The Unassuming Economist

New IMF Working paper by Yan Carrière-Swallow and José Marzluf

“We analyze the causes of the apparent bias towards optimism in growth forecasts underpinning the
design of IMF-supported programs, which has been documented in the literature. We find that
financial variables observable to forecasters are strong predictors of growth forecast errors. The
greater the expansion of the credit-to-GDP gap in the years preceding a program, the greater its
over-optimism about growth over the next two years. This result is strongest among forecasts that
were most optimistic, where errors are also increasing in the economy’s degree of liability
dollarization. We find that the inefficient use of financial information applies to growth forecasts more
broadly, including the IMF’s forecasts in the World Economic Outlook and those produced by
professional forecasters compiled by Consensus Economics. We conclude that improved
macrofinancial analysis represents a promising avenue for reducing over-optimism in growth
forecasts.”

In a recent column for Social Europe, a public policy discussion and publication platform, and the IPS-Journal, the reputed development economist Dr. Jayati Ghosh writes about finding a blueprint for an economy that serves the public rather than the other way around.

“Feminist economists have long argued that the purpose of an economy is to support the survival and flourishing of life, in all its forms. This may seem obvious but it turns on its head the prevailing view, which implicitly assumes the opposite causation: the economy runs according to its own laws, which must be respected by mere human actors. In this market-fundamentalist perspective, it is a potential angry god which can deliver prosperity or devastation and must be placated through all sorts of measures—including sacrifices made in its name. “ 

Ghosh, J. (2021). The feminist building blocks of a sustainable, just economy. Social Europe.

Taking a cue from UN Women’s report titled, Feminist Plan for Sustainability and Social Justice, she writes about expanding the purview of economic valuation to include unpaid care work and environmental costs in it, the need for gender-sensitive institutions, regulations, and policies, and a boost to public investment.

Click here to read the full article.

From a Project Syndicate post by Robert Skidelsky:

“While systematic thinkers close a subject, leaving their followers with “normal” science to fill up the learned journals, fertile ones open their disciplines to critical scrutiny, for which they rarely get credit. Three recent biographies show how this has been the fate of three great economists who were marginalized by their profession.

Jeremy Adelman, Worldly Philosopher: The Odyssey of Albert O. Hirschman, Princeton University Press, 2013.
Charles Camic, Veblen: The Making of an Economist Who Unmade Economics, Harvard University Press, 2020.
Zachary D. Carter, The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes, Random House, 2020

LONDON – There are two types of extraordinary economist. The first type includes pioneers of the field such as David Ricardo, William Stanley Jevons, and, in our own time, Robert Lucas. They all aimed to economize knowledge in order to explain the largest possible amount of behavior with the smallest possible number of variables.

The second category, which includes Thorstein Veblen, John Maynard Keynes, and Albert O. Hirschman, sought to broaden economic knowledge in order to understand motives and norms of behavior excluded by mainstream analysis but important in real life. The first type of economist is fiercely exclusive; the second has tried, largely in vain, to make economics more inclusive.

The first type of economist rather than the second has come to define the field, owing partly to the successful drive to professionalize the production of knowledge. Economics and other social sciences are heirs of the medieval guilds, each jealously preserving its chosen method of creating intellectual products. It also reflects the increasing difficulty in a secular age of developing moral content for the social sciences in general. We lack an agreed standpoint from outside “the science” by which to judge the value of human activity.”

Continue reading here.

From the IMF’s latest report on Netherlands:

“Real estate markets call for heightened vigilance and the pursuit of policies to address near-term risks and long-term challenges confronting residential and commercial properties. Prices – and valuations – for housing have continued to soar during the pandemic (see chart), reflecting longstanding supply bottlenecks, low interest rates, and the favorable tax treatment of owner-occupied housing. Existing vulnerabilities have been exacerbated by a further rise in already elevated levels of mortgage debt, with some households exceedingly stretching their debt servicing capacity. Consequently, the activation of floors for risk weights applied to mortgage lending from 2022 is welcome and may be complemented by measures such as an additional reduction in eligible loan-to-value ratios, and reviewing the taxation of owner-occupied housing. In addition, efforts to improve the elasticity of the housing supply appear warranted, as structural rigidities, such as distorted planning incentives and restrictive building or zoning laws, maintain imbalances. Such policies will also support macroeconomic stability by lessening households’ exposure to house-price fluctuations, which can significantly affect consumer spending.

Vacancy rates for commercial properties have increased due to the recession yet with little effect on prices as investment yields have stayed attractive in relation to other assets. With banks maintaining comparatively large exposures, valuation has become a concern, especially since long-term structural change may prevent the full recovery of some property segments. The authorities should contemplate options to better steer the investment cycle of commercial real estate to avoid a build-up of financial stability risks, potentially modelled on policies in place for owner-occupied dwellings. Furthermore, incentivizing climate-friendly modernization or the rededication of obsolete structures should help preserve the value of existing buildings.”

In a recent working paper of the Bank of England (2021), authors Jonathan Bridges, Georgina Green, and Mark Joy evaluate a panel dataset of 26 developed nations over 5 decades preceding the Covid-19 pandemic to show that inequality rises following recessions, and rapid credit growth in the time until downturn exacerbates that effect. This growth, whether financial or normal in nature, increases unemployment and inequality effects. They observe that “one standard deviation credit boom leads to a 40% amplification of the distributional fallout in the bust that follows”.

Moreover, “low bank capital ahead of a downturn amplifies the inequality increase that follows. These insights add a new dimension to policy cost-benefit analysis, at the distributional level.” The paper’s results indicate that a 55% amplification in the cyclical response of income inequality to a recession if a country enters the recession with bank capital ratios one standard deviation lower than average. The authors note that using the tools established in new macroprudential norms empower economies to safeguard their financial stability using both borrower and lender resilience, but can also lead to distributional costs in the event of an untamed crisis.

“Taken together, these results suggest an important link between credit, crises, and inequality. They demonstrate that tail events for the macroeconomy also represent distributional shocks.” Vulnerabilities like the rapid accumulation of debt, weakening of bank capital, and an increased risk of recession transforming into a full-fledged financial crisis can all contribute to distributional effects and rising inequalities when a crisis actually strikes. While the use of macroprudential policies to address these vulnerabilities has both, associated costs and benefits, entirely avoiding the usage of these policies entirely can lead to severe macroeconomic and distributional ill effects.

Click here to read the full paper.