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31. The Economic Impact of Political Instability and Mass Civil Protest

Author:
Samer Matta, Michael Bleaney, and Simon Appleton
Publication Date:
01-2021
Content Type:
Working Paper
Institution:
Nottingham Interdisciplinary Centre for Economic and Political Research (NICEP)
Abstract:
An extensive literature has examined the economic effects of non-violent political instability events. Nonetheless, the issue of whether economies react differently over time to such events remains largely unexplored. Using synthetic control methodology, which constructs a counterfactual in the absence of political instability, we estimate the output effect of 38 regime crises in the period 1970-2011. A crucial factor is whether crises are accompanied by mass civil protest. In the crises accompanied by mass civil protest, there is typically an immediate fall in output which is never recovered in the subsequent five years. In crises unaccompanied by protest, there are usually no significant effects. Furthermore, this paper provides new evidence that regime crises (with and without mass civil protest) have heterogeneous (country-specific) effects on output per capita.
Topic:
Economics, Political Economy, Regime Change, Political stability, Economic Growth, Protests, Economic Policy, and Civil Unrest
Political Geography:
Global Focus

32. Cordon of Conformity: Why DSGE models Are Not the Future of Macroeconomics

Author:
Servaas Storm
Publication Date:
02-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The Rebuilding Macroeconomic Theory Project, led by David Vines and Samuel Wills (2020), is an important, albeit long overdue, initiative to rethink a failing mainstream macroeconomics. Professors Vines and Wills, who must be congratulated for stepping up to the challenge of trying to make mainstream macroeconomics relevant again, call for a new multiple-equilibrium and diverse (MEADE) paradigm for macroeconomics. Their idea is to start with simple models, ideally two-dimensional sketches, that explain mechanisms that can cause multiple equilibria. These mechanisms should then be incorporated into larger DSGE models in a new, multiple-equilibrium synthesis – to see how the fundamental pieces of the economy fit together, subject to it being ‘properly micro-founded’. This paper argues that the MEADE paradigm is bound to fail, because it maintains the DSGE model as the unifying framework at the center of macroeconomic analysis. The paper reviews 10 fundamental weaknesses inherent in DSGE models which make these models irreparably useless for macroeconomic policy analysis. Mainstream macroeconomics must put DSGE models, once and for all, in the Museum of Implausible Economic Models – and learn important lessons from non-DSGE macroeconomic approaches.
Topic:
Economics, Economic Growth, Macroeconomics, Money, Demand, and Models
Political Geography:
Global Focus

33. The Updated Okun Method for Estimation of Potential Output with Broad Measures of Labor Underutilization: An Empirical Analysis

Author:
Claudia Fontanari, Antonella Palumbo, and Chiara Salvatori
Publication Date:
05-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper extends to different indicators of labor underutilization the Updated Okun Method (UOM) for estimation of potential output proposed in Fontanari et al (2020), which, from a demand-led growth perspective, regards potential output as an empirical approximation to fullemployment output, as in A.M.Okun’s (1962) original method. Based on the apparent incapability of the official rate of unemployment to fully account for labor underutilization, in this paper we offer estimates of Okun’s law both with broad unemployment indicators and with an indicator of ‘standardized hours worked’ which we propose as a novel measure of the labor input. The paper reflects on the possible different empirical measures of full employment. The various measures of potential output that we extract from our analysis show greater output gaps than those produced by standard methods, thus highlighting a systematic tendency of the latter to underestimate potential output. Output gaps that underestimate the size of the output loss or that tend to close too soon during recovery, may produce a bias towards untimely restriction.
Topic:
Economics, Labor Issues, Economic Growth, Demand, and Unemployment
Political Geography:
Global Focus

34. Can Panel Data Methodologies Determine the Impact of Climate Change on Economic Growth?

Author:
Richard A. Rosen
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Several major papers have been published over the last ten years claiming to have detected the impact of either annual variations in weather or climate change on the GDPs of most countries in the world using panel data-based statistical methodologies. These papers rely on various multivariate regression equations which include the annual average temperatures for most countries in the world as one or more of the independent variables, where the usual dependent variable is the change in annual GDP for each country from one year to the next year over 30-50 year time periods. Unfortunately, the quantitative estimates derived in these papers are misleading because the equations from which they are calculated are wrong. The major reason the resulting regression equations are wrong is because they do not include any of the appropriate and usual economic factors or variables which are likely to be able to explain changes in GDP/economic growth whether or not climate change has already impacted each country’s economy. These equations, in short, exhibit suffer from “omitted variable bias,” to use statistical terminology.
Topic:
Climate Change, Economics, Economic Growth, and Methodology
Political Geography:
Global Focus

35. Digital agreements: What’s covered, what’s possible

Author:
Gary Clyde Hufbauer and Megan Hogan
Publication Date:
10-2021
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Rapidly expanding digital flows have significantly contributed to world economic growth. The exponential expansion of digital flows since 2005 has partially compensated for lethargic growth in global conventional trade and foreign direct investment flows. COVID-19 accelerated the digital revolution in 2020, as businesses and consumers increasingly “went digital” in everything from online education and work to shopping. Many countries, particularly the United States, have enormous commercial and cultural interests in preserving the freedom of cross-border digital traffic. Strong international agreements can keep digital highways open, but agreements reached so far do too little to discipline government practices that threaten to restrict digital flows, allowing ample room for ideological and protectionist obstacles. A new and better agreement is necessary to safeguard the growth of digital flows.
Topic:
Treaties and Agreements, Economic Growth, COVID-19, and Digital Policy
Political Geography:
Global Focus and United States of America

