Explaining the Great Moderation: Credit in the Macroeconomy Revisited

This study in recent history connects macroeconomic performance to financial policies in order to explain the decline in volatility of economic growth in the US since the mid-1980s, which is also known as the ‘Great Moderation’. Existing explanations attribute this to a combination of good policies, good environment, and good luck. This paper hypothesizes that before and during the Great Moderation, changes in the structure and regulation of US financial markets caused a redirection of credit flows, increasing the share of mortgage credit in total credit flows and facilitating the smoothing of volatility in GDP via equity withdrawal and a wealth effect on consumption. Institutional and econometric analysis is employed to assess these hypotheses. This yields substantial corroboration, lending support to a novel ‘policy’ explanation of the Moderation.real estate, macro volatility

"Causes of Financial Instability: Don’t Forget Finance"

Given the economy's complex behavior and sudden transitions as evidenced in the 2007–08 crisis, agent-based models are widely considered a promising alternative to current macroeconomic practice dominated by DSGE models. Their failure is commonly interpreted as a failure to incorporate heterogeneous interacting agents. This paper explains that complex behavior and sudden transitions also arise from the economy's financial structure as reflected in its balance sheets, not just from heterogeneous interacting agents. It introduces "flow-of-funds" and "accounting" models, which were preeminent in successful anticipations of the recent crisis. In illustration, a simple balance-sheet model of the economy is developed to demonstrate that nonlinear behavior and sudden transition may arise from the economy’s balance-sheet structure, even without any microfoundations. The paper concludes by discussing one recent example of combining flow-of-funds and agent-based models. This appears a promising avenue for future research.Credit Crisis; Finance; Complex Systems; DSGE; Agent-based Models; Stock-flow Consistent Models

Risk and De-Collectivisation: Evidence from the Czech Republic

The replacement of wage-labour farms by family farms in Central and Eastern Europe during the transformation has been more limited than was initially expected. In this paper a formal framework is developed in order to analyse the behaviour of family farms and socialist-style farms in the presence of risk, given the typical post-socialist environment. Management incentives, ownership structure, lump-sum transfers and consumption choices are shown to have the potential to limit the size of family farms relative to socialist-style farms. The hypotheses are tested with survey data collected by the author in the Czech Republic.transition, agriculture, structural change, risk, survey data, Risk and Uncertainty, D21, D81, O18, Q12,

This is not a credit crisis

Using an analogy with ancient Babylonia as its leading motive, this Viewpoint argues that the credit crisis is the symptom of an underlying problem. Fuelled by government policies, unprecedented debt levels were run up in industrialized countries over the last quarter century. Present policies of financial sector bailouts are not only unwise use of taxpayer’s money. They maintain economic structures opposed to what Classical liberals such as JS Mill envisaged as a free market economy.credit crisis; debt; Babylonia; Mill; Liberalism

Banks As Social Accountants: Credit and Crisis Through an Accounting Lens

This paper probes the role of banks and credit in our socio-economic system using the metaphor of banks as social accountants (Stiglitz and Weiss 1988). It highlights the credit nature of money, and thus the fact that money is an accounting construct. This motivates the viewing of financial booms and crises through an accounting lens. By accounting necessity, credit creation in deposit-taking institutions implies debt creation. The analysis is that self-amortizing credit to the real sector grows apace with the size of the economy while credit to financial asset markets creates a net debt overhead on the real economy, as illustrated by dissection of long-term credit flows in the US economy. The long boom in credit to the financial sector so led to the growth of debt since the 1980s and onto the credit crisis. Turning to the behavioral aspects of credit and debt growth, the paper also discusses the role of banks and regulators in facilitating the boom. It identifies three ways in which debt growth was de-emphasized in monitoring and policy making.credit; economic history; banks; accounting; crisis; regulation

"Innocent Frauds Meet Goodhart's Law in Monetary Policy"

