The natural rate of interest has attracted only minor empirical attention. The attention that it has attracted has been exclusively with Woodford’s equilibrium rate of interest rather than with Wicksell’s definition of the natural rate of... more
The natural rate of interest has attracted only minor empirical attention. The attention that it has attracted has been exclusively with Woodford’s equilibrium rate of interest rather than with Wicksell’s definition of the natural rate of interest as measured by the return on capital. Statistical offices in the US, the UK and Israel publish data for the return to capital. However, most don’t. National income accounting methods for measuring operating surpluses and capital are reviewed. Data from national statistical offices in several countries have been used to construct data on their returns to capital. These data show that ZIP, which was expected to boost investment and reduce the return to capital, failed to do so. Under the New Abnormal, a major disconnect between the natural and money rates of interest has emerged. There is an elephant in the room, which Neo-Wicksellians have ironically failed to notice.
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The development of cryptocurrencies is inextricably intertwined with the New Abnormal. Investors hedge existential risk by holding cryptocurrency. Cryptocurrency enhances macroeconomic price flexibility because its price is more flexible... more
The development of cryptocurrencies is inextricably intertwined with the New Abnormal. Investors hedge existential risk by holding cryptocurrency. Cryptocurrency enhances macroeconomic price flexibility because its price is more flexible than the general price level. If cryptocurrency eventually replaces fiat money, macroeconomic theory will have to be reconstructed. Ending ZIP raises the cost of debt service. If the rate of interest is less than the rate of growth of nominal GDP, the debt-to-GDP ratio stabilizes at a higher level. If it exceeds the rate of growth of nominal GDP, the debt-to-GDP ratio explodes. In the explosive case, it is necessary to run fiscal surpluses to stabilize debt-to-GDP ratios. In the stable case, it is necessary to cut primary fiscal deficits to stabilize debt-to-GDP ratios at levels that are politically feasible. Japan and eurozone countries are likely to crash out of the New Abnormal. The US runs the risk of crashing out. Economies recover more rapidly from natural disasters such as Covid-19 than man-made disasters, such as the Subprime Crisis.
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If ZIP lasts indefinitely, Generation X and Millennials will be worse off in retirement than their parents. Since Japan has had the longest experience of ZIP, we use data from the Survey of Household Income and Expenditure in Japan to... more
If ZIP lasts indefinitely, Generation X and Millennials will be worse off in retirement than their parents. Since Japan has had the longest experience of ZIP, we use data from the Survey of Household Income and Expenditure in Japan to show that pensioners in 2019 had 20 percent less pension income than their counterparts in 1999. The New Abnormal is inequitable from an intergenerational perspective because future generations bear the burden of public debt. It is less clear whether the New Abnormal is inequitable from an intragenerational perspective. ZIP directly increases house prices because housing is a capital asset whose return is correlated with the yield on long-term bonds. Since these yields have decreased because of ZIP by about 3 percentage points, ZIP increased real house prices by about 25 percent. ZIP increased the price of insurance because insurance companies invest their premium income in liquid assets, which have little or no return.
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This paper is concerned with the joint determination of savings, investment, interest rates and economic growth in the industrialized countries over the last three decades. The key economic variables which concern us are plotted on... more
This paper is concerned with the joint determination of savings, investment, interest rates and economic growth in the industrialized countries over the last three decades. The key economic variables which concern us are plotted on figures 1–4 and are by now familiar to students of the world economy. Economic growth was buoyant through the 1960s, sluggish and volatile through the 1970s and more stable through the 1980s. World interest rates fell during the 1970s, but in the 1980s they surpassed their level of the 1960s. Investment performed strongly during the 1960s, weakly during the 1970s and weaker still during the 1980s. Private sector savings largely mirrored investment throughout the entire period.
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The adoption of ZIP is placed in historical context, and is chronicled, starting with Japan in 1996 and ending with New Zealand in 2020. Israel, which was not involved in the Subprime Crisis, is used to illustrate the epidemiology of ZIP... more
The adoption of ZIP is placed in historical context, and is chronicled, starting with Japan in 1996 and ending with New Zealand in 2020. Israel, which was not involved in the Subprime Crisis, is used to illustrate the epidemiology of ZIP in small open economies. The relation between ZIP and long-term interest rates is reviewed through term structure theory. Initially ZIP was expected to be temporary; it took several years for long-term rates to decrease. Even then, long-term rates exceeded 2 percent. It took tsunami-style quantitative easing to flatten yield curves completely. Wicksell’s interest rate gap (between the natural rate of interest and the real long-term interest rate) is calculated for various countries, which increased for all countries studied. Debt-to-GDP ratios and kinetic inflation induced by quantitative easing are reviewed.
