Category: Economics

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Summary of Gregory Mankiw and Ricardo Reis:                                                                      “Friedman’s Presidential Address in the Evolution of Macroeconomic Thought”

Fifty years ago Milton Friedman delivered his presidential address ^[1] to the American Economic Association. His speech is the third most-cited presidential address, preceded only by those of Kuznets ^[2] and Schultz ^[3], with more than 7500 citations. Why has it been so influential? Friedman stressed his opinion, built over years of study of monetary theory and history, distinguishing what monetary policy could and could not do. In less than 17 pages, with a simple writing not common to most of economic papers, without any equation or complicated model, he challenged the mainstream thought, opening a new era in macroeconomic research.

In occasion of this anniversary, Gregor Mankiw and Ricardo Reis explore the state of the art at that time, the main points of the address and the consequences it had not only on the field but most importantly on policy in a recent paper, “Friedman’s Presidential Address in the Evolution of Macroeconomic Though”, published in the Journal of Economic Perspectives.

Looking back at the beginning of the 60s, the mainstream thought in macroeconomics was the Keynesian one, based on Hicks and Hansen’s simplification of the general theory: the IS-LM model as a building block, accompanied by the belief that the Phillips curve was an actual instrument in the toolkit of policymakers and finally that the long-run behaviour of the economy was the results of the sum of Keynesian short runs. The Keynesian approach to the short and medium run, corrected with the advance made by theorists, is still the starting point of any introductory course on macro, while most of students are initiated to long-run theory through the Solow growth model.

On the contrary of Keynes, Friedman was  convinced that the long-run is the realm of classical economics and thus monetary policy, being neutral, cannot do anything to change real variable like the natural rate of unemployment which is pinned down by the characteristics of the market structure. Moreover, according to his view, the trade-off between inflation and unemployment is always necessarily temporary, as expectations evolve through time, frustrating central bank’s attempts. Milton Friedman’s definition of long-run was indeed the time horizon over which people become informed and align their expectations to the reality. The ground for the rational expectations revolution (and later the development of the RBC model) had been put in place, even though Friedman thought expectations were slow to adapt, sluggish rather than rational.

Following Friedman’s reasoning, central banks cannot take advantage of the Phillips curve infinitely to control real variables in the long run, as it will eventually disappear as expectations adjusts (it should be stressed that he did not consider feedbacks between inflation and unemployment in a fashion like the modern Taylor rule). Notwithstanding this view, and the fact that monetary policy is not timely but takes time to exert its effects, he was not a complete advocate of passive policy, as he believed that monetary policy and credit policy could be used to offset disturbances caused by other sources like fiscal policy (yes, he considered fiscal policy a disturbance, didn’t you know?). He finally proposed to use the rate of growth of some monetary aggregate as the baseline instrument of monetary policy, ruling out the exchange rate and the interest rate instead.

But decades have passed, and nowadays monetary policy could not be more different than that simple rule, with balance sheet policy, fine tuning operations and unconventional “weapons” used by central banks all around the world to cope with the crisis and impaired transmission mechanisms. Monetary policy today is mostly based on the interest rate instead, given its central role in asset pricing and as a driver of investment and saving decisions, and the paper explains the role of monetary policy today, digging into the current ideas which Friedman would have agreed with as well as those he would have opposed. Just to cite one, Galí and Gertler ^[4] point out the “significant role of expectations” in the transmission mechanism of monetary policy (which Friedman would be totally fine with), as opposed to “the importance for the central bank of tracking the flexible price equilibrium values of the natural levels of output and the real interest rate” which fosters the monetary policy activism criticized by the Nobel prize laureate.

The final section of the paper illustrates the “road ahead” and current research themes (and associated real world problems) which relate to Friedman’s theories. First, the natural rate hypothesis clashes against the stagnation affecting our economies, with the latter opening both to the competing views of hysteresis and shortage of aggregate demand. Second, the Philipps curve is still alive as a synonym of nominal rigidities and investigation of price and wage setting flourishes as that on expectations, recently driven by progresses in surveys and experimental/behavioural economics.

On the policy side, the effects of massive central banks interventions on the potential of fiscal authorities and their constraint and vice versa ask for a compelling understanding, as well as the role of liquidity in financial markets, the potential of macroprudential policy and finally the effectiveness of macroeconomic policy at the zero lower bound. As a matter of fact Friedman did not discuss the last two, which are today central issues in macroeconomic policy: the view that monetary policy could be ineffective and different instruments are needed as the interest rate approaches zero was Keynesian, and he did not reserved a role in macroprudential regulation to central banks. On the contrary, today it is recognized that monetary authorities should pay attention to credit variables as they are related to potential risks for financial stability and crises and ultimately to the potential functioning of the transmission mechanisms of monetary policy, in good and bad times.

Concluding, Mankiw and Reis article on the Journal is accompanied by two other related essays  “Should we reject the natural rate hypothesis?” by Blanchard and “Short-Run and Long-Run effects of Milton Friedman’s Presidential Address” by Hall and Sargent, which further contribute to the discussion surrounding Milton Friedman’s inheritance.

