Working Papers

Alberto Baccini’s presentation for INET’s panel on research evaluation at the G20 Global Solutions Summit in Berlin, May 2018.

Adair Turner, Chair of the Institute for New Economic Thinking, Lecture at School of Advanced International Studies, Johns Hopkins University, Washington DC April 10th 2018

To get justice, targets must show measurable harm: economists can help.

Veiling among Muslim women is modeled as a commitment mechanism that limits temptation to deviate from religious norms of behavior. 

The past 30 years has witnessed a worldwide decrease in real interest rates. We demonstrate that a large part of the fall in interest rates can be explained by changes in demography, which are as the result of a sudden fall in fertility rates across all of the advanced economies in the early 1970s.

We examine the hypothesis that the slowdown in productivity following the Great Recession was in significant part an endogenous response to the contraction in demand that induced the downturn.

The concern that an economy could experience persistent, and in some sense unusual, weakness goes back to Keynes’s General Theory and led Alvin Hansen to coin the term “secular stagnation.”

This paper shows that aging has positive effect on output growth per capital at positive interest rates, due to capital deepening.

We provide a Keynesian growth theory in which pessimistic expectations can lead to very persistent, or even permanent, slumps characterized by high unemployment and weak growth.

We explore the transmission mechanism of income inequality to output.

This paper answers fundamental questions that have preoccupied modern economic thought since the 18th century.

Long-term real interest rates across the world are low, having fallen by about 450 basis points (bps) over the past thirty years.

This paper replaces an earlier version of a paper released in 2014 under the title “A Model of Secular Stagnation.”

One might think of the satisfied consensus reigning in macroeconomics before the financial crisis (and still relatively entrenched) as evidence of “Groupthink” in a “Divided State”

The consensus that reigned in macroeconomics before the financial crisis has come under renewed attack.

The path to holding fossil fuel producers accountable for climate change & climate damages 

The deregulatory zeal of the 1990s and 2000s has returned to the US and the post-Brexit plans to protect the City in the UK sound like the pre-crash light-touch mentality that fueled global regulatory arbitrage.  As a result, a foremost “challenge of our time” is to stop “subsidizing more one-way bets” and “doubling down on failure.”

As globalization proceeds rapidly, manufacturing industry in most of developed countries declined steadily. 

The Death of the Seventy-year American Empire  

An Assessment and Some Policy Implications

What economics can – and can’t – tell us about climate change 

We want an economy that generates stable and equitable growth—or what I call “sustainable prosperity.” We want productivity growth that makes it possible for the population to have higher living standards over time. We want an equitable sharing of the gains from productivity growth among those whose work efforts and financial resources contribute to that growth. And we want sufficient job stability to enable workers to remain in productive employment for some four decades at work while providing them with enough savings to provide them with adequate incomes over some two decades of retirement.

Can a Policy of Guaranteed Basic Income Return Mature Market Economies to les Trente Glorieuses?

Building symbiotic public-private partnerships

Decomposition by such an important category as gender helps us understand the economy at the macro level, and design macroeconomic policy, better. It also provides the foundation for advocating equal gender rights and outcomes. But, where gendered policy issues arise in mainstream macroeconomics (income maldistribution, labour market composition, etc.) the subject matter is narrowed by its microfoundations, by focusing on GDP growth and on suboptimal outcomes being explained by market imperfections.

This paper examines the value of connections between German industry and the Nazi movement in early 1933. Drawing on previously unused contemporary sources about management and supervisory board composition and stock returns, we find that one out of seven firms, and a large proportion of the biggest companies, had substantive links with the National Socialist German Workers’ Party. Firms supporting the Nazi movement experienced unusually high returns, outperforming unconnected ones by 5% to 8% between January and March 1933. These results are not driven by sectoral composition and are robust to alternative estimators and definitions of affiliation. 

After re-iterating five well-known theorems about the properties of conditional expectations in stationary settings—such as providing unbiased minimum mean square error predictions despite in- complete information, and the law of iterated expectations—we clarify unpredictability and illustrate its prevalence empirically.

In the paper that we present this afternoon, Soren Johansen, Anders Rahbek, Morten Tabor, and I introduce the Qualitative Expectations Hypothesis (QEH) as a new approach to modeling macroeconomic and financial outcomes.

“The Failure of Democracy” – “The weaknesses of Weimar” Do headlines such as these suggest that the whole architecture of the first German republic was wrong, that it was doomed right from the start, that the “collapse” was unavoidable?