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1. The Political Economy of Unemployment Insurance 2. Unemployment Insurance in Nineteenth-Century Britain 3. The Theory of Unemployment Insurance Pricing 4. Competitive Pricing of Unemployment Insurance in Britain 5. Contemporary... more
1. The Political Economy of Unemployment Insurance 2. Unemployment Insurance in Nineteenth-Century Britain 3. The Theory of Unemployment Insurance Pricing 4. Competitive Pricing of Unemployment Insurance in Britain 5. Contemporary Unemployment Insurance Policies 6. Policy Analysis
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The New Normal is a form of political economy, adopted by Japan in 1996 and elsewhere since 2008, in which central banks set their policy rate to zero, finance ministries run large budget deficits, and debt-to-GDP ratios soar. Central... more
The New Normal is a form of political economy, adopted by Japan in 1996 and elsewhere since 2008, in which central banks set their policy rate to zero, finance ministries run large budget deficits, and debt-to-GDP ratios soar. Central banks found a new raison d’ être in quantitative easing, leading to massive expansions in money supply. Nevertheless, inflation remained minimal. The New Normal is very abnormal, hence the New Abnormal. However, the laws of economics have not been suspended. Keynes’ liquidity trap theory explains why expansionary monetary and fiscal policy are not inflationary when the rate of interest is zero. As their debt-to-GDP ratios increase, countries get caught in a debt trap, which impedes the normalization of monetary policy. The unsustainability of the New Abnormal induces existential risk, which depresses investment and perhaps fertility. When the rate of interest eventually becomes positive, countries threaten to crash out of the New Abnormal, generating economic chaos. The thesis in this book is revisionist. Orthodox macroeconomic theory explains the rise of the New Abnormal and how to escape it.
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In this paper we have a threefold objective. Firstly, to identify the principal macroeconomic determinants of U.K. private sector investment. Secondly, to examine the effects of private investment on aggregate supply. Finally, we attempt... more
In this paper we have a threefold objective. Firstly, to identify the principal macroeconomic determinants of U.K. private sector investment. Secondly, to examine the effects of private investment on aggregate supply. Finally, we attempt to integrate the effects of public sector investment and pricing on private sector output.Investigators have modelled private sector or manufacturing investment behaviour in a variety of ways. The neoclassical tradition, associated with Jorgenson (1963), explains investment expenditures in terms of the lagged capital stock, expected output and a distributed lag on the cost of capital. The most recent effort along these lines on U.K. data is the paper by Bean (1981). Although he found significant negative effects of the change in interest rates and the real cost of capital on the change in investment he failed to obtain satisfactory estimates of long-run cost of capital effects on the level of investment. Thus investment was determined solely in relation to output in the steady state. Alternatives to the neoclassical formulation have been proposed in the form of the multiplier-accelerator model and Tobin’s q model, in which changes to the capital stock incur adjustment costs. The former, which have been widely used in macroeconomic models, have generally failed to predict turning points in investment. Oulton (1981) and Dinenis (1984) have had moderate success with q models for the U.K. The major difficulty encountered is that of rationalising the existence of a lag structure for q, the ratio of market value to the current replacement asset cost.
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Parents, children and siblings are correlated for outcomes such as schooling and earnings. A methodology is proposed for decomposing the genetic, ethnic and causal factors that underpin these correlations. This methodology is compared... more
Parents, children and siblings are correlated for outcomes such as schooling and earnings. A methodology is proposed for decomposing the genetic, ethnic and causal factors that underpin these correlations. This methodology is compared with behavioral genetics and quasiexperimentation with adopted and biological siblings. The methodology predicts that families increase inequality through assortative mating, sexual reproduction and fertility. The methodology is applied to a large sample of Israeli families. Nature and ethnicity rather than nurture are largely responsible for the correlation between parents and children.
