Volume 10, Issue 2, April 2009
The Research Agenda: Marco Bassetto on the Quantitative Evaluation
of Fiscal Policy Rules
Marco Bassetto is a Senior Economist in the Economic Research
Department at the Federal Reserve Bank of Chicago. He is
interested in political-economy models of fiscal policy and in
applications of game theory to the analysis of macroeconomic
policy more in general. This piece reflects the personal views
of the author and not necessarily those of the Federal Reserve
Bank of Chicago or the Federal Reserve System.
Bassetto's RePEc/IDEAS entry
In 2009, the federal government is poised to run the biggest
peacetime deficit in the history of the United States (both in
absolute value and as a fraction of gross domestic product, or
GDP). Current projections suggest that large deficits will
persist in future years, considerably raising the debt/GDP
ratio and putting additional strains on future public finances,
which will soon also be challenged by the retirement of the
These developments are likely to rekindle debate about the
desirability of imposing restrictions on government
indebtedness. Constraints on deficit financing are the norm for
state and local governments in the United States, and they are
part of the European Stability and Growth Pact (SGP) to which
eurozone countries have committed.
There is a large political-economy literature on government
deficits and debt. On the theoretical side, most papers derive
qualitative predictions from stylized models. On the empirical
side, many papers have studied the consequences of different
fiscal constraints on spending and debt (see, e.g., Poterba,
1994 and 1995, Bohn and Inman, 1996); these papers provide
quantitative answers, but they do not contain a model that can
be used for welfare considerations, or to extrapolate to fiscal
institutions that have not been used in the past.
Few papers have attempted to bridge the gap, developing
quantitative theoretical models that can be used to study the
welfare properties of different fiscal restrictions. As an
example, Krusell and Ríos-Rull (1999) have studied the dynamics
of government redistribution under a balanced budget, as a
function of the frequency with which government decisions are
In this piece, I review some recent quantitative contributions
that deal with fiscal deficits and debt, and I discuss open
questions that warrant future consideration.
In the first set of papers, a balanced-budget restriction (BBR)
is necessarily desirable, and the research question is whether
public investment should be subject to the BBR in the same way
as ordinary government expenses. The second set of papers
abstracts from government investment, but introduces a cost of
enacting a BBR, through the inability to smooth tax rates in
response to shocks. It then becomes possible to discuss under
what conditions a BBR actually improves welfare.
2. Does public investment deserve special treatment?
One of the main complaints about the original form of the
European SGP concerned the lack of special provisions for
public investment (see, e.g., Monti, 2005). Its reform in 2005
heeded these criticisms, and now "policies to foster research
and development and innovation" are taken into account in
evaluating whether a deficit is truly excessive (European
Council on the Stability and Growth Pact, 2005, article 1).
Similarly, all U.S. states can borrow to pay for long-term
capital projects. They follow what is known in public finance
as the "golden rule," whereby a jurisdiction should balance its
operating budget, but should be able to borrow to pay for
capital improvements. This rule has a long tradition both in
theory and actual policy, and is mostly justified on the
grounds of "fairness": The operating budget is assumed to
benefit current residents, who should thus bear its cost, while
public improvements offer long-run benefits to future
generations, which implies that it is fair to also ask them to
share the burden by using debt financing.
How important was the 2005 reform of the SGP for restoring
appropriate incentives to invest in public infrastructure? If a
balanced-budget amendment were included in the U.S.
Constitution, would public capital deserve special treatment?
What other features of the environment are relevant in
assessing the quantitative impact of different provisions? We
look for the answers to these questions in a series of recent
In Bassetto with Sargent (2006), we introduce the framework of
analysis and apply it to the Unites States. In this research,
we consider an economy populated by overlapping-generations of
potentially mobile households, in which government spending is
chosen period by period by current residents. In their
decisions, voters only take into account their own present and
future costs and benefits, while they neglect those that will
accrue to other future residents (new people coming of age or
The government produces two types of public goods: One is
durable, while the other is not. The environment is such that a
BBR necessarily yields a Pareto-efficient choice for nondurable
public goods: all households alive are assumed to benefit in
the same way, and to also pay taxes in the same amount. A BBR
forces current households to pay exactly for the services they
get from the government, and yields correct incentives. The
same does not happen for public investment, since current
investment will have long-lasting benefits.
