Suchergebnisse

That's the title of a panel discussion at AEI with With Steven B. Kamin moderating, and Jason Furman, Julia Coronado, Nathan Sheets and Desmond Lachman participating. Wednesday, January 24, 1:15 pm Eastern – click to register. (Steve Kamin's last posts on Econbrowser, here and recent discussion of a paper of his here).

Marc Joffe


Most state and local governments file their financial statements on time, but there are some notable exceptions. Among those are the last two cities to declare bankruptcy—Fairfield, AL and Chester, PA—as well as Puerto Rico, the largest municipal bond issuer to ever file a bankruptcy petition. Now another perennially late financial statement filer is getting attention from local media and its state government.
Hopewell, VA, a city south of Richmond, with about 23,000 people, is four years behind in producing audited financial statements. Further, its audits for the years 2015–2018 did not receive "clean" opinions from the Certified Public Accountants hired to review them, suggesting serious irregularities. The 2018 opinion was especially negative, with the auditor observing:
There were material differences between the Treasurer Office's June 2018 bank reconciliation and the City and Component Unit School Board's adjusted general ledger and financial statements. The City, Treasurer's Office and Component Unit School Board were unable to provide sufficient appropriate audit evidence for these material discrepancies in cash transactions.

In connection with federal grant oversight, the auditor also assessed Hopewell's accounting systems and procedures and found them to be inadequate. City management accepted these findings and attributed the problems to "staff turnover, minimal documented procedures/​guidelines."
Hopewell last issued municipal bonds in 2011. At that time, it received strong ratings from all three of the major credit rating agencies. But the city's mounting financial reporting challenges have compromised its credit. In 2017, both Moody's and Standard and Poor's withdrew their ratings due to Hopewell's failure to provide timely disclosure. Fitch followed in 2018.
At a City Council meeting, Ward 1 Councilor Rita Joyner noted the lack of credit ratings and concluded that, as a result, the city could no longer fund capital expenditures. That is not necessarily the case. Many governments issue unrated bonds and Hopewell's bonds traded in the secondary market multiple times (albeit at significantly elevated yields) in late 2022, suggesting that some investors are willing to shoulder the city's elevated credit risk if the city chooses to issue "junk bonds".
In recent months, the State of Virginia has been investigating Hopewell's financial status and offering assistance. The state government took a largely hands‐​off approach to local government finance until the City of Petersburg suffered a financial crisis in 2016. (Petersburg is just a ten‐​mile drive from Hopewell.) In 2017, the state legislature directed the Virginia Auditor of Public Accounts (APA) to create a local fiscal distress early warning system.
But, although the state can now identify distress situations, its intervention options are limited. State law allows the governor to allocate up to $500,000 to provide technical assistance to distressed local government but cannot compel the governing body to accept this assistance.
After determining that Hopewell was in distress, the state hired the firm of Alvarez and Marsal to assess the situation and make recommendations. In May, the consultants issued a 161‐​page report with 27 recommendations including the establishment of a fiscal turnaround project management office, the development of a multi‐​year financial plan, and the creation of new monthly and annual accounts closing processes.
In July, Virginia Secretary of Finance Stephen Cummings sent City Council members a letter, offering to fund an interim City Manager and Finance Director to help implement the consultant's findings if those individuals are approved by state officials. The Council rejected the state's offer by a 4–3 vote. Without Hopewell's cooperation, there is little more the state can do.
North Carolina has a much more aggressive local intervention law. If the state's Local Government Commission determines that a local government's finances have become unsustainable, it can take over "all of the powers of the council as to the levy of taxes, expenditure of money, adoption of budgets, and all other financial powers conferred upon the council by law." Further, the Commission has the power to merge or dissolve local governments which lack a path back to sustainability.
Hopewell's problems illustrate the need for Virginia to adopt a similar set of policies.

