House Prices in Ireland

"House prices are rising nationally, with strong growth in Dublin and increases emerging elsewhere (...)," according to the latest IMF report on Ireland.

Reforming Dual Labor Markets In Advanced Economies

Labor market duality has increased dramatically in many advanced countries in recent years. While duality has some positive aspects, microeconomic and cross-country studies suggest that an excessive reliance on “non-regular” employment has a negative impact on total factor productivity (TFP) and growth, according to Giovanni Ganelli. His excellent article summarizes recent research on this topic, and draws some policy implications for reforms aimed at reducing duality and creating more inclusive labor markets in advanced economies.

The China Chill & the Shale Gale: The IMF’s Commodity Market Review

The latest IMF's Commodity Review was presented at the MENA Industrial Gas Conference 2013. On my presentation, Rob Cockerill tweeted:

• "The message here is firstly that the advanced economies in the west, particularly the US and Europe, have to be very nimble in their policy making. Secondly, if countries who have benefited from China’s growth in the past fail to diversify, they will be vulnerable.”

• "Thirdly, don’t get carried away by the shale gale – the numbers do not translate into huge income gains in the US and therefore won’t have huge impact elsewhere. It might have huge impact for companies, but not countries."

• "US incomes go up, by just a little over 1% after 12-13 years, there is very little additional employment generated from this, and domestic demand goes up by about 1.5% - we’re not talking about big changes in the US. Which means, we are not talking about big changes in the rest of the world either."
• "We revise our forecast every three months, and what you can see here is that we have revised down our global forecast slightly, and we have also revised this down for 2014.”
• “This is due to some revisions within our outlook of developing and emerging economies. If you break down within the emerging markets, we've really marked down Russia, India and China, a little bit. The BRICs are areas where we are seeing softness, more than we did three months ago.”

For a summary of the conference click here and here. 

Moving closer? Changing patterns of labour mobility in Europe and the US

Labour mobility is one of the keys to a successful currency union – be it within or across nations. This column discusses new evidence showing that the shock-absorbing role of migration has increased in Europe and declined in the US. During the Great Recession, European migration remained high – although not high enough given the vast differences across the Eurozone. Overall, Europe has strengthened this essential adjustment mechanism. Read the full column here. 

'Austerity' and Inequality at the G-20

Davide Furceri presented our joint work (with Daniel Leigh and Larry Ball) on the impacts of fiscal consolidation--sometimes referred to in the blogosphere as 'austerity'--at a G-20 seminar in Buenos Aires. See the presentation and prepared text of the talk.

Stijn Claessens kicks off housing conference

The IMF, Dallas Fed, and the JMCB are holding a conference on "Housing, Stability and the Macroeconomy: International Perspectives". The program is available here. Stijn Claessens's presentation gives an excellent overview of the state of the housing markets and policy issues.

Are Jobs and Growth Still Linked? Stress-Testing Okun's Law

At Rice University today, continuing my mission to keep Okun's Law alive. Art Okun must be smiling down on me. See the presentation here.

House Prices in Brazil

"Brazil’s house prices rose substantially over the last few years, especially in two major cities (Figure 1). The national FIPE–Zap index has increased 62 percent from August 2010 to April 2013. It rose 26 and 14 percent in 2011 and 2012 respectively, while construction costs did not rise in tandem. The prices for Sao Paulo and Rio de Janeiro have almost tripled since January 2009, and grew by 30 and 15 percent in 2011 and 2012. Brazil was one of two countries that showed the highest real house price appreciation in 2011 among 52 advanced and emerging market economies," according to a new report from the IMF.

Blanchard on Unemployment, Flexibility & IMF Advice

My VoxEU post with Olivier Blanchard and Florence Jaumotte tries to move beyond ritual invocation of the mantra of “labor market flexibility.” We develop the concepts of “micro” and “macro flexibility”; explain why they are needed; what labor market institutions help or hinder micro and macro flexibility; and assess IMF advice against the backdrop of these concepts. The Staff Discussion Note on which our post is based is available here.

