Reviewer Quotes
Loading Quotes...
Looking for topics recently in the news? Search the Karlan/Morduch blog.
What’s New on the Blog

The Most Efficient Way to Help Those in Need this Holiday Season

Posted on Dec 23, 2014 | 0 comments

The NewsHour’s Paul Solman has a nice interview with Dean Karlan as part of his Making Sense series. Read the interview here.

This holiday season, as a guide to the rest of us, the interview highlights some of the charities that efficiently help those in need. Here is Karlan’s list:

Innovations for Poverty Action

Trickle Up

Seva Mandir

Evidence Action

The key is that each charity is doing solid research, by running controlled experiments, to figure out what works and what doesn’t. This way good money does not chase ideas that are counterproductive.

Discussion questions:

Discuss why it is more efficient to place a chlorine dispenser at the village well than to place chlorine into every single house.

Discuss why micro-credit has not been as efficient as micro-insurance.

US Economy Grows 5% in 3rd Quarter (Third Estimate)

Posted on Dec 23, 2014 | 0 comments

The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:

Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 5.0 percent in the third quarter of 2014, according to the “third” estimate released by the Bureau of Economic Analysis.  Read the release here. As the figure below shows, this is the fastest growth rate in 10 years.

gdp

 

December FOMC Announcement

Posted on Dec 17, 2014 | 0 comments

The Federal Reserve concluded its latest Federal Open Market Committee (FOMC) meeting on today.

Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.

The FOMC has reaffirmed that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

Read the complete announcement here.

Russia’s Economy

Posted on Dec 17, 2014 | 0 comments

Matt O’Brien has an interesting article in the Washington Post on the Slowing Russian economy. Read the article here.

In an emergency meeting early December 15–around 1 am–the Russian central bank raised interest rates from 10.5 to 17 percent (that’s right, a 62 percent increase) in an attempt to stop the ruble from falling further. Clearly, an interest rate of 17 percent is sure to further slow economic activity in Russia. So, why do it? It was done to slow the fall of the Russian ruble.

Despite the sharp interest rate increase, at one point on Tuesday, 80 rubles were needed to buy 1 U.S. dollar, whereas 33 rubles were need for the same transaction last January–that is over a 62 percent decline in value.

At this point, what we have is a classic panic.  Persons with rubles no longer want to hold them because the are worried that the value of the ruble will fall further. So a lot of rubles get sold at the same time. Such selling, of course, only fulfills the original worry. The consequence is that the value of the ruble falls even further. What a mess.

Discussion question:

Discuss what might have happened if Russia’s central bank had not opted for the “financial shock-and-awe of raising rates from 10.5 to 17 percent in one fell swoop.”

Why Coffee Bean Prices Are Falling

Posted on Dec 15, 2014 | 0 comments

Leslie Josephs reports in the WSJ that the March arabica-coffee contract on the ICE Futures U.S. exchange fell 1.2 percent Thursday to end at $1.7640 a pound, which is the lowest price since July. Click  here to read the article.

It turns out that an increase in rainfall in Brazil is helping ease concerns over the size of the next season’s crop from the number one producer. Brazil produces about one third of the world’s coffee beans.

Discussion questions:

1) Sketch a supply and demand diagram for the world coffee market. Demonstrate the impact that an increase in rainfall in Brazil has had on this market.

2) Discuss why the demand or supply curve has shifted.

3) Discuss the role that the expectations term plays in this situation.

New York Jobs Report

Posted on Dec 11, 2014 | 0 comments

The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), New York (red line) and the New York City metro area (green line) between January 2004 and October 2014.

ny employees

New York has experienced monthly increases in this employment measure since April 2010, the New York City metro area has experienced a monthly increase in this employment measure since August 2010, and the U.S. has experienced a monthly increase in this employment measure since August 2010.

The most recent data reveal that year-on-year employment growth continues in the New York City metro area (1.4 percent, October 2014), New York (1.1 percent, October 2014) and the U.S. (2.0 percent, October 2014).

As of October 2014, the number of nonfarm employees in the New York City metro area is 206,800 greater than the peek level observed prior to the great recession in February 2008.