Jai Kedia


Recently, CMFA published an article and a working paper that detailed the Federal Reserve's departure from rules‐​based governance following the financial crisis of the late 2000s. As per academics and Fed officials, the era of rules‐​based governance facilitated the Great Moderation – a stable economic period characterized by less volatile macro indicators such as inflation, output gap, and unemployment. In academic parlance, macroeconomists refer to this situation as determinacy. Despite conflicting evidence, the prevailing view is that the Fed facilitated the Great Moderation by establishing a determinate economic environment through rules‐​based governance that focused on keeping inflation low. Previous CMFA papers had posited the question as to whether the Fed's departure from this "successful" era of monetary policy may have instead led to indeterminacy. This article provides evidence that indeterminacy did occur during this period.
Determinacy is a feature of an economic system whereby outcomes such as inflation, output, etc., can be precisely determined based on a given set of initial conditions and policy rules. Under determinacy, the economy (as represented by a mathematical model) has a unique equilibrium outcome. In simple terms, under determinacy, the economy has only one possible resting state and is also stable with no large spirals or variability. Conversely, indeterminacy occurs when there are multiple possible equilibria that could result from the same initial conditions and policy rules. This state can create uncertainty in predicting the future state of the economy, as different equilibria may lead to significantly divergent economic outcomes. Simply put, the economy could end up in multiple possible states, some of which may be highly volatile, depending on how individuals form their expectations and make decisions.
Academics generally believe that a strong Fed response to inflation (a more than one‐​to‐​one increase in the target federal funds rate to inflation changes) can ensure a determinate system. This is known as the Taylor Principle. A greater than one‐​to‐​one response to inflation is deeply entrenched in the economic literature; most empirical macroeconomic studies simply assume determinacy and fix the Fed's response to inflation at a number higher than one or use estimation techniques that entirely exclude the possibility of indeterminacy. This determinacy bias has serious implications for policy analysis because economic models (such as those used by the Fed) exhibit significantly different dynamics in an indeterminate system. Additionally, even approaches that account for indeterminacy, including seminal papers, fail to take consumers' inflation expectations seriously. As noted above, expectations matter drastically when determining equilibrium selection. They should be included in the datasets used by empirical methods.
I utilize a simple macro model – connecting output gap, inflation, and the federal funds rate – to test the determinacy of the U.S. economy during the period when the Fed abandoned rules‐​based governance (2009 through 2022). I use actual U.S. time series data for the three variables listed above as well as a measure of consumers' inflation expectations – one year ahead inflation expectations collected from the Michigan Survey of Consumers.[1] I fit the macro model to the data using a Bayesian estimation procedure under both determinacy and indeterminacy to see which fits the data better.
I find that the model under indeterminacy significantly outperforms its determinate counterpart in fitting the data set. That is, the model under indeterminacy has a much higher "goodness‐​of‐​fit" versus determinacy. Goodness‐​of‐​fit values from Bayesian analysis are unlike the usual R2 value reported from regressions. Bayesian model comparison is conducted through marginal likelihoods which are then converted to an odds ratio (similar to betting odds) called the Bayes factor. The estimated odds of determinacy to indeterminacy are 1 to 1.5 x 1015 – making determinacy an extremely unlikely event. To understand exactly how unlikely, let us compare these odds to another extremely unlikely event – being struck by lightning. The odds of being struck by lightning are much higher in comparison: 1 to 1.5 x 104. In other words, the odds of being struck by lightning are significantly higher than the odds that the U.S. economy was determinate from 2009 through 2022.
Consequently, the probability that the U.S. economy was indeterminate following the financial crisis is nearly 100%. The (indeterminate) model with a 0.57 estimated inflation response coefficient fits the data better than the (determinate) model with a 1.13 coefficient estimate. The results confirm that the Fed did not target inflation in line with the Taylor Principle.
These findings raise an important question: how responsible is the Fed in keeping the economy determinate with a unique and stable outcome? If it is, as several academics and Fed officials have claimed, then they must answer why they did not conduct policy in a way that ensured the economy's determinacy. If they are not responsible for keeping the economy determinate (as several recent studies are now finding), then the Fed's reputation for stabilizing the economy is undeserved, and the public should question why an unelected governmental agency exerts such a high degree of influence over the political economy discourse if it is ineffective in maintaining prices or keeping the economy stable. A forthcoming paper will further examine the history of the Fed's effectiveness in achieving determinacy.
The author thanks Jerome Famularo for providing research assistance during the preparation of this essay. For more information on the model, empirical methodology, and posterior distribution please click here.