 

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^[1] https://www.andrew.cmu.edu/course/88-301/phillips/friedman.pdf

^[2] “Economic Growth and Income Inequality”, The American Economic Review, 1955

^[3] “Investment in Human Capital”, The American Economic Review, 1961

^[4] “Macroeconomic Modelling for Monetary Policy Evaluation.”, Journal of Economic Perspectives, 2007

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By Marco Albori (Economics ’18)

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We are pleased to give you a first ever glance at the new Welcome Kit by Barcelona Graduate School of Economics (limited to one per Master student).

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Orestis shares his recent work on bitcoin, joint with professors Theodore Panagiotidis (Univeristy of Macedonia) and Thanasis Stengos (University of Guelph).

The paper is in press and currently available online at Finance Research Letters. It first appeared as a working paper of the Rimini Centre for Economic Analysis (RCEA).

Extended abstract: Bitcoin has recently received increased attention by both investors and researchers. The consumer base, transaction frequency in the digital currencies market and the number of businesses and organizations accepting payments in bitcoin have been rapidly expanding.

In this paper, within a Least Absolute Shrinkage and Selection Operator (LASSO) framework, we examine the significance of factors such as stock market indices, exchange rates, gold and oil, central bank rates, internet trends and policy uncertainty as drivers of bitcoin returns for alternate time (sub)periods within 2010-2017. The advantage of LASSO is that it performs coefficient shrinkage (even setting some coefficients to zero) and in this way automates model selection. Search intensity and gold returns emerge as the most important factors for bitcoin returns.

References

Panagiotidis, T., Stengos, T. and Vravosinos, O. (2018). On the determinants of bitcoin returns: a LASSO approach. Finance Research Letters, doi: 10.1016/j.frl.2018.03.016

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By Roberta Sgariglia (International Trade, Finance, and Development ’18)

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Ideally, in the best of possible worlds, we would not need a day when we are reminded of exceptional women in science and statistics on gender quotas in American research departments. However, such is the current state of things, and in this relatively brief article I will report the results of a hectic, imperfect and rather personalized attempt I made to address some of the myths, common ideas and stereotypes regarding the role of women in science. The main insights have been drawn from Halpern, Benbow et al (2007), a reading I highly recommend.  I will also briefly share some highlights from the story of Rita Levi Montalcini, who is a source of great inspiration for me, and whose book In Praise of Imperfection this article is named after. As I hope will become clear, I chose this title because of the complex and troubled relationship women generally have with imperfection as well as, obviously, the great consideration I have of Levi Montalcini’s work.

The question of whether women can contribute meaningfully to science, how they compare to men in terms of “ability”, whether or not they are underrepresented in STEM academic environments was of little interest to me until fairly recently. As a matter of fact, I have been raised in a country where the greatest strength of the public educational system lies in humanities, classics and history. This particular feature of the Italian “liceo classico” is incredibly enriching in many respects, and it provides students with a unique, though slightly outdated, understanding of the world. Later in life there is always time to gain hard skills that are more in demand, but what does acquire shape in these crucial years for personality formation is a general tendency to see the world through non-scientific “lenses”. Piero Angela, perhaps Italy’s most famous science journalist (who was awarded 10 degrees ad honorem  in a broad range of disciplines), indeed notes that Italian culture is still heavily humanities-centered, and this significantly hampers Italian productivity and growth prospects. Very few children in general see themselves as scientists, let alone girls. Therefore, part of the reason why we need a “Women in Science” day is the fact that some countries and societies do not invest enough in scientific research, and do not understand its value in modern economies.

To start with, we need to address a question that I find rather fascinating: can observed differences in female and male behavior and skills be traced back to structural differences in the brain? If that were the case, perhaps our scope for action would be limited. Contrasting evidence has been found on this matter. Male brain size seems to be higher,  which however tells us little about brain functions, the amygdala seems to be larger for men on average as well, and recent studies find that women tend to have thicker prefrontal cortices, which translates into higher general intelligence and cognitive ability, a result that is obviously sensitive to how such a characteristic is defined, measured and sample size used.

However, most researchers point out that there are effectively more similarities than differences, and an interesting study of 1400 individuals by the University of Tel Aviv finds that brains are “patchworks of forms” that do not fit into male or female categories, as defined by an index of “maleness” and “femaleness”. Researchers involved in this project argue that the majority of brains observed could be described as a “mosaic” of female and male structures, and therefore it does not make sense to speak about female or male “nature” ex ante. A significant portion of heterogeneity can be accounted for by environmental factors affecting the biological development of the brain. However, no consensus has been reached on these matters. What is worth mentioning though is an idea that is thoroughly explained in Halpern et al (2000): it is extremely difficult to separate biological and environmental factors in brain development and consequently other outcomes deriving from it. As a matter of fact, prenatal hormones as well as other hormones released later in life can develop differently depending on the experiences of the individual in question, as hormonal secretion is altered by the environment. This statement is reassuring: it tells us that there is no reason why women should, a priori, be less competent scientists.

