Research papers
PhD dissertation in Economic History, Lund University
"Growth, factor shares, and factor prices"
Abstract
This dissertation is a study in empirical macroeconomic history. The first two papers concern themselves with the functional distribution of income. The third paper is an examination of global real interest rates, and the final paper examines city growth in Sweden over the last two hundred years. While this thesis is not about secular stagnation per se, every articles is related in one way or the other to Larry Summers' theory.
The Kappa discusses in greater length the theory of secular stagnation and the related macroeconomic phenomena that have ailed advanced economies in recent years, including low real interest rates, higher debt levels and equity prices, and rising inequality, including lower labor shares.
The first paper of the thesis examines the downward trend in the US labor share since the postwar period. We establish that a significant part of the decline is related to rising imputations in the GDP calculations. More specifically, economy-wide depreciation and imputed rents have increased substantially in recent years.
The second paper uses long-run panel data for 17 advanced economies and establishes a relationship between rising asset prices and the increasing capital share of GDP. We find a significant effect of stock price booms on the capital share. The relationship for housing booms is weaker.
The third paper of the thesis examines global real interest rates for the same set of advanced economies from 1870 to today. Using a time series factor model, we establish that a substantial part of the variation in real interest rate is determined by global factors. In contrast to neo-keynesian models, this finding implies that Central Banks have less monetary autonomy than what is commonly assumed.
Finally, the last paper examines Swedish city growth from the pre-industrial period to today. We estimate Zipf's law for each decade from 1810 to 2010. Using the rank-size rule as a benchmark, we also show that, with the exception of Stockholm, most large Swedish cities are considerably smaller than what the power law would suggest. Given the positive relationship between city size and productivity, this finding might even have macroeconomic implications.
Econ Journal Watch
"Lawrence Summers Deserves the Nobel Prize for Reviving the Theory of Secular Stagnation"
Abstract
Lawrence Summers produced a big upset within the economics profession when he revived Alvin Hansen’s theory of secular stagnation, which had been thought of as an old-Keynesian fallacy. While some economists like Brad DeLong and Paul Krugman instantly recognized Summers’s contribution, a large share of the economics profession remained skeptical at first. Whereas most New Keynesian models allow for macroeconomic shocks to have only transitory effects, Summers argued that the global natural real interest rate has fallen into negative territory. Furthermore, he suggested a number of reasons why this equilibrium might not be only transitory in nature. This also led Summers to believe that economies could be more prone to financial bubbles and persistent shortfalls in aggregate demand. I summarize the secular stagnation debate and outline the main empirical support of the secular stagnation interpretation, including falling real interest rates, lower productivity growth, increasing inequality, and rising asset prices. Ever since Summers first outlined his theory, global growth has been extremely anemic and interest rates have declined to even lower levels. Given that many aspects of the secular stagnation debate now find increasing empirical support, I argue that Summers deserves to win the Nobel Prize in economics on the grounds of reviving a once-dismissed theory and initiating the most important macroeconomic debate of our times.
Keywords:
New Keynesian macroeconomics, secular stagnation, macroeconomic policy, real interest rates, falling productivity growth
International Review of Economics and Finance
"Global real interest rate dynamics from the late 19th century to today"
Abstract
There is a long-standing economic debate to what extent interest rates are determined by domestic versus international forces. Using a time series factor model, we estimate two common global factors for the short-term real interest rate for a panel of 17 advanced economies from 1871 to 2013. Our analysis shows that more than 50% of the variation in national real interest rates can be explained by our two international factors alone. While our data encompasses several macroeconomic regime changes, we find in general that real interest rates are more responsive to international conditions during times of high international capital mobility, such as the post Bretton Woods period. Our first common global factor can be interpreted as an approximation of the global short-term equilibrium real interest rate. Using an error-correction approach, we show that that the global real interest rate acts as a force of attraction for national real interest rates. Moreover, our factor analysis can also explain the long-term downward trend of national real interest rates that started in the 1980s, meaning that the forces of secular stagnation have acted on a global level. Finally, we estimate a Panel-VAR model, which allows us to show that the national business cycle is highly responsive to our two common global factor variables, thus indicating that small economies have increasing difficulties to insulate themselves from international macroeconomic conditions. Our analysis is important insofar as it shows that during periods of high capital mobility Central Banks might have even less influence in setting the domestic short-term real interest rate than what is commonly assumed by most neo-keynesian macroeconomic models.