[1] Respondents are asked the question: 'By what percent do you expect prices to go up, on the average, during the next 12 months?' The average of all responses is used as the measure for inflation expectations.

Many are worried that the bankruptcy of Evergrande will trigger a domino effect that extends that crisis from the property to the finance sector.

At the height of the financial crisis a decade ago, economists and policymakers underestimated the depth and severity of the recession that would follow. I argue in a paper released today by the Brookings Papers on Economic Activity (BPEA) that remedying this failure demands a more thorough inclusion of credit-market factors in models and forecasts…

China's housing crisis is part and parcel of market socialism, which puts the power of the Chinese Communist Party (CCP) above economic and personal freedom.

In our third and final episode on the 2008 financial crisis, Kate & Luigi look at recent volatility in the markets and try to predict the cause of the next financial crash with help from prominent economists Robert Shiller and Lawrence Summers.

Background The Greek economy went through a steep recession for ten years in the aftermath of the global financial crisis of 2007-2008. What started as a unique episode of a sovereign debt crisis in a monetary union, triggered a banking sector crisis and a sequence of adjustment programmes aiming at macroeconomic stabilization and economic recovery. … Continued

While it is clear that councils are under more pressure now than at any point since the financial crisis, insufficient attention has been paid to how the financial health of local government is measured. This has undermined trust between central and local government in England and discredits the centre's ability to respond to financial challenges, writes Jack Shaw.
The post Better measures needed to flag financial health of local authorities appeared first on Bennett Institute for Public Policy.

After several systemic crises in a decade, emergency politics has taken hold in Europe. In the wake of the 2008 financial crisis and later the Covid-19 pandemic, governments have responded with exceptional measures. Along the way, they have accumulated extraordinary powers. We might be tempted to think that this form of politics is the natural […]
The post In Europe, emergency politics has become unexceptional appeared first on Post-Crisis Democracy in Europe.

Key Findings Stimulants are playing a prominent role in the current U.S. overdose crisis. As stimulant use continues to mount, the need for evidence-based treatment grows more urgent. This brief highlights contingency management, the most effective treatment for stimulant use disorder, and reviews the current barriers to its widespread use along with practice and policy […]

Several questions continue to swirl around the collapse of Silicon Valley Bank and its larger implications. In this special episode, Chicago Booth's Raghuram Rajan – former Governor of the Reserve Bank of India and IMF Chief Economist – joins Bethany and Luigi to explore the risks in the financial system and possible solutions.

Rajan discusses a paper he presented (with NYU Professor Viral Acharya) at the Federal Reserve's Jackson Hole conference in 2022, arguing that the Fed's liquidity provision left the financial sector more sensitive to shocks, and suggesting that the expansion and shrinkage of central bank balance sheets involves tradeoffs between monetary policy and financial stability. Together with the hosts, Rajan discusses the path forward on inflation, given economic and political pressures, and his recommendations on how to manage risks and tradeoffs.

Critics who levy concerns about the size of private financial institutions show little concern about the balance sheet of the Federal Reserve—whose assets have grown exponentially since the financial crisis.

Gunther Schnabl and Thomas Stratmann Ten years after the outbreak of the global financial crisis, banks in the euro area have not recovered. The Euro Stoxx Financials is 65% below the pre-crisis peak, whereas the S&P Financials has come close to the pre-crisis level. The different fate of financial institutions is due to different monetary … Continue reading Unlike the Fed the ECB Leaves Euro Area Banks Unprepared for the Downswing

Romina Boccia


Conservative Washington Post columnist George Will wrote about an idea I've been pitching for several months: a BRAC‐​like fiscal commission to help Congress stabilize the growth in the debt. In his column, titled "A fiscal crisis awaits. Here's a provocative idea for heading it off," Will grapples with the core objection conservatives are prone to raise over empowering an unelected body with vast powers. He writes:
"This nation is slouching into the most predictable fiscal crisis in its history. There is no mystery about what the crisis is; there is clarity about what broadly must be done. There is, however, fatalism about the political system's inability to do it. The fatalism is refutable, but with a mechanism that should make constitutionalists queasy: Should we protect the nation's fiscal future by further diminishing Congress, which would exacerbate the braided problems of a rampant executive and an unaccountable administrative state?"