Nobel Prize winner Robert Shiller on house prices … and Eliot Spitzer

My ‘golden oldie’ interview with Robert Shiller still makes for interesting reading. It is prescient but even Shiller could not have predicted the fate of Eliot Spitzer.

Shiller on US corporate scandals: “On that score I’m actually somewhat sanguine … Eliot Spitzer has been going after corporate crime as aggressively as Eliot Ness, the guy who went after the gangster Al Capone. Combine that with people like … William Donaldson, Chair of the SEC, and it adds up to a lot of people who are really doing their jobs. The budget for the SEC has really been increased; for 2004, it was over $800 million, more than double what it was five years ago. And people can see what a price Martha Stewart paid for acting on a tip. This is the U.S. solution: the United States has generally handled financial scandals aggressively.”

Shiller on housing markets (in 2004): “I’m not exactly sure what’s going on with housing prices. People still report that a major consideration for their buying houses is that they think it is a good investment; that is, they expect house prices to appreciate. But fewer people report buying houses just to make a profit from speculation. I think the thought process a lot of homebuyers are going through right now is more like: I know prices are too high, but that’s what I thought last year and prices still went up. I better buy now before I’m totally priced out.”

Shiller on importance of combining psychology and economics: “We know the role that overconfidence and wishful thinking play in driving financial markets. But psychological theories have still not been completely integrated into economics. Human behavior is very complex, and economists have been in the mood to simplify it, and simplify it heroically. We will have to change our whole approach to problems—our methodology and our tool kits—if we are serious about grappling with the complexity of human behavior.”

Shiller on how he got into behavioral finance: “I wasn’t much of a rebel as a graduate student. My dissertation was on rational expectations. But I was always a bit skeptical about conventional economic theory. An early formative influence was George Katona, who wrote the book Psychological Economics in 1975. I never took one of his courses, but I sat in on one of his lectures and was impressed. It seemed fine to me, then, that there were only a few people like Katona who wanted to sit halfway between economics and psychology. It wasn’t as clear to me then as now that psychology should be central to economics. Much later, Stan Fischer invited me to write a review essay critiquing the rational expectations revolution for a conference he’d organized. Writing that essay awakened further doubts about rational expectations, which I always thought of as a construct that had some interest but was a small part of a big picture.”

Read the full interview here and also a very nice profile of Shiller written by Paolo Mauro.

The ‘Shale Gale’ and the ‘China Chill’: the IMF’s Commodity Market Review

Full report

How will the shale revolution affect U.S. GDP and trade balance? How would a growth slowdown in China affect commodity exporters? Answers given in the IMF’s commodity markets review, released this morning as part of the World Economic Outlook.

Shale Gale: There has been some euphoria about the impact of the unconventional energy revolution on U.S. prospects. The simulations of the IMF’s large scale models suggest a modest impact: increases in unconventional energy production of the magnitude currently forecast will raise U.S. real GDP by only 1.2 percent at the end of 13 years and employment by 0.5 percent. The main reason is the small share of energy in the U.S. economy, even after factoring in the additional production.

‘China Chill’: Which commodity exporters are vulnerable if China’s growth slows from an average of 10 percent over the past decade to an average of 7 ½ percent over the coming decade? The IMF’s illustrative calculations rank the countries that have benefitted the most from past Chinese growth—and  therefore the ones that could be vulnerable in the absence of policy actions.

There’s a lot more in the review, including new analysis from my colleague Samya Beidas-Strom on the drivers of the Brent-WTI differential

Global House Prices: falling, recovering, or bubbling?

My colleague Hites Ahir, who has worked with me over the years on housing issues, is making this presentation at UDC today. What's the answer to the question posed in this title? See his presentation below to find out.

Judging Jeff Sachs

I wrote a profile of economist Jeff Sachs that paints a positive picture of his achievements, particularly of his early work in Poland. A new book seems to be much more critical of Sachs, particularly of his recent work in Africa, according to this book review.