Keywords:
Real interest rate; Time series factor model; Global monetary regimes; Capital mobility
"Growth, factor shares, and factor prices"
Abstract
This dissertation is a study in empirical macroeconomic history. The first two papers concern themselves with the functional distribution of income. The third paper is an examination of global real interest rates, and the final paper examines city growth in Sweden over the last two hundred years. While this thesis is not about secular stagnation per se, every articles is related in one way or the other to Larry Summers' theory.
The Kappa discusses in greater length the theory of secular stagnation and the related macroeconomic phenomena that have ailed advanced economies in recent years, including low real interest rates, higher debt levels and equity prices, and rising inequality, including lower labor shares.
The first paper of the thesis examines the downward trend in the US labor share since the postwar period. We establish that a significant part of the decline is related to rising imputations in the GDP calculations. More specifically, economy-wide depreciation and imputed rents have increased substantially in recent years.
The second paper uses long-run panel data for 17 advanced economies and establishes a relationship between rising asset prices and the increasing capital share of GDP. We find a significant effect of stock price booms on the capital share. The relationship for housing booms is weaker.
The third paper of the thesis examines global real interest rates for the same set of advanced economies from 1870 to today. Using a time series factor model, we establish that a substantial part of the variation in real interest rate is determined by global factors. In contrast to neo-keynesian models, this finding implies that Central Banks have less monetary autonomy than what is commonly assumed.
Finally, the last paper examines Swedish city growth from the pre-industrial period to today. We estimate Zipf's law for each decade from 1810 to 2010. Using the rank-size rule as a benchmark, we also show that, with the exception of Stockholm, most large Swedish cities are considerably smaller than what the power law would suggest. Given the positive relationship between city size and productivity, this finding might even have macroeconomic implications.
Econ Journal Watch
"Lawrence Summers Deserves the Nobel Prize for Reviving the Theory of Secular Stagnation"
Abstract
Lawrence Summers produced a big upset within the economics profession when he revived Alvin Hansen’s theory of secular stagnation, which had been thought of as an old-Keynesian fallacy. While some economists like Brad DeLong and Paul Krugman instantly recognized Summers’s contribution, a large share of the economics profession remained skeptical at first. Whereas most New Keynesian models allow for macroeconomic shocks to have only transitory effects, Summers argued that the global natural real interest rate has fallen into negative territory. Furthermore, he suggested a number of reasons why this equilibrium might not be only transitory in nature. This also led Summers to believe that economies could be more prone to financial bubbles and persistent shortfalls in aggregate demand. I summarize the secular stagnation debate and outline the main empirical support of the secular stagnation interpretation, including falling real interest rates, lower productivity growth, increasing inequality, and rising asset prices. Ever since Summers first outlined his theory, global growth has been extremely anemic and interest rates have declined to even lower levels. Given that many aspects of the secular stagnation debate now find increasing empirical support, I argue that Summers deserves to win the Nobel Prize in economics on the grounds of reviving a once-dismissed theory and initiating the most important macroeconomic debate of our times.
Keywords:
New Keynesian macroeconomics, secular stagnation, macroeconomic policy, real interest rates, falling productivity growth
International Review of Economics and Finance
"Global real interest rate dynamics from the late 19th century to today"
Abstract
There is a long-standing economic debate to what extent interest rates are determined by domestic versus international forces. Using a time series factor model, we estimate two common global factors for the short-term real interest rate for a panel of 17 advanced economies from 1871 to 2013. Our analysis shows that more than 50% of the variation in national real interest rates can be explained by our two international factors alone. While our data encompasses several macroeconomic regime changes, we find in general that real interest rates are more responsive to international conditions during times of high international capital mobility, such as the post Bretton Woods period. Our first common global factor can be interpreted as an approximation of the global short-term equilibrium real interest rate. Using an error-correction approach, we show that that the global real interest rate acts as a force of attraction for national real interest rates. Moreover, our factor analysis can also explain the long-term downward trend of national real interest rates that started in the 1980s, meaning that the forces of secular stagnation have acted on a global level. Finally, we estimate a Panel-VAR model, which allows us to show that the national business cycle is highly responsive to our two common global factor variables, thus indicating that small economies have increasing difficulties to insulate themselves from international macroeconomic conditions. Our analysis is important insofar as it shows that during periods of high capital mobility Central Banks might have even less influence in setting the domestic short-term real interest rate than what is commonly assumed by most neo-keynesian macroeconomic models.
