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21. Good Policy or Good Luck? Why Inflation Fell Without a Recession

Author:
Thomas Ferguson and Servaas Storm
Publication Date:
09-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes claims that the Federal Reserve is principally responsible for the decline of inflation in the U.S. We compare several different quantitative approaches. These show that at most the Fed could plausibly claim credit for somewhere between twenty and forty percent of the decline. The paper then examines claims by central bankers and their supporters that a steadfast Fed commitment to keeping inflationary expectations anchored played a key role in the process. The paper shows that it did not. The Fed’s own surveys show that low-income Americans did not believe assurances from the Fed or anyone else that inflation was anchored. Instead, what does explain much of the decline is the simple fact that most workers nowadays cannot protect themselves by bargaining for higher wages. The paper then takes up the obvious question of why steep rises in interest rates have not so far led to big rises in unemployment. We show that recent arguments by Benigno and Eggertson that shifts in vacancy rates can explain this are inconsistent with the evidence. The biggest factor in accounting for the strength in the economy is the continuing importance of the wealth effect in sustaining consumption by the affluent. This arises, as we have emphasized in several papers, from the Fed’s quantitative easing policies. Absent sharp declines in wealth, the continuing importance of this factor is likely to feed service sector inflation in particular.
Topic:
Economics, Monetary Policy, Federal Reserve, Inflation, and Macroeconomics
Political Geography:
North America and United States of America

22. Macroeconomic Modeling in the Anthropocene

Author:
Yannis Dafermos, Andrew McConnell, Maria Nikolaidi, Servaas Storm, and Boyan Yanovski
Publication Date:
10-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Recent years have seen an increasing use of environmental dynamic stochastic general equilibrium (E-DSGE) models for analyzing the macroeconomic effects of the climate crisis. This paper explores to what extent these models are fit for purpose. We identify the limitations of the benchmark E-DSGE framework and explain how these limitations restrict the ability of this framework to meaningfully capture the macroeconomics of the climate crisis. We then explain how the assumptions behind these limitations can be relaxed, but argue that simply relaxing some of these assumptions in isolation is insufficient to address the problem. We therefore call for a broader use of other macroeconomic models, such as ecological stock-flow consistent (E-SFC) and ecological agent-based (E-AB) models, that address these limitations simultaneously. We explain how these models do not suffer from the pitfalls of the E-DSGE framework and outline how they need to improve to increase their usefulness as tools that can inform macroeconomic policy making in the Anthropocene.
Topic:
Climate Change, Environment, Monetary Policy, and Macroeconomics
Political Geography:
Global Focus

23. Structural Transformation and Economic Resilience: The Case of Malaysia

Author:
Cassey Lee
Publication Date:
05-2024
Content Type:
Working Paper
Institution:
Economic Research Institute for ASEAN and East Asia (ERIA)
Abstract:
Exports have been a critical source for the resilience of the Malaysian economy during the COVID-19 pandemic and post-pandemic period. Long-term structural change in intersectoral production networks could have reduced this resilience. Stronger domestic intersectoral linkages and declining participation in backward global value chain participation are likely to reduce the impact of positive export shocks on the country’s economy. The services sector has become increasing important over time. Consumption in the services sector is clearly an important driver of growth. A positive export shock is enhanced by higher domestic intersectoral linkages in the services sector but not in manufacturing.
Topic:
Economy, Exports, Macroeconomics, Services, Resilience, and COVID-19
Political Geography:
Malaysia, Asia, and Southeast Asia

24. Empirical Analysis of Turkish Banking Sector Institutional and Macroeconomic Determinants of Risks

Author:
Hikmet Akyol and Selim Başar
Publication Date:
01-2024
Content Type:
Journal Article
Journal:
Istanbul Journal of Economics
Institution:
Istanbul University Faculty of Economics
Abstract:
This research examines the macroeconomic and institutional sources of individual, systemic, and systematic risks in the Turkish banking sector. The period between 2008:Q3 and 2019:Q3 of the nine deposit banks selected for this purpose were estimated using panel data analysis estimators. The results indicate that selected macroeconomic and institutional variables affect banking risks. These findings are important for revealing the institutional and macroeconomic sources of risks in the Turkish banking sector. Therefore, the results contain significant propositions for researchers, market participants, and politicians. Market participants and researchers can anticipate defaults and financial instability using selected macroeconomic and institutional variables. The estimation results reveal Turkish banks’ institutional soundness and financial performance strength. In addition, the extent to which banks are effective intermediaries in the sector was analysed. This research documented a strong link between global market indicators and banking risks.
Topic:
Finance, Macroeconomics, Risk, and Banking
Political Geography:
Turkey and Middle East