Distributional Consequences of Fiscal Consolidation

The IMF released a second working paper on the distributional impacts of fiscal consolidation. Like the previous work, this one concludes that “fiscal consolidations are likely to raise inequality through various channels including their effects on unemployment. Spending-based consolidations tend to worsen inequality more significantly, relative to tax-based consolidations.” For more on the IMF’s recent work on fiscal policy, see this presentation at UNICEF.

Global House Price Watch

Full report

1. Index of global house prices keeps inching up …

2. … with house prices rising in 30 countries out of 51 included in the index



3. Among OECD countries, increases and declines are more evenly balanced



4. In most OECD countries house price-to-rent ratios remain above their historical averages …



5. … as do house price-to-income ratios



Here's the full report. 

Okun's Not Broken: Jobs and Growth are Still Linked

I sound like a broken record (young people will not know how a broken record sounds, let alone what a 'record' is) but I gave a talk at the New School for Social Research today on how jobs and growth are linked in many countries across the globe. On a personal note: It was difficult not to 'feel verklempt' giving a talk at New School--Robert's Heilbroner's "The Wordly's Philosophers" is probably why I became an economist.

"Austerity" and Inequality: Engaging UNICEF

In my presentation at UNICEF today I spoke about the impacts of fiscal consolidation (often called "austerity" in the blogosphere) on long-term unemployment, labor's share of income, and inequality. 

Here's a link to the paper.

The announcement

The view from the UNICEF conference room

House Prices in Austria

"The housing market has experienced strong price growth but from low levels. In nominal terms at end-2012, house prices rose 14.9 percent y-o-y in Vienna compared with 11.5 percent y-o-y for Austria overall. In real terms and from a medium-term perspective, the price increase appears more modest: a cumulative 40 percent over 10 years in Vienna and about 5 percent in the rest of Austria. Housing market activity seems to be driven largely by non-resident buyers and domestic investors seeking an alternative to low fixed-income returns, though continued immigration also likely supported demand for housing in urban areas. Mortgage credit has exhibited slow growth, suggesting the prevalence of equity buyers," according to the IMF's annual report on Austria. 

U.S. “Structural” Unemployment: Updated Estimates

Each release of the U.S. payroll employment report leads to a debate on the extent to which unemployment is cyclical vs. structural. I’ve just updated the estimates of U.S. structural unemployment reported in my 2011 IMF Working Paper. (Please note that IMF working papers represent the views of the authors and not the official view of the IMF or of any institution with which my co-authors are affiliated.)

Estimate of Structural Unemployment, 2008:Q1 to 2013:Q2

The bottom line? The estimate of structural unemployment has declined over the past year in line with the decline in the actual unemployment rate. In the figure below, the solid (black) line shows the U.S. unemployment rate declining from nearly 10 percent in 2009:Q4 to about 7 ½ percent today. The dotted (red) line is the estimate of structural unemployment; it too has declined over that time and the latest estimate of structural unemployment is 6.2 percent. There is a lot of concern about U.S. long-term unemployment. In this case too, there has been a decline in the estimate of the structural component of long-term unemployment, but it is more gradual than in the case of total unemployment.

Structural Component of Long-Term Unemployment

Intrigued? This post by Menzie Chinn (Econbrowser) has a nice ‘cheat sheet’ on how these estimates were constructed.

House Prices in the Nordics

"House prices in the Nordic-4 [Denmark, Finland, Norway, and Sweden] rose in tandem from the mid-1990s until the recent peaks in 2007 but diverged afterwards. House prices increased by more than 120 percent on average in the Nordic countries between 1995 and 2007 (see Figure 2.1). Since 2007 peaks, house price co-movements seem to have dissipated. The real house price in Norway increased by more than 10 percent relative to the 2007 peak level, while house prices fell by close to 30 percent in Denmark. In Finland and Sweden, house prices have remained broadly constant around 2007 levels," according to an IMF report on the Nordic Region. 