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This paper is concerned with testing the asset theory of the price level using quarterly UK data over the period 1968-1979. Expressed in its most general form, the asset theory states that the aggregate price level (P) is related to real... more
This paper is concerned with testing the asset theory of the price level using quarterly UK data over the period 1968-1979. Expressed in its most general form, the asset theory states that the aggregate price level (P) is related to real variables such as the level of economic activity (Y), financial wealth and the composition of wealth in terms of financial assets such as money (M), government bonds (B), etc. This theory has a long tradition and has been revived and developed by Blinder and Solow (1973), among many others. For the present we limit our attention to only two financial assets, namely money and government bonds, although in principle this set could be enlarged. This preoccupation reflects the attention paid to money and bonds in the literature and the requirement that financial assets should be of the "outside" variety, which precludes bank lending, corporate liabilities, etc. Hence our general specification of the price level is
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... First, from equation (3) vessel speed will be increased, ... A third result would be the increased deployment of combined carriers in the tanker market to take advantage of the rise in tanker freight rates relative to other freight... more
... First, from equation (3) vessel speed will be increased, ... A third result would be the increased deployment of combined carriers in the tanker market to take advantage of the rise in tanker freight rates relative to other freight rates; that is, COM would tend to increase. However, ...
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The New Abnormal set the scene for an activist mitigation policy because its key features, cheap money and loose fiscal policy, were extended during the Covid-19 crisis. A Rawlsian case is made for justifying the deficit financing of... more
The New Abnormal set the scene for an activist mitigation policy because its key features, cheap money and loose fiscal policy, were extended during the Covid-19 crisis. A Rawlsian case is made for justifying the deficit financing of Covid-19 mitigation policy. Pandemics cannot be insured within generations, but they may be insured between generations. Future g enerations have an interest in sharing the risk of pandemics with generations born before and after them. The economic cost of mitigation has been out of all proportion to the benefit in terms of life years saved. The cost per life year saved in Israel during the first wave of Covid-19 was $46,000, which is cheaper than a comparable estimate for the UK (£180,000). These estimates are vastly larger than health economists’ estimates of the value of life. The prospects of ending the New Abnormal after 2020 were much slimmer than they were in 2019.
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First-degree course grades for a cohort of social science students are matched to their instructors, and are statistically decomposed into departmental, course, instructor, and student components. Student ability is measured alternatively... more
First-degree course grades for a cohort of social science students are matched to their instructors, and are statistically decomposed into departmental, course, instructor, and student components. Student ability is measured alternatively by university acceptance scores, or by fixed effects estimated using panel data methods. After controlling for student ability, course characteristics, and instructor fixed effects, departmental grade differentials range over 7 points out of 100. Instructors who teach in more than one department grade more generously in departments that award higher grades, suggesting that differential grading policy is set by departments and does not result from unobserved differences in instructor quality and teaching material. Finally, student fixed effects, which measure ability at university, are correlated to 0.41 with their university entrance scores, which measure ability prior to university. This suggests that university entrance scores are poor predictors of student performance in higher education.
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Applied macroeconomics during the last quarter of a century has undergone a postmodernist revolution. Data are not used to test models, but to infer the parameters of DSGE models using methods such as calibration, under the assumption... more
Applied macroeconomics during the last quarter of a century has undergone a postmodernist revolution. Data are not used to test models, but to infer the parameters of DSGE models using methods such as calibration, under the assumption that the model is ‘true’. This revolution was intended as a response to the Lucas critique. Lucas contended that econometricians were rejecting too many “good models.” It is ironic, therefore, that the spread of calibration has led to the acceptance of too many “bad models.” These bad models led central bankers astray, and contributed to the eventual adoption of zero interest policy. The emergence of the New Abnormal cannot be disconnected from the spread of postmodernism in applied macroeconomics. Modernist (frequentist) methods have recently been developed to test models empirically based on indirect inference. These methods strongly reject DSGE models, such as the seminal Smets-Wouters model.
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Fertility had been decreasing in OECD countries well ahead of the New Abnormal. However, fertility decline intensified in Japan after ZIP was adopted in 1996. Could this have anything to do with the New Abnormal? Just as business... more
Fertility had been decreasing in OECD countries well ahead of the New Abnormal. However, fertility decline intensified in Japan after ZIP was adopted in 1996. Could this have anything to do with the New Abnormal? Just as business investment suffered during the New Abnormal, perhaps parents, like investors, are fearful of the future, and are reluctant to have children. The “quality–quantity theory of fertility” predicts that ZIP, growing debt-to-GDP ratios, and existential risk reduce fertility. Since changes in fertility are slow to occur, Japan provides the main opportunity to study the relationship between fertility and the New Abnormal. Since fertility decline was pronounced in, for example, Italy and South Korea, it is difficult to reach clear conclusions. At the very least, it cannot be ruled out that the steep decline in fertility in Japan is related to its deep involvement in the New Abnormal.
