Evan Soltas
Mar 1, 2012

Academic Roundup

A random sampling of working papers I found interesting

Macro economics
The first is a theory paper by Gauti Eggertson, and it's written in such a way that I feel like I should start counting down until Paul Krugman comes by it. Why? It says that "[c]utting government spending on goods and services increases the budget deficit if the nominal interest rate is close to zero," as the fall in income and spending from the reduced output causes a fall in tax revenue in excess of the reduction in expenditures. I don't know if I believe this -- by the same logic, we could increase government spending and reduce the deficit at the same time when we're at the zero lower bound -- and it seems like it would require unusually high assumptions for both the Keynesian multiplier and the marginal tax rate.

The second is a really amazing paper by Barry Eichengreen which China should treat as a big warning sign. Using a mind-bogglingly large dataset of output growth in foreign economies since 1957, they ask a simple but dangerous question: when do fast-growing economies slow down? They find that a drop of 2 percentage points occurs with notable consistency when per capita income nears $17,000 -- the level which they argue corresponds with "the point in the growth process where it is no longer possible to boost productivity by shifting additional workers from agriculture to industry and where the gains from importing foreign technology diminish."

The third is a rigorous examination of how an institution creates systemic risk as a function of its size, exposures, and connectedness. With this framework, it proposes that we set capital and reserve requirements for individual institutions such that we meet a target level of systemic risk, understanding fully the tradeoff between efficiency and stability. I like this paper for the clarity of the thinking and argument, and wish it could be the starting point of our own discussion of financial sector reform in the United States. Alas.