Despite the awful arctic cold wave, attending ASSA 2014 in Philadelphia was a delight as it is every year! The sheer amount of energy and enthusiasm that comes from such a large professional gathering is really unparalleled. Economists also seem to be getting better at entertaining themselves, if this year’s music and humor sessions are any indicator. But most off all, for me, the highlights were AEA/AFA luncheon with the recent Nobel Laureates Ms. Fama, Shiller and Hansen and continuing education series on Economic Growth.
Due to illness, Fama could not actually make it to the luncheon but he was ably represented by his long time coauthor Ken French. The conversations were well facilitated by Luigi Zingales of Chicago Booth. Some interesting highlights:
On bubbles: There is nothing called as bubbles- there is only volatility in asset prices.
Take on market efficiency: Bob Shiller thinks that efficiency of markets is only half truth but nonetheless a very significant one. Hansen responded by saying that the function of financial markets is aiding resource allocation in the economy. Hence, the more important question is about its role in promoting allocative efficiency. This, according to me, is one of the clearer statements of how economists should look at the process of financial intermediation.
While elaborating on the half truth comment, Shiller, who came across as an extremely soft spoken yet a very candid speaker, said that any profession should be wary of ‘group think’. This refers to the blind spots that professionals develop to obvious gaps in understanding a phenomenon as more and more people buy into the dominant thinking framework. That was a very interesting point.
Optimal Investment Strategy: If markets cannot be predicted, what should be the optimal investment strategy? According to Shiller, people should seek advice from paid professionals and there should be more of them available.
The second interesting session I attended was ” What Macroeconomists should know about finance?”. It was a panel discussion constituted by Markus Brunnermeier, Atif Mian, and Arvind Krishnamurthy. Some interesting points about macro-finance linkages that were made in this discussion were as follows:
1. Atif Mian: Debt matters for macro aggregates through:
- Asset Price Channel: asset prices declined faster in states where foreclosure laws are laxed.
- Aggregate Demand Channel: HH that suffer higher net wealth shocks cut back on spending. Higher level of leverage means that aggregate losses are going to be shared by levered households disproportionately. Decrease in demand leads to reduction in tradable and non tradable jobs.
- Financial Rigidity Channel: absence of state contingent debt. Rigidity in financial contracts. Hence, important question is why are private contracts not optimal from macro perspective.
- Endogenous risk = systemic risk
- Multiple asset prices- Do not respond in synchronous manner.
- Careful thought to Intermediary asset pricing is needed.
- Market segmentation: Importance looking at process of intermediation for macro.
- Changes in risk premia are not included in standard macro.
- Capital structure of financial firms is not irrelevant as macro assumes.
3. Markus Brunnermeier: Unfortunately I missed this presentation-I definitely blame it on cold weather
The best part was the continuing education series on economic growth. Oded Galor and David Weil did an extremely good job of summarizing the existing research, commenting on intricacies of research designs and giving a clear picture of what we know about economic growth till now. Further, Galor’s Unified Growth Theory is a sure winner according to me. His paper on genetic diversity and comparative economic development was supremely exciting! You can access his research from his IDEAS page. You can access David’s research on health and economic growth here.
Update (January 11, 2014): Not sure why and how I missed this- Claudia Goldin’s Presidential address tops everything-you can watch it here.
Update (January 19, 2014): Interesting presentation on Railways and Famines in India. Check it out here.