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152. Twisting the economic tale: what literature can do that political economy can’t
- Author:
- Sara Thornton
- Publication Date:
- 04-2015
- Content Type:
- Working Paper
- Institution:
- Institute for New Economic Thinking (INET)
- Abstract:
- This paper will address the problem of how we might gain economic understanding from literature. It will look at the aesthetic form of literature as being an efficient vehicle for economic thinking.
- Topic:
- Economics, Political Economy, Culture, Inequality, History, and Literature
- Political Geography:
- Global Focus
153. Towards a Sovereign Debt Restructuring Framework
- Author:
- Richard A. Conn Jr.
- Publication Date:
- 04-2015
- Content Type:
- Working Paper
- Institution:
- Institute for New Economic Thinking (INET)
- Abstract:
- Initiatives to improve sovereign debt restructuring (“SDR”) began long before recent Argentine bond decisions but were redoubled in the aftermath of these rulings. At first glance, these cases identify problematic contract language that could be rectified by re-drafting critical boilerplate provisions such as the pari passu and collective action clauses (“CAC”). But given the effects of disorder, costs and delays in restructuring foreign sovereign debt upon debtor countries, creditors, and the bond market itself, it is understandable that some are uncomfortable leaving such matters solely in the hands of private parties to contracts without a framework that assists in minimizing damage to contracting and non-contracting parties alike. The creation of an agreed upon framework that facilitates the interaction among private and public parties is a good alternative to the status quo if this approach can provide greater stability and efficiency in the restructuring process while allowing for sufficient flexibility and certainty (traditional benefits of the iterative development of contract language) for market participants. There are a broad variety of options to consider and analyses to be performed, particularly relating to political feasibility, before proposing a framework. As discussed herein, given the historic context of SDR, a framework that focuses upon consensual procedures seems to be a logical starting point since it could add value to the restructuring process without treading on the political terrain of sovereigns.
- Topic:
- Government, Politics, History, Inequality, Finance, and Sovereign Debt
- Political Geography:
- Global Focus
154. Leveraging the network: a stress-test framework based on DebtRank
- Author:
- Stefano Battiston, Guido Caldarelli, Marco D'Errico, and Stefano Gurciullo
- Publication Date:
- 02-2015
- Content Type:
- Working Paper
- Institution:
- Institute for New Economic Thinking (INET)
- Abstract:
- We develop a novel stress-test framework to monitor systemic risk in financial systems. The modular structure of the framework allows to accommodate for a variety of shock scenarios, methods to estimate interbank exposures and mechanisms of distress propagation. The main features are as follows. First, estimate and disentangle not only first-round effects(i.e. shock on external assets) and second-round effects (i.e. distress induced in the interbank network), but also a third-round effect induced by possible fire sales. Second, monitor at the same time the impact of shocks on individual or groups of financial institutions as well as their vulnerability to shocks on counterparties or certain asset classes. Third, estimate loss distributions, thus combining network effects with familiar risk measures such as VaR and CVaR. Fourth, in order to do robustness analyses and cope with incomplete data, generate sets of networks of interbank exposures coherent with the total lending and borrowing of each bank. As an illustration, we carry out a stress–test exercise on a dataset of listed European banks over the years 2008-2013. We find that second-round and third-round effects dominate first-round effects, therefore suggesting that most current stress-test frameworks might lead to a severe underestimation of systemic risk.
- Topic:
- Debt, Science and Technology, Inequality, Finance, and Innovation
- Political Geography:
- Global Focus
155. Pseudo-wealth Fluctuations and Aggregate Demand Effects
- Author:
- Martin Guzman and Joseph E. Stiglitz
- Publication Date:
- 04-2015
- Content Type:
- Working Paper
- Institution:
- Institute for New Economic Thinking (INET)
- Abstract:
- This paper presents a theory of pseudo-wealth in a model that displays aggregate demand externalities. With heterogeneous beliefs and a market for exploiting those differences in beliefs, pseudo-wealth will be created–i.e. the sum of expected wealth of all the individuals will be larger than what it is feasible for the society. Under some conditions, those perceptions will lead to larger levels of consumption of (tradable and non-tradable) goods, leisure, and borrowing than in a world with common beliefs. If those differences in beliefs disappear, pseudo-wealth will disappear, leading to adjustments in behavior that amplify the initial decrease in expected wealth. That is, we provide a simple general equilibrium model in which the destruction of pseudo-wealth amplifies the effects of the initial disturbance, leading to large decreases in economic activity. Importantly, this downturn is not associated with any change in the state variables that describe the economy. More generally, the paper shows that completing markets (in this case by creating a market for bets) may imply lower output both in the present and in the future, raising unsettling questions on criteria for welfare analysis.