We analyze a constitutional restriction on government
indebtedness that features two key parameters:
a. The fraction of government investment that can be excluded
from the deficit count (e.g., 100% according to the golden rule)
b. The maturity structure of debt, which measures how fast newly
incurred debt has to be repaid.
Two relevant conflicts emerge in the determination of public
investment: the first among current voters, who are
heterogeneous by age and thus face different mortality and
mobility profiles, and the second between current voters and
future residents. With a growing population, the second effect
always dominates under a pure BBR, leading to underinvestment:
the current voters fully take into account the immediate cost,
but they only partially internalize future benefits. Under
further mild restrictions on the demographic structure and/or
the maturity of debt, we obtain the intuitive result that
allowing some issuance of debt alleviates the underinvestment.
In our quantitative calibration, we assume that the government
is allowed to issue long-term debt that has to be repaid
gradually over time through a sinking fund. This is a common
practice among U.S. states. For this case, we establish the
a. The golden rule, with 100% deficit financing of public
capital, tends to perform very well. The precise amount of
deficit financing that exactly yields an efficient outcome is
not affected much by the demographic details.
b. When the constitutional restriction is far away from the
optimum, demographics are important for the magnitude of the
resulting distortions. This is not surprising, since
demographics are what drives the economy away from Ricardian
equivalence in our context.
c. When the borrowing limit treats public capital and
nondurable public consumption in the same way, we find much
bigger distortions at the state level than at the federal
level. At the state level, people discount future costs and
benefits because of mobility more than mortality: at most ages,
the hazard of moving out of state is much higher than the
hazard of death. By contrast, the hazard of moving out of the
United States is negligible.
The quantitative results thus suggest that the current pattern of
U.S. institutional restrictions is well matched to its
theoretical benefits: the golden rule is practiced by the
states, where benefits are likely to be large, but not at the
federal level, where benefits would not be as prominent.
In Bassetto and Lepetyuk (2007), we apply the same model to
European data. As expected, the costs of not including an
investment exemption in the SGP turn out to be modest: European
countries are about as far away from Ricardian equivalence as
the U.S. federal government, with a somewhat higher hazard of
emigration offsetting lower population growth.
More surprisingly, we find that the golden rule performs rather
poorly in the context of the SGP, generating distortions from
overinvestment that are about as big as those for
underinvestment in the original version of the SGP, which
treated operating and capital expenses symmetrically. This is
because the SGP only counts interest payments against a
country's deficit allowance, allowing indefinite rollover of
debt principal. Thus, under the golden rule the additional
taxes needed to pay for public investment would be shifted into
the future much more than the benefits from the investment. Two
possible solutions to this problem are as follows:
a. excluding less than 100% of investment from the deficit
count (in our numerical results, about 50% turns out to be
b. excluding net, rather than gross,investment from the deficit
count. By including depreciation in the deficit count, this
strategy is equivalent to forcing a gradual repayment of the
debt that is issued to finance public investment. The drawback
of this strategy is that depreciation is difficult to measure,
opening a new margin to skirt the rules.
In ongoing work (Bassetto, 2009), I extend the analysis to
account for the possibility of endogenous mobility, as well as
different tax bases. This extension of the research is
particularly important to understand which rules are best
suited for local communities, where the household location
decision is much more likely to be affected by local amenities
Starting from Tiebout (1956), there is a large literature in
local public finance that considers how endogenous location
affects voters' incentives. One of the central themes in this
literature is capitalization: local amenities and debt are
likely to be reflected in the property prices. The theoretical
literature (see, e.g., the survey by Mieszkowski and Zodrow,
1989) has analyzed in detail the environments that are more or
less conducive to capitalization. Most of these papers consider
static environments, with a few considering
overlapping-generations of households living for two periods;
thus they are difficult to use for quantitative policy
analysis. There is also a vast empirical literature that
has tried to estimate the magnitude of capitalization.