New York’s Case Shiller HPI

Posted on Dec 10, 2014 | Comments Off

New York metro area’s Case-Shiller housing price index (HPI) from January 1987 to September 2014 is shown in the figure below.

NY

New York’s pre-recession housing market peak was May 2006. Similar to the rest of the U.S., New York’s housing market declined after 2006 and it has subsequently recovered.

If the New York housing market is split into thirds, the pattern observed is similar to that of other U.S. housing markets: relative to the high and middle tiers, the low tier experienced the greatest decline after the housing bust and is now experiencing the strongest growth rate.

The top third of New York’s housing market—the high tier segment—reached a maximum index value of 261 in March 2007. The high tier declined 36 percent to reach its lowest HPI value of 166 in April 2012. As of September 2014, this segment of New York’s housing market has increased 12 percent from its 2012 low.

The middle third of New York’s housing market—the middle tier segment—reached a maximum index value of 225 in May 2006. The middle tier declined 28 percent to reach its lowest HPI value of 161 in February 2012. As of September 2014, this segment of New York’s housing market has increased 9 percent from its 2012 low.

The bottom third of New York’s housing market—the low tier segment—reached a maximum index value of 195 in February 2006. The low tier declined 20 percent to reach its lowest HPI value of 156 in March 2012. As of September 2014, this segment of the New York’s housing market has increased 8 percent from its 2012 low.

Real Interest Rates

Posted on Dec 9, 2014 | Comments Off

Professor Vivek Jayakumar has an interesting article in the winter 2015 issue of The Tampa Bay Economy. Click here to read the article. Jayakumar asks whether or not there is a structural explanation for persistently low real interest rates in advanced economies. The article answers in the affirmative.

Jayakumar writes, “[i]t is critical to discern whether central bank policies are ultimately adjusting to underlying structural trends, or, if monetary policies are indeed the primary drivers of critical market trends involving inflation rates and interest rates. Isolating underlying long-term trends from temporary market fluctuations is necessary to obtain a thorough understanding of the extent of the impact of unconventional monetary policies.”

“Two economists at the Federal Reserve Bank of San Francisco – Thomas Laubach and John Williams – have created a simple economic model that provides regular estimates of the natural rate of interest for the U.S. economy. The Laubach-Williams estimate of the U.S. natural rate of interest is shown in” the figure below. “The estimates indicate a steady decline in the natural rate interest.”

jayakumar

“[T]he fall in the U.S. natural rate of interest is consistent with a structurally transformed American economy. Persistently low interest rates may in fact be appropriate if it is reflective of subdued long-term growth prospects.”

“The implication is that even when the Fed and other rich-world central banks ultimately raise rates, they will not push them back to levels that were considered normal levels in the past. The “new normal” level of interest rates is likely to be lower than that observed in previous decades.”

 

 

 

November Jobs Report

Posted on Dec 5, 2014 | Comments Off

The Bureau of Labor Statistics (BLS) released its November 2014 jobs report. Read the BLS report here.

The U.S. added 321,000 jobs in November 2014, compared with an average monthly gain of 224,000 over the prior 12 months.

The unemployment rate in November held at 5.8 percent.

Once again, the labor force participation rate in November was unchanged at 62.8 percent and the employment-population ratio was unchanged 59.2 percent.

Here are other highlights from the November report:

The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 2.8 million persons. The number of long-term unemployed has decreased by 1.2 million over the last 12 months. They account for 30.7 percent of the unemployed.

Individuals working part time because their hours had been cut back or because they were unable to find a full-time job, at 6.9 million persons, was little changed in November.

The number of discouraged workers in November 2014 was 698,000 persons, essentially unchanged from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.

The Global Shakeout From Plunging Oil

Posted on Dec 3, 2014 | Comments Off

Daniel Yergin has a nice Op-Ed in the WSJ on the profound changes in the global oil market. Click here to read it.

For a long while the ever increasing demand for oil from China dominated the global oil market. This is no longer. The new forces in the oil market are the following:

1) A surge in production from the U.S. and Canada.

