During the financial crisis, U.S. government intervention forestalled the failure of the largest financial firms. The persistence of too-big-to-fail policies such as forbearance and bailouts in the face of supervisory and regulatory reforms, and as a means of mitigating systemic threats, raises questions about the motives of authorities.

The author evaluates the underlying motives and concludes that structural reforms to contain the problems of too-big-to-fail should limit further concentration among the largest financial companies. He suggests restricting specific activities, revising bank merger policy, and, perhaps, divestiture.

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According to Research Scholar Rania Antonopoulos and Research Associate Emel Memis, time availability affects living standards, but this notion has been overlooked in traditional poverty measures and it has not been studied in the context of developing countries. Traditional measures capture neither the time-use dimensions of both paid and unpaid work, nor some of the income-poor and time-deprived households.

Due to the close association of the unpaid work burden and poverty, the authors find that the time spent on unpaid work (e.g., water and fuel collection) can be as binding as that spent on paid work, while hindering participation in paid work. Their analysis is based on South Africa’s first time-use survey, conducted in 2000.

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The divergence of U.S. housing prices across neighborhoods has long been associated with racial prejudice. However, there is a race-amenity correlation, with historical links to prejudice, discrimination, and state-sanctioned segregation.

Research Associate Sanjaya DeSilva, Anh Pham, and Michael Smith test for the presence of racial preferences in the small urban housing market of Kingston, New York. They find that price discounts in black neighborhoods and the spatial dispersion of black and white households are caused by the demand for amenities, not by racial prejudice. The goal of policymakers should not necessarily be racial integration but the elimination of amenity and price differences that have persisted along racial lines.

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Research Associate Fatma Gül Ünal, Mirjana Dokmanovic, and Rafis Abazov review the countries in Central and Eastern Europe (CEE) and in the Commonwealth of Independent States (CIS). They find that governments with similar macroeconomic fundamentals and (limited) fiscal space have adopted policy mixes that have differential impacts on vulnerable groups such as women and the poor.

The authors emphasize that fiscal policies must target the lower-middle class, which has been most affected by the global downturn. They recommend that poverty should be addressed through both short-term and long-term programs, women should be involved in developing policy, and economic stimulus packages should prioritize job creation through employment guarantee programs in both the private and public sectors.

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The Bretton Woods 2 hypothesis is that global current account imbalances reflect a symbiosis of interests among deficit and surplus countries (the United States and developing countries, respectively). According to Research Associate Jörg Bibow, a return to precrisis trends is unlikely because of rising (and unsustainable) U.S. household indebtedness.

Bibow rejects the global saving glut hypothesis that excess saving flows from developing countries were channeled into the U.S. mortgage markets, causing the housing boom and bust. Rather, defensive macro policies in the rest of the world prompted expansionary Federal Reserve policies and a global dollar glut. Thus, a Bretton Woods 3 regime could arise where U.S. current account deficits continue, driven by public spending and debt, and safe assets abroad sponsor U.S. spending in excess of income.

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Macroeconomists have used structural vector autoregressions (SVARs) to quantify the economic effects of monetary policy shocks. Research Scholar Greg Hanngen extends Working Paper No. 546 (October 2008) and finds evidence supporting the hypothesis that for one or more equations, the error term has an alpha-stable, infinite-variance distribution.

Hannsgen also finds evidence to support the notion of devising a better model than SVAR for some macro data by combining time-varying dispersion with stable, non-Gaussian shocks. And since the empirical effects of his findings are, as yet, unknown, he recommends caution when using SVARs.

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The author considers the currency recycling problem in the European Monetary Union and determines that the union’s architects overlooked the intra-union imbalance problem; that is, the Maastricht rules only work when there are fiscal imbalances, which lead to falling real wages and rising unemployment.

Krimpas advocates combining the Currency Union Central Bank (CUB) and the European Investment Bank (EIB), thus creating an entity that is a lender of last resort as well as a spender of first resort, where the Maastricht principles are not disturbed, EIB principles remain intact, and creditworthiness is enhanced. Recycling from the surplus to deficit fiscal authority (within the CUB/EIB construct) is not a redistributive transfer or bailout but rather a straightforward application of Keynes’s banking principle.

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The New Cambridge School (under the leadership of recently deceased Distinguished Scholar Wynne Godley) articulated the comprehensive empirical modeling strategies associated with the theoretical views of Post Keynesians. Research Associate Claudio H. Dos Santos and Antonio C. Macedo e Silva argue that modified versions of the New Cambridge approach to macroeconomic modeling are compatible with modern Post Keynesian stock flow–consistent (SFC) macroeconomic models and an important contribution to the tool kit for applied macroeconomists.

The authors favor an applied modeling strategy that combines direct estimates of the New Cambridge financial balances with nonmodel information about household, firm, and bank financial balance sheets; and with a stylized theoretical SFC model of the economy. This strategy has been adopted by the Levy Institute’s Macro-Modeling Team.

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