Stock Market Returns and Corporate Networks 

On 23 June 2016, the British electorate voted to leave the European Union (EU). We analyse vote and turnout shares across 380 local authority areas in the United Kingdom.

This paper discusses household debt as a long term phenomenon that influences economies beyond crises.1 In other words, rather than look at how household indebtedness can lead to crises, I will focus on its surprising persistence at very high levels, and its interactions along the way with other key variables, such as public policies and spending. The first section describes some stylized facts and the final section explores the macroeconomic consequences.

Support for populism is often attributed to xenophobia, racism, sexism; to anger and resentment at immigrants, racial or ethnic minorities, or “uppity” non-traditional women. According to these accounts , people who feel socially resentful may reject established politicians as favoring those “others” over people like themselves, and turn to outsider populistic leaders.

The debt-growth relationship is complex, varying across countries and being affected by global factors. While there is no simple universal threshold above which debt-to-GDP becomes a significant brake on growth, based on data from the last four decades we show that high and rising public debt burdens slow down growth in the long term.

Unpacking the Effect of Trade on Workers and Voters 

This paper discusses what we have learned about the debt build-up in advanced societies over the past century. It shows that the extraordinary growth of aggregate debt in the past century was driven by the private sector.

A better set of approaches for the 21st century.

The contemporary literature on neoliberalism has grown so large as to be unwieldy. For some on the left, this has presented an occasion to denounce it altogether.

How far are economists implicated in the rise of ‘fake experts’ and ‘fake news’?

Is Comparative Advantage the Ideology of the Comparatively Advantaged? 

The Electoral Consequences of Rising Trade Exposure

Especially in the wake of the Great Recession, calls for more diversity within economics are usually limited to appealing for greater diversity in the economists’ backgrounds, while diversity of opinion and approaches is often neglected.

The Academic and Professional Performance of the Chicago School, 1960-1985

The current crisis is the culmination of a process of integration that has profoundly changed the structure of each member state, their inter-relations and their power relations. One of its side effects was the rediscovery of the terms ‘centre’ and ‘periphery’ to analyse the economic situations of the European countries.

The euro area has been experiencing a prolonged period of weak economic activity and very low inflation.

The wind appears to be back in the sails of the Eurozone economy ….

Some fresh reflections on ECB policy

Given that this is a panel on that quintessential Enlightenment thinker Adam Smith, I can think of no better way to begin my remarks than to invoke that most enlightened of modern economists, Kenneth Boulding, who in 1971 penned the delightful essay, “After Samuelson, Who Needs Adam Smith?” 

When priests and princes lost their monopoly over the big questions of human existence over the course of the Enlightenment, philosophers, poets, and ordinary people struggled to find out the answers on their own. 

Adam Smith’s modern fame as the founding father of economics has, until relatively recently, obscured the fact that he saw himself as a moral philosopher.

The road towards a decent society; lessons from classical political economy

Growing income inequality is threatening the American middle class, and the middle class is vanishing before our eyes. We are still one country, but the stretch of incomes is fraying the unity of our nation.

The Precariat under Rentier Capitalism Guy Standing We are in the midst of a Global Transformation, analogous to Karl Polanyi’s Great Transformation described in his seminal 1944 book. Whereas Polanyi’s Transformation was about constructing national market systems, today’s is about the painful construction of a global market system. To use Polanyi’s term, the ‘dis-embedded’ phase has been dominated by an ideology of market liberalisation, commodification and privatisation, orchestrated by financial interests, as in his model. The similarities also extend to today’s fundamental challenge, how to construct a ‘re-embedded’ phase, with new systems of regulation, distribution and social protection.

In the economic literature, several scholars have addressed the narrative of a two-stage European crisis. In a first stage, the so-called “he-cession”, men would have been hit the most by the economic recession induced by the financial crisis. Shortly thereafter, in the “she-austerity” stage, women would have suffered the heaviest burdens of the fiscal retrenchment measures. If that were the case, the policy response to the crisis would be producing an increase in the – already high pre-existing – gender inequality.

This paper aims to assess such tendency to return to a supply-determined potential output, independent of aggregate demand, after episodes of demand expansion.

Preliminary draft prepared for INET conference session “A Decade of Stagnation. Why?”

This paper analyzes white attitudes towards African Americans in the United States at different points in a business cycle from 1979- 2014.

The Eurozone crisis has been wrongly interpreted as either a crisis of fiscal profligacy or of deteriorating unit-labour cost competitiveness (caused by rigid labour markets), or a combination of both.