I develop a dynamic model with long-lived agents, in which the
parameters of the model can be more easily related to empirical
counterparts, to deliver quantitative predictions about the
effects of different policy rules on the efficiency of
When the tax base is income, endogenous mobility creates two
opposing forces on the voters' incentive to provide public
capital. First, a congestion externality is exacerbated: when
additional public capital makes a location more attractive,
more people move to that location, free-riding on the original
investment and diluting its benefits for the original
residents. Second, capitalization mitigates the externality:
the increased demand for living in the location raises property
prices, which benefits the original residents (assumed to own
their house). Thus, it is important whether equilibrium
adjustments mainly occur through quantity (population size) or
Early quantitative results hint that the price adjustment will
be insufficient to provide appropriate incentives for local
public investment. An explicit rule that favors capital
investment is thus called for. Alternatively, zoning
restrictions are needed to drastically limit adjustment in
3. Should we impose a BBR on the federal government?
Answering this question is one of the themes in recent work by
Battaglini and Coate (2008a, 2008b) and Azzimonti, Battaglini,
and Coate (2008). In their work, in each period the public
sector can use its resources in two different ways: by
providing public goods or by redistributing resources toward
favored groups ("pork-barrel spending"). Public revenues come
from a distortionary tax on labor, and the government has
access to risk-free borrowing and lending, but cannot issue
state-contingent debt. In each period, each group ("district")
has one representative in the policy-making body ("Congress"),
and a random coalition forms and makes a decision.
In this environment, debt is potentially beneficial for
tax-smoothing considerations, such as in Barro (1979) and
Aiyagari et al. (2002). However, access to debt is also a
potential source of inefficiency, since the partisan nature of
some policies introduces a deficit bias akin to what Alesina
and Tabellini (1990) and Tabellini and Alesina (1990) describe.
Specifically, in each period, the coalition in power has the
opportunity to appropriate government funds and redistribute
them to its own constituents. This is ex ante undesirable,
since it involves raising revenues with distortionary taxes and
rebating the proceeds to (a random group of) taxpayers.
However, ex post, the transfers may be beneficial to the group
in power at the expense of the others. Running deficits
constrains future coalitions, which may redistribute government
funds in ways that the current coalition finds undesirable.
Battaglini and Coate (2008a, 2008b) prove that the economy will
necessarily alternate between two regimes:
a. "Responsible policy-making," when the marginal distortions
from taxation are sufficiently high as to discourage diversion
of public funds for redistributive purposes and
b. "Business as usual," when public resources are less scarce
and the coalition in power engages in such targeted spending.
Responsible policy-making will prevail when the economy
inherits a high level of public debt, or when it faces an
adverse shock such as a high need for the general public good
(e.g., during a war). When the adverse shock ends, the debt
level gradually drifts lower, until it reaches a level at which
business as usual restarts.
An important observation is that a BBR is a cure for one of the
symptoms of inefficiency, but not for its source. While a
deficit bias obviously disappears under a BBR, pork-barrel
spending does not. In a calibrated example, Azzimonti,
Battaglini, and Coate (2008) show that the prevalence of
pork-barrel spending actually increases under a BBR, since the
governing coalitions are no longer subject to the fiscal
discipline imposed by servicing large amounts of debt. This
insight potentially applies to many other environments, and
serves as a warning that curing deficits simply by banning them
may cause undesirable consequences unless we have a clear
understanding of the political frictions that generate
In ongoing work, Azzimonti, Battaglini, and Coate (2008)
