Showing papers in "Canadian Parliamentary Review in 2015"

Beyond Abyssal Thinking: From Global Lines to Ecologies of Knowledges

Abstract: Boaventura de Sousa Santos is Professor of Sociology at the School of Economics, University of Coimbra (Portugal) and Distinguished Legal Scholar at the University of Wisconsin-Madison Law School. He is Director of the Center for Social Studies of the University of Coimbra and Director of the Center of Documentation on the Revolution of 1974, at the same University. He has published widely on globalization, sociology of law and the state, epistemology, democracy, and human rights in Portuguese, Spanish, English, Italian, French and German.

Risk Aversion at the Country Level

Abstract: An individual’s attitude about risk underlies economic decisions about the optimal amount of retirement or precautionary savings to set aside, investment in human capital, public or private sector employment, and entrepreneurship, among other things. In the aggregate, these micro-level decisions can influence a country’s growth and development. Although there is a vast literature on measuring risk aversion, estimates of the coefficient of relative risk aversion vary widely—from as low as 0.2 to 10 and higher. Probably the most widely accepted measures lie between 1 and 3. 1 The most common approach to measuring risk aversion is based on a consumption-based capital asset pricing model (CAPM). Hansen and Singleton (1982), using the generalized method of moments (GMM) to estimate a CAPM, report that relative risk aversion is small. Hall (1988) shows that minor changes in the specifi cation and instruments cause the results to vary substantially. Neely, Roy, and Whiteman (2001), in turn, explain this difference, arguing that CAPM-based estimations fail to provide robust results because difficulties in predicting consumption growth and asset returns from available instruments lead to a near identification failure of the model. In this article, we fol low a different approach. We build on the methodology first outlined in Layard, Mayraz, and Nickell (2008). Using happiness data to estimate how fast the marginal utility of income declines as income increases, This article estimates the coefficient of relative risk aversion for 75 countries using data on self- reports of personal well-being from the 2006 Gallup World Poll. The analysis suggests that the coefficient of relative risk aversion varies closely around 1, which corresponds to a logarithmic utility function. The authors conclude that their results support the use of the log utility function in numerical simula tions of economic models. (JEL D80, D31, I31, O57)

Monetary Policy Normalization in the United States

Abstract: Because of the Federal Reserve’s unconventional approaches to monetary policy during the Great Recession and recovery, the Fed now finds itself in an unconventional situation. Short-term nominal interest rates have been close to zero for more than six years, and the Fed’s balance sheet is currently more than four times as large as in 2007. This article explains how and why the Fed got into this situation and the challenges this creates in returning Fed policy to “normal”—a state in which the Fed’s nominal interest rate target is above zero and its balance sheet is reduced in size.

Human Capital and Development

Abstract: Perhaps no question has attracted as much attention in the economics literature as “Why are some countries richer than others?” In this article, the author revisits the “development problem” and provides some estimates of the importance of human capital in accounting for cross-country differences in output per worker. His results suggest that human capital has a central role in determining the wealth of nations and that the quality of human capital varies systematically with the level of development.

How Effective Is Central Bank Forward Guidance

Abstract: In this paper, we use survey forecasts to investigate the impact of forward guidance on the predictability of future short- and long-term interest rates in four countries: New Zealand, Norway, Sweden, and the United States. New Zealand began providing forward guidance in 1997, Norway in 2005, and Sweden in 2007. The United States had two periods of implicit forward guidance: 2003-2005 and 2008-2011. Overall, we find little or no convincing evidence that forward guidance actually improves markets’ ability to forecast future rates or that any improvement in forecasting short-term rates is reflected in longer-term yields. The weak support we do find is at the short end of the yield curve and at relatively short forecast horizons and only for Norway and Sweden. There is no evidence that forward guidance has increased the efficacy of monetary for New Zealand, the country with the longest—15-year—forward guidance history.

