Growth and Long Term PolicyPart I - Lecture M2 - ETE

September 2012 - October 2012

Jean-Bernard Chatelain,

CES, University Paris I

Pantheon Sorbonne and IUF

Plan

1. How do we proceed?

2. Start of the course.

01-06 Growth and Finance (JB Chatelain)

07-12. Long Term Policies in Overlapping Generations Models

Plan

3 sessions: overview of 6 topics.

2 sessions: 15 minutes presentations from Blanchard (2012) 23 proposals by « leading economists » by students. (1/4th of the grade).

1 session synthesis.

Because huge and/or frequent financial crisis lead to long term instability and depression, the links between asset prices bubbles, financial structure of firms, households and banks, output growth trend and cycles and macro-policy are now on the top of the research agenda. It is particularly difficult during depressions to disentangle growth and cycles, as depressions last longer and shift downwards the growth trend.

Topic 1: Growth, Business Cycles and Finance. Towards a paradigm change?

• Chatelain J.B. and Ralf K. (2012). The Failure of Financial Macroeconomics and What to Do about It. The Manchester School, pp. 21-53, supplement.

• Quiggin J. (2012). Zombie economics. Princeton University Press. (paperback edition with chapter 6: expansionary austerity).

• Many articles and blogs on the failure of DSGE (dynamic stochastic general equilibrium) since 2008. Bradford de Long, Buiter, Krugman, Kay, Woodford, Stiglitz, Franklin, Wieland and Wolters, Schlefer, Farmer

Topic 2: Competing paradigms and History of Economic Thought.

• Bardsen G., Lindquist K-G., Tsomocos D. (2008). Evaluation of Macroeconomic Models for Financial Stability Analysis. The Journal of World Economic Review, 3(1), pp. 7-32.

• Irving Fisher (1933). The debt deflation theory of great depressions. Econometrica, vol.1 (4), 337-357.

• Krugman (2002). Crises: The Next Generation? in Economic Policy in the International Economy: Essays in the honour of Assaf Razin.

Topic 3: Financial accelerator Models (including phasis diagramma).

• Miller M. and Stiglitz J. (2010). Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?, Economic Journal, 120 (544), pp. 500-518.

• Edison H.J., Luangaram P. and Miller M. (2000). Asset Bubbles, Leverage and ‘Lifeboats’: Elements of the East Asian Crisis, Economic Journal, 110 (460), pp. 309-334.

• Kiyotaki N. and Moore J. (1997). Credit Cycles [section 2]. Journal of Political Economy, 105, 211-248.

Topic 4: “Inefficient Market” Hypothesis

• De Grauwe P. (2011) : Where Do Booms and Busts Come From?, Prisme 22, Centre Cournot. http://www.centre-cournot.org/?wpfb_dl=91

• Shleifer A. and Vishny R.W. (2010). Unstable banking. Journal of Financial Economics, 97(3), , Pages 306-318

Topic 5: Growth, Finance and Convergence: general overview; “Too much Finance”

• Arcand J.L., Berkes E. and Panizza U. (2012). Too Much Finance? IMF working paper 12/161.

Topic 6: Growth, Finance in Overlapping Generations Models with Multiple

Equilibria.• Matsuyama (2007). Credit traps and Credit

cycles. American Economic Review. Volume 97, Number 1, March 2007, pp. 503-516(14).

• Song, Z.; Storesletten, K.; Zilibotti, F. (2011): Growing like China, American Economic Review, Volume 101, Number 1, February 2011 , pp. 196-233(38)

Students short presentations (23 papers). (last 3 sessions, then synthesis final

session).• Blanchard O.J. (2012). In the Wake of the Crisis:

Leading Economists Reassess Economic Policy. International Monetary Fund. MIT Press.

• Conference slides (sometimes nearly empty) also available.

• At most 15 minutes presentation per paper (at most 11 presentations per session). (a) what was missing (b) what proposes the leading economist (c) what is missing or debatable in his view? (d) what is relevant for my country (e) questions from the floor. Write an up to 3 pages handout given to the professor and send to other students.

Grading 50% each

Exams: two last wednesdays of december.

JB Chatelain: paper

A copy printed in box 209, in front of office 209, 2nd floor MSE. 15’ presentation on the Wednesdays (15/20) including 3 questions on topics 1 to 6.

+ evaluation of 3 pages paper (5/20) on Blanchard (2012).

B. Wigniolle: exam

1 or (better) 2 students per Report, at most 15 pages

Report: compare 2 recent (since 2008), (working or published) papers quoting one of the papers (Click on CITED by, in « Google Scholar » presented in the topics).

Credit cycles N Kiyotaki… - 1995 - nber.org Cité 2328 fois - Autres articles - Les 48 versions

.

Finding the 2 recent papers, available since 2008 latest

Should be on a topic relevant for the course.

