The Methodology of Modern Macroeconomics and the Descriptive Approach to Discounting

Critics of modern macroeconomics often raise concerns about unwarranted welfare conclusions and data mining. This paper illustrates these concerns with a thought experiment, based on the debate in environmental economics about the appropriate discount rate in climate change analyses: I set up an economy where a social evaluator wants to determine the optimal time path of emission levels, and seeks advice for this from an old-style neo-classical macroeconomist and a new neo-classical (modern) macroeconomist; I then describe how both economists analyze the economy, their policy advice, and their mistakes. I then use the insights from this thought experiment to point out some pitfalls of the modern macroeconomic methodology

Can We Identify Balassa-Samuelson Effects with Measures of Product Variety?

The Balassa-Samuelson hypothesis - i.e. that real exchange rates between each pair of countries increase with the tradables sector productivities ratio between these countries, and decrease with their non-tradables sector productivities ratio - has been one of the most prominent frameworks in open economy macroeconomics for more than forty years. However, empirical studies have often been unable to confirm it. We argue that this might at least in part be due to measurement errors leading to downward-biased estimates. We test the Balassa-Samuelson hypothesis with innovative trade-based vari-ety measures to differentiate between tradables and non-tradables sector productivities that do not suffer from such errors-in-variables. Using a pairwise regression approach, we find stable and very robust Balassa-Samuelson effects over all our specifications

Financial Stability: The Significance and Distinctiveness of Islamic Banking in Malaysia

This paper explores the significance of Islamic banking in Malaysia for stability in the country's economy as a whole. Neither conventional theory nor Islamic economics puts forward a systematic explanation of financial intermediation; consequently, neither is capable of identifying destabilizing elements in the system. Instead, a flow- of-funds approach similar to Minsky's own is applied to the (post-) modern consumption-led) business cycle and financial (and asset) market. Malaysia's structural current account surplus contributes to the overcapitalization of domestic firms. This in turn finances a financial (as opposed to an industrial), consumptionled (instead of investment-led) business cycle, where banking favors destabilizing asset price inflation. Islamic banks operating interdependently with conventional ones contribute to economic destabilization channeling surplus funds from the corporate to the household sector