The macroeconomics of financial crises: How risk premiums, liquidity traps and perfect traps affect policy options

The paper shows that structural models of the IS-LM and Mundell-Fleming variety have a lot to tell about the macroeconomics of the current global crisis. In addition to demonstrating how the emergence of risk premiums in money and capital markets may drive economies into recessions, it shows the following: (1) Liquidity traps may occur not only when interest rates approach zero but at positive and/or rising rates as well; (2) Fiscal policy works even in a small, open economy under flexible exchange rates when the country is stuck in a liquidity trap; (3) Near the fringe of liquidity traps, the risk arises of perfect traps, in which neither monetary nor fiscal policy works when used in isolation, but policy coordination is called for; and (4) Massive financial crises in the domestic money market may even destabilize the economy.financial crisis, credit crunch, liquidity trap, zero lower bound, risk premiums, policy options, fiscal policy, monetary policy, open economy.

Inequality, Development, and the Stability of Democracy – Lipset and Three Critical Junctures in German History

This paper studies the endogenous emergence of political regimes, in particular democracy, oligarchy and mass dictatorship, in societies in which productive resources are distributed unequally and institutions do not ensure political commitments. The political regime is shown to depend on resource inequality as well as on economic development, reflected in the production structure. The main results imply that for any level of development there exists a distribution of resources such that democracy is the political outcome. This distribution is even independent of the particular development level if the income share generated by the poor is sufficiently large. On the other hand, there are distributions of resources for which democracy is infeasible in equilibrium irrespective of the level of development. The model also delivers results on the stability of democracy. Variations in inequality across several dimensions due to unbalanced technological change, immigration or changes in the demographic structure affect the scope for democracy or may even lead to its breakdown. The results are consistent with the different political regimes that emerged in Germany after its unification in 1871.Income inequality, development, democracy, coalition formation, factor endowments, demographic structure.

Clothes for the Emperor or Can Graduate Schools Learn From Undergraduate Macroeconomics?

The current crisis is not only one of financial markets, but also of macroeconomics. Leading scholars call for a paradigm shift away from dynamic general equilibrium models, though some argue that the profession's arsenal already contains the tools and historical lessons needed to deal with such crises. Taking this view to the limit, this note demonstrates that the workhorse models of undergraduate macroeconomics not only permit a refined view and classification of financial crises. These models also identify scenarios under which either policymakers would be ill advised to follow conventional prescriptions, or full-scale depressions loom that cannot be fought by means of fiscal or monetary policy alone.Teaching macroeconomics, lessons, graduate, undergraduate, financial crisis, liquidity trap, risk premium

Grundy Coloring & Friends, Half-Graphs, Bicliques

The first-fit coloring is a heuristic that assigns to each vertex, arriving in a specified order ?, the smallest available color. The problem Grundy Coloring asks how many colors are needed for the most adversarial vertex ordering ?, i.e., the maximum number of colors that the first-fit coloring requires over all possible vertex orderings. Since its inception by Grundy in 1939, Grundy Coloring has been examined for its structural and algorithmic aspects. A brute-force f(k)n^{2^{k-1}}-time algorithm for Grundy Coloring on general graphs is not difficult to obtain, where k is the number of colors required by the most adversarial vertex ordering. It was asked several times whether the dependency on k in the exponent of n can be avoided or reduced, and its answer seemed elusive until now. We prove that Grundy Coloring is W[1]-hard and the brute-force algorithm is essentially optimal under the Exponential Time Hypothesis, thus settling this question by the negative. The key ingredient in our W[1]-hardness proof is to use so-called half-graphs as a building block to transmit a color from one vertex to another. Leveraging the half-graphs, we also prove that b-Chromatic Core is W[1]-hard, whose parameterized complexity was posed as an open question by Panolan et al. [JCSS \u2717]. A natural follow-up question is, how the parameterized complexity changes in the absence of (large) half-graphs. We establish fixed-parameter tractability on K_{t,t}-free graphs for b-Chromatic Core and Partial Grundy Coloring, making a step toward answering this question. The key combinatorial lemma underlying the tractability result might be of independent interest

Teaching Macroeconomics after the Crisis: A Survey among Undergraduate Instructors in Europe and the U.S.

An online survey among undergraduate macroeconomics instructors reveals that roughly half of them were scared when the crisis erupted and remain wary that more may be in the offing. As regards teaching, courses feature much the same lineups of models as they did before the crisis. A striking change concerns public debt dynamics, which receives much more emphasis. Regarding the finer fabric of undergraduate macro teaching, exciting things are going on. A host of topics related to financial markets has entered the curriculum, and there is more interest in economic history, the history of economic thought and case studies.Financial crisis, teaching, undergraduate, macroeconomics.

PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies

This paper asks whether rating agencies played a passive role or were an active driving force during Europe's sovereign debt crisis. We address this by estimating relationships between sovereign debt ratings and macroeconomic and structural variables. We then use these equ-ations to decompose actual ratings into systematic and arbitrary components that are not explained by observed previous procedures of rating agencies. Next, we check whether both systematic and arbitrary parts of credit ratings affect credit spreads. We find that both do, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecy that may drive even relatively healthy countries towards default.Sovereign debt ratings, sovereign default, debt crisis, budget deficit, rating agencies, PIGS, risk premiums, government bond spreads.

Complexity of Grundy coloring and its variants

The Grundy number of a graph is the maximum number of colors used by the greedy coloring algorithm over all vertex orderings. In this paper, we study the computational complexity of GRUNDY COLORING, the problem of determining whether a given graph has Grundy number at least $k$. We also study the variants WEAK GRUNDY COLORING (where the coloring is not necessarily proper) and CONNECTED GRUNDY COLORING (where at each step of the greedy coloring algorithm, the subgraph induced by the colored vertices must be connected). We show that GRUNDY COLORING can be solved in time $O^*(2.443^n)$ and WEAK GRUNDY COLORING in time $O^*(2.716^n)$ on graphs of order $n$. While GRUNDY COLORING and WEAK GRUNDY COLORING are known to be solvable in time $O^*(2^{O(wk)})$ for graphs of treewidth $w$ (where $k$ is the number of colors), we prove that under the Exponential Time Hypothesis (ETH), they cannot be solved in time $O^*(2^{o(w\log w)})$. We also describe an $O^*(2^{2^{O(k)}})$ algorithm for WEAK GRUNDY COLORING, which is therefore \fpt for the parameter $k$. Moreover, under the ETH, we prove that such a running time is essentially optimal (this lower bound also holds for GRUNDY COLORING). Although we do not know whether GRUNDY COLORING is in \fpt, we show that this is the case for graphs belonging to a number of standard graph classes including chordal graphs, claw-free graphs, and graphs excluding a fixed minor. We also describe a quasi-polynomial time algorithm for GRUNDY COLORING and WEAK GRUNDY COLORING on apex-minor graphs. In stark contrast with the two other problems, we show that CONNECTED GRUNDY COLORING is \np-complete already for $k=7$ colors.Comment: 24 pages, 7 figures. This version contains some new results and improvements. A short paper based on version v2 appeared in COCOON'1

Do Social Bots Dream of Electric Sheep? A Categorisation of Social Media Bot Accounts

So-called 'social bots' have garnered a lot of attention lately. Previous research showed that they attempted to influence political events such as the Brexit referendum and the US presidential elections. It remains, however, somewhat unclear what exactly can be understood by the term 'social bot'. This paper addresses the need to better understand the intentions of bots on social media and to develop a shared understanding of how 'social' bots differ from other types of bots. We thus describe a systematic review of publications that researched bot accounts on social media. Based on the results of this literature review, we propose a scheme for categorising bot accounts on social media sites. Our scheme groups bot accounts by two dimensions - Imitation of human behaviour and Intent.Comment: Accepted for publication in the Proceedings of the Australasian Conference on Information Systems, 201

The Macroeconomics of Financial Crises: How Risk Premiums and Liquidity Traps Affect Policy Options

The paper offers an overview of what structural models of the IS-LM and Mundell-Fleming variety can tell about the macroeconomics of economic crises. In addition to demonstrating how the emergence of risk premiums in money and capital markets can generate liquidity traps at positive interest rates and may drive economies into recessions, it shows the following: (1) Fiscal policy works even in a small, open economy under flexible exchange rates when the country is stuck in a liquidity trap; (2) Near the fringe of liquidity traps, there may be perfect traps, in which neither monetary nor fiscal policy works when used in isolation but policy coordination is called for; and (3) Massive financial crises in the domestic money market may even destabilize the econom

PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies

This paper asks whether rating agencies played a passive role or were an active driving force during Europe's sovereign debt crisis. We address this by estimating relationships between sovereign debt ratings and macroeconomic and structural variables. We then use these equations to decompose actual ratings into systematic and arbitrary components that are not explained by previously observed procedures of rating agencies. Finally, we check whether systematic, as well as arbitrary, parts of credit ratings affect credit spreads. We find that both do affect credit spreads, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecies that may drive even relatively healthy countries towards defaul