Why Does Music Give Chills?

David Shariatmadari suggests some answers in The Guardian.

  • What’s happening? An “autonomic nervous system arousal, the evolutionarily ancient preparation for fight or flight.” Plus a positive emotional component, related to brain activity and dopamine release.
  • To whom? Not to everybody. According to some estimates, only to every second non-musician.
  • Why? Emotional experiences can be related to specific musical structures like “enharmonic changes” or “appoggiaturas” (examples given in the article), connected with unexpected, dramatic shifts that force the listener to pay attention. Add to this memories and “feelings of transcendence.” Maybe music helps to form bonds with other human beings or it played a role in the development of language. “Music simply taps into [linguistic ability] in the same way that drugs tap into a system that wasn’t designed for drugs”.
  • Example: “The last few minutes of Bach’s Mass in B Minor, the last page or so of the Dona Nobis Pacem.”

Family Constellations

A documentary on (German-language TV channel) SWR looked into “family constellations,” a

method which draws on elements of family systems therapy, existential phenomenology and Zulu attitudes to family…. a Family Constellation supposedly attempts to reveal a previously unrecognized systemic dynamic that spans multiple generations in a given family and to resolve the deleterious effects of that dynamic by encouraging the subject to accept the factual reality of the past. (Source: Wikipedia)

The documentary covers one session. It does not report on the substantial controversy surrounding the method and its proponents.

Some information in German: therapie.de; Wikipedia.

Corporate Taxes: Difficult International Coordination

The Economist discusses proposals for improved consistency of international company taxation with the aim to counter firms’ “profit shifting.” Harmonization does not seem to constitute a Nash equilibrium. Tax rates on “patent boxes” typically are much lower than the headline rates.

Real Estate as Retirement Asset?

How many years of care in a nursing home does a typical single family house buy? In Der Spiegel, Christina Elmer, Patrick Stotz und Achim Tack have done the math for Germany. Accounting for price variation in care and real estate yields large regional differences: 3 years in poor regions in Eastern Germany versus 40 years in downtown Munich (see the map in the article).

 

“Politico-Economic Equivalence,” RED, 2015

Review of Economic Dynamics 18(4), October 2015, with Martín Gonzalez-Eiras. PDF.

Traditional “economic equivalence” results, like the Ricardian equivalence proposition, define equivalence classes over exogenous policies. We derive “politico-economic equivalence” conditions that apply in environments where policy is endogenous and chosen sequentially. A policy regime and a state are equivalent to another such pair if both pairs give rise to the same allocation in politico-economic equilibrium. The equivalence conditions help to identify factors that render institutional change non-neutral and to construct politico-economic equilibria in new policy regimes. We exemplify their use in the context of several applications, relating to social security reform, tax-smoothing policies and measures to correct externalities.

Ukraine Restructures Its Debt

In the FT, Elaine Moore and Neil Buckley report that Ukraine secured a restructuring deal with its creditors. The deal includes a 20% haircut on some bonds as well as new GDP-linked securities. The FT writes:

The IMF alluded to the uncertainty in early August when it reiterated that although it expected Ukraine’s debt operation to be completed, it was willing to support the country even if debt discussions failed and a moratorium was imposed. However, the repercussions of Ukraine defaulting on its debt would have been severe. Ukrainian bonds, issued under English law, contain cross-default clauses that mean missed payments on one can trigger default on all, allowing bondholders to demand repayment, drag a country into lengthy legal battles and exacerbating existing economic problems. … If Ukraine succeeds in a debt restructuring it could plausibly return to international debt markets within a yea r… Market prices for Ukrainian bonds have recovered in recent weeks as hopes rose that the country would avoid default …

EU Tax Blacklist

The Economist reports (somewhat belated) about a blacklist put together by the European Union. The EU list aggregates lists of member states which applied different criteria and in parts were outdated. The Economist writes:

As pressure has mounted, however, Brussels has backtracked. At a meeting with the 30 ostracised states last month, it agreed to make clearer reference to efforts that some of them have made to adhere to new tax-transparency standards—though it is not clear if it will ditch the “non-co-operative” label.

