy in stimulating credit and investment. We show that, under certain circumstances, unconventional monetary policies fail in that liquidity injections into the banking sector are hoarded and not lent out. We use the term “credit traps” to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. We show that small contractions in monetary policy can lead to a collapse in lending. Our analysis demonstrates how quantitative easing may be useful in increasing collateral prices, bank lending, and aggregate investment.

The science of economics has some constraints and tensions that set it apart from other sciences. One reflection of these constraints and tensions is that, more than in most other scientific disciplines, it is easy to find economists of high reputation who disagree strongly with one another on issues of wide public interest. This may sug gest that economics, unlike most other scientific disciplines, does not really make progress. Its theories and results seem to come and go, always in hot dispute, rather than improving over time so as to build an increasing body of knowledge. There is some truth to this view; there are examples where disputes of earlier decades have been not so much resolved as replaced by new disputes. But though econom ics progresses unevenly, and not even monotonically, there are some examples of real scientific progress in economics. This essay describes one—the evolution since around 1950 of our understanding of how monetary policy is determined and what its effects are. The story described here is not a simple success story. It describes an ascent to higher ground, but the ground is still shaky. Part of the purpose of the essay is to remind readers of how views strongly held in earlier decades have since been shown to be mistaken. This should encourage continuing skepticism of consensus views and motivate critics to sharpen their efforts at looking at new data, or at old data in new ways, and generating improved theories in the light of what they see. We will be tracking two interrelated strands of intellectual effort: the methodol ogy of modeling and inference for economic time series, and the theory of policy influences on business cycle fluctuations. The starting point in the 1950s of the the ory of macroeconomic policy was Keynes's analysis of the Great Depression of the 1930s, which included an attack on the Quantity Theory of money. In the 1930s, interest rates on safe assets had been at approximately zero over long spans of time, and Keynes explained why, under these circumstances, expansion of the money sup ply was likely to have little effect. The leading American Keynesian, Alvin Hansen, included in his (1952) book A Guide to Keynes a chapter on money, in which he explained Keynes's argument for the likely ineffectiveness of monetary expansion in a period of depressed output. Hansen concluded the chapter with, Thus it is that modern countries place primary emphasis on fiscal policy, in whose service mone tary policy is relegated to the subsidiary role of a useful but necessary handmaiden. The methodology of modeling in the 1950s built on Jan Tinbergen's (1939) seminal book, which presented probably the first multiple-equation, statistically estimated economic time series model. His efforts drew heavy criticism. Keynes

An advantage of cap-and-trade programs over more prescriptive environmental regulation is that compliance flexibility and cost effectiveness can make more stringent emissions reductions politically feasible. However, when markets (versus regulators) determine where emissions occur, it becomes more difficult to assure that mandated emissions reductions are equitably achieved. We investigate these issues in the context of Southern California's RECLAIM program by matching facilities in RECLAIM with similar California facilities also in nonattainment areas. Our results indicate that average emissions fell 20 percent at RECLAIM facilities relative to our counterfactual. Furthermore, observed changes in emissions do not vary significantly with neighborhood demographic characteristics.

A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment.

The combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity. In turn, this real rigidity makes the economy prone to involuntary unemployment during external crises. This paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency. First- and second-best monetary and fiscal solutions are analyzed. Second-best solutions are prudential, whereas first-best solutions are not.

This paper experimentally investigates the effects of a costly punishment option on cooperation and social welfare in long, finitely repeated public good contribution games. In a perfect monitoring environment, increasing the severity of the potential punishment monotonically increases average net payoffs. In a more realistic imperfect monitoring environment, we find a U-shaped relationship. Access to a standard punishment technology in this setting significantly decreases net payoffs, even in the long run. Access to a severe punishment technology leads to roughly the same payoffs as with no punishment option, as the benefits of increased cooperation offset the social costs of punishing.

The growth of kidney exchange presents new challenges for the design of kidney exchange clearinghouses. The players now include directors of transplant centers, who see sets of patient-donor pairs, and can choose to reveal only difficult-to-match pairs to the clearinghouse, while withholding easy-to-match pairs to transplant locally. This reduces the number of transplants. We discuss how the incentives for hospitals to enroll all pairs in kidney exchange can be achieved, and how the concentration of hard to match pairs increases the importance of long, non-simultaneous nondirected donor chains.

We document the cyclical properties of US firms' financial flows and show that equity payout is procyclical and debt payout is countercyclical. We then develop a model with debt and equity financing to explore how the dynamics of real and financial variables are affected by “financial shocks.” We find that financial shocks contributed significantly to the observed dynamics of real and financial variables. The recent events in the financial sector show up as a tightening of firms' financing conditions which contributed to the 2008–2009 recession. The downturns in 1990–1991 and 2001 were also influenced by changes in credit conditions.