Knowledge that Transforms

A decade ago in a paper, “Reassessing Discretionary Fiscal Policy,” published in the Journal of Economic Perspectives, I concluded that “in the current context of the US economy, it seems best to let fiscal policy have its main countercyclical impact through the automatic stabilizers. ... It would be appropriate in the current circumstances for discretionary fiscal policy to be saved explicitly for longer term issues, requiring less frequent changes.” This was not an unusual conclusion at the time. As Martin Eichenbaum (1997) put it, “There is now widespread agreement that countercyclical discretionary fiscal policy is neither desirable nor politically feasible,” or, according to Martin Feldstein (2002), “There is now widespread agreement in the economics profession that deliberate ‘countercyclical’ discretionary policy has not contributed to economic stability and may have actually been destabilizing in the past.” Despite this widespread agreement of a decade ago, there has recently been a dramatic revival of interest in discretionary fiscal policy. The purpose of this short paper is to review the empirical evidence during the past decade and determine whether it calls for such a revival. I find that it does not.

Thirty years have passed since a small group of theorists began applying concepts and tools from industrial organization to the analysis of international trade. The new models of trade that emerged from that work didn't supplant traditional trade theory so much as supplement it, creating an integrated view that made sense of aspects of world trade that had previously posed major puzzles. The "new trade theory"—an unfortunate phrase, now quite often referred to as "the old new trade theory"—also helped build a bridge between the analysis of trade between countries and the location of production within countries. In this paper I will try to retrace the steps and, perhaps even more important, the state of mind that made this intellectual transformation possible. At the end I'll also ask about the relevance of those once-revolutionary insights in a world economy that, as I'll explain, is arguably more classical now than it was when the revolution in trade theory began.

Most analyses of the U.S. Great Moderation have been based on structural VAR methods, and have consistently pointed towards good luck as the main explanation for the greater macroeconomic stability of recent years. Based on an estimated New-Keynesian model in which the only source of change is the move from passive to active monetary policy, we show that VARs may misinterpret good policy for good luck. First, the policy shift is sufficient to generate decreases in the theoretical innovation variances for all series, and decreases in the variances of inflation and the output gap, without any need of sunspot shocks. With sunspots, the estimated model exhibits decreases in both variances and innovation variances for all series. Second, policy counterfactuals based on the theoretical structural VAR representations of the model under the two regimes fail to capture the truth, whereas impulse-response functions to a monetary policy shock exhibit little change across regimes. Since these results are in line with those found in the structural VARbased literature on the Great Moderation, our analysis suggests that existing VAR evidence is compatible with the 'good policy' explanation of the Great Moderation.

Trade Liberalization and New Imported Inputs by Pinelopi Goldberg, Amit Khandelwal, Nina Pavcnik and Petia Topalova. Published in volume 99, issue 2, pages 494-500 of American Economic Review, May 2009

This paper examines the take-up of a new malaria-control device by rural households in Kenya, and tests whether the demand curve for the device varies with the framing of marketing messages and with the gender of the person targeted by the marketing. Previous research suggests that the demand for malaria prevention is highly price-sensitive (Jessica Cohen and Dupas 2008), even though the private returns to preventing malaria are very large (Christian Lengeler 2004). In the standard model of investment in human capital, individuals invest in a health product if the expected benefits from the product outweigh its costs (Michael Grossman 1972). In this framework, the low take-up observed at relatively moderate prices by Cohen and Dupas (2008) could be due to people underestimating the expected benefits of investing in prevention; or due to people being credit-constrained and unable to pay the cost up front. It is also possible that the standard model does not apply, because people have time-inconsistent preferences or because they are uncertain about their own preferences and rely on external cues to resolve their own uncertainty when they need to make a decision. An extensive literature in psychology and marketing suggests that decision-making can be affected by frames or cues that do not add information about a product, but can be effective at persuading individuals to invest in it. For example, in a recent field experiment in South Africa, Marianne Bertrand et al. (2008) found What Matters (and What Does Not) in Households’ Decision to Invest in Malaria Prevention?

In this paper, we assess the likely contribution of immigration over the past three and a half decades to poverty in the U.S. We first document trends in poverty rates among the native-born by race and ethnicity and poverty trends among all immigrants, recent immigrants, and immigrants by their region and (in some instances) country of origin. Next, we assess how poverty rates among immigrants change with time in the United States. Finally, we simulate the effects of competition with immigrant labor on native wages and the likely consequent effects on native poverty rates. We find that international immigration to the U.S. between 1970 and 2005 has increased the overall poverty rate due to the facts that immigrants are more likely to be poor and that an increasing proportion of the U.S. resident population that is foreign born. This effect, however, is modest (it increases U.S. poverty rates by half a percentage point) and transitory, as immigrant poverty rates decline quickly with time in the U.S. Our wage simulations indicate that competition with immigrants does adversely impact those natives, and only those natives, with the least education. However, the impact of wage competition with immigrants on native poverty rates is negligible.

We study ex post efficient policy responses to a run on the banking system and the ex ante incentives these responses create. We show that the efficient response to a run is typically not to freeze all remaining deposits, since doing so imposes heavy costs on some individuals. Instead, once a run is underway, (benevolent) government institutions would allow additional deposit withdrawals, placing further strain on the banking system. When depositors anticipate these extra withdrawals, their incentive to participate in the run increases. In fact, ex post efficient interventions can generate the conditions necessary for a self-fulfilling run to occur. (JEL G21, G8)

The use of microeconomic data has become extremely widespread in applied economics. Household and firm level data are now routinely used not only in labour and industrial organization, but also in macroeconomics. The use that is made of the data is extremely varied, ranging from simple comparison of means in the evaluation literature based on Randomized Control Trials, to the matching of some data moments to calibrate the structural parameters of complex models of individual behaviour to the structural estimation of dynamic optimization models. At the same time, partly as consequences of technology advances, many more data sets are available. And much more detailed and high quality data are being collected. From a methodological point of view, important advances have been made in the techniques aimed at the elicitation in surveys of information about a variety of factors that constitute important inputs in the empirical analysis of economic behaviour. A good example, for instance, is the collection of information on household financial and non financial wealth, which was thought to be a very difficult if not impossible variable to measure accurately in a household survey and, instead, is now collected routinely and satisfactorily in many surveys, thanks to the development and standardization of new

We examine the effect of early-life rainfall on the health, education, and socioeconomic outcomes of Indonesian adults. We link historical rainfall for each individual's birth year and birth location with adult outcomes from the 2000 Indonesia Family Life Survey (IFLS). Higher early-life rainfall has large positive effects on the adult outcomes of women, but not of men. Women with 20 percent higher rainfall (relative to the local norm) are 0.57 centimeters taller, complete 0.22 more schooling grades, and live in households scoring 0.12 standard deviations higher on an asset index. Schooling attainment appears to mediate the impact on adult women's socioeconomic status. (JEL I12, I21, J16, O15)