evaluate quantitatively the consequences of a balanced-budget
amendment to the U.S. constitution. Their preliminary results
show that the welfare consequences depend on the initial level
of debt. When the government is not initially subject to a BBR
and debt is at any of the values in the support of the
associated ergodic distribution, introducing a BBR would never
Azzimonti, Battaglini and Coate's calibration struggles to
match the pattern of peacetime deficits, since the
shock-absorbing role of government debt is minor in response to
typical business-cycle shocks. This may be of concern because
the cyclical behavior of spending is used to identify the
magnitude of political distortions. Nonetheless, the match to
the actual variability of spending and debt is quite good when
the possibility of large shocks such as World War II is
introduced, and their work represents an important step in
developing a dynamic quantitative model of the costs of
4. Where should we go next?
The papers described in the previous sections are but one step
in bringing quantitative economic modeling to the optimal
design of fiscal institutions. Future work will have to develop
in three dimensions:
The previous analysis relies on specific political-economic
frictions. To what extent do the implications generalize to
other settings? As an example, let me briefly speculate on the
robustness of the results about the golden rule.
It is straightforward to see that the rule would be much more
beneficial if we assumed that operating budgets are subject to
a deficit bias arising from partisan policymaking, while public
investment is purely for the common good, as in Peletier, Dur,
and Swank (1999), Azzimonti (2004), or Battaglini and Coate
(2007). However, this assumption is at odds with the
observation that "pork projects" are often capital items (e.g.,
the now infamous "bridge to nowhere").
Consider instead the following scenario, vaguely inspired by
work of Rogoff and Sibert (1988), Rogoff (1990), and Besley and
Smart (2007). Suppose that it takes time for voters to
correctly assess the benefits of a long-term project (e.g.,
investment in renewable energy resources). Then, in the short
run, it is difficult for the voters to distinguish the
farsighted politicians, who are able to discern good projects,
from the incompetent ones, who may pick projects more or less
at random. This difficulty may bias policymaking to short-term
projects, for which competence may be easier to signal to
voters. Is this an important quantitative force? Only by
developing models that are more detailed will we be able to
gain confidence in the robustness of the institutional
b. Analysis of other fiscal institutions
In this discussion, I have only addressed two specific
questions. In practice, there are of course countless other
dimensions of fiscal institutions worth considering. Taking
again inspiration from current events, the stimulus package
signed into law by President Obama on February 17 contains
substantial transfers from the federal government to state
governments. Moreover, federal matching is a standard feature
for some expense items (such as interstate highways) but not in
others (education). How large should a federal match be, and in
what circumstances should it be granted? Are externalities from
public goods quantitatively more important for this question,
or is it more important to pay attention to insurance and
discipline (see, e.g., Persson and Tabellini, 1996a and 1996b,
or Sanguinetti and Tommasi, 2004)?
These questions are important not just for the United States,
since transfers from the central government to
regional/provincial governments are or have been prominent in a
number of countries (e.g., Argentina, Brazil, or Italy).
c. Tax base
Should we rely more or less on property taxes, rather than
income taxes, to finance government expenditures? Two
provocative papers by Rangel (2005) and Conley and Rangel
(2001) argue that land taxes (based on pure acreage, not value)
would be very beneficial for intertemporal incentives. As we
discuss in Bassetto (2009), the drawback of pure land taxes is
that they would be unable to generate substantial revenues
without dragging the value of the marginal land to zero, at
which point the scheme unravels. Does this imply that we should
move towards income or sales taxes? Or should we instead
consider property taxes, which may have beneficial
capitalization effects but distort capital accumulation?
d. Intergenerational accounting
In the works cited previously, what represents a deficit is
clearly defined, and government debt captures well the
intertemporal effects of fiscal policy. Yet Auerbach and
Kotlikoff (along with various coauthors) have forcefully argued
for intergenerational accounting as a more comprehensive and
appropriate measure (see, e.g., Auerbach, Gokhale, and
Kotlikoff, 1991 and 1994, and Kotlikoff, 1992).
In the context of distortionary taxation, a similar point is
made formally in Bassetto and Kocherlakota (2004): When the
government has the power to tax (or subsidize) past income, the
same allocation can be supported by arbitrary paths for
government debt (for an application to Social Security, see
Grochulski and Kocherlakota, 2007). This is particularly an
issue in models of "new dynamic public finance," where the
fiscal distortions arise purely out of asymmetric information
between the private sector and the fiscal authority. In these
papers, the ability to tax past income is always present, and
the deficit path may be correspondingly indeterminate.
