The Unassuming Economist

Source: Econbrowser

“Fama (JME, 1984), and Tryon (1979) demonstrated that changes in the exchange rate do not equal the forward premium, in what came to be known as the forward premium puzzle. Since the forward premium equals the interest differential in the absence of current and incipient capital controls and in the absence of default risk — this finding is equivalent to the result that interest rates, after accounting for exchange rate changes, are not equalized on average. In other words, if the yield on the US default-risk-free bond is 2% and the yield on a UK default-risk-free bond is 5%, then the US dollar does not on an average appreciate by 3% against the pound in order to equalize returns.“

While this puzzle has largely persisted for a long time, it disappeared during and after the global financial crisis, until reappearing recently. In this blog, the authors have propounded explanations for the same. Read on to know more.

Source: VoxDev

Authors of this article (2022), Baafra Abeberese, A. et al describe their study and its results as follows:

“We study how democratisation affects firm productivity — a critical micro-driver of economic growth. We do so in the context of Indonesia, which had been under the dictatorial rule of Soeharto for three decades, until the unexpected collapse of his regime in 1998. Using the exogenous timing of when each district in the country transitioned to a democracy, we estimate the causal effect of democratisation on firm productivity. We combine data on the timing of democratisation with an annual census of manufacturing firms over two decades to analyse the impact of democratisation on firms using an event study design. Our findings suggest that democratic leaders are less likely to impose socially inefficient regulations or engage in rent-seeking and, hence, enhance firm productivity.”

Related Reading

Revisiting the causal effect of democracy on long-run development

On cross-country:

• Cross-Country Comparison: Home Rent Growth – Core Logic

On the US:    

• There Was No Housing Bubble in 2008 and There Isn’t One Now. Some smart economists are challenging the conventional wisdom that the Great Recession was triggered by out-of-control home prices. – Bloomberg
• Apartment Occupancy Just Hit a Historic High. Is That Good? There’s a silver lining to astronomic U.S. rent hikes: Most tenants won’t pay them, because they’re already locked into their leases. – Bloomberg
• Housing costs swell, hampering home buyers and pushing up rents – New York Times
• Call for Papers: The Mortgage Market Research Conference: Call for Papers – Federal Reserve Bank of Philadelphia
• Mortgage Rates Hit Highest Levels Since Spring 2020. Increase in cost comes after ultralow rates have fueled boom in home sales and prices – Wall Street Journal
• Wall Street Is Using Tech Firms Like Zillow to Eat Up Starter Homes. A business that’s touted as a convenience for home sellers has created a secret pipeline for big investors to buy properties, often in communities of color. – Bloomberg  
• People Don’t Want to Move to Shrinking Cities. Slowing population growth could worsen America’s geographic divides, with home prices skyrocketing in some places and plummeting in others. – Bloomberg
• Rising sea levels threaten affordable housing – NPR
• ‘Magic’ Multigenerational Housing Aims to Alleviate Social Isolation. Two co-living communities set to break ground this year seek to address loneliness, as well as the caregiving and affordable-housing shortages, in the U.S. – Wall Street Journal
• U.S. mortgage interest rates surge by most in almost 2 years – Reuters
• Can You Game Your Way Out of American Housing Injustice? A new video game uses a choose-your-own adventure format to interrogate the illusion of choice in the U.S. housing system. – Bloomberg
• There’s Still No Amazon for Housing, But Fintech’s Working on It. Buying and selling a house is a large, complicated transaction, so companies are focusing on making small parts of it easier. – Bloomberg

On China

• China Plans Millions of Low-Cost Rental Homes in Equality Push – Bloomberg

On other countries:  

• [Germany] Germany Fights Soaring Home Prices With Curbs on Mortgage Lending. As in the U.S. and other economies, pandemic financial support has sparked a surge in property investment and borrowing in the country – Wall Street Journal
• [Germany] Germany asks banks to build buffers as property market heats up – Reuters  
• [Hong Kong] Why Hong Kong housing and office markets are facing very different supply shocks – South China Morning Post  
• [United Kingdom] U.K. House Prices Surged Last Year at Fastest Pace Since 2004 – Bloomberg
• [United Kingdom] Help to Buy has pushed up house prices in England, says report. Lords claim flagship £29bn policy would have been better spent on social housing – FT
• [United Kingdom] Letter: Britain must encourage more affordable housing – FT
• [United Kingdom] As the North Cotswolds Get Hipper, Home Values Soar. House prices in this section of the English countryside have risen thanks to the flurry of celebrity residents who have turned the north Cotswolds into the place to see and be seen – Wall Street Journal

In a latest blog for the Conversable Economist, author Timothy Taylor studies data from the OECD publication, Health at a Glance (2021) to understand why meaningful healthcare reform in the USA may be harder to achieve.

It glances over evidence that demonstrates USA’s not-so-commendable performance on health and wellbeing indicators (like mortality, growth in life expectancy, etc.) despite a large share of expenditure on healthcare. Subsequently, parameters of Americans’ satisfaction from their healthcare industry are discussed, which are found to be upbeat and high-ranking in contrast.

Click here to read the full blog.

In his blog, The Grumpy Economist, John H. Cochrane, Senior Fellow at Stanford University’s Hoover Institution writes about the role of fiscal policy in pushing inflation.

“Starting in March 2020, in response to the disruptions of Covid-19, the U.S. government created about $3 trillion of new bank reserves, equivalent to cash, and sent checks to people and businesses. (Mechanically, the Treasury issued $3 trillion of new debt, which the Fed quickly bought in return for $3 trillion of new reserves. The Treasury sent out checks, transferring the reserves to people’s banks. See Table 1.)  The Treasury then borrowed another $2 trillion or so, and sent more checks. Overall federal debt rose nearly 30 percent. Is it at all a surprise that a year later inflation breaks out?  It is hard to ask for a clearer demonstration of fiscal inflation, an immense fiscal helicopter drop, exhibit A for the fiscal theory of the price level (Cochrane 2022a, 2022b).”

Click here to read the full blog.

Related Reading:

The Ghost of Christmas Inflation