Neoclassical Business Cycles

According to Prescott the reason for business cycles is due to technology shocks which manifest itself as changes in the TFP productivity term (or Solow residual) A. Summers criticises this explanation believing that Prescott doesn’t provide evidence for where these technology shocks come to. Furthermore he cites Berndt who shows that the oil shock crisis – recessionary periods in the 1970s for both the US and the UK – had little effect on labour productivity which would cast doubt on Prescott’s story. Summers also points out that US GNP declined by 50% between 1929 and 1933, and questions whether it is really plausible that such an output shock could be caused by a productivity shock which lead to inter-temporal substitution on such a scale, as Prescott’s model would predict.

Measuring Inequality

Inequality is the difference between the incomes of the rich and the poor and there are a number of different measures to see how inequality has been changing over time and between countries. National accounts do not provide any data on how income, consumption or wealth is distributed across households [OECD] instead they provide overall income for the country, and dividing this by the population gives us the average income of the nation. Instead we need to use household survey data to give us a measure of inequality. Such surveys are not consistent across countries and therefore make international comparisons of inequality difficult. To overcome these issues, and allow more precise measures of international inequality, we might consider aggregating the national accounts data with the survey data. Unfortunately, this is a very difficult task, and may cause more issues than it solves. One such issue is that in survey data, households who own their home when asked their income may not include an imputed value of their rent, but this is done when we construct the national accounts. Deaton believes that this factor alone is responsible for explaining a large majority in the difference between national income as given by the national accounts versus the household surveys.

Search Markets

Economic theory may initially have us believe that firms shouldn’t offer a higher wage than the reservation wage of workers. If they did so then another firm could enter the market, charge below the reservation wage, have lower costs, sell output at a lower price and capture the market. Yet the theory of efficiency wage provides another story, that higher productivity can offset the cost of higher wages (so that a firm offering w>w* isn’t competed out of the market), and more importantly that a firm must offer a wage greater than the reservation wage in order to operate.

The Credit Channel

The credit channel is an enhancement mechanism for traditional monetary policy transmission, not a truly independent or parallel channel. Discuss

The traditional monetary policy transmission works through a number of conventional channels: interest rate effect, exchange rate effect, asset price effect and through expectations. The stance of monetary policy acts as a signal to firms and individuals about what the central bank thinks the future state of the economy will look like, and thus affects investment and spending decisions by agents now based on this. A higher interest rate could imply that the central bank thinks the economy is doing well, which may induce firms and consumers to spend more, because of this signal. [...]

What is Social Ontology and why should Economists care?

Literally, social ontology is the study of social nature and it concerns itself with “how existents exist”1. It is the study of the social realm which includes the “domain of all phenomena, existents, properties”2 whose existence depends upon humans and their interactions. To paraphrase Little “almost all human action is social: socially oriented, socially embedded or socially constructed”6.  So how can it be useful for illuminating the study of economics? If economics is the study of people, and how they interact to form markets, bargain with each other, and more generally interact economically, then we need to examine an economist’s worldview on how these interactions are governed. [...]

The Relationship Between Debt and Growth

The debt-growth nexus has received renewed interest among academics and policy makers alike in the aftermath of the recent global financial crisis and the subsequent euro area sovereign debt crisis. Discuss whether there exists a tipping point, for public indebtedness, beyond which economic growth drops off significantly; and more generally, whether a build-up of public debt slows down the economy in the long run.

This essay explores the effects of debt on growth, by first examining the theoretical mechanisms that high debt can lead to lower growth before examining some of the empirical literature to see whether we observe such a relationship. [...]

Investment Functions

In this article we explain the fundamental factors determining investment decisions of firms, which comprise the investment function. By determining the structure of the investment function we can hypothetically estimate this and thus predict how much a given firm ought to be investing, given economic fundamentals. This is interesting because we could then aggregate such functions – i.e. add up each firm-specific investment equation – to get a measure of what total investment by private firms in the economy ought to be investing. By comparing this amount with actual levels of investment we can derive a measure of the investment gap. [...]

GDP Data Revisions

The importance of accurate GDP data is often understated and there is a need to document carefully the extent of revisions to statistics on economic activity and evaluate how this affects macroeconomic policy as well as examine ways to improve statistical methods.

The Office for National Statistics (ONS) has a trade-off between providing estimates on measures of economic activity, such as GDP, quickly, but also accurately. Information sources used to calculate GDP often take up to three years to arrive, but policymakers need to know before this the state of the economy. As such, the ONS uses a fraction (44%) of the eventual data source to make first estimates of the GDP. [...]

Why has wage inequality risen?

Wage inequality has increased in many economies in recent decades. Discuss the three leading hypotheses regarding the causes of this increase. What does the empirical evidence tell us about the quantitative importance of each of these factors?

The US economy has almost double since the 1970s, and labour productivity has risen over this period. Yet real wages for the median worker hasn’t changed much since the 1970s, and below-median male wages have fallen; showing that the increasing size of the economy hasn’t been fairly distributed.

The rise in inequality between high skilled and low skilled workers is particularly pronounced, with Autor finding that households which are composed of university education individuals earned $30,298 more than non-skilled workers in 1979, but this rose to $58,249 by 2012, an increase of 92%. [...]