Having spent some time on a somewhat biological excursus, let me address the common perception that women may lack or have less “cognitive abilities”, especially those necessary to thrive in science and mathematics. This statement was also made in 2005 by no less than Lawrence Summers. As explained in Halpern et al (2007), evidence has been found that there are differences in some psychological variables between men and women (see Hyde, 2005). However, these discrepancies are generally measured based on the following broad categories of core cognitive skills: verbal, visuospatial, quantitative skills, general reasoning as well as measures of working memory, perceptual speed and mechanical reasoning. First and foremost, these categories are not unitary constructs, they comprise a wide range of skills and activities, for which men and women may have different predispositions. For instance, the two sexes may naturally excel in different components of language use, or different aspects of image processing in the range of visuospatial abilities. In general, women seem to fare better in verbal, memory and general reasoning, while men in quantitative and visuospatial skills. However, as discussed above, we have reason to be skeptical of these generalizations.

This brings me to the most important point I want to make. There is consensus that girls generally receive higher grades in school, and that, even when lacking the initial foundations in a specific subject, they tend to perform better in the long run (see Dwyer, Johnson, 1997). They also fare worse in admission and standardized tests than their counterparts, but it has been proven that the latter underpredict academic performance. Bearing this in mind, we should also note that there are no “science abilities” per se: success in STEM research requires a wide range of skills, capabilities, approaches that complement one another and are used simultaneously. Given the evidence on girls’ and women’s ability to learn, and learn effectively, a strong case can be made for higher female involvement in science, a field where thinking differently and rigorously is an asset rather than a restraint.

To conclude, I have provided substantive evidence to back the idea that women can not only contribute to science, but can in fact thrive in all sciences. A complex set of factors is holding them back, and this would be a great subject for another article, but in this one I will mention three in particular, and explain how they are connected: perfectionism, low self-esteem and interiorized societal expectations. As a matter of fact, it is understood that women generally have lower self-esteem than their male counterparts, and take action when they are sure they will succeed, basing perception of their own capabilities (and often also self worth) on exterior feedback and reinforcement mechanisms.  This often results in girls and women setting higher standards for themselves than necessary, and striving for an unattainable perfection which they believe is out of their reach. This was one of the main issues Rita Levi Montalcini strived to address in her book In Praise of Imperfection and in her personal life. A Jewish woman, political refugee and Nobel laureate in neurobiology, Rita argued that just like the human brain, an incredibly sophisticated creation, is inherently flawed, we should not strive too hard for perfection, as it is not the essence of nature nor life . Moreover, she encouraged young people, men and women, to “think of the future”, “think of what you can do and do not fear anything”, to build one’s own path and follow one’s own aspirations. Rita is one of the many exceptional women that set the example and took revolutionary stances on controversial matters.  I look forward to a time when great female minds become the norm rather than the exception.

References

Dwyer, C.A., & Johnson, L.M. (1997). Grades, accomplishment, and correlates. In W.W. Willingham & N.S. Cole (Eds.), Gender and fair assessment (pp. 127–156). Mahwah, NJ: Erlbaum

Halpern, Benbow et al (2007). The Science of Sex Differences in Science and Mathematics, Association for Psychological Science, Volume 8

Halpern, D.F. (2000). Sex differences in cognitive abilities (3rd ed.). Mahwah, NJ: Erlbaum.

Halpern, D.F. (2004). A cognitive taxonomy for sex differences in cognitive abilities. Current Directions in Psychological Science, 13, 135–139

Hyde, J.S. (2005). The gender similarities hypothesis. American Psychologist, 60, 581–592.

A year ago, master’s student in the Barcelona GSE Finance Program, Patrick Altmeyer gave a talk at TEDx University of Edinburgh on how positive impact European integration has had and should continue to have on our lives contrary. It provides us with greater freedom to choose, learn, exchange ideas, experience, develop. Here he describes his experience as a TEDx speaker and expands on the subject of the talk based on his experience as a student in Barcelona:

“TEDx at the University of Edinburgh was a very challenging and rewarding experience. I loved the thrill of speaking in front of hundreds of people and would definitely enjoy doing something similar again. It also provided my fellow speakers and me with a unique platform to speak out and actually reach people. I was at the time and still am bothered by growing pessimism about the idea of European integration. With my speech I intended to remind people of what’s at stake if in face of undeniable difficulties we simply give up on Europe and return to nationalist agendas.

Experiencing at first hand the recent political developments here in Barcelona has been a true reality check for me. The call for secession is by its very nature anti-unionist. But somehow the many peaceful independence supporters I have seen in the streets – among them many of my Catalan friends – have nothing in common with what we would generally think of as nationalists. Their opponents love to portray the Catalan separatists as anti-European (and themselves as saviours of the union), but personally I don’t buy that. I have realised during my time here that a strive for regional identity can go hand in hand with an open mind for Europe. One of today’s biggest challenges for supporters of integration is therefore to promote a sense of European unity while at the same time recognising that we are a very diverse group of people.”

 

You can watch his TEDx talk from January 2017 here, as well as discover what triggered the idea for this TEDx talk here.