Knowledge that Transforms

The 2008 financial crisis and its policy response has urgently raised the old question of the impact of fiscal policy, in particular government spending and tax cuts, on the economy. This paper contributes to this debate, using a simple neoclassical growth model with endogenous labor, adding fiscal instruments to provide a positive rather than normative analysis of the impact of fiscal policy shocks. It is shown that the timing of the tax response to the ensuing deficits may be crucial and that the calculations of fiscal multipliers can be misleading. Keywords: JEL codes: 2 1 A short introduction What is the impact of fiscal policy on the economy? How large are the “multipliers ” of government spending and tax cuts? This old question has recently received considerable attention. This paper contributes to answering that question by thinking through fiscal multipliers in a baseline neoclassical

I develop a novel view of the trade frictions between rich and poor countries by arguing that to reconcile bilateral trade volumes and price data within a standard gravity model, the trade frictions between rich and poor countries must be systematically asymmetric, with poor countries facing higher costs to export relative to rich countries. I provide a method to model these asymmetries and demonstrate the merits of my approach relative to alternatives in the trade literature. I then argue that these trade frictions are quantitatively important to understanding the large differences in standards of living and total factor productivity across countries.

Capital Flows and Macroeconomic Performance: Lessons from the Golden Era of International Finance by Lee E. Ohanian and Mark L. J. Wright. Published in volume 100, issue 2, pages 68-72 of American Economic Review, May 2010

This paper studies equilibrium behavior in a class of games that models asymmetric competitions with unconditional and conditional investments. Such competitions include lobbying settings, labor-market tournaments, and R&D races, among others. I provide an algorithm that constructs the unique equilibrium in these games and apply it to study competitions in which a fraction of each competitor's investment is sunk and the rest is paid only by the winners. Complete-information all-pay auctions are a special case.

Issuer Credit Quality and the Price of Asset Backed Securities by Oliver Faltin-Traeger, Kathleen W. Johnson and Christopher Mayer. Published in volume 100, issue 2, pages 501-05 of American Economic Review, May 2010

In a January 2009 lecture on the financial crisis, Federal Reserve Chairman Bernanke advocated a new Fed policy of credit easing, defined as a combination of lending to financial institutions, providing liquidity directly to key credit markets, and buying of long term securities. We show that Bernanke's analysis and recommendations can be naturally considered in a model of "unstable banking," which relies on two mechanisms: 1) fire sales reduce asset prices below fundamental values, and 2) financial institutions prefer speculation to new lending when markets are dislocated. We analyze credit easing and compare it to alternative government interventions during the crisis.

The incidence of bilateral trade costs is calculated here using neglected properties of the structural gravity model, disaggregated by commodity and region, and re-aggregated into forms useful for economic geography. For Canada's provinces, 1992–2003, sellers' incidence is on average some five times higher than buyers' incidence. Sellers' incidence falls over time due to specialization, despite constant gravity coefficients. This previously unrecognized globalizing force drives big reductions in “constructed home bias,” the disproportionate predicted share of local trade; and large but varying gains in real GDP.

Using data on user attributes and interactions from an online dating site, we estimate mate preferences, and use the Gale-Shapley algorithm to predict stable matches. The predicted matches are similar to the actual matches achieved by the dating site, and the actual matches are approximately efficient. Out-of-sample predictions of offline matches, i.e., marriages, exhibit assortative mating patterns similar to those observed in actual marriages. Thus, mate preferences, without resort to search frictions, can generate sorting in marriages. However, we underpredict some of the correlation patterns; search frictions may play a role in explaining the discrepancy.

Gaps in educational performance between whites and racial minorities are not present at early ages but do emerge early in the schooling years and increase over time (Roland Fryer and Steve Levitt 2006, forthcoming). James Heckman (2007) assembles evidence from both the bio logical and social sciences which highlights the dynamic complementarity of the learning pro cess?the notion that early learning is vital for learning later on. A recent literature in econom ics finds evidence that the returns to early invest ments in children yield high returns to society (Heckman and Dimitriy Masterov 2007). That educational gaps exist and worsen over time is troubling as educational attainment is associated with a host of socioeconomic outcomes such as health, earnings, and wealth (David Cutler and Adriana Lleras-Muney 2008). At the same time, gaps in educational performance and outcomes are but one dimension of racial inequality. One area of research has been with respect to racial health disparities, which unlike educational dis parities appear at very early ages and increase over time (Linda Dynan (2009) provides a lit erature review). Little work, however, directly analyzes how health disparities in children may impact other outcomes.1 The fact that health out comes may lead to socioeconomic differences which themselves may lead to further health and