14 | February | 2022 | Mostly Economics

Archive for February 14th, 2022

Does infrastructure spending boost the economy?

February 14, 2022

There are debates in India over whether higher capital expenditure leads to a higher multiplier effect? While literature does suggest a positive impact both over the short and the long run. Dr Rathin Roy in this Business Standard article countered this multiplier approach as spurious macro!

Anyways, the discussions on this capital/infra spending are happening elsewhere too. US has passed a Infrastructure Investment and Jobs Act which plans to spend USD 550 billion over next 10 years.

Marios Karabarbounis of Richmond Fed in this short piece summarises the literature:

Public infrastructure investment is not like other government stimulus. Public investment acts as a typical demand stimulus but also provides important services to the private sector to assist with production of goods. This article analyzes the effects of public investment — especially highway construction, which is traditionally one of the largest components of public investment — on output. Dynamic effects turn out to be very important: Most studies find substantial benefits for the economy not in the immediate aftermath of the investment spending but a few years ahead.

Posted in Academic research & research papers, Economics - macro, micro etc, Indian Economy/Financial Markets | Leave a Comment »

Who Can Tell Which Banks Will Fail?

February 14, 2022

Kristian Blickle, Markus K. Brunnermeier & Stephan Luck in this NBER paper argue that inter-bank markets can identify bank panics much better compared to depositors:

We use the German Crisis of 1931, a key event of the Great Depression, to study how depositors behave during a bank run in the absence of deposit insurance.

We find that deposits decline by around 20% during the run and that there is an equal outflow of retail and non-financial wholesale deposits from both ex-post failing and surviving banks. This implies that regular depositors are unable to identify failing banks.

In contrast, the interbank market precisely identifies which banks will fail: the interbank market collapses for failing banks entirely but continues to function for surviving banks, which can borrow from other banks in response to deposit outflows.

Since regular depositors appear uninformed, we argue that it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing “discipline” via short-term funding.