IMF Working Paper 17/119, May 2017, with Tamon Asonuma and Romain Ranciere. PDF.
Rejecting a common assumption in the sovereign debt literature, we document that creditor losses (“haircuts”) during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999–2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.
On his blog, Roger Farmer advertizes his new book, “Prosperity for All,” and argues that governments should stabilize asset prices:
Following the Great Stagflation of the 1970s, economists backtracked and revived the classical economic theory that had dominated academic economics for a hundred and fifty years, beginning with Adam Smith in 1776 and culminating in the business cycle theory described by Keynes’s contemporary Arthur Pigou in his 1927 book, Industrial Fluctuations. That backtrack was a big mistake. It is time to realize that much, but not all, of Keynesian economics is correct. …
In my book Prosperity for All: How to Prevent Financial Crises, … I do not conclude that more government spending is the right way to cure a depression. Instead, I argue for a new policy in which central banks and national treasuries systematically intervene in financial markets to prevent the swings in asset prices that have such debilitating effects on all of our lives.
The control of asset prices will seem like a bold step to some, but so too did the control of the interest rates by the Open Market Committee of the Federal Reserve System when it was first introduced in 1913. We do not have to accept hyperinflations of the kind that occurred in 1920s Germany. Nor should we be content with the 50% unemployment rates that plague young people in Greece today. By designing a new institution, based on the modern central bank, we can and must ensure Prosperity for All.
And in another post:
The New Keynesian agenda is the child of the neoclassical synthesis and, like the IS-LM model before it, New Keynesian economics inherits the mistakes of the bastard Keynesians. It misses two key Keynesian concepts: (1) there are multiple equilibrium unemployment rates and (2) beliefs are fundamental. My work brings these concepts back to center stage and integrates the Keynes of the General Theory with the microeconomics of general equilibrium theory in a new way.
In his blog, John Cochrane discusses plausible features of habit models (that some other models share):
Consumption moves more with income in bad times.
In bad times, consumers start to pay inordinate attention to rare bad states of nature.
[The habit model] also gives a natural account of endogenous time-varying attention to rare events.
Robert Shiller’s CAPE data.
In a letter to the editor of The Economist, Jeremy Siegel points out that the earnings series underlying Robert Shiller’s CAPE model has changed over the years. He argues that
- mark-to-market accounting implied increased volatility of reported earnings, in particular during the great recession;
- this leads to an overstatement of the CAPE ratio and underprediction of stock returns.
- “The Shiller CAPE ratio remains the best tool for predicting long-term real stock returns. When a time-consistent series of corporate earnings, such as those published in the national income accounts are used instead of GAAP earnings, not only does the predictive power of the CAPE ratio improve, but the current stockmarket does not appear nearly as overvalued.”
A StarCapital note on another in/consistency issue.
In a Project Syndicate post, Axel Weber argues that inflation targeting needs to be rethought.
Within a complex and constantly evolving economy, a simplistic inflation-targeting framework will not stabilize the value of money. Only an equally complex and highly adaptable monetary-policy approach – one that emphasizes risk management and reliance on policymakers’ judgment, rather than a clear-cut formula – can do that. Such an approach would be less predictable and eliminate forward guidance, thereby discouraging excessive risk-taking and reducing moral hazard. … intermediate targets … could potentially be applied to credit, interest rates, exchange rates, asset and commodity prices, risk premiums, and/or intermediate-goods prices. … Short-term consumer-price stability does not guarantee economic, financial, or monetary stability.
Jointly with the Journal of Monetary Economics and the Swiss National Bank, the Study Center Gerzensee organises a conference on asset price fluctuations. The program can be viewed here.