May be in the long list of recent REPEC 2012 provided by prof., but not necessarily.

Working papers or published in journals.

Sources: NBER, CEPR, Repec, SSRN, Google Scholar (+editors: Elsevier, Wiley): use keywords, look for series on macro/finance, click on CITED in google scholar.

Format

Not more than 15 pages, compare 2 papers (theory or applied), possibly with one or more tables of 2 columns: assumptions, data, methods, results + what is missing: what could be done to improve these both papers + what is relevant in the case of your country + add printed slides (6 per pages) at the end of your report.

A couple of questions from the course may be asked during the oral, outside the topic

Oral exam, in office 209

Print a copy on Monday 10th december in letter box 209 in front of office 209.

10 minutes: installation + presentation (including a few slides), bring laptop or USB stick.

5 minutes, at most. Questions, including a couple of questions related to other topics of the course.

google « EPI chatelain croissance»

Google « EPI UFR02 », M2 Master ETE, block « Croissance », page « Croissance et Politiques de Long Terme (part 1)».

Link to another EPI (panel data).

In the wake of the CrisisIdeas for master, PhD thesis

1. Monetary Policy

2. Fiscal Policy

3. Financial Intermediation and Regulation

4. Capital Account Management

5. The International Monetary System

6. Growth Strategies

Macro Facing an Interventionist Nightmare?

1. Regulation: loan to value, asset prices

2. Regulation: fiscal policy/fiscal rule

3. Regulation: regulating banks / finance

4. Regulation: control capital flows

5. Regulation: control imbalances

6. Regulation: growth policy

Before/after 2007: major changes of focus in macro literature, along with resistance to change.

Monetary Policy forPrudent macroeconomists

The challenge of macro-prudential policy:

For a few papers: « How the state opposite results than before 2007 using the same DSGE models with collateral constraints».

Objectives: public control of asset prices to avoid ex-ante bubbles, public control of loan to value ratios to avoid over-lending.

Macro-prudential

1. A problem with tools: loan to value tool (quantitative credit constraint; indirect control on the monetary market with increasing costs, interest rate, quantitative easing)…

2. Connection with refined regulation: breaking the contagion between asset classes and between countries: firewall tools. Glass steagall act: investment/retail; Control of capital flows/offshore/shadow

following

3. Connection with banking competition?

Too big to fail versus stable control of activities. Is big a problem? Canada’s case?

4. Political determinants of banking regulation: Fragile by design

International competition for regulators

Cross border banking/opacity.

Crisis management

5. Ex post adjustment: part of macro-prudential, yes or no? Orderly management and distribution of losses, timing.

6. What to do with long run quantitative easing? Long run Risks and cumulated short run benefits? How to restore confidence? Coordination with fiscal policy?

Alleviate or foster sovereign default?

Independance?

7. Saving the financial system/independance?

8. Liquidity trap, liquidity uncertainty trap: Coordination with fiscal policy (losing independance).

9. Inflation and distributing the losses of the crisis to borrowers.

II. Fiscal policy is back?

1. Contingent evaluation of fiscal multiplier effects:

Coordinated policy, in liquidity trap, depending on tradable/non tradable, long term public investment, targeted public expenditures towards consumers, sectors, spillovers, long term green policy

Fiscal policy

2. Fiscal multiplier versus sovereign default (public debt) versus bank defaults (systemic risk), turning around « expansionary austerity ».

3. Targeted support of banks? Towards private lending of SME? Public banks?

(the failure of TARP).

Fiscal Policy

4. The particular case of fiscal policy in the Euro-Area with nations with different degrees of competitivness.

5. Changing the tax structure, the efficiency of the tax system (second bests)

3. Banking regulation

1. It frames how monetary policy (with financial stability obejctive) and how budgetary policy (in systemic crisis) may react. Cf. previous slides.

2. Too much finance (cf growth policy).

Misallocation of talent, too many trades, too much opacity, too many crisis.

How to do it

3. Political economy issue on the determinants of the bargaining power of international banks.

4. Details of micro-level regulations, tax, constraints (cf firewalls) and their consequences.

4. Capital account management

1. Smoothing China / USA / Europe imbalances, how exports/exchange rate over-valuation is changing? Are there excess reserves and how to correct it over time?

2. Contingent evaluations of the efficiency of Capital controls: evaluations again with another view than it is always bad (signs of regressions will change).

Capital account management

3. Interactions with cross-border banking regulations and current account management. (short term sudden stop, contagion between asset classes, debt in foreign currency).

6. Growth Policy

The debate did not change much with respect to the crisis (issue such that industrial policy, export driven, public infrastructure, education, health, oppenness, commodities resources)

Except: « too much finance » (cf. regulation)

And still « green, less CO2, growth ».