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Research related to:  Macroeconomics

The Surprising Instability of Export Specializations

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We study the instability of hyper-specialization of exports. We have two main findings. (1) Specializations are surprisingly unstable: Export ranks are not persistent, and new top products and destinations replace old ones. Measurement error is unlikely to be the main or only determinant of this pattern. (2) Source-country factors are not the main explanation of this instability: Only 20% of the variation in export growth can be explained by variation in comparative advantage (source-by-product factors), while another 20% of the variation in export growth can be explained by variation in bilateral (source-by-destination) factors.

Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity?

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We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus or a policy of fiscal austerity, appropriately tailored in magnitude and duration, will insulate the economy from deflation traps. However "fiscal switching rules" that automatically kick in without discretionary fine tuning can be equally effective.
By Jess Benhabib, George W. Evans, and Seppo Honkapohja

The Role of Growth Slowdowns and Forecast Errors in Public Debt Crises

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According to the well‐known arithmetic of debt dynamics, a growth slowdown results in rising debt ratios if fiscal policy does not adjust. This mechanical effect plays a role in a surprisingly wide variety of public debt crises, from the Latin American debt crisis of the 80s and 90s to the low income HIPC crisis of the same period to the current Eurozone debt crisis and US debt crisis. Growth slowdowns often result in growth projections by fiscal authorities that are too optimistic, one of the possible reasons for which fiscal policy fails to adjust. Sound forecasting practices of projecting mean reversion and being more conservative the worse the debt situation are ignored in some major debt crises.
William Easterly

The Distribution of Wealth and Fiscal Policy in Economies with Finitely Lived Agents

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We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and inter-generational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth, of wealth inequality in particular, on various fiscal policy instruments . . . 
Jes Benhabib, Alberto Bisin and Shenghao Zhu

The Phelps-Koopmans Theorem and Potential Optimality

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Can discounted optimal paths spend an “infinite amount of time above” the golden rule?
This paper seeks to answer that question. I show in Proposition 1 that if an optimal path converges, its limit must lie weakly below the minimal golden rule, the lowest capital stock that globally maximizes net consumption. This result is independent of any curvature assumptions, either on the production function or on the utility function. Thus far, then, the intuition of the convex model carries over: convergent programs that are potentially optimal with respect to some utility function cannot stay above and bounded away from the golden rule . . . 
Debraj Ray, NYU

The Political Economy of Normal Macroeconomic Pathologies.

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Recognizing that inflation and the macroeconomic policies that affect it can emanate from distributional conflicts in society, we examine the deep determinants of several nominal pathologies and related policy variables from a distributional perspective. We develop new instruments and use well- established existing instruments for these deep determinants and find that two deep determinants—societal divisions and democratic institutions—have a powerful and robust causal impact on nominal macroeconomic outcomes . . . 
Shanker atyanath and Arvind Subramanian

Capital Controls, Political Institutions, and Economic Growth

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The case study literature suggests that liberal international capital flows can have extremely different growth consequences depending on the political environment. Despite this, little systematic attention has been paid to how politics affects the relationship between capital controls and long term growth in a large-n context. Focusing on the conflict alleviating properties of democracy we demonstrate that authoritarian countries with a large number of societal divisions are negatively affected by capital controls, while neither democratic nor homogeneous countries suffer adverse growth effects from capital controls . . . 

Politically Generated Uncertainty and Currency Crises: Theory, Tests, and Forecasts

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While it is widely acknowledged that political factors contribute to currency crises there have been few efforts at using political variables to improve crisis forecasts. We discuss ways in which political factors can be incorporated into theoretical models of crises, and develop testable hypotheses relating variations in political variables to variations in the probability of a currency crisis. We show that the incorporation of political variables into diverse crisis models substantially improves their out-of-sample predictive performance . . . 
By David Leblang, University of Colorado; Shanker Satyanath, New York University