Econ 116 Studies

Question 1

Reinhart and Rogoff “Growth in a Time of Debt” (19)

Answer 1

For advanced countries, public debt has no effect on inflation, while for developing countries, inflation rises as debt increases. R&R also found that debt to GDP ratios above 90% caused decreased GDP growth rates.

Question 2

“Assessing Early Warning Systems: How Have They Worked in Practice?” by Andrew Berg, Eduardo Borensztein, and Catherine Pattillo (20)

Answer 2

Only the IMF Early Warning was at all accurate. However, it often had too many false alarms. All the private models consistently failed. None of the EWSs would have been useful to predict the 2008 crisis.

Question 3

“Did Securitization Lead to Lax Screening? Evidence From Subprime Loans”, Benjamin J. Keys, Tanmoy Mukherjee, Amit Seru and, Vikrant Vig (21)

Answer 3

Borrowers with FICO = 621 defaults 1.2 times more over two years than FICO =619. Borrowers needed a 620 or higher score to have their mortgages easily securitized.

Question 4

What Makes a good forecaster (22)

Answer 4

Forecasters who received even a very brief (1 hour training session in basic probabilistic reasoning) performed 1/6 of s.d. better than the rest. Cultivating this skills matter.
 Experience matters (more experienced forecasters did better)
 Desire to make forecasts precise matters hugely: the difference between “estimative verbs” and a 7-step forecast is worth 20-30% of improvement of a typical forecast
 Most importantly, desire to revise forecasts
 This is also a trait of Superforecasters (to 2%)

Question 5

Reinhart-Rogoff “The aftermath of the financial crises” (22)

Answer 5

Recovery takes: 6 years for housing prices, 3.4 years for equity prices, 4.8 years for unemployment, 1.9 years for GDP.

Question 6

Optimal taxes on fossil fuel in general equilibrium, by Mikhail Golosov, John Hassler, Per Krusell, and Aleh Tsyvinski (23)

Answer 6

Determined specific carbon taxes needed depending on castrophic, uncertain, or moderate effect of climate change. All of these taxes were quite high.

Question 7

Jones & Klenow: “Beyond GDP: Welfare across Countries and Time (2)

Answer 7

“Veil of ignorance” used to talk about gdp as a measure of welfare between countries like the US or france. Used to talk about “consumption equivalents”.

Question 8

Atkeson and Kehoe (5)

Answer 8

Finding a link between deflation and depression: huge study of a negative inflation rate (deflation) and negative real growth rate (depression). NO LINK between deflation and depression except for great depression.

Question 9

Hagedorn, Karahan, Manovski, MItman (2013) (7)

Answer 9

Unemployment Benefit extensions. Finding: Unemployment benefits increase unemployment. Issue: ENDOGENEITY problem. - hard to measure change in unemployment by extending unemployment benefits. Solution: comparing unemployment in different states but close counties.

Question 10

Hagedorn, Manovski, Mitman (2015) (7)

Answer 10

Finding: 1% drop in unemployment benefit extension leads to a statistically significant decrease in unemployment.

Question 11

Haitiwanger, Jarmin, Miranda (2012) (7)

Answer 11

Inverse relationship between size of firm and net growth rates. Smaller firms grow faster. However, controlling for age, young firms fail much more but end up growing faster if successful.

Question 12

Acemoglu, Johnson, Robinson (10)

Answer 12

Extractive institutions: In places where europeans faced high mortality rates, instead of settling they were more likely to set up extractive institutions. Still continues to this day. These differences in mortality rates have large effects on income per capita.

Question 13

Eichengreen, et al. (10)

Answer 13

Middle Income Trap: Slowdowns are less likely in countries where the population has a relatively high level of secondary and tertiary education and a significant amount of advanced technology.

Question 14

Pritchett and Summers (10)

Answer 14

Middle income trap does not exist: Mean reverssion. Countries entering the trap got there because of high growth. They are just regressing to the normal level of growth now.