Several papers have looked at the political-economy of
intergenerational accounting, particularly from the perspective
of social security (see, e.g., Cooley and Soares, 1996,
Galasso, 1999, Song, Storesletten, and Zilibotti, 2007, and
Bassetto, 2008). The introduction of a balanced-budget
restriction would most likely interact with the considerations
raised in these papers.
e. Timing of institutional reforms
Policy choices are endogenous in the work described previously,
but institutional constraints are taken as given, and the goal
of the research is to assess the welfare properties of imposing
alternative restrictions on fiscal policy. A separate but
important issue is when an institutional reform takes place,
and how. In the case of U.S. states, the introduction of
balanced-budget requirements dates back to the aftermath of the
state defaults of the 1840s (see, e.g., Secrist, 1914). These
constitutional reforms took place at a time when access to
borrowing for states was severely disrupted; indeed, a renewed
commitment to fiscal responsibility could be viewed as a way of
restoring access to credit markets. This is but one example of
a general pattern, whereby major fiscal reforms often follow a
public finance crisis (for some other examples, see Sargent,
1983a and 1983b). The largely ineffective Gramm-Rudman-Hollings
Act of 1985 could also be seen in this light - it was a
preventative measure that was enacted out of concern for the
consequences of the then-unprecedented deficits of the Reagan
While these considerations warrant a more systematic analysis,
they suggest to me that now may be the perfect time for
economists to engage in a debate over the fiscal institutions
that will serve the United States for the next generation and
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EconomicDynamics Interviews Robert Barro on Rare Events
Robert Barro is the Paul M. Warburg Professor of Economics at Harvard University and a senior fellow of the Hoover Institution of Stanford University. He is currently interested in the interplay between religion and political economy and the impact of rare disasters on asset markets.
Barro's RePEc/IDEAS entry
EconomicDynamics: In your recent work, you have emphasized the impact of rare, but
large, events on the economy, in particular interest rates and premia. Does
the current crisis correspond to the large event you had in mind, and what
does this imply for interest rates in the medium term?
Robert Barro: In our study, we defined a macroeconomic crisis as a decline (over one or
more years) of per capita real GDP or consumption by 10% or more. We do
not yet know whether the U.S. situation will fall into this range--the
probability at present, given the stock-market performance, is around 25%.
However, the current crisis is global, and several countries will likely
end up in the depression range. Iceland and Russia, I think, are already
If the probability of disaster goes up--as it did last year after the
spring--the real interest rate on safe assets, such as indexed U.S.
Treasury bonds, should go down. The expected real return on risky assets,
such as stocks, should go up (corresponding to a fall in stock prices).
Thus, the equity premium goes up. Effects on nominal interest rates
depend also on expectations of inflation. With low expected inflation
over the short term, short-term nominal rates, such as on U.S. Treasury
Bills, should become very low. Interest rates on medium term bonds should
be higher than the short-term rates.
ED: The Great Moderation of the last two decades was characterized by
dampened economic fluctuations and lower equity premia. Following your
theory, can we interpret the latter as a consequence of the market putting
lower probabilities on large events during this lull in fluctuations?
RB: A decrease in disaster probability would have the effect of lowering the
equity premium. And the rise in price-earnings ratios up to 2007 is
consistent with this reasoning. However, it's hard to determine equity
premia on a high-frequency basis, such as annually, because stock returns
are so volatile. Thus, even 20 years is not a long time for computing the
expected rate of return on equity (based on the observed average return).
ED: Beyond the themes just discussed, where do you see you research
agenda on disaster probabilities bringing you?
RB: As a general matter, I think the rare-disasters perspective is important
for many aspects of finance and macroeconomics. As an example,
Gabaix (2009) applies this framework to explaining ten
puzzles in asset pricing. The approach is also promising for
understanding puzzles related to exchange rates and interest rates. An
example involves the carry trade--borrowing in a low-interest-rate
currency such as the Yen and investing in a high-interest-rate currency.