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... Indeed, we find that such variables play a major role in understanding the behavior of the multiplier. Moreover, since we also pay detailed attention to the dynamic specification of the model, our approach arguably encompasses theirs.... more
... Indeed, we find that such variables play a major role in understanding the behavior of the multiplier. Moreover, since we also pay detailed attention to the dynamic specification of the model, our approach arguably encompasses theirs. ...
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In this paper we report our efforts to estimate an econometric model of the Israeli housing market estimated from quarterly data over the period 1974-90. The principle endogenous variables in the model are housing starts and completions,... more
In this paper we report our efforts to estimate an econometric model of the Israeli housing market estimated from quarterly data over the period 1974-90. The principle endogenous variables in the model are housing starts and completions, the stock of housing, house prices and rents. The specification of the model draws on capital asset pricing theory in which account is taken of stock-flow phenomena that are inherent in the housing market. At a given point in time the stock of housing is fixed and house prices are treated as the price of a capital asset which clears the asset demand for housing. At the same time house-building is motivated by profitability which reflects the level of house prices. Increased building activity raises the stock of housing over time which, in turn, feeds back on to house prices.
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ABSTRACT Empirical literature in disciplines ranging from behavioral genetics to economics shows that in virtually every aspect of life the outcomes of children are correlated to a greater or lesser extent with the outcomes of their... more
ABSTRACT Empirical literature in disciplines ranging from behavioral genetics to economics shows that in virtually every aspect of life the outcomes of children are correlated to a greater or lesser extent with the outcomes of their parents and their siblings. In Heredity, Family, and Inequality, the economist Michael Beenstock offers theoretical, statistical, and methodological tools for understanding these correlations. Beenstock presents a comprehensive survey of intergenerational and sibling correlations for a broad range of outcomes--including fertility and longevity, intelligence and education, income and consumption, and deviancy and religiosity. He then offers a critique of the sometimes conflicting explanations for these correlations proposed by social scientists from such disciplines as developmental psychology, sociology, and economics. Beenstock also provides an axiomatic framework for thinking about the complex interplay of heredity, family, and environments, drawing on game theory, control theory, and econometrics. Chapters 1-7 discuss such topics as the important contributions of Francis Galton (1822–1911) to the statistical study of heredity, the family as an engine of inequality and diversity, and natural experiments designed to identify how environments, families, peer groups, and neighborhoods affect human outcomes. Chapters 8-10 present technical material on statistical, theoretical, and methodological tools used by the earlier chapters. Beenstock’s goal is not to argue for either nature or nurture but to suggest more rigorous ways to assess the diverse contributions to this lively debate.
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Layard, Metcalf and Nickell have formed annual estimates of the union mark-up for unskilled males in the United Kingdom manufacturing sector over the period 1951-1983. We critically assess their estimates as an index of union power and... more
Layard, Metcalf and Nickell have formed annual estimates of the union mark-up for unskilled males in the United Kingdom manufacturing sector over the period 1951-1983. We critically assess their estimates as an index of union power and propose a number of hypotheses that determine the union mark-up in both cyclical and secular contexts. We use their mark-up estimates to test
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List of tables and illustrations. Symbols and abbreviations. Preface. A hundred years of world shipping. A survey of the literature. The theory of shipping markets. The dry cargo model. The tanker model. Integrated model of the shipping... more
List of tables and illustrations. Symbols and abbreviations. Preface. A hundred years of world shipping. A survey of the literature. The theory of shipping markets. The dry cargo model. The tanker model. Integrated model of the shipping markets. Forecasting. References. Bibliography.
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In the “New Normal” central banks set their interest rate to zero and print money through massive quantitative easing, while finance ministries run huge fiscal deficits. Yet inflation remains minimal. This book explains why. It also... more
In the “New Normal” central banks set their interest rate to zero and print money through massive quantitative easing, while finance ministries run huge fiscal deficits. Yet inflation remains minimal. This book explains why. It also explains why the New Normal is really the New Abnormal, and why it can’t last. The academic roots of the New Abnormal are traced to a conceptual confusion about the “natural rate of interest,”’ and postmodernism in macroeconomics, exemplified by the DSGE (dynamic stochastic general equilibrium) movement. A theory of “existential risk” is developed, which is concerned with the collapse of political economies such the Bretton Woods system and the New Abnormal. Existential risk expresses itself in the growing gap between the natural rate of interest, measured by the rate of return on capital, and the real rate of interest. Existential risk is also expressed in the development of cryptocurrencies. A theory of “kinetic inflation” based on Keynes’ liquidity trap is developed, which accounts for the absence of inflation in the New Abnormal, and predicts its outbreak when zero interest policy ends. The adverse social consequences of the New Abnormal for fertility, pensions, house prices, economic inequality, and intergenerational equity are explored. A causal link is established from the New Abnormal to Covid-19 mitigation policy, and from the latter to the intensification of the New Abnormal. Finally, the prospects are assessed for ending the New Abnormal, and an orderly return to the Old Normal. The alternative is to crash out of the New Abnormal chaotically.