I am grateful for George Will boldly hitting the nail on the head. It won't be easy to convince Congress to empower an independent, unelected body to propose sweeping changes to major entitlement and revenue programs. Doing the right thing is hardly ever easy. What will be even harder is trying to course‐​correct when this fiscal train goes off the rails. If something cannot go on forever it will stop.
Conservatives feel like they've been burned by Congress delegating too much power to the executive and to unelected regulatory bodies. And they're not wrong. It's one thing to establish independent bodies to further burden the American people with new regulations and more government spending. It's quite another to set up an independent commission to help Congress avoid driving us into a catastrophic debt crisis or slow‐​walk us into becoming a nation in decline.
As the old adage goes: desperate times call for desperate measures.
Who will lend more than $100 trillion to the U.S. federal government over the next three decades—a sum that's more than four times what this government has borrowed over its entire history?

A fiscal crisis is an almost certain outcome of the current unsustainable budget trajectory. Who will be willing to lend more than $100 trillion to the U.S. federal government over the next three decades—a sum that's more than four times the amount that investors have been willing to lend to this government over its entire history?
The major drivers of this brewing fiscal storm are beloved entitlement programs, Medicare and Social Security, whose constituencies will only grow bigger as time goes on. The nation is aging, and older constituents also happen to have the financial resources and the time to amplify their voices in Washington. The fact that 95 percent of long‐​term U.S. unfunded obligations originate from Medicare and Social Security spending growth be darned, "don't touch seniors' benefits", those running for office are told.
Asking politicians running for office to reform entitlement programs is like asking astronauts in space to shut off their oxygen.

An understanding of how incentives work dictates that asking politicians to self‐​sacrifice for the greater good is a futile attempt. Will suggests:
"Adopting Boccia's recommendation — "a new mechanism for forcing action" — would be an admirable acknowledgment by Congress of an unadmirable weakness."

Without reforming underfunded entitlement programs, the best case scenario is a much slower growing U.S. economy that blocks pathways of opportunity for people to rise above the hand they were dealt at birth. This would alter the very fabric of our nation, turning an exceptional country, that churns out entrepreneurs and innovators like no other, into yet another gerontocratic nanny state. The old country has plenty of those.
In the worst case scenario, America may be staring down the barrel of a fiscal crisis that nobody knows when it will trigger. But when it does, the outcome will be catastrophic, likely making the economic repression of the financial crisis of 2008 and the post‐​pandemic inflation look like blips.
The magnitude of America's fiscal challenge and the political sacrifices it will demand hasn't escaped the watchful eyes of the world's major credit agencies. Fitch Ratings followed S&P's 2011 decision just last week, downgrading U.S. Treasury bonds from AAA to AA+. More downgrades could lie ahead.
A BRAC‐​like fiscal commission has the potential of overcoming the polarization and policy gridlock plaguing this Congress, addressing directly "the expected fiscal deterioration […], a high and growing general government debt burden, and the erosion of governance…" Fitch cites in its rating decision.
The cure in this case cannot be worse than the disease. Delegating broad legislative authority to a fiscal commission may seem like a step too far. Why not just ask the experts for advice and leave it to Congress to enact reforms at will, or at least to take an up‐​or‐​down vote? Congress has tried this approach before, and not just once. It's failed nearly every time. George captures my views perfectly when he writes:
Boccia has the courage of her conviction that the alternative is even worse than this aspect of her proposal: The commission's recommendations must be "self‐​executing upon presidential approval, without Congress having to affirmatively vote on their enactment." With a bracing candor reminiscent of another realistic child of Italy (Machiavelli, in "The Prince"), Boccia says: Making the commission's recommendations self‐​executing without Congress's having to endorse them is necessary to give legislators "political cover to vocally object to reforms" vital to the national interest but impossible to enact by normal procedures.

In the words of Machiavelli, in "The Prince": "Wisdom consists of knowing how to distinguish the nature of trouble, and in choosing the lesser evil."