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Reporter NATIONAL BUREAU of ECONOMIC RESEARCH NBER Reporter NATIONAL BUREAU OF ECONOMIC RESEARCH A quarterly summary of NBER research 2015 Number 2 Program Report ALSO IN THIS ISSUE International Finance and Macroeconomics Jeffrey A. Frankel In the years since the severe global financial crisis of 2008,1 macro- prudential policies have attracted interest as a potential additional set of tools to complement ordinary monetary policy, a possible means of counteracting financial market excesses and subsequent crashes. Political Institutions and 10 In the six years since my last report,2 members of the International Comparative Development Finance and Macroeconomics Program have written over 600 working The Economics of Happiness 14 papers. Many have been published subsequently in leading journals. Understanding the Effects 18 There is not space here to summarize all or most of them. Instead, I of Early Investments in Children will concentrate on recent research on international macroprudential How Powerful Are Fiscal Multipliers 21 regulation. All of the working papers in the International Finance and in Recessions? Macroeconomics Program can be found on the program’s publications NBER News 25 page, http://www.nber.org/papersbyprog/IFM.html. We have long had microprudential regulation of banks and secu- Conferences 25 rities markets. But macroprudential thinking begins with the obser- Program and Working Group Meetings 33 vation that the whole of the financial system is more than the sum of Bureau Books 42 the parts. A micro-prudential regulation might, for example, limit the loan-to-value ratio for individual mortgages or set capital minimums for individual lenders at levels that are figured by taking the proba- bility of housing price fluctuations as exogenous. Thus it is a “partial equilibrium” approach. A macro-prudential approach recognizes that housing prices are endogenous, and that during a credit-fueled hous- ing boom, the probability of a crash is greater and so regulations on individual borrowers and lenders may need to be set more stringently. Financial regulators need to think about business cycle fluctua- tions, and macroeconomic policy-makers need to think about financial regulation. It is not just banks and private financial institutions that were led by a micro perspective into thinking that default probabilities were independent across households, and that therefore treated mort- gage-backed securities as virtually riskless. Some regulatory agencies also neglected the correlation across borrowers and so underestimated Reporter OnLine at: www.nber.org/reporter the possibility that many mortgages could fail els in which labor markets and goods tions imported from abroad, materially simultaneously in a housing downturn. markets do not always clear. The collat- heighten the risk of financial crises.16 NBER Reporter This survey of recent NBER research eral constraint acts as a financial accel- Some countries have had success using on international macroprudential policies is erator, magnifying economic downturns. regulations in the housing sector to dis- divided into four distinct areas: (1) national Monetary policy may not be adequate to courage households from excessive mort- The National Bureau of Economic Research is a private, nonprofit research orga- prudential policies that address macroeco- combat the recession that results during gaging. The regulations include maxi- nization founded in 1920 and devoted to objective quantitative analysis of the nomic issues in the sense of varying over the the deleveraging phase, especially if the mum ratios of debt service-to-income American economy. Its officers and board of directors are: business cycle; (2) macroprudential regula- nominal interest rate cannot fall enough (DSTI) and loan-to-value (LTV). These President and Chief Executive Officer — James M. Poterba tion that focuses on the composition of debt, because of a liquidity trap, more specifi- become “macroprudential” when they are Controller — Kelly Horak 7 17 Corporate Secretary — Alterra Milone for example treating foreign debt as carrying cally the zero lower bound. In this con- raised or lowered with the cycle. an extra risk beyond that of domestic debt text, central banks may be able, in place BOARD OF DIRECTORS and perhaps restricting mortgage borrowing of monetary policy, to use ex ante macro- 2. Macroprudential Regulation Chairman — Martin B. Zimmerman in foreign currency more than in domestic prudential policies such as debt limits and Vice Chairman — Karen N. Horn in Emerging Markets Treasurer — Robert Mednick currency; (3) a precautionary approach to the mandatory insurance requirements during DIRECTORS AT LARGE national balance sheet with regard, in par- the boom phase. These policies can offset Models of