Three Scenarios for Interest Rates in the Transition to Normalcy

Abstract: © 2015, The Federal Reserve Bank of St. Louis. The views expressed in this article are those of the author(s) and do not necessarily reflect the views of the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. Articles may be reprinted, reproduced, published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis.

Microfoundations of Money: Why They Matter

Abstract: What is the value of having microfoundations for monetary exchange in a macro model? In this article, the author attempts to answer this question by listing what he considers the major accomplishments of the field. He argues that the evidence overwhelmingly shows that microfoundations matter for many questions of first-order importance in macroeconomics.

Unpacking Gender's Role in Political Representation in Canada

Abstract: The story of women�s political representation in Canada has generally been told as one of progress. While substantial progress has been made, particularly in recent years, there have also been periods of stagnation. In this article, the author interrogates a theory of demand and supply with respect to candidate recruitment strategies. She writes that the undersupply of women candidates does not have to do with voter preferences, but rather partisan selection processes, media-influenced gender norms, and the kinds of issues which dominate political discourse. She concludes that a demand and supply model of political recruitment provides a useful framework for understanding variation in women�s political underrepresentation in Canada.

Fear of Liftoff: Uncertainty, Rules, and Discretion in Monetary Policy Normalization

Abstract: As the author describes it, the Federal Reserve’s muddled mandate to attain simultaneously the incompatible goals of maximum employment and price stability invites short-term-oriented discretionary policymaking inconsistent with the systematic approach needed for monetary policy to contribute best to the economy over time. Fear of liftoff—the reluctance to start the process of policy normalization after the end of a recession—serves as an example. Drawing on public choice and cognitive psychology perspectives, the author discusses causes of this problem: The Federal Reserve could adopt a framework that relies on a simple policy rule subject to periodic reviews and adaptation. Replacing meetingby- meeting discretion with a simple policy rule would eschew discretion in favor of systematic policy. Periodic review of the rule would allow the Federal Reserve the flexibility to account for and occasionally adapt to the evolving understanding of the economy. Congressional legislation could guide the Federal Reserve in this direction. However, the Federal Reserve may be best placed to select the simple rule and could embrace this improvement on its own, within its current mandate, with the publication of a simple rule along the lines of its statement of longer-run goals.

A Consideration of Cabinet Size

Abstract: Cabinet size has fluctuated in Canadian legislatures over the past century. Beginning in 1993, two federal governments introduced “roll back” cabinets which sought to significantly reduce the number of ministers. The author, focusing especially on the years 1993 to 2014, asks if Canadian governments have a “cabinet size problem.” He notes that since 1993 two trends have emerged: 1) cabinets are more likely to expand during government and more likely to consolidate between governments and 2) cabinet size is more likely to increase during government under centre-left parties than centre or centre-right parties. Although arguments for a reduction of cabinet size tend to focus on financial costs, the author highlights the political cost of having a large cabinet relative to the size of the legislature, as there are fewer private members to keep the government accountable.

The Welfare Cost of Business Cycles with Heterogeneous Trading Technologies

Abstract: The author investigates the welfare cost of business cycles in an economy where households have heterogeneous trading technologies. In an economy with aggregate risk, the different portfolio choices induced by heterogeneous trading technologies lead to a larger consumption inequality in equilibrium, while this source of inequality vanishes in an economy without business cycles. Put simply, the heterogeneity in trading technologies amplifies the effect of aggregate output fluctuation on consumption inequality. The welfare cost of business cycles is, therefore, larger in such an economy. In the benchmark economy with a reasonably low risk aversion rate, the business cycle cost is 6.49 percent per- period consumption for an average household when the model is calibrated to match the risk premium.

A Measure of Price Pressures

Abstract: The Federal Reserve devotes significant resources to forecasting key economic variables such as real gross domestic product growth, employment, and inflation. The outlook for these variables also matters a great deal to businesses and financial market participants. The authors present a factor-augmented Bayesian vector autoregressive forecasting model that significantly outperforms both a benchmark random walk model and a pure time-series model. They then use these factors in an ordered probit model to develop the probability distribution over a 12-month horizon. One distribution assesses the probability that inflation will exceed 2.5 percent over the next year; they term this probability a price pressure measure. This price pressure measure would provide policymakers and markets with a quantitative assessment of the probability that average inflation over the next 12 months will be higher than the Fed’s long-term inflation target of 2 percent.