"The estimates suggest house prices are overvalued in the Nordic-4, but the extent of overvaluation varies (see Figure 2.3). The chart shows both the range and the mean of house price gaps based on the three different measures discussed above [(i) a time-series model; (ii) deviations from a long-run price-to-income ratio; and (iii) deviations from a long-run price-to-rent ratio]. The average estimate of the valuation gap for Norway is just over 40 percent while the estimated valuation gap is less than 10 percent in Denmark. Average estimates for Finland and Sweden suggest that house prices are moderately overvalued, by 12 and 22 percent, respectively."

House Prices in Norway

"House prices continue to rise in Norway. There was only a brief correction at the time of the global financial crisis. Real house prices increased by nearly 30 percent from its lowest level in 2008. Standard affordability indicators are also worsening. Price-to-income and price-to-rent ratios increased by 14 percent and 23 percent, respectively, from their lowest levels in 2008. Several factors have been identified to explain the upward trend of house prices, including robust income growth and high population growth due to immigration (see Box 2.1). While these factors may partly explain recent house price developments, there are also risks associated with a house price reversal, and household would be vulnerable to house price corrections given the high levels of household debt," according to a new report by the IMF. 

House Prices in Sweden

"Swedish house prices are potentially overvalued by more than 15 percent. House prices have more than doubled since the mid-1990s, increasing by about 140 percent in real terms between 1995 and 2007 and remaining broadly stable since then. Current estimates suggest that house prices are overvalued by 15 to 18 percent, accounting for rental regulations," the IMF said in its latest annual report on Sweden. 

A Marxist theory is (sort of) right

From the Economist: 

THE Prebisch-Singer hypothesis (PSH) was a staple of leftist economics during the second half of the 20th century. Raúl Prebisch and Hans Singer, working independently, showed that the “terms of trade” between primary products and manufactured goods tended to decline over time. In other words, producers of crops and raw materials gradually became poorer relative to producers of cars and household appliances. If true, the theory would have important implications for world trade; it would suggest that commodity-focused economies must diversify into other sectors or risk falling ever further behind richer countries.

A new paper* by the International Monetary Fund discusses the PSH. The authors examine 25 commodities, from sugar to silver, with some data going back to 1650. Since 1900, around 50% of the commodities show clear downward relative price slopes. About 25% show a clear upward slope. You will have to forgive the confusing labelling of the graphs, but you get the idea:

These graphs show prices relative to manufactured goods; in dollar terms many commodity prices have trended upward over the past century. So countries that produce high levels of primary products have, over time, done worse than economies which rely on manufactured goods. The authors cautiously conclude that "in the majority of cases the PSH is not rejected".

What can primary producers do about this? In a recent conference at the IMF in Washington, one of the authors, Kaddour Hadri, suggested that commodity-dependent economies should take advantage of short periods of price spikes to invest in alternative industries. But many commodity-dependent economies fail to do this. William Sawyer, of Texas Christian University, argues that South America has failed to take advantage of high commodity prices over the past decade. As a result, their economies are not well-equipped to deal with the current price declines.

But according to Javier Blas, a journalist for the Financial Times who spoke at the IMF conference, commodity producers have been fighting against the Prebisch-Singer hypothesis for the last century. Many have shifted production away from commodities which do relatively badly against manufactured goods. The development of the soybean market, as well as shifts towards farming of chicken and pork, are some examples of this. None of these commodities appears in the IMF paper, so it does not tell a complete story. Still, and oddly enough, the IMF seems to have turned up some evidence support a bit of Marxist economic theory.



*Rabah Arezki, Kaddour Hadri, Prakash Loungani and Yao Rao (2013) 'Testing the Prebisch-Singer Hypothesis since 1650: Evidence from Panel Techniques that Allow for Multiple Breaks' Working Paper No. 13/180

Stan Fischer: A Class Act

In 2012, the magazine Global Finance gave Stanley Fischer, then central bank governor of Israel, an A for his handling of the economy during the financial crisis. It was the fourth year in a row that Fischer had received an A. It’s a grade the former professor—who taught both Federal Reserve Board Chairman Ben Bernanke and European Central Bank (ECB) President Mario Draghi—cherishes: “Those were some tough tests we faced in Israel.”