John Muth proposed the Rational Expectations Hypothesis (REH) to represent how the market (an aggregate of its participants) understands and forecasts outcomes. REH imposes internal consistency between the market’s forecasts and “the relevant economic theory” (Muth 1961, p. 316).

I first came across economics students’ campaigns to revolutionise their education in that bastion of radical thought: the newsroom of the Financial Times.

Among the areas left largely unscathed by the 2008 financial crisis and subsequent never-­‐ending recession, the teaching of economics ranks high.

This paper proposes a different interpretation of the Eurozone crisis, seeing as its “final” cause European policies which have forced private savings down too low.

Hubris might well head the list

In much of Europe, the social rights and social protections won in the first post-war decades, by labour movements in particular, have subsequently been seriously eroded, and are further threatened by neoliberal austerity.

This memo outlines key concepts and the methodological approach involved in a recently funded Institute for New Economic Thinking project. Our aim is to pinpoint the relationship between the reception of academic ideas, traced by citation networks with qualitative coding, and positions of institutional and political power.

We discuss recent work on bounded rationality and learning in relation to Soros’ principle of reflexivity and stress the empirical importance of non-rational, almost self-fulfilling equilibria in positive feedback systems.

Considerable academic and public attention has been drawn to the pulling away of the very rich—the so-called “one percent” whose gains have far outpaced those of everyone else (Piketty 2014). But the debate has reached well beyond the very top, especially in the United States.Indeed, the hollowing out of the middle class, continuing stagnation of wages, and new evidence on the lack of upward mobility across generations all strike at the very heart of the American ideal.

Italy was one of the worst hit during the 2007–2009 global financial crisis (GFC) among the major advanced economies. By year-end 2009, Italy’s economy had contracted by 6.6 percent; significantly larger than the recessions in the euro zone and the United States, for example, which saw their GDPs shrink by 4.4 and 3.1 percent, respectively.

In the past three years, students around the world have turned the heat of scrutiny onto our economics departments. Our call is strikingly uniform across our diverse cultures and languages: we want critical debate back in the economics curriculum.

“Because many interests come into play in the financing of an election campaign and then they ask you to pay back. So the election campaign should be independent from anyone who may finance it.” - Pope Francis

Pushing this strand of research brings a certain feeling of trepidation. It comes from recognizing that by openly elaborating on how to catch or deter a criminal, you thereby confer an undue advantage on the criminal through forewarning.

Initiatives to improve sovereign debt restructuring (“SDR”) began long before recent Argentine bond decisions but were redoubled in the aftermath of these rulings. At first glance, these cases identify problematic contract language that could be rectified by re-drafting critical boilerplate provisions such as the pari passu and collective action clauses (“CAC”).

The Cyclically Adjusted Budget (CAB) is the estimated size of the public budget at some previously defined level of output which may represent the ‘normal’ output or a policy target and that usually is considered to be unaffected by business fluctuations or cycles. Such an estimate is supposed to isolate the automatic movements of revenues and expenditures, given the current structure of tax and transfers, from discretionary fiscal interventions and indicate the “impact” and sustainability of fiscal action.

Inequality has emerged as a major economic issue: sharp increases in the share of income going to those at the very top of the income distribution, a rising share of income going to profits, stagnant real wages, and a fall in median family income have raised concern over the sustainability of our economies and societies.

Over the past decades African economies have exhibited two stunning paradoxes: growth acceleration coexisting with stubbornly high poverty rates; increasing capital flight along with widening development financing gaps. There has been no attempt to link the two in the literature.

The modern individual is the point of intersection of the processes of consumption and production. The subjective representation of these processes has been determined by two branches of the modern middle class, the bourgeoisie, which has privileged consumption, and the bureaucracy, which has privileged production.

This paper will address the problem of how we might gain economic understanding from literature. It will look at the aesthetic form of literature as being an efficient vehicle for economic thinking.

The largely unexpected arrival of the global economic crisis and the largely unpredicted slowness of the recovery from the Great Recession should be precipitating an intellectual crisis across economics and policy making. We require additional theories and additional methods to detect how an economy is evolving and to provide the basis for policy intervention (Haldane, 2014).

During the past year, there have been numerous and somber reflections, rather like those during a traditional period of mourning, about the great and tragic events that occurred just 100 years ago – the beginning of the First World War. And in the course of these melancholy reflections about the past, there naturally have arisen anxious concerns about the future.

What is at stake : Increasing doubt over the virtue of democracy. One cannot doubt the ubiquitous lack of confidence and hope in the so-called democratic institutions by a large majority of the people. The fundamental cause is the blatant contradiction between the principle of democracy, promoting the rule and thereby the welfare of the people, and the indomitable tendency of rising and unsustainable inequality in terms of income, standard of living and wealth.