- Topic:
- Markets, Inequality, Finance, Macroeconomics, Welfare, and Wealth
- Political Geography:
- Global Focus
156. Board Gender Diversity, Audit Fees and Auditor Choice
- Author:
- Judy Tsui
- Publication Date:
- 04-2015
- Content Type:
- Working Paper
- Institution:
- Institute for New Economic Thinking (INET)
- Abstract:
- Using a sample of U.S. firms spanning 2001-2011, we examine whether female directors (female audit committee members) affect audit quality in terms of audit effort and auditor choice. After correcting for endogeneity and other board, firm and industry characteristics, we find that firms with gender-diverse boards pay higher audit fees and are more likely to choose specialist auditors compared to their peers. Our findings suggest that boards with female directors are likely to demand higher audit quality, ceteris paribus.
- Topic:
- Economics, Gender Issues, Race, Culture, Inequality, Diversity, Private Sector, and Audit
- Political Geography:
- Global Focus
157. Perverse and virtuous feedbacks between inequality and innovation: Which role for public institutions and public investment?
- Author:
- Alberto Botta
- Publication Date:
- 04-2015
- Content Type:
- Working Paper
- Institution:
- Institute for New Economic Thinking (INET)
- Abstract:
- In this paper, we deal with the complex relationship connecting inequality to innovation, and the ways through which public investment, in particular public participation to R&D initiatives, may affect it. We first stress that multiple different equilibria may exist in the inequality-innovation space. The positive link that part of the economic theory often assumes between (initially) rising inequality and improving innovation performances emerges as only one among many other far less virtuous dynamics. We then analyze the specific case of the US. We put emphasis on the possible perverse effects that the financialization of the US economy may induce on the inequality-innovation nexus. We also note that the US developmental State that is very often neglected by the economic literature may effectively mitigate such undesirable outcomes. According to our interpretation of recent developments in the US economy, the widespread belief in the positive proinnovation effects of fierce cutthroat remuneration systems may prove to be ungrounded.
- Topic:
- Development, Inequality, Innovation, Financialisation, and Public Investment
- Political Geography:
- Global Focus
158. A New Rational Expectations Hypothesis: What Can Economists Really Know About the Future?
- Author:
- Roman Frydman and Michael Goldberg
- Publication Date:
- 04-2015
- Content Type:
- Working Paper
- Institution:
- Institute for New Economic Thinking (INET)
- Abstract:
- John Muth proposed the Rational Expectations Hypothesis (REH) to represent how the market (an aggregate of its participants) understands and forecasts outcomes. REH imposes internal consistency between the market’s forecasts and “the relevant economic theory” (Muth 1961, p. 316). In implementing REH, economists have relied on a class of models that rest on a key premise: an economist can ignore the importance of quantitative changes in the economy’s structure that he himself could not specify ex ante with a probabilistic rule. In the early 1970s, Robert Lucas pointed out that once such models are upheld as “the relevant economic theory,” it follows on purely logical grounds that REH models represent rational forecasting and its implications for market outcomes. There is ample evidence that quantitative structural change is an important driver of outcomes in real-world markets, most notably those for assets. The evidence also shows that this change often is triggered by historical events that are not exact repetitions of similar events in the past, for example, the appointment of a new Federal Reserve chair or company CEO. The timing of these events may be unknown, and their quantitative impact on the economy’s structure depends on the extent of their novelty and the particular historical context in which they occur. As such, no one can fully anticipate — even in probabilistic terms — the structural change triggered by such events.
- Topic:
- Economics, Inequality, Microeconomics, and Behavior
- Political Geography:
- Global Focus
159. Discrimination, Social Identity, and Coordination: An Experiment
- Author:
- Vessela Daskalova
- Publication Date:
- 04-2015
- Content Type:
- Working Paper
- Institution:
- Institute for New Economic Thinking (INET)
- Abstract:
- This paper presents an experiment investigating the effect of social identity on hiring decisions. The question is whether people discriminate between own and other group candidate This paper presents an experiment investigating the effect of social identity on hiring decisions. The question is whether people discriminate between own and other group candidates. Key features of the experiment are: First, to consider whether they do so in individual, as well as in joint decisions; Second, to document whether the identity of the co‐decision maker matters in joint decisions. Substantial discrimination occurs in both individual and joint decision‐making situations. In joint decisions, decision makers discriminate when deciding with someone from their own group, but not when deciding with someone from the other group.
- Topic:
- Economics, Race, Employment, Inequality, Discrimination, Job Creation, Social Order, and Identity
- Political Geography:
- Global Focus
160. Social Institutions and Gender Inequality in Fragile States: Are They Relevant for the Post-MDG Debate?
- Author:
- Boris Branisa and Carolina Cardona
- Publication Date:
- 01-2015
- Content Type:
- Working Paper
- Institution:
- Institute for Advanced Development Studies (INESAD)
- Abstract:
- We focus on an issue that appears particularly relevant for fragile states and which has received little attention: social institutions related to gender inequality, defined as societal practices and legal norms that frame gender roles and the distribution of power between men and women in the family, market, and social and political life. We show empirically that fragile states perform worse than other non-fragile developing countries when considering these social institutions. We suggest that a special set of indicators reflecting social institutions related to gender inequality in both fragile states and non-fragile states should be considered in the post-MDG agenda.
- Topic:
- Development, Inequality, Millennium Development Goals, Fragile States, and Institutions
- Political Geography:
- Global Focus