36. Can climate change be tackled without ditching economic growth?

Author:
Guntram Wolff, Simone Tagliapietra, and Klaas Lenaerts
Publication Date:
09-2021
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Higher levels of economic activity tend to go hand-in-hand with additional energy use and consumption of natural resources. As fossil fuels still account for 80 percent of the global energy mix, energy consumption remains closely related to greenhouse gas emissions and hence to climate forcing. This paper explores whether decarbonisation and economic growth are compatible or whether the world economy needs to grow less to be able to reduce greenhouse gas emissions fast enough to reach net zero in 2050. The literature provides profoundly different answers to this question, with scholars positioning along a spectrum that extends from the most optimist version of ‘green growth’ theories to sceptical ‘degrowth’ theories. While globally, CO2 emissions per unit of GDP are declining, the decoupling rate from 1995 to 2018 was only -1.8 percent annually. To achieve net zero by 2050, the rate would have to accelerate to -8.7 percent, assuming population and GDP growth projections as given, or by a factor of almost five. To keep GDP growth and population at their projections and thus reject the proposition of de-growth, decoupling would have to accelerate massively. Two avenues are crucial: reducing the energy intensity of production and/or the emissions intensity of energy. The huge fall in the price of renewable energy provides hope that decoupling can accelerate. Decoupling rates have accelerated in the last decade and decoupling is substantially faster in the European Union. In the EU, we estimate that decoupling only has to accelerate by a factor of 2.5. We do not think degrowth propositions advanced in the literature will be pursued and therefore focus on the main challenges that must be tackled to achieve decoupling. Unprecedented efforts are required to achieve green growth. But hoping for humanity to sacrifice growth appears unrealistic.
Topic:
Climate Change, Economic Growth, Fossil Fuels, Carbon Emissions, and Decarbonization
Political Geography:
Global Focus

37. Does money growth tell us anything about inflation?

Author:
Francesco Papadia and Leonardo Cadamuro
Publication Date:
11-2021
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Economists and central bankers no longer consider monetary aggregates relevant for inflation forecasts. We explain this neglect by advancing and testing the hypothesis that monetary aggregates are only relevant for inflation in unsettled monetary and inflationary conditions. When inflation is basically stable around the central bank target (1.9 percent), as it has been in most of the last two decades, there is no apparent relationship between monetary aggregates and inflation. This is not surprising: there is not much to be explained about a constant.
Topic:
Economy, Economic Growth, Inflation, and Banking
Political Geography:
Global Focus

38. Labor Taxation: Insights from the World Economic Forum Survey

Author:
Michael Mitsopoulos and Theodore Pelagidis
Publication Date:
10-2021
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
One of the main topics highlighted in the field of economic policy applications is the impact of taxation on labor. In an era in which macroeconomic stability, technological change, and globalization pressure the job market, there exists no strong consensus in the literature on how exactly taxation influences growth, choice between work and leisure, share of income attributed to labor, or participation in different job market segments. This article focuses on employment levels and uses the results of the World Economic Forum (WEF) Executive Opinion Survey (EOS) between 2013 and 2017 to bypass several challenges often faced in the literature. By doing so, we complement the insights of the existing literature by establishing that, in institutionally mature countries, taxation that is deemed by a survey of business executives to pose a disincentive to work reduces employment.
Topic:
Labor Issues, Employment, Economic Growth, Tax Systems, and Survey
Political Geography:
Global Focus

39. Effects of Immigration on Entrepreneurship and Innovation

Author:
Robert Krol
Publication Date:
10-2021
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Economic growth in advanced economies is driven primarily by innovations that improve productivity. Entrepreneurs and researchers, who are motivated by economic incentives, generate new ideas that result in either new or expanded businesses. The resulting expansion of businesses generates new and better products and services. Entrepreneurs also change the way production is organized because they improve efficiency that lowers prices for consumers. Such actions produce economic growth, which manifests itself by increasing product variety, jobs, and wages. As a result, economic well‐​being increases (Alcigit and Kerr 2018; Jones 1995, 2016; McCloskey 2016; Romer 1990).
Topic:
Immigration, Entrepreneurship, Economic Growth, and Innovation
Political Geography:
Global Focus

40. The Impact of Public Debt on Economic Growth

Author:
Jack Salmon
Publication Date:
10-2021
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Following the 2007–2008 global financial crisis (GFC) and subsequent sovereign debt crisis in Europe, there has been a renewed interest in exploring the relationship between government debt and economic growth. One of the cornerstone studies on the subject that triggered an emergence of new literature was Carmen Reinhart and Kenneth Rogoff’s “Growth in a Time of Debt” (2010), which became widely cited and influential among commentators, academics, and policymakers in the debate surrounding austerity and fiscal policy in debt‐​burdened economies. Much of the research that followed the GFC uses panel data analysis of the debt‐​growth nexus using datasets from the World Bank, International Monetary Fund (IMF), European Commission, and Organisation for Economic Co‐​operation and Development (OECD).
Topic:
Economy, Economic Growth, Survey, and Public Debt
Political Geography:
Global Focus