The Jackson Hole papers | FT Alphaville

The Jackson Hole papers

Londoners are off today and many Wall Streeters are stuck at home because of ongoing New York transit problems, so if you’re bored and in need of reading material, below you’ll find links to the papers along with brief excerpts from their abstracts and conclusions.

(These are the academic papers, not the speeches given by BernankeTrichet and Lagarde.)

The Future of Economic Convergence, by Dani Rodrik:

There is good news and bad news in this paper.  The good news is that there is unconditional convergence after all.  But we need to look for it in the right place: in manufacturing industries (and possibly modern services) instead of entire economies. The key to growth is getting the economy’s resources to flow into those “convergence industries.”

The bad news is that this is not easy to accomplish. … Continued rapid growth in the developing world will require pro-active policies that foster structural transformation and spawn new industries – the kind of policies that today’s advanced economies employed themselves on the way to becoming rich. Such policies have never been easy to administer.  They will face the added obstacle over the next decade of an external environment that is likely to become increasingly less permissive of their use.

One of the paradoxes of the last two decades of globalization is that its biggest beneficiaries have been those countries that have flouted its rules – countries like China and India that have effectively played the game by Bretton Woods rather than post-1990 rules (controlled finance, controlled currencies, industrial policies, significant domestic maneuvering room).  But as such countries become large players and turn into targets for emulation, the tensions become too serious to ignore. …

Balancing growth with equity: The view from Development, by Esther Duflo:

In a world of perfect markets, the distribution of resources in an economy would not affectinvestment and growth, and the ability to benefit from growth would only depend on one’sintrinsic talents. However, if financial, land, and human capital markets do not functionvery well, the identity of who holds resources in an economy matters for how they are used.The poor can stay poor even if the economy as a whole grows. And growth can be sloweddown because resources are not used in the most efficient way possible. Our understandingof why growth suddenly catches on in a poor country, and even more of what type of growthis inherently “pro-poor” or not is very limited. A long term strategy to balance growth withequity is thus to put in place policies that maximizes the chance that the poor are ableto fully participate in markets, so that when growth starts, they can benefit from it. Thispaper describes market failures in developing countries, and discusses what is known, andnot known, about such policies.

The real effects of debt, by Stephen G Cecchetti, MS Mohanty, and Fabrizio Zampolli:

At moderate levels, debt improves welfare and can enhance growth. But high levels can be damaging. When does the level of debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is bad for growth. For government debt, the threshold is in the range of 80 to 100% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Up to a point, corporate and household debt can be good for growth. But when corporate debt goes beyond 90% of GDP, our results suggest that it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.

Aspirin, Angioplasty, and Proton Beam Therapy: The Economics of Smarter Health Care Spending, by Katherine Baicker and Amitabh Chandra:

The growing share of the U.S. economy devoted to health care spending is cause for concern both because of the share that is publicly financed and because of the inefficiency with which those resources are used. Fueled in part by demographic transitions, unchecked increases in entitlement spending will necessitate some combination of tax increases, the elimination of other public spending, or public debt levels that far exceed those currently observed in Greece. Despite these spending levels, highly cost-effective treatments like aspirin and flu shots are underused, while angioplasty is used in both lifesaving and inappropriate cases and exorbitantlyunproven procedures such as proton beam therapy are generously reimbursed by public programs. Driven by expenditures on such expensive care, public insurance spending is rising unsustainably at the same time that a fifth of the population goes uninsured. In an efficient system, more spending on health care would not be a cause for concern. Achieving this means improving the incentives and infrastructure for providers to deliver – and patients to consume –high-value care, as well as wrestling with the difficult question of whom to cover versus what to cover in public insurance programs. But the wide prevalence of inefficiencies also offers hope, for there is scope for fundamental reforms to improve the productivity of health care spending and the fiscal health of the U.S.

Regulating Finance and Regulators to Promote Growth, by Randy Levine:

The operation of the financial system exerts a powerful effect on national rates of economic growth, the distribution of income, and the proportion of people living in poverty. The impact of financial regulations on the operation of financial systems depends—in reasonably predicable ways—on national institutions, such that there is no universal checklist of growth-promoting policies, but there are broad regulatory strategies. Strategies that focus on how policies and institutions combine to shape the incentives of decision-makers within financial institutions—and within the regulatory agencies themselves—work best, as exemplified by an examination of several current regulatory policies.

Role reversal in global finance, by Eswar Prasad:

Emerging markets have cast off their original sin–their external liabilities are no longer dominated by foreign-currency debt and have shifted sharply towards direct investment and portfolio equity. Their external assets are increasingly concentrated in foreign exchange reserves. Given the deteriorating public debt trajectories of reserve currency economic areas, the long-term risk on emerging markets‘ external balance sheets is shifting to the asset side. Still, emerging markets are looking for more insurance against balance of payments crises even as adverse debt dynamics in advanced economies increase the potential costs of self-insurance through reserve accumulation. I propose a mechanism for global liquidity insurance that would meet this need with fewer domestic policy distortions and force a quicker adjustment of global imbalances. I also argue that the big risks most emerging markets face from rising financial openness are no longer related to dependence on foreign finance but arise because capital flows heighten home-grown vulnerabilities and exacerbate the costs of weak domestic policies and institutions.

Related links:
The Jackson Hole Papers (finally) – FT Alphaville
A Question for the Kansas City Fed – Mark Thoma