Lecture 12 Slides - Economics 210c/236a Fall 2011 Christina...

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L ECTURE 12 Deleveraging and Balance Sheet Effects November 16, 2011 Economics 210c/236a Christina Romer Fall 2011 David Romer
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I . I NTRODUCTION
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What Do We Mean By “Balance Sheet Effects”? Not just an impact of wealth on behavior. Why might assets and liabilities, rather than just their difference, matter? o Heterogeneity in wealth. o Bankruptcies (an extreme form of heterogeneous wealth?). o Channels through which assets and liabilities on the balance sheets of a single agent might not net out in determining behavior.
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II. R ICHARD K OO , “J APAN S R ECESSION
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Koo’s Hypotheses Japan’s poor macro performance is the result of balance sheet effects. In his view, why wasn’t it just the difference between assets and liabilities that mattered? o In places, he seems to imply that the entire economy had negative net worth. But that can’t be right. o His story appears to be one of heterogeneity: “many … firms had a negative net worth.”
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Koo’s Hypotheses (cont.) Balance sheet effects: Operate through AD, not AS. Operate through credit demand, not credit supply. Not only reduce demand, but make it less responsive to the interest rate.
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What Evidence Does Koo Look at to Distinguish the Potential Output and AD Views? Direct evidence about Y (e.g., quality of products, frequency of strikes). Inflation. The exchange rate and net exports. Interest rates.
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What Evidence Does Koo Look at to Distinguish the Credit Supply and Credit Demand Views? Did firms that were able to issue debt? Did foreign banks enter? Were interest rates (real and nominal) high?
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Possible Weaknesses in Koo’s Analysis He presents little evidence that these effects were quantitatively important. He present almost no evidence that demand became less responsive to interest rates. He doesn’t address the issue of whether these effects can explain 15 years of poor macro performance.
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III . G AUTI B. E GGERTSSON AND P AUL K RUGMAN , “D EBT , D ELEVERAGING , AND THE L IQUIDITY T RAP : A F ISHER -M INSKY -K OO A PPROACH
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Key Ingredients Two types of consumers credit-constrained and
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This note was uploaded on 02/28/2012 for the course ECON 210c taught by Professor Romer,c during the Fall '08 term at University of California, Berkeley.

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Lecture 12 Slides - Economics 210c/236a Fall 2011 Christina...

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