2) The sudden quadrupling of production from Lybia.

3) Slower global economic growth that has slowed the expected growth in oil demand.

4) The decision by the Organization of the Petroleum Exporting Countries (OPEC) to not cut future production for fear of losing existing market share.

These forces have driven the price of a barrel of crude oil down below $70.

The lower price of oil will drive inefficient production from the market. However, new research by IHS finds that oil in the U.S. would continue to be profitable between $50 and $69 a barrel. And new technology will help drive the break-even point even lower. All this reveals that any hope by OPEC (or others) that today’s lower prices will force US producers out of the market might be optimistic at best.

Lower oil prices appear to be most challenging to those oil producing countries with small financial reserves and high government budget deficits: Venezuela, Iran and Russia. It will be most interesting to watch the geopolitical impact that continued low oil prices have on these countries.

Discussion question:

Sketch a basic supply and demand diagram for crude oil. Take each of the four forces described above and demonstrate how they impact the supply or demand for oil.

The Unsettling Mystery of Productivity

Posted on Dec 2, 2014 | Comments Off

Alan Blinder has an interesting piece in the WSJ. Read it here.

He writes that many economic policy makers are focused on the degree of slack in the U.S. labor market. Measures of unemployment and labor market participation rates are necessary in determining the degree of slack in the labor market. Equally important is labor productivity: output per hour worked.

In measuring the output gap—the difference between actual and potential GDP—the Fed must estimate 1) the number of hour of work the economy would have at full employment and 2) the future track of output per hour of work (labor productivity). And Blinder argues that the second estimation gets too little attention.

The chart below shows labor productivity growth rates over various time periods.

productivityBlinder writes, “we can be reasonably confident that, within a small margin of error, potential GDP will advance roughly 0.2 percent faster than nonfarm labor productivity.” So, if labor productivity returns to the 1995-2010 average, potential GDP will advance at roughly 2.8 percent annually. If labor productivity stays near its 2010-2013 average, then potential GDP will advance at roughly 0.9 percent annually.

The point is that the degree of labor market slack is much less in the second case. It also means that economic policy response need be much less accommodative. So, what will it be? The question remains open.

US GDP grows 3.9% in 3rd Quarter (Second Estimate)

Posted on Nov 25, 2014 | Comments Off

The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:

Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 3.9 percent in the third quarter of 2014, according to the “second” estimate released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 4.6 percent.

Read the release here.

OJ & Price Elasticity of Demand

Posted on Nov 24, 2014 | Comments Off

Alexandra Wexler reports on the Florida OJ market in this WSJ article.

Here is the relevant paragraph: “… retail demand for the beverage continues to slide. U.S. consumers bought 37.05 million gallons of orange juice in the four weeks ended Oct. 25, down 9.4% from a similar period a year earlier, according to Nielsen data published by the Florida Department of Citrus this month. Average prices for the beverage rose 4.8% over the same period to $6.46 a gallon, while total revenue fell 5.1% to $239.24 million, the data showed.”

Discussion questions:

1) Calculate the price elasticity of demand for orange juice, over the four-week period ended October 25, using the data provided above.

2) Given your answer to question 1, does the data support the law of demand?

3) The reports also reveals that as the price of OJ increased, total revenue decreased. Does this make sense given the price elasticity of demand for orange juice that you calculated in question 1? Explain your answer in words and by using a diagram.

iPhones and Broken Bones

Posted on Nov 24, 2014 | Comments Off

Dean Karlan has an interesting Op-Ed in the NY Times. Click here to read it.

Karlan reports on new research out of Yale University by Craig Palsson.

He writes, “that the expansion of the 3G cellphone network led to more widespread adoption of the iPhone, which led to parents who discovered new apps and continual email on their cellphone; which led to parents who paid attention to their new toys at playgrounds and not necessarily to their small children; which led to 10 percent more accidents for those children from 2005 to 2012, including broken bones and concussions.”

This study appears to have captured an indirect cost induced by advances in cell phone technology.

