The Unassuming Economist

The IMF, Dallas Fed, and the JMCB are holding a conference on “Housing, Stability and the Macroeconomy: International Perspectives”. The program is available here. Stijn Claessens’s presentation gives an excellent overview of the state of the housing markets and policy issues.

At Rice University today, continuing my mission to keep Okun’s Law alive. Art Okun must be smiling down on me. See the presentation here.

“Brazil’s house prices rose substantially over the last few years, especially in two major cities (Figure 1). The national FIPE–Zap index has increased 62 percent from August 2010 to April 2013. It rose 26 and 14 percent in 2011 and 2012 respectively, while construction costs did not rise in tandem. The prices for Sao Paulo and Rio de Janeiro have almost tripled since January 2009, and grew by 30 and 15 percent in 2011 and 2012. Brazil was one of two countries that showed the highest real house price appreciation in 2011 among 52 advanced and emerging market economies,” according to a new report from the IMF.

My VoxEU post with Olivier Blanchard and Florence Jaumotte tries to move beyond ritual invocation of the mantra of “labor market flexibility.” We develop the concepts of “micro” and “macro flexibility”; explain why they are needed; what labor market institutions help or hinder micro and macro flexibility; and assess IMF advice against the backdrop of these concepts. The Staff Discussion Note on which our post is based is available here.

My ‘golden oldie’ interview with Robert Shiller still makes for interesting reading. It is prescient but even Shiller could not have predicted the fate of Eliot Spitzer.

Shiller on US corporate scandals: “On that score I’m actually somewhat sanguine … Eliot Spitzer has been going after corporate crime as aggressively as Eliot Ness, the guy who went after the gangster Al Capone. Combine that with people like … William Donaldson, Chair of the SEC, and it adds up to a lot of people who are really doing their jobs. The budget for the SEC has really been increased; for 2004, it was over $800 million, more than double what it was five years ago. And people can see what a price Martha Stewart paid for acting on a tip. This is the U.S. solution: the United States has generally handled financial scandals aggressively.”

Shiller on housing markets (in 2004): “I’m not exactly sure what’s going on with housing prices. People still report that a major consideration for their buying houses is that they think it is a good investment; that is, they expect house prices to appreciate. But fewer people report buying houses just to make a profit from speculation. I think the thought process a lot of homebuyers are going through right now is more like: I know prices are too high, but that’s what I thought last year and prices still went up. I better buy now before I’m totally priced out.”

Shiller on importance of combining psychology and economics: “We know the role that overconfidence and wishful thinking play in driving financial markets. But psychological theories have still not been completely integrated into economics. Human behavior is very complex, and economists have been in the mood to simplify it, and simplify it heroically. We will have to change our whole approach to problems—our methodology and our tool kits—if we are serious about grappling with the complexity of human behavior.”

Shiller on how he got into behavioral finance: “I wasn’t much of a rebel as a graduate student. My dissertation was on rational expectations. But I was always a bit skeptical about conventional economic theory. An early formative influence was George Katona, who wrote the book Psychological Economics in 1975. I never took one of his courses, but I sat in on one of his lectures and was impressed. It seemed fine to me, then, that there were only a few people like Katona who wanted to sit halfway between economics and psychology. It wasn’t as clear to me then as now that psychology should be central to economics. Much later, Stan Fischer invited me to write a review essay critiquing the rational expectations revolution for a conference he’d organized. Writing that essay awakened further doubts about rational expectations, which I always thought of as a construct that had some interest but was a small part of a big picture.”

Read the full interview here and also a very nice profile of Shiller written by Paolo Mauro.