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By Bilal Hafeez 21-05-2019
In: post | Newsletter

Macro From the Web: Nature Or Nature Helps Econ Outcomes?, Piketty’s EU Critique and China’s Rare Element Weapon

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This week’s curated list features some good articles on the dynamics of inflation-less strong labour markets such as helping poorer people more than rich people. Then there’s an interesting article on how temperature affects economic growth – it seems like cooler climates are optimal.

On the markets side, a good piece on how positive corporate bond returns are due their embedded optionality, the noise of ETF rebalancings and the lack of contagion after the ECB’s OMT operation. On the politics front, we have articles on how being anti-China is the common stance amongst populist right-wing parties around the world, Piketty writes how the EU is pro-elites and the economic effects of Germany’s recent waves of immigration.

Source: click here for full article

Labour markets and Inequality

The role of nature versus nurture in wealth and other economic outcomes and
Looking at
the path of adopted children in Sweden, the study finds that the environment
more than biology determines transmission of wealth. Is the Hot Economy Pulling New Workers into the Labor Force? San Fran Fed finds “why underlying flows between
labor force states shows that, rather than drawing new people in, the hot labor
market has instead reduced the number of individuals who are dropping out.” The Increasing Benefits and Diminished Costs of Running a High-Pressure Labor
“changing inflation dynamics, in tandem with higher wage,
income, and wealth inequality, should create an asymmetry in the Fed’s reaction
function, as such dynamics elevate the benefits of full employment and diminish
the risks of inflationary pressures.” [some
good analysis that shows how tight labour markets help poor people more than
rich people]
The new globalisation and income inequality
“trade in intermediates generates a reallocation of capital across
countries that exacerbates world inequality in both income and welfare.
Unbundling of production hurts middle-income countries but helps those with
high productivity.” When
American Capitalism Meant Equality
Fascinating account of the shift from seeing capitalism
bring equality to accepting inequality. Author traces this back to thinkers
like Galbraith and Hostadter – both of whom shifted the focus away from fights
over monopoly power to technocracies. Predicting wage
growth with measures of labor market slack
“Since 2008, the share of adults between the ages of
25 and 54 who are employed (or the “prime-age EPOP”) has predicted wage growth
better than the unemployment rate.”

Business cycle

the Business Cycle, Mid-May 2019
key series look like they have peaked; nowcasts indicate slowing growth.
Forward looking indicators look “iffy”. The
Changing Mix of Light Vehicle Sales
In the 1970s, 80% of sales were passenger cars and
only 20% SUVs in  the US. Today it has
flipped to 30% of sales are passenger cars and 70% are SUVs. The
U.S. Economic Outlook
DeLong’s outlook presentation, includes some slides on San Fran economy “possible
loss of hardware innovative dominance to Shenzhen, but software/network
dominance remains” America’s
Illusions of Growth
Jeffrey Sachs argues that current US
growth masks issues like falling life expectancy. What is behind the recent
BIS: “When
financial conditions tighten, very long and elaborate global value chains [GVCs]
will no longer be viable economically…around 80% of bank trade financing was denominated in
US dollars.. fluctuations in the trade-to-GDP ratio closely
track the strength of the dollar, with a stronger dollar associated with
subdued GVC activity” The RBA’s Economic
Outlook and Monetary Policy
Lowe writes “looking forward, the global picture looks a little brighter” and “the
decline in housing prices is a factor here [in lowering household consumption],
but the more important factor is the long period of weak growth in household
income” Long-term
growth and productivity
Climatic Constraints on Aggregate
Economic Output
Authors look at longitudinal data
on economic output from over 11,000 districts across 37 countries. They find
that output peaks at cooler climates (<10°C) and declines steeply after. They
estimate that since 2000, warming has already cost both the US and the EU at
least $4 trillion in lost output, and tropical countries are >5% poorer than
they would have been without this warming. International Business Travel and
Technology Sourcing
sourcing through in-person business travel is statistically and economically
significant, accounting, for example, for 20% of the higher patenting in
Germany’s Greater Stuttgart area, compared to Portugal’s Algarve region. Globalisation
and state capitalism: Assessing the effects of Vietnam’s WTO entry
The recent success
of China and Vietnam over the past three decades has triggered a debate over
‘state capitalism’ as a viable growth and development model. Comparing
state-owned companies and private ones in Vietnam, the authors find that ”productivity
gains from trade after WTO entry might have been 66% higher in the absence of
state-owned firms” Long-term
and intergenerational effects of education

61,000 primary schools were built by the Indonesian government between 1973 and
1979. The evidence shows that the people who accessed education provided by the
construction programme benefited from significant improvements in their
educational and later life outcomes. So too did their children. Why
We Need New Measures of Potential Output—and What They Tell Us
Uses a version of Okun’s output gap measure rather
than NAIRU to measure output gaps.Argues that currently the economy can
“respond positively to a lasting expansion in demand” without inflation.

Monetary policy

Disconnect between Inflation and Employment in the New Normal
Fed governor Brainard argues that “the weakening in
the relationship between inflation and employment [means] that we should not
assume monetary policy will act to restrain the financial cycle as much as
previously…One tool other central banks have been using to help temper the
financial cycle is the countercyclical capital buffer (CCyB)” Negative
interest rates, excess liquidity and retail deposits: banks’ reaction to
unconventional monetary policy in the euro area
ECB finds that negative
rates actually do promote loan growth contrary to earlier findings. This partly
to do with incorporating how banks manage their excess liquidity with the ECB A
heterogenous response to unconventional monetary policy
The ECB’s unconventional
monetary policy package implemented in February 2012 changed collateral
requirements. The blog looks French corporate loans and finds that credit
increased after the liquidity injection, exclusively driven by supply.