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Macroeconomics and regional science have developed as separate disciplines. However, the fact that the gross domestic product is the sum of gross regional products suggests that the two disciplines are related. The present study considers... more
Macroeconomics and regional science have developed as separate disciplines. However, the fact that the gross domestic product is the sum of gross regional products suggests that the two disciplines are related. The present study considers the implications of regional science and economic geography for macroeconomics. Specifically, a spatial econometric model for Israel is simulated to explore the implications of regional productivity and amenity shocks for gross regional products and the gross domestic product. We show that the effects of productivity shocks on the gross domestic product depend on where they occur and may even be negative. These results question estimates of the effect of productivity shocks in macroeconomic models in terms of spatial aggregation bias. They also provide empirical evidence rejecting the spatial granularity hypothesis regarding the secular relation between macroeconomic economic activity and regional economic activity. The study concludes with speculations about the implications of macroeconomics for regional science.
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Neo-Wicksellian macroeconomic theorists have misunderstood Wicksell’s natural rate of interest, which refers to the return on fixed assets. They have also misunderstood that the natural rate of interest is not an equilibrium phenomenon.... more
Neo-Wicksellian macroeconomic theorists have misunderstood Wicksell’s natural rate of interest, which refers to the return on fixed assets. They have also misunderstood that the natural rate of interest is not an equilibrium phenomenon. The natural rate of interest, overlooked in canonical New Keynesian and DSGE models, is reinstated here in the influential New Keynesian model. Whereas in the New Keynesian model there is an output gap and an inflation gap, in the reinstated model there is also an interest rate gap (the difference between the natural rate of interest and the real rate of interest). Whereas according to the New Keynesian model, if output and inflation are on target (the so-called divine coincidence), the interest rate gap must be zero, matters are different in the reinstated model. This theoretical flaw has been instrumental in the widespread international adoption of the New Abnormal. Key theoretical concepts are introduced, which are used throughout this study, incl...
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We apply a methodology for analyzing bank credit risk in Israel, which distinguishes between contagion and correlation on the one hand, and risk factors that are macroeconomic, sectoral and idiosyncratic on the other. Credit risk may be... more
We apply a methodology for analyzing bank credit risk in Israel, which distinguishes between contagion and correlation on the one hand, and risk factors that are macroeconomic, sectoral and idiosyncratic on the other. Credit risk may be correlated because the observed and unobserved drivers of credit risk happen to be correlated, or because they are causally related through contagion. Bank credit risk is measured by the proportion of problem loans in credit sectors of Israel’s banking system. Contagion is malignant and infectious if credit risk in one sector increases credit risk in other sectors. Contagion is benign and immunizing if credit risk in one sector reduces credit risk in other sectors. In some sectors, such as construction, credit risk is highly contagious and malign. On the other hand, credit risk elsewhere immunizes credit risk in the construction sector through benign contagion. According to our results there are two aspects related to the construction sector. First, ...
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SummaryWe contest Jaeger and Paserman's claim (Jaeger and Paserman , 2008. The cycle of violence? An empirical analysis of fatalities in the Palestinian–Israeli conflict. American Economic Review 98(4): 1591–1604) that Palestinians... more
SummaryWe contest Jaeger and Paserman's claim (Jaeger and Paserman , 2008. The cycle of violence? An empirical analysis of fatalities in the Palestinian–Israeli conflict. American Economic Review 98(4): 1591–1604) that Palestinians did not react to Israeli aggression during Intifada 2. We address the differences between the two sides in terms of the timing and intensity of violence, estimate nonlinear vector autoregression models that are suitable when the linear vector autoregression innovations are not normally distributed, identify causal effects rather than Granger causality using the principle of weak exogeneity, and introduce the “kill‐ratio” as a concept for testing hypotheses about the cycle of violence. The Israelis killed 1.28 Palestinians for every killed Israeli, whereas the Palestinians killed only 0.09 Israelis for every killed Palestinian.