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Noted for March 6, 2013

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  • Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff: Debt Overhangs: Past and Present: "We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90% for at least five years. Consistent with Reinhart and Rogoff (2010) and other more recent research, we find that public debt overhang episodes are associated with growth over one percent lower than during other periods. Perhaps the most striking new finding here is the duration of the average debt overhang episode. Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II. Across all 26 cases, the average duration in years is about 23 years. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive. We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates."

  • Tim Duy (April 2012): On the Difference Between Bernanke-1999 and Bernanke-2012: "Note - and I think this is important - when Bernanke's Fed took the opportunity to shift down the path of inflation by sanctifying the 2 percent target, they were comfortable with the subsequent shift in the distribution of outcomes.  And consider that shift. At a time when households were overwhelmed with excessive debt, the Fed deliberately chose to increase the real burden of the debt by changing the inflation trajectory. Why one would use a balance sheet recession to shift downward the path of prices is certainly something of a mystery.  But it does imply that the Fed wanted to induce a new distribution of outcomes, even knowing that the beneficiaries would not be households…. The Fed must also know that the by reducing the path of inflation they have knowing altered the distribution of outcomes in a way that is likely to slow the pace of recovery."

  • Tyler Cowen: The more things change…: "'Malthus argued that redemption of the public debt wold be unwise given England’s economic circumstances, which were characterized by an excess of capital relative to aggregate demand and, consequently, a low rate of profit.' That is from Nancy Churchman…. Lord Lauderdale, circa 1803… 'constantly links the welfare of the country with the continuance of a high rate of yield to holders of the public debt'. How about J.B. Say?  From Wikipedia: 'Say himself advocated public works to remedy unemployment, and criticized Ricardo for neglecting the possibility of hoarding if there was a lack of investment opportunities'…. Ho hum, ho hum.  Go back and read the classics, and hang your heads in despair. As I’ve mentioned, it sometimes feels like we are living in the early 19th century."

  • Greg Sargent: Joe Scarborough versus the world: "Scarborough needs to obscure Krugman’s actual positions in order to create an aura of sensible centrism around himself and an aura of marginalization around Krugman. Scarborough attacked Krugman for his claim that any reductions in spending are bad for the economy right now. But elsewhere, Scarborough actually agreed that we don’t have a serious immediate term spending problem, and said he supports immediate stimulus spending on infrastructure and education."

  • Buttonwood: Pensions: Life is a lottery: "The OECD ran a simulation to see what past outcomes would be for workers saving 5% of their salary for 40 years and putting it in a 60/40 equity/bond portfolio. (As far as I can see, the assumption doesn't allow for charges. Even if you save for 40 years, which many people won't manage, 5% is not enough. As the saying goes, don't try this at home.) In the US, the peak replacement ratio was 50% at the height if the dotcom boom*. Those retiring 10 years later could expect only 20%. That is a huge differential; such retirees have lower income just by accident of birth."

  • Yuriy Gorodnichenko and Michael Weber: Are Sticky Prices Costly? Evidence From The Stock Market: "We propose a simple framework to assess the costs of nominal price adjustment using stock market returns. We document that, after monetary policy announcements, the conditional volatility rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large as well as strikingly robust to a broad array of checks. These results suggest that menu costs—broadly defined to include physical costs of price adjustment, informational frictions, etc.—are an important factor for nominal price rigidity. We also show that our empirical results qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models where firms have heterogeneous price stickiness. Since our approach is valid for a wide variety of theoretical models and frictions preventing firms from price adjustment, we provide 'model-free' evidence that sticky prices are indeed costly."

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On March 5, 2013:

March 05, 2013 at 21:15 in #weblogging | | Comments (6)

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