The Unassuming Economist

The ongoing Covid-19 crisis, which is likely to exacerbate economic inequality within countries in the West and probably among countries worldwide (Furceri, Loungani, Ostry, Pizzuto, 2021), has reinstated the need for a thorough investigation into the causes and consequences of inequality. In a recent column for VoxEU CEPR, economists Guido Alfani, Victoria Gierok, and Felix Schaff discuss inequality in the context of Germany over the years.

This column reconstructs wealth inequality in Germany over five centuries and demonstrates potential leveling effects of catastrophes with the help of evidence from events like the Black Death and the Thirty Years’ War. They conclude with insights like the fact that inequality falls in the aftermath of epidemics only in the presence of extremely high mortality rates.

Click here to read more.

New article by John Cochrane from John Cochrane’s blog.

“Torsten Slok, chief economist at Apollo Global Management, passes along the above gorgeous graph. Fed forecasts of interest rates behave similarly. So does the “market forecast” embedded in the yield curve, which usually slopes upward.
Torsten’s conclusion:

The forecasting track record of the economics profession when it comes to 10-year interest rates is not particularly impressive, see chart [above]. Since the Philadelphia Fed started their Survey of Professional Forecasters twenty years ago, the economists and strategists participating have been systematically wrong, predicting that long rates would move higher. Their latest release has the same prediction.

Well. Like the famous broken clock that is right twice a day, note the forecasts are “right” in times of higher rates. So don’t necessarily run out and buy bonds today.

Can it possibly be true that professional forecasters are simply behaviorally dumb, refuse to learn, and the institutions that hire them refuse to hire more rational ones?”

To read more click here.

From a VoxEU post by Yoto Yotov:

“This year marks the 60th anniversary of the workhorse model of trade – the gravity equation. This column celebrates the anniversary by addressing some misconceptions about gravity and by tracing its evolution from an intuitive a-theoretical application to an estimating computable general equilibrium model that can be nested in more complex frameworks.

This year marks the 60th anniversary of the workhorse model of trade – the gravity equation (Tinbergen1962). Gravity is a ‘celebrity’ among economic models; it has been applied and extended in thousands of papers by trade economists, colleagues from other fields, and policy practitioners. Moreover, as noted by the brilliant late Peter Neary, the gravity equation is probably the only econometric model that has been featured on the front page of the Financial Times (on 19 April 2016). 

Unfortunately, and as sometimes happens to celebrities, the gravity model is misspecified (misunderstood) by the press. More worrisome, we often see gravity applications in academic papers and policy reports that are not consistent with theory and/or do not take into account major developments in the empirical gravity literature. As a result, the estimates in such papers could be severely biased and their policy recommendations could be misleading. Moreover, while it is well understood that trade theory and trade-policy analysis should be set in general equilibrium (GE), there is still a division and scepticism among academics and trade-policy practitioners about the usefulness of the gravity as a Computable GE (CGE) framework for counterfactual projections. A prominent example, which motivated the inclusion of the gravity equation in the Financial Times, is the debate among UK economists over gravity-based projections of the Brexit effects.

To celebrate gravity’s anniversary and address some misconceptions about the gravity model, in a new paper (Yotov 2022) I trace its evolution, as depicted in Figure 1, from a naive application to an ‘estimating CGE’ (E-CGE) model that can be nested in more complex frameworks.”

Continue reading here.

Source: VoxEU CEPR

The informal sector, which accounts for nearly one-third of the GDP and employment in emerging and developing economies (EMDEs), has not only been the worst affected by the Covid-19 pandemic but is now also threatening to dampen economic recovery. Three features of the informal sector have compounded the damage of Covid-19 on activity: (i) their predominant presence in the service sector, (ii) limited savings and access to social safety nets, and (iii) the lack of effective policy support (Ohnsorge and Yu 2021).

This column assesses the impact of the pandemic on job losses in the informal sector of both manufacturing and service sectors of EMDEs and the impact of support policies rolled out by governments. Thus, recommendations call for facilitating access to finance for small firms, adopting cash transfer programs in the short run for countries with larger poor populations (Furceri, Loungani, Ostry, and Pizzuto, 2020), and using technology to reach the poor and informal workers.

From a new report by Daniela Gabor and Sebastian Kohl:

“Over the past decades, institutional landlords – from real estate companies like the German giant Vonovia to private equity companies like Blackstone, or pension funds like ABP, the Dutch pension fund for government and education employees – have minted EUR 40bn of Berlin’s houses into assets that they rent out. This is roughly double the combined value of London’s and Amsterdam’s institutionally owned houses and it is a trend that has accelerated since the COVID19 pandemic. Europe’s residential real estate has become an attractive asset class for investors worldwide, supported by a range of government policies that are ostensibly aimed at homeowners: support for housing markets pushes up house prices and reduces affordability for citizens, whereas income support for rent-paying households ensures stable returns for investors.

In response, citizens across Europe – from Berlin to Dublin and Madrid – have mobilized to pressure governments into taking action. From rent controls to better regulation or even expropriation of institutional landlords, the political tide seems to be turning against a decades-old phenomenon known as the financialization of housing. A mega-trend across housing markets everywhere, it can be understood as (1) the disproportionate growth of housing finance relative to the underlying housing economy or (2) the turn to Housing as an Asset Class (HAC), captured by the increasing for-profit and financial orientation of actors in housing markets, and encouraged in Europe by a broad range of European-level financial legislation.

In this report, we explore the growing importance of institutional landlords such as Blackstone, focusing in particular on the mechanisms through which European legislation has accommodated their strategies to transform housing into asset classes. We use data from the private provider Preqin to map the complex financial ecosystem behind private equity landlords. We then propose a set of reforms that would de financialize housing for the public good.”