This paper discusses recent UK monetary policies as instances of John Kenneth Galbraith's "innocent fraud," including the idea that money is a thing rather than a relationship, the fallacy of composition (i.e., that what is possible for one bank is possible for all banks), and the belief that the money supply can be controlled by reserves management. The origins of the idea of quantitative easing (QE), and its defense when it was applied in Britain, are analyzed through this lens. An empirical analysis of the effect of reserves on lending is conducted; we do not find evidence that QE "worked," either by a direct effect on money spending, or through an equity market effect. These findings are placed in a historical context in a comparison with earlier money control experiments in the UK.Quantitative Easing; UK Innocent Frauds; Accounting

The rural non-agricultural economy in transition countries: Enterprise level findings from Armenia

In this paper the findings of a survey conducted in June 2001 in Armenia are summarised. The aim was to gain insight into the nature of the rural non-farm economy (RNFE) in the country. For that purpose, 21 rural communities in 3 regions (called marzes in Armenian) were non-randomly selected. These regions were Ararat, Gegharkunik and Syunik . Since a prime motivation of the research is to study the potential of the NFRE to alleviate rural poverty, selection criteria included poverty levels and the level of development of the RNFE.Enterprise development, rural-non-farm economy, poverty, transition economies

Key emerging and conceptual issues in the development of the rural non-farm economy in developing countries and transition economies

The rural non-farm economy (RNFE) is of interest to governments, multilateral donor organisations, non-governmental organisations (NGOs) and development practitioners because of its increasing prevalence in both developing and transition economies. In many parts of the world, the number of poor people in rural areas exceeds the capacity of agriculture to provide sustainable livelihood opportunities. Even with a decline in fertility rates and a slowing of population growth, this situation will not change significantly. Out-migration is not possible for all types of people, and urban centres cannot (or should not, for economic and social reasons) be assumed capable of providing adequate livelihood opportunities for all those unable to make a living in agriculture. For these reasons, a healthy RNFE holds out the prospect of improved livelihoods for people living in rural areas. This set of circumstances puts the spotlight on the RNFE as a potential vehicle for poverty reduction in rural areas. This paper reviews contemporary empirical and conceptual thinking on the economics of diversity, non- agricultural growth and the rural non-farm economy.Rural non-farm economy, non-agricultural growth, employment, livelihoods, diversity

Something of a Paradox: The Curious Neglect of Agriculture in Development

This paper argues that investment in agriculture has a large and continuing developmental importance in terms of both economic growth and poverty reduction. Moreover, targeted public resources have proven to be indispensable in achieving these results. Both arguments are supported with novel analyses which update and strengthen the traditional case for agriculture-led development with public-sector involvement. But despite the strong case for agriculture-led development strategies, the authors find that over the last three decades the financial resources allocated towards this sector have strongly declined. It is suggested that a shift towards new development paradigms since 1980 might be a significant explanation for this apparent Agricultural Paradox. This conjecture is tested with data on market reform impacts, PRSP contents and analyses of the intellectual resources devoted to the study of agriculture in development by both practitioners and researchers. The authors conclude with a critical discussion of these disturbing trends.

Causes of financial instability

Given the economy's complex behavior and sudden transitions as evidenced in the 2007-08 crisis, agent-based models are widely considered a promising alternative to current macroeconomic practice dominated by DSGE models. Their failure is commonly interpreted as a failure to incorporate heterogeneous interacting agents. This paper explains that complex behavior and sudden transitions also arise from the economy's financial structure as reflected in its balance sheets, not just from heterogeneous interacting agents. It introduces flow-of-funds and accounting models, which were preeminent in successful anticipations of the recent crisis. In illustration, a simple balance-sheet model of the economy is developed to demonstrate that nonlinear behavior and sudden transition may arise from the economy's balance-sheet structure, even without any microfoundations. The paper concludes by discussing one recent example of combining flow-of-funds and agent-based models. This appears a promising avenue for future research