financial market imper- Jeffrey Frankel is Harpel 8 Peter Aldrich Mohamed El-Erian Michael H. Moskow ticular, to foreign exchange reserves; and (4) the overborrowing externality. fections, overborrowing, crises, and mac- Professor of Capital For- Elizabeth E. Bailey Linda Ewing Alicia H. Munnell global liquidity conditions and coordination Financial market shocks can be trans- roprudential regulation were consid- mation and Growth at Harvard John H. Biggs Jacob A. Frenkel Robert T. Parry issues. This survey places some emphasis on mitted to the real economy through the ered appropriate for emerging markets18 University’s Kennedy School. John S. Clarkeson Judith M. Gueron James M. Poterba 9 Don R. Conlan Robert S. Hamada John S. Reed findings from emerging markets. banking sector in particular. Standard long before the financial crisis of 2008 He directs the Program in Kathleen B. Cooper Peter Blair Henry Marina v. N. Whitman bank regulations to reduce risk include10 impelled most economists to contemplate International Finance and Charles H. Dallara Karen N. Horn Martin B. Zimmerman 1. Cross-country Differences in the capital requirements, a limit on leverage, them seriously for advanced countries. Macroeconomics at the National George C. Eads John Lipsky 11 Jessica P. Einhorn Laurence H. Meyer Use of Macroprudential Policies dividend taxes, liquidity requirements, Some of the same lessons and models Bureau of Economic Research and deposit insurance,12 stress tests,13 ongo- that international economists developed is also a member of its Business DIRECTORS BY UNIVERSITY APPOINTMENT One root source of capital market imper- ing supervision of financial institu- to explain the emerging markets’ sudden Cycle Dating Committee, which Jagdish Bhagwati, Columbia Benjamin Hermalin, California, Berkeley fections is the need for borrowers to have col- tions,14 and minimum reserve require- stops of the 1990s, for example, could officially declares the dates of U.S. Timothy Bresnahan, Stanford Marjorie B. McElroy, Duke lateral in order to prove their creditworthiness.3 ments. Pablo Federico, Carlos Végh, and be applicable to Europe and the U.S. as recessions. Frankel was a senior Alan V. Deardorff, Michigan Joel Mokyr, Northwestern 19 Ray C. Fair, Yale Andrew Postlewaite, Pennsylvania A debtor who is up against a collateral con- Guillermo Vuletin find that develop- well. Korea, in particular, has had some staff economist at the President’s Edward Foster, Minnesota Cecilia Elena Rouse, Princeton straint may be forced to sell assets (“fire sale”), ing countries use reserve requirements success with macroprudential measures Council of Economic Advisers in John P. Gould, Chicago Richard L. Schmalensee, MIT driving down the market price and thereby put- countercyclically far more than advanced that vary over the cycle.20 1983–84, served as chief econo- Mark Grinblatt, California, Los Angeles David B. Yoffie, Harvard ting other borrowers up against their own con- countries do (see Figure1), probably as Bruce Hansen, Wisconsin • Regulation of Foreign mist there in 1996–97, and was straints. Javier Bianchi and Enrique Mendoza Liabilities a Senate-confirmed appointee in DIRECTORS BY APPOINTMENT OF OTHER ORGANIZATIONS show how overborrowing carries a pecuniary 1997–99. Earlier in his career, Jean Paul Chavas, Agricultural and Applied Economics Association externality because private agents do not inter- In open economies, he was professor of economics Martin Gruber, American Finance Association Ellen Hughes-Cromwick, National Association for Business Economics nalize how the price of assets used for collat- prudential regulation can- at the University of California, Arthur Kennickell, American Statistical Association eral responds to collective borrowing decisions.4 not be imposed domes- Berkeley, where he joined the William W. Lewis, Committee for Economic Development Their model suggests that financial innovation tically without regard to faculty in 1979. Robert Mednick, American Institute of Certified Public Accountants Alan L. Olmstead, Economic History Association may have played a role in the financial crisis of the international activities Frankel is a member of the Peter L. Rousseau, American Economic Association 2008–09.5 of financial institutions. Bellagio Group and advisory pan- Gregor W. Smith, Canadian Economics Association Many observers warn of the moral hazard In some cases, authorities els for the Federal Reserve Bank William Spriggs, American Federation of Labor and Congress of Industrial Organizations dangers of bailing out creditors or lenders in may decide to treat for- of New York and the Bureau Bart van Ark, The Conference Board a financial crisis. But if the time-consistent eign debt as carrying extra of Economic Analysis. He was The NBER
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