Fischer stepped down as central bank governor in June this year after eight years in the job, bringing the curtain down on an extraordinary third act of his career. The second act was as the IMF’s second-in-command during the tumultuous period of financial crises in emerging markets from 1994 to 2001. This role as policymaker came after a rousing opening act in the 1970s and 1980s, during which Fischer established himself as a preeminent macroeconomist, one who defined the contours of the field through his scholarly work and textbooks. It speaks to Fischer’s success that stints as the World Bank’s chief economist in the 1980s and as vice chairman at Citigroup in the 2000s—which would be crowning achievements of many a career—come across as interludes between the main acts.­ For the full profile, continue reading here. 

Also, see the Washington Post's article titled: The most qualified candidate for Fed chair isn’t Summers or Yellen. 

Florida vs. Spain: Labor Mobility within Currency Unions

Paul Krugman has blogged extensively on how states within the US currency union have adjusted better than regions and countries within the European currency unions. My presentation at the European Regional Science Association today gives some background on this discussion and some new results.

The Driving Force behind Construction in Europe

A new IMF working paper finds that a country’s geography, demographics, and economic conditions (e.g. income level, credit conditions, and stock market performance) are the driving forces behind the changes in construction shares. The results of the paper show that "During the boom, many countries overshoot the norm. After the crisis, the process has reversed and many countries have undershoot the norm. But for some countries, the adjustment has fallen short of the model’s predictions." So, "when economic conditions normalize over the medium term, Greece, Iceland, and Ireland in advanced Europe, and Latvia, Lithuania, Hungary, and Ukraine in emerging Europe may see a recovery in their construction shares. But construction shares could decline further in Spain, the United Kingdom, Romania, and the Slovak Republic."

The Stock Market 'Prediction Charade'

"The next time you are tempted to rely on forecasts of experts in making investment decisions, remember these words attributed to Prakash Loungani of the International Monetary Fund: “The record of failure to predict recessions is virtually unblemished.” Read the full story here. 

Okun's Law during the Great Recession: jobs and growth are still linked

There is further evidence that employment growth is low because output growth is poor. According to a new IMF working paper, "Much of [the cross-country differences in employment growth] are the result of the differences in real GDP growth. A scatter chart of real GDP growth and employment growth between 2008 and 2011 shows a strong correlation between the two (Figure 1). Latvia, which had the largest decline in real GDP between 2008 and 2011, also experienced one of the largest reductions in employment. And Poland, which had the largest increase in real GDP during this time period, also had one of the best employment outcomes."  

Ball, Leigh, and Loungani also provide evidence on how well Okun's Law has held up during the Great Recession.

House Prices in Germany

In Germany, "Nationwide property prices have continued to rise, driven mainly by stronger increases in apartment prices in some major cities. However, these prices remain below historical averages and do not appear excessive."

House Prices in France

In France, "(...) prices have been declining: housing activity has slowed markedly and prices have fallen by 1.9 percent in 2013 Q1 from their peak in 2011 Q3," according to the latest IMF economic report on France. To read more click here. 

House Prices in Spain

In Spain, "house prices are falling fast and are down a third from their peak (but are still likely some 15 percent overvalued)."

House Prices in United Arab Emirates

"Residential real estate prices in Dubai have been rising substantially, while other market segments, especially office space, are recovering at a slower pace. The recovery in the Abu Dhabi real estate market has been lagging," according to the latest IMF economic report on UAE. On Dubai and Abu Dhabi, it says:

• "The recovery in Dubai is largely concentrated in high-quality residential properties, helped by robust non-oil GDP growth, increasing numbers of expatriates, and Dubai’s relative stability as an investment destination. Residential real estate prices rose on average 16 percent year-on–year in April 2013. Supply growth was modest in 2012 but is expected to increase in 2013. Hotel occupancies and room prices have increased significantly because of a substantial rise in tourism. Despite a large increase in the supply of office space, a recovery in rentals started in late 2012."