Keywords:
Real interest rate; Time series factor model; Global monetary regimes; Capital mobility
Master theses
The Euro: 'As bad as gold'? An examination into the Euro Crisis through the eyes of the gold standard literature
2013
Abstract
This paper examines whether monetary autonomy can explain the divergence in macroeconomic performance between Euro and Non-Euro countries across the OECD since 2007. The paper also provides a short overview on the gold standard literature. Historical, empirical, and theoretical accounts of the Great Depression have mainly revealed that the economic downturn in the 1930s was largely of monetary nature. More specifically, monetary policy was constrained by the peg to gold. Countries off gold, however, were able to pursue expansionary policies and their economic performance during the 1930s was thus far superior. Euro countries face somewhat similar constraints when it comes to monetary policy. The current Euro Crisis has striking similarities to the Great Depression when it comes to both the buildup of the crisis as well as its progression. Using an estimation method from the gold standard literature, this paper finds that Euro countries (and Euro-pegs) have indeed performed significantly worse than Non-Euro countries. Furthermore, the better performance of the latter can largely be explained by their monetary autonomy.
Rising markups and the fall of the labor share: Predicting the effects of industry market power in the U.S.
2014|Erik Grenestam & Julius Probst
Abstract
This paper examines the downward trend in the U.S. labor share of income, which is shown to have declined significantly over the last two decades. This phenomenon is in direct contradiction with standard neoclassical growth theory, which postulates constant factor shares of income. Increased trade with low-income countries, financialization, and the decline of labor unions are some of the explanations that have been put forward, sometimes with ambiguous evidence. We develop a model to examine the effect of a rise in the markup of firms on the labor share. Increasing markups imply that monopoly rents rise at the expense of labor and also capital income. This result holds if the economy is characterized by a Cobb-Douglas production function or a CES (constant elasticity of substitution) production function. We use both a standard regression as well as a Bayesian approach to estimate U.S. industry markups over time. Our results suggest that markups in the private sector might have risen by as much as 7 to 12 percent from the early 1980s until today. Moreover, this significant aggregate increase in monopoly power can explain almost the entire fall of the U.S. labor share over the same time period.
2013
Abstract
This paper examines whether monetary autonomy can explain the divergence in macroeconomic performance between Euro and Non-Euro countries across the OECD since 2007. The paper also provides a short overview on the gold standard literature. Historical, empirical, and theoretical accounts of the Great Depression have mainly revealed that the economic downturn in the 1930s was largely of monetary nature. More specifically, monetary policy was constrained by the peg to gold. Countries off gold, however, were able to pursue expansionary policies and their economic performance during the 1930s was thus far superior. Euro countries face somewhat similar constraints when it comes to monetary policy. The current Euro Crisis has striking similarities to the Great Depression when it comes to both the buildup of the crisis as well as its progression. Using an estimation method from the gold standard literature, this paper finds that Euro countries (and Euro-pegs) have indeed performed significantly worse than Non-Euro countries. Furthermore, the better performance of the latter can largely be explained by their monetary autonomy.
Rising markups and the fall of the labor share: Predicting the effects of industry market power in the U.S.
2014|Erik Grenestam & Julius Probst
Abstract
This paper examines the downward trend in the U.S. labor share of income, which is shown to have declined significantly over the last two decades. This phenomenon is in direct contradiction with standard neoclassical growth theory, which postulates constant factor shares of income. Increased trade with low-income countries, financialization, and the decline of labor unions are some of the explanations that have been put forward, sometimes with ambiguous evidence. We develop a model to examine the effect of a rise in the markup of firms on the labor share. Increasing markups imply that monopoly rents rise at the expense of labor and also capital income. This result holds if the economy is characterized by a Cobb-Douglas production function or a CES (constant elasticity of substitution) production function. We use both a standard regression as well as a Bayesian approach to estimate U.S. industry markups over time. Our results suggest that markups in the private sector might have risen by as much as 7 to 12 percent from the early 1980s until today. Moreover, this significant aggregate increase in monopoly power can explain almost the entire fall of the U.S. labor share over the same time period.
The Conversation
Other blogs
Economic Questions:
Is the falling wage share simply a statistical phenomenon?
Is the falling wage share simply a statistical phenomenon?
Some short essays
Economic History
1) Economic growth and the lack thereof in pre-industrial Europe
2) Industrialization and the process of modern economic growth
3) Race against technological progress: more of a crawl than a sprint
Macroeconomics
1) Modern macroeconomics: A degenerative research program!?
2) An account of the Swedish twin crisis of the early 1990s
1) Economic growth and the lack thereof in pre-industrial Europe
2) Industrialization and the process of modern economic growth
3) Race against technological progress: more of a crawl than a sprint
Macroeconomics
1) Modern macroeconomics: A degenerative research program!?
2) An account of the Swedish twin crisis of the early 1990s