This strategy can appear to be profitable for a long time but then suffer
greatly in a disaster situation. Thus, the streak of high returns is not
really a puzzle in a setting that allows for the chance of rare disasters.
This setting is analogous to the persistently high returns achieved for
years by AIG (and perhaps also Harvard University's endowment).
At present, I am working with various co-authors on extensions of the
previous research. One project estimates the form of the size
distribution of disaster events (using a Pareto or power-law distribution,
which has been used to explain patterns in city sizes, stock-market price
movements, and many other phenomena). This method for pinning down the
fat tail of the disaster distribution seems to lead to a better
explanation of the equity premium. I am also working on the interplay
between stock-market crashes and depressions to see how properties of the
stock-market crash (What is the size of the crash? Is it accompanied by a
financial crisis? Is it local or regional or global? Is it war related?)
affects predictions for macroeconomic outcomes. I am also studying the
nature of recoveries from macroeconomic disasters (notably wars and
financial crises) and assessing the durations of depressions. Another
extension, being pursued by my student Jose Ursua, will assess the Great
Influenza Epidemic of 1918-20 as a possible source of the macroeconomic
disaster that showed up in many countries, including the U.S. and Canada,
with a trough around 1921. (By the way, President Wilson suffered from
the flu in 1919 and this illness may have led to the harsh Versailles
Treaty that likely caused WWII, and Max Weber--a key figure in the social
science of religion--died of the flu in 1920.)
ED: Gabaix (2009) shows that a large range of puzzles can be explained by rare
disasters. There have been (partially) successful attempts to address these puzzles
with non-standard preferences such as hyperbolic discounting and loss aversion. You
worked with Epstein-Zin preferences. Could the issue rather be framed in terms of
preference formation? Would, for example, loss aversion reduce the need for disasters
to explain data?
RB: In many contexts, shifting disaster probabilities have effects on asset
prices that resemble those from shifting preferences--specifically, from
changing degrees of risk aversion. Of course, I am myself inclined
toward models in which preferences are stable and other factors move
around. But the key matter is how to distinguish these approaches
empirically. One difference is that changes in disaster probabilities
have implications for the actual future course of disasters, whereas
shifting preferences do not have these implications. The key challenge
is to make these different predictions operational in a context where
the frequency and size distributions of actual disasters are hard to pin
down with short samples of data.
ED: In early work, you initiated a rich literature on the Ricardian
Equivalence. After much additional theoretical and empirical work, do you
think the Ricardian Equivalence holds? And if not, how and why?
RB: I think Ricardian Equivalence provides the right baseline in thinking
about fiscal deficits. Then reasonable analyses have to specify
precisely in which dimensions the results depart from this
equivalence--and, thereby, have implications for interest rates,
investment, and so on. Much of the research in this area, such as
tax-smoothing ideas, look more like public finance, rather than
macroeconomics, per se. Tax smoothing has important empirical
predictions about how fiscal deficits should and do behave--for example,
the prediction that deficits are large in wars and depressions.
Political-economy elements, such as the strategic debt model (originally
crafted to explain the large Reagan budget deficits), have also been
Barro, Robert J., 1974.
"Are Government Bonds Net Wealth?
Journal of Political Economy,
University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec.
Barro, Robert J., 1979.
"On the Determination of the Public Debt
Journal of Political Economy,
University of Chicago Press, vol. 87(5), pages 940-71, October.
Barro, Robert J., 2006.
"Rare Disasters and Asset Markets in the Twentieth Century,"
Quarterly Journal of Economics, vol. 121 (3), pages 823-866.
Barro, Robert J., 2007.
"Rare Disasters, Asset Prices, and Welfare Costs
NBER Working Paper
Barro, Robert J., and José F. Ursúa, 2008.
"Macroeconomic Crises since 1870
NBER Working Paper
Barro, Robert J., and José F. Ursúa, 2009.