25. The consequences of granting PNTR to Kazakhstan

Author:
Simon Commander
Publication Date:
06-2024
Content Type:
Policy Brief
Institution:
Center for Social and Economic Research - CASE
Abstract:
This policy brief examines why the US has not yet granted Permanent Normal Trade Relations (PNTR) to Kazakhstan, even though Kazakhstan joined the WTO in 2015. Both countries seem eager to resolve this issue. While the immediate benefits to trade and investment might be limited, granting PNTR could attract more US investment in the future. However, this would require Kazakhstan to implement complementary policies, such as further privatization and reducing the influence of politically connected businesses. Additionally, there is significant potential to improve the business environment in Kazakhstan, even if political reforms towards greater democracy are unlikely. Since 2022, Russia’s shift eastwards and China’s use of Kazakhstan as a trade route to Europe have greatly increased trade and investment from both countries. In this context, granting PNTR would support mutual engagement between the US and Kazakhstan and help Kazakhstan balance its trade relations amid growing global polarization.
Topic:
Macroeconomics, Trade, WTO, and Permanent Normal Trade Relations (PNTR)
Political Geography:
Central Asia and Kazakhstan

26. Towards a Post-neoliberal Stabilization Paradigm: Revisiting International Buffer Stocks in an Age of Overlapping Emergencies Based on the Case of Food

Author:
Isabella Weber and Merle Schulken
Publication Date:
06-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
The neoliberal stabilization paradigm of interest rate hikes and austerity left economies around the world unprepared for the shocks to essentials experienced in the overlapping emergencies of war, conflict, climate change, and pandemic. This presents a window of opportunity for a paradigm shift. Neoliberalism became hegemonic through stabilization policy. Post-neoliberalism will require an alternative stabilization paradigm. In this paper we revisit the classic reasoning for buffer stocks by Keynes, Kaldor, Graham, and others as a starting point for this paradigmatic shift. At the core of the neoliberal stabilization paradigm are the assumptions that competitive markets are efficient and that relative price changes ought to be separated from macro-outcomes. In contrast, buffer stock reasoning starts from the inherent instability and inefficiency of commodity markets. Price volatility in essential commodities can lead to sellers’ inflation because of the interaction with administered prices in the industrial sector and can hamper growth and development prospects. We illustrate that the buffer stock reasoning can help understand the 2020-2023 world food price crisis and propose a multi-layered buffer stock system for food staples as a steppingstone in a gradualist transition to post-neoliberalism and a tool for a green transformation of agriculture.
Topic:
Food Security, Finance, Neoliberalism, Macroeconomics, and Stabilization
Political Geography:
Global Focus

27. Marx on Credit and Financial Crises: The Industrial Cycles and the English Experience in the 19th Century

Author:
Henrique de Abreu Grazziotin
Publication Date:
03-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
This paper presents Marx’s theory of the industrial cycles, creating a synthesis and organizing his approach to this topic, which is fragmented throughout Part 5 of Capital Volume III. Marx’s theory of the industrial cycles explains why and how the credit system periodically drives capitalist production to endogenous business cycles that lead to crises of credit-driven overproduction and financial fragility. The paper presents the basic theoretical elements needed to understand the credit system in Marx’s approach, to later organize Marx’s theory, characterizing each phase of the cycle and indicating the causes of the movements observed for the credit dynamics, which directly affects the capitalist reproduction. It also presents Marx’s historical interpretation of the 1847 crisis in England, analyzing each phase of the cycle and associating it with Marx’s theoretical perspective.
Topic:
Capitalism, History, Macroeconomics, Industry, and Karl Marx
Political Geography:
Global Focus

28. Can Price Controls Be Optimal? The Economics of the Energy Shock in Germany

Author:
Tom Krebs and Isabella Weber
Publication Date:
03-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
In the wake of the global energy crisis, many European countries used energy price controls to fight inflation and to stabilize the economy. Despite its wide adoption, many economists remained skeptical. In this paper, we argue that price controls should be part of the policy toolbox to respond to shocks to systemically important sectors because not using them can have large economic and political costs. We put forward our arguments in two steps. In a first step, we analyze the impact on the German economy and society of the global energy crisis that followed Russia’s attack on Ukraine in February 2022. Our analysis shows that energy shocks matter. Specifically, the one-year GDP loss of the energy crisis 2022 amounts to 4 percent and is of a comparable magnitude to the short-run output losses during the COVID-19 crisis 2020 and the global financial crisis 2008. In addition, during the energy crisis 2022 inflation rates rose dramatically and real wages dropped more than in any other year in post-war Germany. There are also clear signs that the crisis is causing severe long-term economic damage (hysteresis effects). At the beginning of 2024, GDP is 7 percent and real wages are 10 percent below their pre-COVID-19 trend. We argue that the German government handled the immediate response to the energy shock well, but subsequently waited too long to introduce an energy price brake in 2022. This failure to act decisively in response to heightened economic insecurity coincided with a strong rise of the approval rates of the far-right AfD in the summer of 2022. We also show that the German energy price brake was an effective price stabilization policy for households, but did not protect the industrial base appropriately making it more likely that the German economy will continue to stagnate. In a final step, we turn to the use of price controls as an optimal policy response to an energy shock within a general equilibrium framework. We develop a simple production model with an energy sector and shows that price controls are socially optimal whenever selffulfilling expectations generate endogenous price uncertainty in the wake of an energy shock. We also link our analysis to the so-called sunspot literature that was developed in the 1980s as a response to the rational-expectations revolution in macroeconomics. Finally, we use our theoretical analysis to shed some light on the economic policy debate and the resistance of German mainstream economists to the introduction of energy price controls in 2022.
Topic:
Economics, Inflation, Macroeconomics, Price Control, Energy, and Stabilization
Political Geography:
Europe and Germany