China Cuts Key Interest Rates

Posted on Nov 24, 2014 | Comments Off

On Friday, the People’s Bank of China (PBoC) announced a surprise reduction in its benchmark lending rate by .4 percentage points to 5.6 percent and a reduction in its deposit rate by .25 percentage points to 2.75 percent.

This is the first rate cut since 2012. The rate cuts come after the world’s second largest economy grew at an annual rate of only 7.3 percent in the third quarter. The concern is that China’s growth rate will fall below 7 percent for 2014. The last time China observed a growth rate below 7 percent was during the Great Recession in 2007-9.

Read more here, here and here.

Discussion question:

Discuss why a central bank would cut its key interest rate.

Inflation News from Around the Globe

Posted on Nov 19, 2014 | Comments Off

Lots of inflation news in the papers today.

The NY Times reports that the U.S. producer price index (PPI) increased in October. The increase occurred “because of higher prices that companies received for new-model cars, beef, pork, pharmaceuticals and electric power.” The PPI increased 1.6 percent in the 12 months through September. Read the article here.

The Financial Times reports that the Bank of Japan has warned that inflation could fall below 1 percent. One percent is half of the Bank of Japan’s official target and it is below the Bank of Japan’s official full year forecast of 1.3 percent.  Read the article here.

The WSJ reports that Asian economies are seeing inflation slowing. Inflation appears to be stuck below 2 percent in Korea. In Vietnam, inflation is expected to remain below 5 percent for 2014–its lowest level in decades. And in India, inflation rose at an annual rate of 5.5 percent in October–down from double digits a year ago. See the figure below. Read the article here.

asia inflationDiscussion question:

Discuss why inflation appears to be slowing around the globe.

 

Once Again, Japan is in Recession

Posted on Nov 17, 2014 | Comments Off

Japan’s economy is in recession once again. Data released today show that Japan’s economy shrank 1.6 percent in the third quarter (on an annualized basis). The market was expecting growth of 2.2 percent.

The figures below, from the Financial Times, show Japan’s real GDP growth since 2004 and how Japan’s economy has expanded since 2008 relative to the US, UK and Eurozone.

Japan 1

Japan 2

Jobs Report: San Diego, CA

Posted on Nov 13, 2014 | Comments Off

The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), California (red line) and the San Diego metro area (green line) between January 2004 and October 2014.

San Diego jobs

California has experienced monthly increases in this employment measure since August 2010, the San Diego metro area has experienced a monthly increase in this employment measure since June 2011, and the U.S. has experienced a monthly increase in this employment measure since August 2010.

The most recent data reveal that year-on-year employment growth continues in the San Diego metro area (2.6 percent, September 2014), California (1.9 percent, September 2014) and the U.S. (1.9 percent, October 2014).

As of September 2014, the number of nonfarm employees in the San Diego metro area is 30,500 greater than the peek level observed prior to the great recession in February 2008.

Japan’s Deflation Fight

Posted on Nov 11, 2014 | Comments Off

Jacob Schlesinger has a nice article in the WSJ on Japan’s deflation fight. Click here to read it.

Although Japan has stumbled for decades, it presently offers a tutorial on how a committed central bank can break the vicious cycle of falling prices. The chart below shows how Japan’s core consumer price index (CPI) has finally begun to accelerate–although still below its 2 percent target. At the same time inflation begins to pick up, real wages (adjusted for inflation) are falling.

Screen Shot 2014-11-11 at 9.05.48 AM

How did it happen? Beginning April 2013, Bank of Japan Governor Haruhiko Kuroda launched a massive bond purchase program to pump trillion of yen into the economy in an effort to generate inflation. And on October 31, Mr Kuroda announced round of bond buying to pump trillions of additional yen into the economy.

Here’s the bottom line: Governor Haruhiko’s stimulus programs are working. Deflation appears to have ended, and inflation is now moving towards it 2 percent target.

Discussion question:

Discuss why deflation is such a difficult program for an economy.

 

October Jobs Report

Posted on Nov 7, 2014 | Comments Off

The Bureau of Labor Statistics (BLS) released its October 2014 jobs report. Read the BLS report here.