Question 15

Ramey (fiscal multiplier)

Answer 15

Study:
Defense news shock vs. government spending (1939-2008)
Conclusions:
Implied government spending multipliers: 0.6-1.1

Question 16

Barro and Redlick (fiscal multiplier)

Answer 16

Focus on defense spending, temporary vs. permanent
Temporary: 0.4-0.5 (contemporaneously) / 0.6-0.7 (over 2 years)
Permanent: +0.1-0.2

Question 17

Romer & Romer (fiscal multiplier)

Answer 17

Federal tax legislation (19455-2007)
Exogenous: -2.5
All legislated tax changes: -1.8

Question 18

Ramey Zubairy (fiscal multiplier)

Answer 18

No evidence that the multiplier on government purchases is higher during high unemployment states
0.6-1.0
Little evidence that the multiplier is higher at the zero lower bound

Question 19

Ramey, “Comments on ‘Roads to Prosperity or Bridges to Nowhere?’”

Answer 19

No money is being disbursed by governments at the time that construction companies are hiring workers and buying materials

If companies are financing their projects with credit, does this crowd out loans for other private companies?

Labor costs represent only 8 percent of the expenditures on road construction because it is so capital intensive

Question 20

Price Stickiness: due to Firms

Answer 20

Blinder et al. (1998): 200 firms
The median firm adjusted prices about once a year.

Hall, Walsh, and Yates (2000): 654 British firms
58% adjusted prices once a year or more

Question 21

Price Stickiness: due to Consumers

Answer 21

Cecchetti (1986): 38 magazines
The number of years since the last price change ranged from 1.8 to 14 years.

Kashyap (1995): 12 mail-order catalog goods
An average of 14.7 months between price changes.

MacDonald and Aaronson (2001): restaurant pricing
Prices display a median duration of about 10 months.

Question 22

Bills & Klenow (2004) (Price Stickiness

Answer 22

Examine the frequency of price changes for 350 categories of goods and services covering about 70 percent of consumer spending
Finds much more frequent price changes, with half of prices lasting less than 4.3 months
Even excluding sales, half of prices last 5.5 months or less
Differs dramatically across goods (laundry machine vs. gasoline)

Question 23

Dhyne et al. (2006): Euro Area (price stickiness)

Answer 23

Bottom line: prices are not very sticky, but it depends on the type of goods and services

The average duration of a price spell in the euro area ranges from four to five quarters, which is about twice as long as in the United States

The frequency of price changes varies substantially across products

No evidence of general downward price rigidity

Question 24

Atkeson & Ohanian

Phillips Curve

Answer 24

Naïve model: inflation over the next year will be equal to inflation over the previous year

All three sets of Phillips curve-based inflation forecasts have been no more accurate than the naïve model

Bottom line: Phillips curve is not a useful forecasting tool

Question 25

Friedman & Schwartz

Answer 25

Declines in the money supply tend to precede declines in output over nearly a century in the United States
Money supply fell sharply during the 1929-33 decline
Excessively tight monetary policy by the Fed following the boom of the 1920s turned an otherwise normal recession into the Great Depression

not useful for extended periods

Question 26

Cole & Ohanian

Answer 26

Financial frictions are unlikely to have caused the prolonged slump

The main culprits were (1) labor frictions and (2) efficiency frictions (productivity)

Cartelization and unionization led to a slow recovery

Question 27

Keynes’ “Beauty Contest”

Answer 27

Stock prices reflect people’s views about what other people think will happen to stock prices
Prone to irrational waves of pessimism/optimism

Question 28

Robert Shiller

Answer 28

Empirically showed that the volatility of the stock market was greater than what could plausibly be explained by expected receipt of future dividends

Stock prices can be predicted over the long run by P/E ratios (as much as 40% of the variance)

Question 29

Reinhart & Rogoff

Answer 29

Private debt is a sign of a banking crisis

public borrowing increases ahead of a crisis

Question 30

Reinhart & Rogoff

Answer 30

Government debt and GDP
The relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP
Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more
Emerging markets face lower thresholds for external debt