Knowledge that Transforms

It is hardly news that we are in the midst of rapid economic change. The advances in information and communication technology (ICT), in the life and other sciences and their profusion of innovative products from the newest electronic devices to the latest drugs and treatments are ample evidence. Equally pervasive are new business models in services (big box retail, online banking, on-demand media) and the explosion in social networking and new business practices ushered in by the Internet (telework, virtual meetings, job boards). Given the magnitude of the changes brought on by these innovations, it is useful to step back and ask: What does economic analysis have to say about the sources and mechanisms of these shifts and revolutions, and what economic metrics are available to measure their overall size and impact? The received theory of economic growth is the natural candidate for this job. It came of age in the 1950s and 1960s with the neoclassical models and emergence of aggregate growth accounting. The latter has become the work horse of empirical macroeconomic growth analysis and the basis for official productivity statistics put out by the Bureau of Labor Statistics (BLS) since 1983. A technological revolution appears, in this framework, as an increase in the fruits of innovation, as measured by the shift in an aggregate production function (termed multifactor

This paper investigates experimentally how a group's structure affects its ethical behavior towards a passive outsider. We analyze one vertical and two horizontal structures (one requiring consensus, one implementing a compromise by averaging proposals). We also control for internal communication. The data support our main predictions: (1) horizontal, averaging structures are more ethical than vertical structures (where subordinates do not feel responsible) and than consensual structures (where responsibility is dynamically diffused); (2) communication makes vertical structures more ethical (subordinates with voice feel responsible); (3) with communication, vertical structures are more ethical than consensual structures (where in-group bias hurts the outsider).

Recent events have stimulated interest in the joint behavior of prices and quantities in credit markets. Data sources such as the Federal Reserve Board’s Flow of Funds Accounts (FFA) provide statistics on a rich set of credit market instruments. However, it is challenging to inter pret such data using economic models that speak to the allocation of risk across agents, such as households or intermediaries. On the one hand, an instrument class such as “Treasury bonds” typically contains many dif ferent instruments that trade at different prices and have different exposure to interest rate shocks (for example, because of differences in duration). On the other hand, a lot of the price movements in instruments like Treasury bonds and mortgage backed securities are due to com mon interest rate shocks, making those instru ments close substitutes from a portfolio choice perspective. For understanding how interest rate risk is allocated in the economy, one would thus like to use information on many positions at the same time, rather than, say, focus on one set of instruments only. At the same time, models with many closely substitutable assets are problem atic. Instead, it would be desirable to compress position data into simple sets of portfolios, like “long” and “short” bonds, but with some con fidence that the risk properties of the original instruments are not lost along the way. DemanD anD Supply for Government BonDS

In order to gain a better empirical understanding of the international financial implications of currency movements, we construct a database of international currency exposures for a large panel of countries over 1990-2004. We show that trade-weighted exchange rate indices are insufficient to understand the financial impact of currency movements and that our currency measures have high explanatory power for the valuation term in net foreign asset dynamics. Exchange rate valuation shocks are sizable, not quickly reversed, and may entail substantial wealth redistributions. Further, we show that many developing countries have substantially reduced their negative foreign currency positions over the last decade. (F31, F32, G15)

We examine the effects of constituents, special interests, and ideology on congressional voting on two of the most significant pieces of legislation in US economic history. Representatives whose constituents experience a sharp increase in mortgage defaults are more likely to support the Foreclosure Prevention Act, especially in competitive districts. Interestingly, representatives are more sensitive to defaults of their own-party constituents. Special interests in the form of higher campaign contributions from the financial industry increase the likelihood of supporting the Emergency Economic Stabilization Act. However, ideologically conservative representatives are less responsive to both constituent and special interests.

What are the effects of fiscal policy in the presence of financial frictions? This question is particularly relevant given the great recession of 2008–2009, how forcefully some governments have resorted to fiscal stimulus over the last two years to fight it, and the widespread view that financial markets have played a decisive role in our current economic problems. To analyze this topic, I build a dynamic stochastic general equilibrium (DSGE) model with financial frictions and fiscal policy, calibrate it to observations of the US economy, and compute the response of output to several fiscal shocks. I. A DSGE Model with Financial Frictions and Fiscal Policy Due to space constraints, I will only briefly describe the main elements of the model that I employ for my investigation. The interested reader can find a more detailed exposition in Fernández-Villaverde (2010). Suffice it to say in terms of motivation that the model is based on the work

This study considers replacing the current US tax system with only a flat tax consumption tax, showing, in contrast to the literature, that such a reform leads to a decline in inequality and increase in welfare for the welfare-poor. The results are obtained from a simple model that identifies the main channels through which the reform affects the economy. It is shown also that these novel results depend on the distribution of wealth and earnings, and that they hold for the relevant empirical distributions.

Economists devote too much attention to international flows of goods and services and not enough to international flows of ideas. Traditional trade flows are an imperfect substitute for flows of the underlying ideas. The simplest textbook trade model shows that a welfare-enhancing move toward freer flows of ideas should be associated with a reduction in conventional trade. The large quantitative effect from the flow of ideas is evident in the second half of the 20th century as the life expectancies in poor and rich countries began to converge. Another example comes from China, where authorities dramatically reduced accident rates by adopting rules of civil aviation that were developed in the United States. All economists, including trade economists, would be better equipped to talk about international flows of technologies and rules if they adopted a consistent vocabulary based on the concepts of nonrivalry and excludability. An analysis of the interaction between rules and technologies may help explain important puzzles such as why private firms have successfully diffused some technologies (mobile telephony) but not others (safe municipal water.)

We use more than a century of Argentine and Mexican data to estimate the structural parameters of a small-open-economy real-business-cycle model driven by nonstationary productivity shocks. We find that the RBC model does a poor job of explaining business cycles in emerging countries. We then estimate an augmented model that incorporates shocks to the country premium and financial frictions. We find that the estimated financial-friction model provides a remarkably good account of business cycles in emerging markets and, importantly, assigns a negligible role to nonstationary productivity shocks.

What "Triggers" Mortgage Default? by Ronel Elul, Nicholas S. Souleles, Souphala Chomsisengphet, Dennis Glennon and Robert Hunt. Published in volume 100, issue 2, pages 490-94 of American Economic Review, May 2010