The U.S. added 214,000 jobs in October 2014, compared with an average monthly gain of 222,000 over the prior 12 months.

The unemployment rate in October decreased to 5.8 percent.

Once again, the labor force participation rate in October was little changed at 62.8 percent and the employment-population ratio increased marginally to 59.2 percent.

Here are other highlights from the October report:

The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 2.9 million persons. The number of long-term unemployed has decreased by 1.1 million over the last 12 months. They account for 32 percent of the unemployed.

Individuals working part time because their hours had been cut back or because they were unable to find a full-time job, at 7 million persons, was little changed in October.

The number of discouraged workers in October 2014 was 777,000 persons, essentially unchanged from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.

Case-Shiller HPI: San Diego, CA

Posted on Nov 5, 2014 | Comments Off

San Diego’s Case-Shiller housing price index (HPI) from January 1989 to August 2014 is shown in the figure below.

Screen Shot 2014-11-05 at 10.41.22 AM

San Diego’s pre-recession housing market peak was March 2006. Similar to the rest of the U.S., San Diego’s housing market declined after 2006 and it has subsequently recovered.

If the San Diego housing market is split into thirds, the pattern observed is similar to that of other U.S. housing markets: relative to the high and middle tiers, the low tier experienced the greatest decline after the housing bust and is now experiencing the strongest growth rate.

The top third of San Diego’s housing market—the high tier segment—reached a maximum value of 225 in March 2006. The high tier declined 34 percent to reach its lowest HPI value of 149 in April 2009. As of August 2014, this segment of San Diego’s housing market has increased 27 percent from its 2009 low.

The middle third of San Diego’s housing market—the middle tier segment—reached a maximum value of 256 in February 2006. The middle tier declined 41 percent to reach its lowest HPI value of 152 in June 2009. As of August 2014, this segment of San Diego’s housing market has increased 33 percent from its 2009 low.

The bottom third of San Diego’s housing market—the low tier segment—reached a maximum value of 298 in April 2006. The low tier declined 53 percent to reach its lowest HPI value of 142 in June 2009. As of August 2014, this segment of the San Diego’s housing market has increased 58 percent from its 2009 low.

Daylight-Savings Time

Posted on Nov 3, 2014 | Comments Off

Jo Craven McGinty has a nice article on daylight-savings time in the WSJ. Click here to read it.

McGinty discusses a recent study by Hendrik Wolff, an economics professor at the University of Washington. The study took advantage of a policy change that forced two states in Australia to start daylight-savings two months earlier than usual for one year to accommodate the 2000 Sydney Olympic Games.

The main finding is summarized in the figure below. Bottom line: daylight-savings leads to decreased electricity use in the evening hours and increased electricity use in the morning hours. However, daylight-savings time has no impact on electricity use overall.

sunshine

U.S. GDP Grows 3.5% in 3rd Quarter (Advance Estimate)

Posted on Oct 30, 2014 | Comments Off

The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:

Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 3.5 percent in the third quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 4.6 percent.

Read the release here.

 

The Fed’s Dual Mandate

Posted on Oct 30, 2014 | Comments Off

Paul Solman has a nice report on the Fed’s dual mandate.

October FOMC Statement

Posted on Oct 30, 2014 | Comments Off

The Federal Reserve concluded its latest Federal Open Market Committee (FOMC) meeting on Wednesday. The Fed announced that it decided to conclude its asset purchase program this month.

Although new assets will not be purchased, the FOMC is maintaining its policy of reinvesting principal payments from its holdings of prior asset purchases and mortgage-backed security purchases and rolling over maturing Treasury securities at auction. This policy effectively keeps the FOMC’s holdings of longer-term securities at its current sizeable level.

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee’s longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.

Read the complete announcement here.

E-Commerce Price Discrimination

Posted on Oct 28, 2014 | Comments Off

A team of Northeastern University computer scientists have found evidence of price discrimination on popular e-commerce sites. Click here to read about the finding in the WSJ.

Here are a couple of the team’s findings: “Travel-booking sites Cheaptickets and Orbitz charged some users searching hotel rates an average of $12 more per night if they weren’t logged into the sites, and Travelocity charged users of Apple Inc.’s iOS mobile operating system $15 less for hotels than other users.