Those revenue-raising early central banks Argues that “banking history contains much wider experiences than a simplified money-raising argument implies”

The Risk of Returning to the Zero Lower Bound San Fran Fed writes “that there currently appears to be a low risk of the economy returning to the zero lower bound for at least the next several years.”. They use a bunch of yield curve models to determine probabilities (see chart at top of email)

Markets and Investing

Credit Where Credit Is Due: What Explains Corporate Bond Returns?
AQR paper finds finds that options markets explain a
great deal of credit returns. Two features of corporate bonds generate option
exposure. The first is thata corporate bond is economically equivalent to a
short put option on a firm’s assets. The second is that many corporate bonds
include call provisions, which are basically options granted to the bond
issuer. The sound of many
funds rebalancing
Authors results
suggest that it is possible to predict if stock Z will be
affected by an ETF rebalancing cascade, but not how stock Z
will be affected. In short, susceptibility to ETF rebalancing cascades predicts
noise volatility.

Measuring euro area monetary policy [impact on rates markets] ECB uses tick data to analyse the market response around ECB decision days. They find the policy decision affects mostly the very short-end of the yield curve, the information conveyed in the press conference window when related to forward guidance affects intermediate maturities of the term structure news relating quantitative easing affects longer maturities. The ECB has also created Euro Area Monetary Policy Event Study Database (EAMPD)

Implications for financial stability, monetary policy, and payments and market
The ECB’s taskforce on crypto
releases some of its findings. Some good background on the crypto markets and
their  potential risks to financial
stability. A
Greek Canary in a Global Goldmine
Yanis Varoufakis argues that as the global mismatch
between economic reality and financial returns grows, there is clear danger
that, once again, Greece is foreshadowing a new phase of the global crisis. “When
vultures grow fat on a corpse, they do not revive it.” Can
Financial Participants Improve Price Discovery and Efficiency in
Multi-Settlement Markets with Trading Costs?

Author finds that the introduction of financial traders in US electricity
markets did improve its efficiency and lowered electricity costs. Euro
area sovereign risk spillovers before and after the ECB’s OMT announcement

Event study finds that post OMT, spillovers to non-crisis, non-safe haven
countries have disappeared.


a revealing puzzle in the China tariffs
Larry Summers argues that stock market gyrations are too large to just
reflect the direct costs of import tariffs, but rather they reflect “a world
where relations between the United States and China are largely conflictual  [which] could involve a breakdown of global
supply chains, a, greatly increased defense expenditures and conceivably even
military conflict.” Trade
Hardball: China Threatens to Cut Off US Supply of Rare Earth Elements
China produces 80% of the
world’s rare earth elements. They are used in weapons, cell phones, hybrid
cars, and magnets. US:
We’ll Pay Countries to Ditch Russian, Chinese Arms
The U.S. State
Department wants to expand a little-known effort that offers countries cash to
buy American-made weapons if they give up Russian-made arms. The
recent political revolution is a major shift toward the right
Tyler Cowen argues that a common element in recent right-wing
electoral victories is an anti-China stance. Don’t
relax about nuclear war
Cowen warns about nuclear war

National politics

Changes in Economic Expectations Foreshadow Swings in the 2018 Elections?
Yes according to NY Fed (or you can read 1800 words
before they tell you) Europe
and the class cleavage
On anti-EU
sentiment of the less well-off,Thomas Piketty notes that while “according
to those who are better off, the working classes are nationalist and xenophobic”
the “simpler explanation is that the EU is based on widespread competition
between countries, [and] favours the most mobile economic actors and functions
objectively to the benefit of the most privileged.” Can Ramaphosa Do It? Former deputy director-general of South Africa’s
National Treasury gives the laundry list of issues South Africa faces including
“South Africa’s biggest challenge is restoring its vertically integrated
electricity monopoly, Eskom, to financial health” How
Has Germany’s Economy Been Affected by the Recent Surge in Immigration?

NY finds per capita income growth
has held up and unemployment has declined after the two waves of recent immigrations
(2011 from EU and 2015 from Syria)

The Economics Discipline

Top Economics Influencers to Follow
The top twitter economists includes Paul Krugman,
Nate Silver and Nouriel Robini and 72 others! Ice
Cream Economics
Apparently, the ultra-premium segment of the ice cream market
reflects six economic issues including government regulation, trade-offs and a monopolistically
competitive market structure This
economics journal only publishes results that are no big deal

Its first paper, published
Tuesday, is about an education intervention that was found to have no effects
at all on anything. [Great  idea to over
publication bias] The
Science of Using Science: Towards an Understanding of the Threats to Scaling
Provides a framework for
policymakers to know whether scaling up economic experiments will work The
bad news about nudges: They might be backfiring
Do people see nudges as substitutes for larger, more
effective policies? If so, they could backfire, undermining support for serious


True Winners and Losers of Financial Regulation
“the number of regulatory restrictions and mandates
related to credit intermediation quadrupled between 1970 and 2010, from around
10,000 to just over 40,000.”. Blog argues that regulation is leading to
consolidation in banking. Fiduciary
Duty and the Market for Financial Advice
Looks at whether extending fiduciary duties to broker-dealers would help
consumers. The paper uses state-level differences in the US (some states force
broker-dealers to have those duties, others don’t) and finds that “extending fiduciary
duty to broker-dealers causes their clients to purchase products with lower
fees…broker-dealers steer customers towards products with a
larger and more diverse set of investment options”

Public Sector

Impact of CEOs in the Public Sector: Evidence from the English NHS

The pay of CEOs of public hospitals vary widely, but there’s little evidence
that the higher paid CEOs make much of a difference to hospital outcomes.


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