"Stock-Market Crashes and Depressions
NBER Working Paper
Gabaix, Xavier, 2009. Variable Rare Disasters: An Exactly Solved Framework for
Ten Puzzles in Macro-Finance, manuscript, New York University.
Society for Economic Dynamics: Letter from the President
Members and Friends:
The developments reported in my last letter proceed apace. Richard Rogerson
will be taking over as SED President at the end of the upcoming meetings in
Istanbul. The handover at the RED has taken place with Gianluca Violante
proving a very worthy successor to Narayana Kocherlakota, who continues to
As you know the upcoming meetings will take place in Istanbul, Turkey July
2-4, 2009. They are hosted by Bahçeşhir University. Our co-chairs Jesús
Fernández-Villaverde and Martin Schneider have put together a fantastic
program including a great set of plenary speakers: Matt Jackson, Tim Kehoe
and Chris Sims. Submissions were up this year by 16%, and there will be a
record 429 papers in 12 parallel sessions. Our local organizers Nezih Guner,
Refet Gürkaynak, Selo Imrohoroglu, Gökçe Kolasin and Kamil Yilmaz have lined
up some great venues and activities. All the details can be found at
http://www.economicdynamics.org/sed2009.htm. I look forward to seeing all of
you in Istanbul.
For 2010, we plan to hold the meetings in Montreal. Montreal is a great
city, and I expect we will put together our usual strong scientific program.
Tentatively for 2011 we plan to go to Gent Belgium, and we will probably
switch from alternating one year in North America, one year overseas to one
year in North America with two years overseas.
Sadly I must report that because our Treasurer Ellen McGrattan avoided
investing in mortgage backed securities, we are ineligible for TARP bailout
David Levine, President
Society for Economic Dynamics
Review of Economic Dynamics: Letter from the Co-ordinating Editor
Since January 1st, I have been serving as Coordinating Editor of the Review of Economic Dynamics. I feel very privileged to have this job. Tom Cooley, Gary Hansen and Narayana Kocherlakota, my predecessors, all did a phenomenal effort in rapidly getting the journal off the ground and in turning it into one of the success stories among Economics journals. On behalf of the Society, I thank Narayana Kocherlakota for the superb job he did in the last three and a half years as Coordinating Editor of RED.
Large part of the success of RED is due to the outstanding work of our Editorial Board, able to select high-quality papers among the many submissions we receive every year, and to turn very good papers into excellent ones through a constructive and fast refereeing process. I thank all the members of the Editorial Board for their dedication.
Over the next few months, we will have to replace some of our Editors and Associate Editors. I will keep using the same recipe of success of my predecessors, which is a mix of experience and new talent. Peter Ireland, who has served the RED for many years has already announced his resignation as Associate Editor, starting from July 1st, 2009. I wish to thank him for the outstanding service he has provided to the journal throughout his tenure. I am delighted to announce that Giorgio Primiceri (Northwestern) has accepted to take his place among our Associate Editors.
Now in its twelfth year of publications, RED is in excellent health and its reputation continues to grow well beyond members of the Society. The table below shows the ISI Impact Factor (one of the best known and most widely used indicator of a journal's quality) for RED and for a number of "competitors". The impact factor of a given journal for year t is calculated as the number times s articles published in year t-1 and t-2 were cited in all journals during year t.
ISI Impact Factor Comparison
|Journal of Monetary Economics||1.48||1.38||1.66||1.58||1.15|
|Review of Economic Dynamics||0.97||0.84||0.48||0.63||0.60|
|J. of Money, Credit, and Banking||0.95||1.16||0.98||0.92||0.84|
|International Economic Review||0.92||1.03||1.28||0.82||0.84|
|J. of Econ. Dynamics and Control||0.70||0.78||0.69||0.48||0.69|
Two facts stand out. First, RED shows the highest gradient since 2003. Second, it has already caught up with IER and, JMBC, journals with a much longer history.