A model of U.S. monetary policy before and after the great recession

Abstract: I study a simple dynamic general equilibrium monetary model to interpret key macroeconomic developments in the U.S. economy both prior to and after the Great Recession. In normal times, when the Fed’s policy rate is above the zero lower bound, the Fed can control in‡ation and countercylical monetary policy works in a textbook manner. When a shock drives the policy rate to the zero lower bound, the economy enters a liquidity trap scenario in which open market pur� � � =

Monetary Policy in Small Open Economies: The Role of Exchange Rate Rules

Abstract: Understanding the costs and benefits of alternative monetary policy rules is important for economic welfare. Within the context of a small open economy model and building on the work of Mihov and Santacreu (2013), the author analyzes the economic implications of two monetary policy rules. The first is a rule in which the central bank uses the nominal exchange rate as its policy instrument and adjusts the rate whenever there are changes in the economic environment. The second is a standard interest rate rule in which the central bank adjusts the short-term nominal interest rate to changes in the economic environment. The main finding of the analysis is that, if the uncovered interest parity condition that establishes a tight link between the interest rate differential in two countries and the expected rate of depreciation of their currencies does not hold, the exchange rate rule outperforms the standard interest rate rule in lowering the volatility of key economic variables. There are two main reasons for this: First, the actual implementation of the exchange rate rule avoids the overshooting effect on exchange rates characteristic of an interest rate rule. And second, the risk premium that generates deviations from the uncovered interest parity condition is smaller and less volatile under an exchange rate rule.

Common Fluctuations in OECD Budget Balances

Abstract: The authors use a dynamic latent factor model to analyze comovements in OECD surpluses. The world factor underlying common fluctuations in budget surpluses across countries explains an average of 28 to 44 percent of the variation in individual country surpluses. The world factor, which can be interpreted as a global budget surplus index, declines substantially in the 1980s, rises throughout much of the 1990s, peaks in 2000, and declines again after the financial crisis of 2008. The authors then estimate similar world factors in national output gaps, dividend-to-price ratios, and military spending that significantly explain the variation in the world budget surplus factor. Idiosyncratic components of national budget surpluses correlate with well-known “unusual” country circumstances, such as the Swedish banking crisis of the early 1990s.

Schools and Stimulus

Abstract: This article analyzes the impact of the education funding component of the American Recovery and Reinvestment Act of 2009 (Recovery Act) on public school districts. We use cross-sectional differences in district-level Recovery Act funding to investigate the program's impact on staffing, expenditures, and debt accumulation.

Does the United States Lead Foreign Business Cycles

Abstract: The U.S. financial crisis of 2007-08 had detrimental and lasting effects on the economies of other nations, reinforcing the leading role played by the United States in the global economy. The authors assess this role by determining whether U.S. output growth informs business cycle turning points in the economies of other nations. They find that U.S. economic growth influences both the timing and duration of business cycle phases for Canada, Germany, the United Kingdom, and, to a lesser extent, Mexico. However, they find no relationship between U.S. output growth and the business cycles of France, Italy, and Japan.

How Does Informal Employment Affect the Design of Unemployment Insurance and Employment Protection

Abstract: The authors use a simple model to study the optimal design of unemployment insurance and employment protection. Workers are risk averse and face the possibility of unemployment. Firms are risk neutral and face random shocks to productivity. Workers can participate in a shadow economy, or informal sector. The model yields several lessons. First, countries should encourage formal employment to address the issue of informal employment. In extreme cases, such encouragement translates into high severance payments and negative payroll taxes. Along these same lines, unemployment payments cannot be too large. In fact, when the risk of informality is extreme, the authors find that unemployment benefits should be negative, which is (in effect) a positive tax on the lack of formal employment.