The power of your prior: Capital controls

Has anybody heard economists proclaim the dangerous, welfare reducing and inefficiency inducing effects of capital controls? Well, there are plenty of examples from the past few decades, but a noticeable shift is occurring.

Sure, progressives have long touted a Tobin Tax or some such measure. But that the IMF and the Peterson Institute are coming around wasn’t predicted by many. On the IMF, see Duncan Green’s discussion, and the IMF’s survey magazine from a little while ago.

Now, Peterson released a working paper by Jeanne and Korinek, titled “Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach,” and the abstract reads like this:

“This paper analyzes prudential controls on capital flows to emerging markets from the perspective of a Pigouvian tax that addresses externalities associated with the deleveraging cycle. It presents a model in which restricting capital inflows during boom times reduces the potential outflows during busts. This mitigates the feedback effects of deleveraging episodes, when tightening financial constraints on borrowers and collapsing prices for collateral assets have mutually reinforcing effects. In our model, capital controls reduce macroeconomic volatility and increase standard measures of consumer welfare.”

And that’s in a model of a “small open economy in a one-good world with three time periods t = 0, 1, 2 [ ... ] populated by a continuum of atomistic identical consumers, with a mass normalized to one” — meaning, essentially, it’s a micro-founded optimization framework. The power of your prior makes as well such a GE-model compatible with government intervention. Amazing!

And, yes, …

… it’s been a slow month, and the next month will not be more active! I hope to pick it up in July again, and which you all a great start in the summer!!

Mulligan vs. the rest of us

Casey Mulligan is hilarious!

He writes that “[r]ecent events only reinforce the prescription that economic analysis should be rooted in incentives, not voodoo incantations of multipliers and contagion.” And that’s only one of a bunch of gems in his reply to Barbera, which is a reply to Mulligan’s reply to Krugman’s often cited criticism of freshwater economics.

Vodoo incantations! Well, sure, incentives matter, who doesn’t believe that?! But this (p. 3, here) is starker Tobak, as we put it, meaning hard to swallow:

“When it came to this recession, the neoclassical decomposition quickly led me to look further at public policies—absent from some of the other recessions—that might have caused the supply of labor to shift relative to its demand. Like others, I noticed that the federal minimum wage was hiked three consecutive times.”

Barbera doesn’t even zoom in on this, maybe because it’s actually hard to get it into focus: The current global recession was caused primarily by a negative labor supply shock, which is due to increases in US federal minimum wages.

Starker Tobak. The Chicago school has officially declared intellectual bankruptcy.