Essec Business School

The National Bureau of Economic Research (NBER) is an American not-for-profit whose goal is to finance economic research. One could say that NBER is to the study of economics as NASA is to the exploration of space – so when NBER hosts their annual research institute in Boston every summer, one can understand why it attracts the top names in the field.

Their summer institute is held over a three week period in Boston, and during this time, participants (myself included) present their latest findings, engage in a series of workshops, and network with their peers.   

This summer, many issues were up for discussion – more general topics as well as methodology-specific ones. However, three broad questions in particular seemed to capture the imagination of the group. Not surprisingly, these are also issues with strong resonance within the public debate. 

1. Short-term stimulus and long-term stabilization – are policies effective?

One major question economists are asking themselves is: how can we measure the effectiveness of the fiscal and monetary policies employed by the United States and Europe in the wake of the crisis. Did policy-makers make the right decisions?

Measuring this ‘effectiveness’ has been frustrating. First of all, it can only be done after the fact, and after the proverbial milk has been spilled. Furthermore, many of the economic and financial methods employed in the wake of the crisis were ‘innovative’. And because they’ve never been used before, researchers aren’t sure what their long term effects will be. 

Nevertheless, measuring the effectiveness is more important than ever. We need to understand why the economies of the US and the EU continue to diverge: the former has seen a sharp drop in unemployment as the latter continues to stagnate.

The consensus among researchers seems to be that the unconventional monetary policies – quantitative easing (QE), or in other words, liquidity stimulus – employed by the United States and the United Kingdom has paid off without any serious adverse consequences. But is it too soon to call?

From a certain perspective, the stimulus achieved what it had been designed to do: it supported the struggling sectors that would otherwise have suffered from interest rates that still remain too high despite being almost at zero (negative rates are unfortunately hard to implement!). Yes, the unconventional monetary policy employed by the Federal Reserve reduced the unemployment rate on the one hand. But on the other hand, it may have encouraged excessive risk-taking. Some fear that the housing and financial bubbles could very well become a serious issue once again.

Nevertheless, research has shown that conventional monetary rules (derived from the famous Taylor rule) can stabilize economies, even after quantitative easing. The role of an abundant household savings, however, was questioned because it has contradictory effects. Indeed, many economists have shown that in the long term, stimulus policies can have serious negative effects. In particular, they may cause significant economic fluctuations (too rapid growth, followed by a crash). Are we setting ourselves up for future failures?

The article I presented offers a method to detect and predict bubbles and their reversals.  With my coauthors, we propose a technique anticipates collapses well in advance. In fact, we show it would have detected the house price reversal in the US as early as March 2006, about a year earlier than other methods!

2. How can we explain asymmetry in economics?

This year, many researchers have proposed models for detecting and understanding asymmetry: why do economic laws seem to differ depending on whether we’re in a period boom or bust. From a statistical standpoint, new models are trying to separate the effects of specific positive or negative impacts on the confidence (or skepticism) of businesses. Some economists have also tried to quantify the role played by economic uncertainty.

In fact, the 2008 crisis and its aftermath was so severe that it can offer us today the perfect viewpoint from which to analyze the impact of boom and bust on the behaviors of businesses. In other words, findings from this period can help us measure the extent to which a recession will put a damper on any “good news” and reduce its positive impact on the economy.  Ultimately,  it is important to understand how economic laws depend on the state of the economy: this realization has vindicated the question of fiscal (so called Keynesian) multipliers. Economists at the IMF now impart that public fiscal consolidation while beneficial during upturns may destroy more wealth in recessions than it purposes to save.

3. How do recessions start…and end?

The origin and cause of the recessions was also a major subject of debate. Frank Portier of the Toulouse School of Economics and his coauthors attempted to reconcile two arguments – those who blame over-investment in firms (à la Hayek) or too little saving by households (à la Keynes). Others have shown how multinational firms can amplify the negative spillovers from one country to the next.

But the million dollar question is: how do we now get out of the recession? G Eggertsson and N. Mehrotra (from Brown University) have show that, in the event of long-term stagnation - as currently experienced by Japan and what could become the reality for the eurozone – lowering interest rates or a temporarily increasing in government spending is not the answer. They show that increases in inflation and public spending are effective. But these researchers are taking a surprising stance by arguing that a reduction in income inequality may be a tool for an exit from the recession. Although, this article will probably be criticized and the debate is not closed on the subject, it provides us with some interesting food for thought.

Finally Emannuel Farhi  from Harvard and Jean Tirole of the Toulouse School of Economics, as well as Olivier Blanchard of the International Monetary Fund and his coauthors focused on how to get Europe out of the recession. Farhi and Tirole, on the one hand, argue that we should not separate Europe’s solvency and banking problems, but rather find a simultaneous solution. Blanchard, Erceg and Lindé on the other hand, focused on how to increase public spending in the heart of the eurozone, believing that positive effects would then be felt by the peripheral economies.  As a result, ‘core’ economies would be able to reduce their current account surplus and see their inflation increase slightly. Unfortunately, spare capacity is located in the periphery, but it is the core economies that would initially bear the cost of such a policy. Hence the short-term gains in terms of activity in core economies may not be sufficient for them to implement such a stimulus.

Many more topics were debated at the Summer Institute and academic arguments are not settled. Yet it is comforting that economists are really working together on understanding the current recession. May the future prove to us that we are indeed learning from our past mistakes.

All the references and links to the articles mentioned are listed here.