Commuting into Switzerland

In the NZZ, Simon Gemperli reports about updated statistics on “Grenzgänger,” people residing outside of Switzerland but commuting into the country for work (press release by the Federal Statistical Office). About 300’000 people fall into that category. Since 2001, their number has doubled while the number of resident foreigners in Switzerland has increased by 25 percent and the total resident population has grown by 12 percent.

At the end of 2014, 8.2 million people resided in Switzerland; 2.0 million of them were non-Swiss (source).

Good and Bad Reasons for Greek Debt Relief

In a Vox column, William Cline argues that

it is important to recognise that the headline debt figure overstates the true burden of Greek debt. Because most of the debt is owed to official sector partners at concessional interest rates, the interest burden is much lower than would usually be associated with the same gross debt. Under the Fund’s own criterion for sustainability in these circumstances (ratio of gross financing needs to GDP), Greek debt should remain within an acceptable range at least through 2030. It is questionable to base debt relief policy on problems that might or might not materialise beyond such a distant horizon. Moreover, most of the projected sharp increase in debt could be avoided by carrying out bank recapitalisation directly from the European Stability Mechanism (ESM) to the banks, rather than through the Greek government as an intermediary.

There is still an important potential role for using interest rate relief, for two purposes. First, if fiscal balances fall below target because of lower than expected growth (rather than policy slippage), a portion of interest otherwise accruing could be forgiven to avoid the need for additional fiscal tightening and its recession-aggravating consequences. Second, because Greek unemployment is at depression levels (26%), special employment programmes would seem appropriate, and forgiving a portion of the interest due could provide a significant source of funding for this purpose.

Cline also discusses the claim that Eurozone loans mainly saved Eurozone banks:

  • not true, they received only one-third of the official sector support;

that the Troika called for too much austerity:

  • true, the cyclically adjusted primary balance swung from -13.2% of GDP in 2009 to +5.3% in 2014, much more than in Portugal, Spain or Ireland;
  • but Greece was cut off from financial markets;
  • and Eurozone support as a share of GDP exceeded 100% in Greece compared with roughly 30% in Ireland and Portugal or 5% when the US supported Mexico;
  • “even at the upper bound of the IMF’s upward-revised multipliers (1.7), smaller spending cuts would not have boosted GDP and revenue by enough to pay for themselves;”
  • and the adjustment mostly occurred in the early years when spreads were high and would have been even higher with less adjustment.

Cline estimates that the third rescue package will raise Greek net debt by 10-15 billion Euros.

Long-Term Interest Rates, Now and Then

A report by the White House Council of Economic Advisors surveys long-term interest rates. The “key takeaways” include:

Real and nominal interest rates in the United States have been on a steady decline since the mid-1980s. Declining interest rates are a global phenomenon. … [F]orecasters largely missed the secular decline of the last three decades.

The Ramsey growth model implies a link between labor productivity growth, per capita consumption growth and the real (inflation-adjusted) interest rate. Historically, periods of low real long-term interest rates have tended to coincide with low labor productivity growth. Projections of labor productivity growth, while imprecise, suggest 10-year real interest rates in the range of 1.5 to 3.5 per cent.

Asset-pricing models that incorporate risk suggest that the long-run nominal interest rate is the sum of expected future short-term real rates, expected future inflation rates, and a term premium. The 10-year rate in ten years that forward transactions in nominal Treasuries imply is currently 3.1 percent. Forward transactions in the market for TIPS suggest a long-term real rate just above 1.00 percent in ten years. Adding the CPI inflation rate implied by the Federal Reserve’s PCE inflation target would imply a forward nominal interest rate of 3.25 percent. The term premium in nominal Treasuries is currently estimated to be near zero, with a 2005-2014 mean of 1 percent. These components together suggest a 10-year nominal interest rate in the range of 3.1 (forward Treasuries) to 4.6 percent (based on FOMC forecasts of the long-run federal funds rate).

