The Unassuming Economist

My work with Davide Furceri, and Jonathan D. Ostry on The aggregate and disttributional effects of financial globalization: evidence from macro and sectoral data makes into the list of the research that shaped our world in 2017–put together by Dan Kopf of Quartz.

The aggregate and disttributional effects of financial globalization: evidence from macro and sectoral data (pdf) by Davide Furceri, Prakash Loungani and Jonathan D. Ostry

Main finding: Foreign finance has led to more inequality.

Nominating economist: Dani Rodrik, Harvard University

Specialization: Globalization and economic development

Why? “In brief, opening up to foreign finance (“financial globalization”) produces limited gains to aggregate output while generating significant increases in income inequality (a higher share of top incomes, a lower labor share, etc.). This paper’s conclusions are significant as the authors are researchers at the International Monetary Fund, which aggressively pushed for financial globalization until recently.”

From Dani Rodrik’s weblog:

Ten commandments for economists

1. Economics is a collection of models; cherish their diversity.

2. It’s a model, not the model.

3. Make your model simple enough to isolate specific causes and how they work, but not so simple that it leaves out key interactions among causes.

4. Unrealistic assumptions are OK; unrealistic critical assumptions are not OK.

5. The world is (almost) always second-best.

6. To map a model to the real world you need explicit empirical diagnostics, which is more craft than science.

7. Do not confuse agreement among economists for certainty about how the world works.

8. It’s OK to say “I don’t know” when asked about the economy or policy.

9. Efficiency is not everything.

10. Substituting your values for the public’s is an abuse of your expertise.

Ten commandments for non-economists

1. Economics is a collection of models with no predetermined conclusions; reject any arguments otherwise.

2. Do not criticize an economist’s model because of its assumptions; ask how the results would change if certain problematic assumptions were more realistic.

3. Analysis requires simplicity; beware of incoherence that passes itself off as complexity.

4. Do not let math scare you; economists use math not because they are smart, but because they are not smart enough.

5. When an economist makes a recommendation, ask what makes him/her sure the underlying model applies to the case at hand.

6. When an economist uses the term “economic welfare,” ask what s/he means by it.

7. Beware that an economist may speak differently in public than in the seminar room.

8. Economists don’t (all) worship markets, but they know better how they work than you do.

9. If you think all economists think alike, attend one of their seminars.

10. If you think economists are especially rude to non-economists, attend one of their seminars.

On cross-country:

• Institutional settings and urban sprawl: evidence from Europe – Journal of Housing Economics
• Bubbles and crashes: A vicious cycle of self- fulfilling investor sentiment – London School of Economics
• Houses, up and down: An international comparison of house price movement – Federal Reserve Bank of St. Louis
• Integrating national policies to deliver compact, connected cities: an overview of transport and housing – Coalition for Urban Transitions
• Space matters: Understanding the real effects of macroeconomic variations in cross-country housing price movements – Economic Letters
• The Crisis in Affordable Housing Is a Problem for Cities Everywhere – World Resources Institute

On the US:

• The Long View of Housing Wealth Effects – Columbia University
• Why Housing Supply Matters – Oregon Office of Economic Analysis
• Reactions to the tax plan: Curbed, New York Times, Reuters, Seattle Times, Seeking Alpha
• Owned Now Rented Later? Housing Stock Transitions and Market Dynamics – Syracuse University
• BuildZoom Research: A Year in Review – BuildZoom
• Measuring population estimates of housing insecurity in the United States: A comprehensive approach – Equitable Growth
• What “affordable housing” really means – Vox
• What Would it Take to Make Neighborhoods More Equitable and Integrated? – Harvard Joint Center for Housing Studies
• The Libertarian: How Housing Got So Expensive – Hoover Institution
• A Decline in Multifamily Housing Permits Offsets a Gain in Single-Family Permits – American Institute for Economic Research
• The Best Housing Market in a Decade, Now What? – Freddie Mac

On other countries:

• [Australia] Does Population Growth Cause Rising Dwelling Prices? – LF Economics
• [Canada] Non-residents focus on new condos in Vancouver, Toronto – Reuters
• [China] Smaller cities drive China’s new home prices in Nov, defying curbs – Reuters
• [Czech Republic] Czech central bank acts to cool buoyant property market – Financial Times
• [Germany] Germany a hot destination for overseas buyers – Global Property Guide
• [Peru] Rapid Rural-to-Urban Migration to Lima: A Need for a Sustainable Housing Reform – Lehigh University
• [Spain] A Decade After Bubble, Spanish Real Estate a Hot Buy Again – Bloomberg
• [United Arab Emirates] Mortgages: Catch me if you can – Reidin
• [United Arab Emirates] Dubai / Abu Dhabi Residential Property Price Indices: November 2017 Results – Reidin
• [United Kingdom] Is owning a house cheaper than renting it? – Medium

Photo by Aliis Sinisalu

The IMF’s latest report on Cyprus says that:

“After falling sharply, property prices are now rising marginally while transactions are recovering, especially in the luxury segment. Prices declined 30 percent (residential) and 50 percent (retail) relative to the 2008–09 peak, stabilized in 2015, and rose moderately since mid-2016. Price-to-rent and price-to-income ratios have returned to historical levels.6 With at least two thirds of loans collateralized with real estate, moderate price growth will increase banks’ NPL cover and borrowers’ net worth. However, prices have also benefited from the limited number of foreclosures, while turnover is more active in the luxury market owing in part to the CbI scheme.

Increased construction activity has supported the recovery, and associated risks appear manageable. Tax and other incentives targeting the property sector helped to stabilize prices and bring jobs and economic growth. The fact that large luxury construction projects are mainly foreign financed or financed through pre-selling helps to limit financial stability risks. The CbI scheme is a general investment scheme, although real estate is the major beneficiary. Regulatory improvements to the CbI—with stricter controls on intermediaries (including real estate agents and lawyers)—are being considered, but there are no plans to amend the eligibility criteria. Some construction projects will generate future revenue streams (e.g., the casino and marinas) that will underpin their value. However, resale prices of residential units could be affected if too many are built, which could spread to prices of other properties. While developers have not relied on domestic bank financing so far, caution is needed to prevent a recurrence of such bank exposure, and tightening of lending standards is warranted for developers and in the event foreign demand spills over to the housing market for the general population. To comply with EU requirements, VAT will be imposed on transactions of buildable land, thereby partly offsetting—from a tax-incidence perspective—the previous elimination of the IPT and reduction in property transfer fees.”

 

 

The IMF’s latest report on Finland says that:

“House prices do not show signs of overvaluation. House prices relative to rent and incomes are close to their long run averages. Real house prices in the Helsinki metropolitan area have increased gradually since 2012, reflecting greater demand, whereas they have declined for the rest of Finland.

Some households are vulnerable (…). Household saving rates are negative, unsecured consumer credit is growing strongly, and a large share of mortgage loans is held by highly indebted borrowers: over a quarter of mortgage debt is to mortgagees with debt to income ratios higher than 400 percent. Some households would therefore be vulnerable to interest rate increases, as most mortgages are variable rate loans (although about 40 percent of mortgages have contracts that lengthening loan maturity instead of increasing payments).

Increasing imbalances in the household sector make it important to give the FIN-FSA additional tools:

Additional macroprudential measures for borrowers should be introduced to allow the macroprudential authority to better target household vulnerabilities that are not well covered by existing Loan-To-Collateral limits. These could include caps on loans in relation to values of houses and personal incomes, and debt servicing to income. The Bank of Finland and FIN-FSA are currently working together to analyze appropriateness of different tools, and plans to propose legislation for additional measures once the SRB is introduced.

A comprehensive credit registry would be particularly helpful to monitor and assess household credit. The Ministry of Justice has ordered a study on its implementation in Finland.”