• "The recovery of the real estate market in Abu Dhabi has been lagging. Price increases in the residential market have been modest (4 percent year-on-year in April 2013). New supply of office space has remained substantial, with constant high-quality rental rates since mid-2012, while lowerquality office leases are still facing downward pressure. Retail supply could grow significantly in 2013, which could place downward pressure on rentals, which have been flat in nominal terms since 2009. Demand for hotel rooms has not kept up with supply in 2012, and significant further capacity is expected to come on stream this year."

House Prices in the U.S.

Here is a snapshot of the recent developments in the U.S. housing sector. For more information see the report here.

House Prices in the United Kingdom

"(...) house prices in the UK are currently high relative to incomes and rents," says the latest IMF report on house prices in the UK. More specifically, it says:

• "Residential property prices in the UK are elevated relative to incomes and rents. Although house prices declined significantly during the crisis (13 percent), they have recovered substantially, reaching near pre-crisis peak values. Moreover, residential property values are currently about 20 percent above their historical average values of price-to-income and price-to rent ratios."

• "This aggregate trend masks some variation across regions. London remains prime real estate and prices are now 12 percent higher relative to their 2007 peak value. In the South East region, prices have stabilized at around 4 percent above their pre-crisis peak values. By contrast, in the rest of Britain house price inflation is zero, although residential values have stabilized at around 6 percent above their trough values."

• "Overseas investment may be an important factor in driving the rapid increase in London house prices. London receives a constant flow of property investors from across Europe, the Middle East and Asia, who are looking for safe investments to protect their wealth. House purchases by foreigners amounted to 5 percent of total transactions in the UK in 2012, and this represented a 40 percent increase relative to 2010 in value terms."

House Prices in China

"Real estate has rebounded," is one of the messages of the latest IMF's economic report on China. The report says, "Real estate investment in 2012 accounted for 12½ percent of China’s GDP, 14 percent of total urban employment, and rising share of FAI. Lending to real estate is primarily for household mortgages and has slowed recently. The real estate market has shown signs of a recovery lately, with moderate growth in prices, investment, and sales and affordability indices have been improving and prices now seem to be broadly in line or even below fundamentals nationwide and in major cities. Over the medium term, residential construction is likely to slow as the market matures."

House Prices in Malta

"House prices slightly below pre-crisis peaks," says IMF's report on Malta that was released today. According to the report, "the fall in property prices was not drastic. The decline in property prices during the crisis was 8 percent. The loss in household wealth from property was thus moderate. Malta’s house prices are one of the most undervalued amongst the advanced economy countries, indicating there is no potential risk of correction in the property market. Both the price-to-income and price-to rent ratio remain one of the lowest among the advanced economies." 

House Prices in Chile

"The increase in housing prices has been strong but standard indicators do not suggest significant misalignment with fundamentals," according to latest IMF's report on Chile. On real estate developments, the report says that "real estate activity (supply and demand) has been dynamic. While residential housing prices in aggregate do not suggest bubbles, these averages hide considerable variation and some regions have seen substantial price increases that could spill over to other parts of the country. One sign of incipient froth in the housing market is the jump in average loan-to-value ratios to above 85 percent since late 2011, as highlighted in recent central bank financial stability reports. Another issue is the above-mentioned worsening in construction companies’ financial strength. As for construction, while residential housing activity seems to be cooling off, commercial real estate (for which data are spotty) remains hot with a substantial amount of office space being completed in 2013-14."

Does Fiscal Consolidation Raise Inequality?

Fiscal tightening, whether based on cutting spending or raising taxes, has raised inequality and lowered the wage share of income. These are the main findings of my co-authored IMF working paper released today. The results are based on 173 episodes of fiscal consolidation during 1978-2009 for 17 OECD economies (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Portugal, Spain, Sweden, the United Kingdom, and the United States). Some of the key charts from the paper are given below.

Fiscal consolidation raises inequality (as measured by the Gini Coefficient)
(The horizontal axis shows the year of the consolidation—year 0—and the impact up to 8 years after the consolidation)

Consolidation based on spending cuts raises inequality …

… as does consolidation based on tax increases

Fiscal consolidation lowers the wage share of income