In a world with financially integrated national capital markets, the general level of world interest rates is determined by the equality of the global supply of saving and global investment demand. Capital markets of advanced economies are now tightly integrated while emerging market economies are becoming increasingly integrated into the global financial system. Low-income economies remain partially segmented from the global capital market. As a consequence of increasing international market integration, long-term real and nominal interest rates are increasingly moving in tandem and have declined along with U.S. rates. Nominal interest rates also tend to be correlated across countries though differences in inflation expectations can produce differences in nominal rates. In a world with uncertainty, global long-term real and nominal interest rates will include risk premiums that can reflect country-specific risk factors. Strong economic linkages, however, reinforce substantial correlation in countries’ long-term bond risk premiums.

Long-term interest rates are lower now than they were thirty years ago, reflecting an outward shift in the global supply curve of saving relative to global investment demand. It remains an open question whether the underlying factors producing current low rates are transitory, or imply long-run equilibrium long-term interest rates lower than before the financial crisis. Factors that are likely to dissipate over time—and therefore could lead to higher rates in the future—include current fiscal, monetary, and exchange rate policies; low-inflation risk as reflected in the term premium; and private-sector deleveraging in the aftermath of the global financial crisis. Factors that are more likely to persist—suggesting that low interest rates could be a long-run phenomenon—include lower forecasts of global output and productivity growth, demographic shifts, global demand for safe assets outstripping supply, and the impact of tail risks and fundamental uncertainty.

Eurozone Finance Ministers Approve Third Greek Bailout

In the FT, Duncan Robinson and Christian Oliver report about Eurozone finance ministers’ approval of the third bailout for Greece, amounting to 86 billion Euros.

Contrary to Germany’s recent demands, the approval came in spite of the fact that the IMF has not committed to participate in the new program. In fact, the IMF has committed not to participate unless Greece’s debt burden is further reduced. Finance ministers effectively promised such further cuts in the future.

The deal falls short of what the German government had hoped to secure (see also this previous blog post).

 

MoU between Greece and its Creditors

In the Guardian, Heather Stewarts reports about the contents of the memorandum of understanding that the Greek government and its creditors have agreed on. It contains four pillars:

  • Fiscal sustainability, including pension reform and social welfare review;
  • Financial stability, including bank recapitalization;
  • Growth, competitiveness, investment, including liberalization of consumer markets, labor markets and professions;
  • Modern state and administration, including judicial reform and anti corruption measures.

European Unity and the Principle of Unity of Liability and Control

In its recent special report entitled „Consequences of the Greek Crisis for a More Stable Euro Area,“ the German Council of Economic Experts has stressed the dangers due to institutional deficiencies and discretionary decision making in the Euro area. The executive summary concludes with the statement:

The institutional framework of the single currency area can only ensure stability if it follows the principle of unity of liability and control. Reforms that stray from this guiding principle plant the seeds of further crises and may damage the process of European integration.

See also my earlier contributions here and here.

Greece’s Financial Position Is Widely Misreported

In an FT letter to the editor, Ian Ball, the Chair of CIPFA International (Chartered Institute of Public Finance and Accountancy), argues that Greece’s financial position is widely misreported. He writes:

While the debt burden is commonly cited as being between 175 and 180 per cent of gross domestic product, this number is incorrect and indefensible because it is based on the face value of Greece’s debt that doesn’t take into account long maturities and concessional interest rates, as well as grace periods.

Greek debt, calculated on an International Public Sector Accounting Standards (IPSAS) basis, is significantly lower, and at the end of 2013 was 68 per cent of GDP. If this is not an appropriate method for measuring debt, then every company on major stock exchanges around the world has got its debt measurement wrong. In neither accounting standards nor economic principle is debt measured at face value. This pervasive misunderstanding of Greece’s real fiscal position has seen agreements reached between Greece and its creditors that do not address the real problem and instead may actually intensify it.

See also my earlier blog post.