The review process at RED is fast, without compromising quality, which is what any serious academic journal should do. Last year we received over 200 submissions, and the average time until first decision was only 12 weeks. I believe this is one of the best records among Economics journals.
In sum, when you submit to RED, you are guaranteed a very quick turnaround, highly competent refereeing, and a chance of publishing on a journal whose reputation is growing at a fast pace.
At RED, we continue with the tradition of publishing special issues (approximately one every 1-2 years) representing the best research at the frontier of topics which are of special interest to members of the Society. Currently, we are planning two special issues.
The first one, "Cross-Sectional Facts for Macroeconomists," s being edited by Dirk Krueger, Fabrizio Perri, Luigi Pistaferri and me. Its aim is to document empirical regularities about cross-sectional distributions of income, hours, consumption and wealth for a number of countries. The underlying micro-data will be made available to the public in a user-friendly format. We hope that this issue will become a standard reference for all of us working with heterogeneous-agents models of the macroeconomy. The issue will be published in January 2010 and the evolution of the individual papers can be monitored in real time here.
The second special issue on "Sources of Business Cycle Fluctuations" is being edited by Stephanie Schmitt-Grohé and Martin Uríbe. Even though this project is at an earlier stage, nine papers have already been selected out of almost fifty high-quality submissions. These papers will be presented in a mini-conference within the SED meetings in Istanbul.
Finally, precisely with the SED meetings approaching, I want to echo the words Narayana Kocherlakota wrote in his letter in 2005, when he took over as Coordinating Editor: If you have a paper that is a good fit for the SED meetings (it needs not be a macro paper), and you are not sending it to a top general-interest journal, submit it to the Review of Economic Dynamics!
I look forward to receiving your submissions.
Gianluca Violante, Co-ordinating Editor
Review of Economic Dynamics
Review: Asset Pricing for Dynamic Economies
Asset Pricing for Dynamic Economies
by Sumru Altug and Pamela Labadie
This book offers an introduction into dynamic economics using asset pricing as the guiding theme. It is useful to graduate students of both macroeconomics and financial economics in that it offer in the same language and approach a unified treatment of discrete time dynamic economies.
This book is self-contained: it offers the basic tools and goes through the basic models, in each case discussing various extension, empirical issues and suggesting exercises. As implied by the title, it starts with the basic asset pricing models APT, CAPM and CCAPM. It covers also production economies, non-separable utility, q-theory of investment, real business cycles, international asset markets, cash-in-advance, frictions, borrowing constraints and overlapping generations.
The level of the treatment should make any graduate student comfortable with the material. Plenty of references are offered for further developments and readings. Instructors should also find plenty of inspiration for new approaches to teaching.
Asset Pricing for Dynamic Economies is published by Cambridge University Press.
Review: Economic Growth
Economic Growth: Theory and Numerical Solution Methods
by Alfonso Novales, Esther Fernández and Jesús Ruíz
Over the past years, a number of textbooks have been published that present computational methods for dynamic general equilibrum models. Typically, they would concentrate on business cycle models and only mention growth models in passing. The new book by Novales, Fernandez and Ruiz does the opposite: focus on numerical solution methods for growth models, with the addition of extensions on business cycles models (and growth theory, too).
The main sections cover the Neoclassical growth model, optimal growth in continuous and discrete time, endogenous growth and monetary economies. For each topic, the theory is introduced with various extensions, then numerical solution methods are discussed, along with some exercises. Note that Excel and Matlab codes are available on the web for various applications.
The book is self-contained and aimed at graduate students, but can also be used as a reference book. The unusually high cost for a graduate textbook (US$199) may discourage its widespread adoption, though, until the paperback version is published.
Economic Growth is published by Springer.
The EconomicDynamics Newsletter is a free supplement
the Review of Economic
(RED). It is distributed through the
mailing list and archived at http://www.EconomicDynamics.org/newsletter/. The
editors are Christian
Zimmermann (RED associate editor)
and Giovanni Luca Violante (RED coordinating editor).
The EconomicDynamics Newsletter is published twice a
in April and November.
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