The central concepts of Keynes’ macroeconomic theories concerning the behavior of labor markets, aggregate demand, and asset pricing can be formulated as special cases of a general social interaction model.

In this paper, we deal with the complex relationship connecting inequality to innovation, and the ways through which public investment, in particular public participation to R&D initiatives, may affect it. We first stress that multiple different equilibria may exist in the inequality-innovation space.

This paper studies the glass ceiling by analyzing the presence of women at the top of the income distribution using tax record data reported for a sample of countries with individual taxation.

Using a sample of U.S. firms spanning 2001-2011, we examine whether female directors (female audit committee members) affect audit quality in terms of audit effort and auditor choice.

This paper presents a theory of pseudo-wealth in a model that displays aggregate demand externalities.

A recent New York Times article observed that Americans want action to address inequality. 2016 presidential candidates from both parties also acknowledge that inequality is a pressing concern. But not one of the candidates has proposed to do anything meaningful about it, sharing wealthy Americans’ (understandable) opposition to any solution (Scheiber 2015). Perhaps nothing has been done because there is nothing to do about it.

A structural transformation is investing labour in Europe, accelerated by the crisis started in 2008. Job destruction is dominating employment trends in most EU countries and deep changes are taking place in labour relations, labour market institutions and wage regimes.

We develop a novel stress-test framework to monitor systemic risk in financial systems. The modular structure of the framework allows to accommodate for a variety of shock scenarios, methods to estimate interbank exposures and mechanisms of distress propagation.

Innovation is essential to economic growth. However, it appears that the ways in which we pursue innovation policies have aggravated inequality. Inequality is an increasingly contentious political issue in both wealthy and emerging economies.

“Oh, the Chinese hate the Japanese and the Japanese hate the Chinese—to hate all but the right folks is an old established rule. The Koreans hate the Japanese and the Vietnamese hate the Chinese, and the North Koreans hate them all. Oh, the People hate the Communists and the Communists hate the People. The Nationalists hate the Communists and the Communists hate themselves. The Confucians hate the Buddhists and the Muslims hate them all. All of my folks hate all of your folks. But during National Brotherhood Week, be nice to people who are inferior to you. It’s only for a week, so have no fear—be grateful that it doesn’t last all year.”

This paper finds its origins in two important developments within mainstream economics since the financial crisis, both of which analyze the economy from the viewpoint of what Schumpeter (1954) referred to as the domain of “real” analysis of a modern market economy in contrast to “monetary” analysis.

Caring Economics is about a new way of thinking about human prosperity. In mainstream economics, prosperity is a matter of consumption, income and wealth. By contrast, Caring Economics conceives of prosperity in terms of deeper sources of durable human wellbeing.

The SSGAC is a research infrastructure designed to stimulate dialogue and cooperation between medical researchers and social scientists. The SSGAC facilitates collaborative research that seeks to identify associations between specific genetic markers (segments of DNA) and behavioral traits, such as preferences, personality and social-science outcomes.

Behavior genetics is the study of the relationship between genetic variation and psychological traits. Turkheimer (2000) proposed “Three Laws of Behavior Genetics” based on empirical regularities observed in studies of twins and other kinships. On the basis of molecular studies that have measured DNA variation directly, we propose a Fourth Law of Behavior Genetics: “A typical human behavioral trait is associated with very many genetic variants, each of which accounts for a very small percentage of the behavioral variability.”

Income and wealth inequality have been rising in the past three decades. Surprisingly, inequality has been largely ignored in the literature and practice of monetary policy. However, due to the crisis, this question has been gaining more attention.

Recent years have witnessed the flourishing of a body of economic literature concerned with the search for empirical evidence of a positive relation between political connections, economic rent and the value of firms. The present paper contributes to the strand of this literature that deals with the quantitative measurement of the value of the political connections of firms.

Regulation of financial services has been an unmitigated policy disaster.

This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the “excess financial elasticity” of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations.

The logic of deep global capitalist crises needs to be incorporated centrally into an understanding of the changes in the within-country inequality levels. I present a theoretical framework that incorporates two levels of political economic processes. First,global capitalist crises lead to the creation of an institutional structure or a regime in the capitalist centers that influences inequality in these core countries and in the periphery. Second the class configuration in the non-core countries - a set of institutional arrangements that can be termed local political economy - also plays a key role in determining inequality outcomes.