“Home Depot Inc. shows mobile-device users products that are roughly $100 more expensive than those offered to desktop-computer users. And Expedia and Hotels.com steer users at random to pricier products, the study said.

Click here to read the full paper.

Discussion questions:

Discuss why users might be charged more on Cheaptickets and Orbitz if they are not also logged into the sites.

Discuss why users of Apple Inc.’s iOS mobile operating system might be charged less than other users over at Travelocity.

Cost of Living Adjustments: Social Security

Posted on Oct 23, 2014 | Comments Off

The Social Security Administration (SSA) on Wednesday announced that existing social security recipients are to get a 1.7 percent annual cost of living adjustment (COLA) for 2015.

The social security COLA is determined by the changes in prices of urban wage earners and clerical workers, known as the CPI-W. The figure below shows three measures of inflation. In the top chart, the WSJ plots the annual change in the CPI-U and the annual change in the core CPI-U, which excludes food and energy price changes. Both of these indexes report an inflation rate of 1.7 percent.

In the bottom chart, the WSJ plots the annual change in quarterly average CPI-W. It also includes circles that represent the actual social security COLA since 2004. The data for September 2014 shows an inflation rate of 1.7 percent.

What is most interesting about the figure is the period just after the Great Recession: 2010-2012. Because COLAs cannot be negative, social security recipients received no COLA in 2010 and 2011 and a COLA less than the annual change in quarterly average CPI-W in 2012. During this three-year period, actual benefits increased in real terms.

SS inflationDiscussion questions:

1) Explain the difference between nominal and real price increases.

2) All else equal, is the COLA increase of 0 percent in 2010 better or worse than a COLA of 1.7% in 2015? Explain

Falling Oil Prices

Posted on Oct 15, 2014 | Comments Off

Global oil prices have fallen over 20 percent since June. The exclamation point came on Tuesday when oil prices declined 4.5 percent—the biggest one-day drop in nearly two years.

Two factors are at play in the oil market.

First, over the near term, worldwide demand is not expected to increase much, if at all. Indeed, the International Energy Agency forecasts oil-demand growth to be the lowest level in five years. Demand is stalling because of global economic worries.

Second, there is a glut of oil. Oil production continues to rise because hydraulic fracturing has made it a lot easier to extract hard to reach oil. Hydraulic fracturing has enabled the U.S. to become the number one producer of oil in the world. In addition, it appears that OPEC (organization of petroleum exporting countries) is no longer willing to cut their oil production to slow the price slide.

All together then, the figures below (from the WSJ; click here to read the related article) show the story: prices are falling while output is rising.

oil 1oil 2

Discussion question:

Sketch a supply and demand diagram for the global oil market. Demonstrate in your diagram how slowing growth in demand and an increasing glut of oil affect the market equilibrium price and quantity.

2014 Nobel Prize in Economics

Posted on Oct 14, 2014 | Comments Off

Goes to…Jean Tirole for his analysis of market power and regulation. Click here and here to read the announcements.

The prize committee writes that Jean Tirole is one of the most influential economists of our time. He has made important theoretical research contributions in a number of areas, but most of all he has clarified how to understand and regulate industries with a few powerful firms.

Click here to watch one of Tirole lectures on two-sided markets.

The Fiscal Multiplier

Posted on Oct 8, 2014 | Comments Off

A recent NBER working paper shows that to properly compute the fiscal multiplier in expansionary and recessionary periods, it is important to distinguish between increases and decreases in government spending. Click here to read the paper.

The fiscal multiplier tells us the amount by which GDP increases when government spending increases by a dollar.

The NBER paper shows that the long-run multiplier for recession and government spending going up is 2.3. On the other hand, when the direction (increase or decrease) of government spending was not controlled for, then the fiscal multiplier during recession was only 1.3.

Discussion questions:

1) Explain what it means to state that the fiscal multiplier is 2.3.

2) Discuss why the fiscal multiplier is greater than 1 for recession and government spending going up.