29. Developing an International Macroeconomic Forecasting Model Based on Big Data

Author:
Sang-Ha Yoon
Publication Date:
06-2024
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
In the era of big data, economists are exploring new data sources and methodologies to improve economic forecasting. This study examines the potential of big data and machine learning in enhancing the predictive power of international macroeconomic forecasting models. The research utilizes both structured and unstructured data to forecast Korea's GDP growth rate. For structured data, around 200 macroeconomic and financial indicators from Korea and the U.S. were used with machine learning techniques (Random Forest, XGBoost, LSTM) and ensemble models. Results show that machine learning generally outperforms traditional econometric models, particularly for one-quarter-ahead forecasts, although performance varies by country and period. For unstructured data, the study uses Naver search data as a proxy for public sentiment. Using Dynamic Model Averaging and Selection (DMA and DMS) techniques, it incorporates eight Naver search indices alongside traditional macroeconomic variables. The findings suggest that online search data improves predictive power, especially in capturing economic turning points. The study also compares these big data-driven models with a Dynamic Stochastic General Equilibrium (DSGE) model. While DSGE offers policy analysis capabilities, its in-sample forecasts make direct comparison difficult. However, DMA and DMS models using search indices seem to better capture the GDP plunge in 2020. Based on the research findings, the author offers several suggestions to maximize the potential of big data. He stresses the importance of discovering and constructing diverse data sources, while also developing new analytical techniques such as machine learning. Furthermore, he suggests that big data models can be used as auxiliary indicators to complement existing forecasting models, and proposes that combining structural models with big data methodologies could create synergistic effects. Lastly, by using text mining on various online sources to build comprehensive databases, we can secure richer and more real-time economic data. These suggestions demonstrate the significant potential of big data in improving the accuracy of international macroeconomic forecasting, particularly emphasizing its effectiveness in situations where the economy is undergoing rapid changes.
Topic:
Economics, Macroeconomics, and Data
Political Geography:
Asia and South Korea

30. Developing an International Macroeconomic Forecasting Model Based on Big Data

Author:
Sang-Ha Yoon
Publication Date:
06-2024
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
In the era of big data, economists are exploring new data sources and methodologies to improve economic forecasting. This study examines the potential of big data and machine learning in enhancing the predictive power of international macroeconomic forecasting models. The research utilizes both structured and unstructured data to forecast Korea's GDP growth rate. For structured data, around 200 macroeconomic and financial indicators from Korea and the U.S. were used with machine learning techniques (Random Forest, XGBoost, LSTM) and ensemble models. Results show that machine learning generally outperforms traditional econometric models, particularly for one-quarter-ahead forecasts, although performance varies by country and period. For unstructured data, the study uses Naver search data as a proxy for public sentiment. Using Dynamic Model Averaging and Selection (DMA and DMS) techniques, it incorporates eight Naver search indices alongside traditional macroeconomic variables. The findings suggest that online search data improves predictive power, especially in capturing economic turning points. The study also compares these big data-driven models with a Dynamic Stochastic General Equilibrium (DSGE) model. While DSGE offers policy analysis capabilities, its in-sample forecasts make direct comparison difficult. However, DMA and DMS models using search indices seem to better capture the GDP plunge in 2020. Based on the research findings, the author offers several suggestions to maximize the potential of big data. He stresses the importance of discovering and constructing diverse data sources, while also developing new analytical techniques such as machine learning. Furthermore, he suggests that big data models can be used as auxiliary indicators to complement existing forecasting models, and proposes that combining structural models with big data methodologies could create synergistic effects. Lastly, by using text mining on various online sources to build comprehensive databases, we can secure richer and more real-time economic data. These suggestions demonstrate the significant potential of big data in improving the accuracy of international macroeconomic forecasting, particularly emphasizing its effectiveness in situations where the economy is undergoing rapid changes.
Topic:
GDP, Economic Growth, and Macroeconomics
Political Geography:
Asia, South Korea, and United States of America