The Unassuming Economist

From a new post by Pierre Monnin:

“Theoretical analyses and recent empirical evidence support the hypothesis that increasing inequality can pave the way to financial instability. Considering these results, central banks and financial regulators should keep a close watch on income and wealth distributions in their countries. They should be particularly attentive to a simultaneous rise in inequality and aggregate debt. They might also consider including inequality in their sets of early warning indicators for financial crises.”

“Central banks and financial regulators should also carefully consider the potential feedback loops between their macroprudential policy, inequality and financial stability. Some measures aimed at strengthening financial stability might increase inequality, and thus impede their initial goals. In such a case, central banks and financial regulators, perhaps in collaboration with fiscal authorities, could consider accompanying measures to mitigate the impact of macroprudential measures on inequality. When facing the choice between two policies with the same impact on financial stability, they should prefer the option that does not lead to higher inequality (or increases it the least) to avoid or reduce the side effects of higher inequality on financial stability. Finally, in accordance with their mandate regarding financial stability, central banks and financial regulators may have some reasons to support policies, e.g. fiscal policies, that mitigate the impact of inequality on financial stability.”

From a new IMF working paper:

“China has experienced rapid economic growth over the past two decades and is on the brink of eradicating poverty. However, income inequality increased sharply from the early 1980s and rendered China among the most unequal countries in the world. This trend has started to reverse as China has experienced a modest decline in inequality since 2008. This paper identifies various drivers behind these trends – including structural changes such as urbanization and aging and, more recently, policy initiatives to combat it. It finds that policies will need to play an important role in curbing inequality in the future, as projected structural trends will put further strain on equity considerations. In particular, fiscal policy reforms have the potential to enhance inclusiveness and equity, both on the tax and expenditure side.”

A new IMF working paper finds that “employment protection legislations and large productivity differentials are the key drivers of Korea’s duality. […] well-calibrated flexicurity policies can significantly reduce duality and inequality and raise welfare and productivity. Notably, the introduction of all three pillars—flexibility, a strong safety net and active labor market policies—is critical for its success. If only one pillar is introduced it can result in negative side-effects and might not reduce duality.”

From a new paper by Jonathan Ostry:

“Ongoing work suggests several urgent priorities that seem likely to pay dividends in the form of inclusive growth. Public policies should provide income support for workers displaced by technological change or trade, as well as incentives and opportunities to learn new skills. Fiscal policies should safeguard the political legitimacy of the growth model by ensuring that regulations are not skewed in favor of the wealthy; steps could include increased taxation of rents and estates and cooperative efforts across jurisdictions to stem corporate tax avoidance, tax inversions, and the use of tax shelters. Authorities should also make more aggressive efforts to regulate financial markets to prevent insider trading and money laundering and ensure that regulations prevent unfair competition and crony capitalism, whether in industry, services, or even the media.”

“The task of policymakers is to ensure that the disadvantaged also have the opportunity to succeed in the modern, hyperglobalized economy, by designing reforms and globalization with an eye to their distributional effects. If they fail, progrowth reforms will lose political legitimacy, enabling destructive nationalist, nativist, and protectionist forces to gain further traction and undermine sustainable growth. The key to success will be to take preemptive action, rather than focusing solely, or even primarily, on ameliorative measures after the fact. Inclusive globalization need not be the same as unbridled globalization.”

A new IMF working paper “explores regional differences to shed light on drivers of participation rates at the state and metropolitan area levels. It documents a broad-based decline, especially pronounced outside metropolitan areas. […] it finds that metropolitan areas with higher exposures to routinization and offshoring experienced larger drops in participation in 2000-2016. Thus, areas with different occupational mixes can experience divergent labor market trajectories as a result of trade and technology.”

In a recent paper on labor mobility in the United States, Mai Dao, Davide Furceri and I show that the ability to migrate is not as immediate as previously supposed and has been weakening since the early 1990s. We also find that net mobility across states picks up during national recessions, this increase is driven more by a stronger population inflow into states that are doing better rather than stronger population outflow from states that are doing worse; the outflow occurs only toward the end of the recession.

See my previous post here and my paper here.