I wonder if TFP really would be exogenous to the sort of policy experiment I'm using my model for?Institutions exist in both endogenous and exogenous capacities, and total factor productivity depends in part on how different institutions interact with one another - both locally and internationally. Family formation and knowledge/time based services are examples of endogenous institutions, while traditional manufacture and commodity wealth represent exogenous institutions. In particular, tradable sectors contribute to exogenous (international) monetary flows. However, tradable sector wealth tends to accrue in regions with already existing geographic and knowledge product advantages.
I wonder if social/economic institutions really would be exogenous to the sort of policy experiment I'm using my model for?
How might one think about endogenous and exogenous factors in terms of worldwide economic conditions? Until the Great Recession, developed nations were able to continue the growth of their local, non tradable sectors via connections to still expanding growth in tradable sectors around the globe. As tight monetary conditions now affect exogenous (international) wealth, the implications this also holds for endogenous wealth formation, should be more obvious.
What is being missed, is the degree to which endogenous wealth remains dependent on the exogenous wealth of tradable sectors. For instance, it becomes more difficult for nations to "come to the rescue" with fiscal policy, when international wealth (i.e. sources of fiscal revenue) is steadily losing value in the international marketplace.
No one should lightly dismiss the problems which tradable sectors are now experiencing. While non tradable sectors could ultimately generate growth capacity through more direct means, this process has not yet begun. In the meantime, tradable sector wealth has already begun to slow. Once these forms of production capacity are lost, they can take a lot more time to rebuild, than it ever took to lose capacity in the first place. And no one can safely assume such rebuilding would automatically occur!
Thus far (since the Great Recession) central bankers have mostly attempted to rely on stabilization methods which protect financial interests. But international economic conditions have gradually proven this approach insufficient. Meanwhile, as the Fed remains reluctant to maintain aggregate spending capacity, a too strong dollar is now depressing growth potential, internationally. An article from the NYT points to some of the confusion in this regard:
Did global output rise or fall last year? It all depends on what currency you use to keep track. Measured in dollars, global growth recorded the first drop since the end of the financial crisis late in the last decade, declining by nearly 5 percent, from $77.3 trillion to $73.5 trillion. That's largely because of the dollar's rise, which makes the output of countries with weaker currencies seem smaller when measured in dollars. But if you count in euros, growth soared by 13.6 percent.
Consider what has already occurred, in terms of further monetary tightening on the part of the Fed. As Lars Christensen noted in a recent post, the dollar embarked on a sharp rise two years earlier. This process has gone on mostly uninterrupted, since Janet Yellen's leadership role began in February of 2014.
Due to the dollar's appreciation - particularly given the dollar's additional role as a monetary anchor - aggregate spending capacity worldwide has been somewhat diminished. While this is reflected in the recent worldwide devaluation of commodities, the problems don't stop there. A growing inability for developed nations to deal effectively with structural issues in their non tradable sectors, contributes to political and social polarization both locally and nationally. Also at stake, are broader questions regarding the capacity for long term growth.
One issue in this regard, is a lack of understanding how a nation's budgets work differently from either local or state budgets. National budgets in particular, tend to have have exposure to the international or exogenous wealth of tradable sectors. In a recent post, David Glasner notes that national budgets are not analogous to local budgets, and he explains: "In the intertemporal context, consumers have a given resource endowment but prices are not known." Potential contributions from exogenous forms of wealth aren't easy to determine (hence price uncertainty), given the fact they are shared by multiple nations for resource coordination potential.
The relationship of endogenous to exogenous resource capacity needs to be better understood, especially since the former has such a strong correlation with nominal income. The endogenous/exogenous relationship also has bearing on the ability of nations to maintain general equilibrium conditions, which in turn allows sufficient knowledge use capacity to continue on asymmetric terms. These are also the forms of sticky wages which matter most in general equilibrium, for endogenous non tradable sector activity.
Central bankers have fallen short, in part due to their inability to consider the correlations between endogenous and exogenous factors of aggregate wealth. As a result, they have prioritized financial stability over nominal stability, which only destabilizes the relation of income to existing equilibrium. This in turn has the effect of reducing asset valuations, and also the value of existing exogenous wealth. Which is vitally important, because maintenance of international wealth capacity, can preserve the primary links nations hold with one another.
Present economic circumstance are somewhat different than what existed in the Great Recession, because the main problems are more exogenous in nature. By way of comparison, the financial crisis included a lack of response to internal structural problems. Lack of resolution in this regard only contributed to current circumstance. In that central bankers believed they actually "took care" of the problems stemming from the Great Recession, this likely has bearing on their slow response and denial of the fact that little has actually been resolved.
Due to the dollar's appreciation - particularly given the dollar's additional role as a monetary anchor - aggregate spending capacity worldwide has been somewhat diminished. While this is reflected in the recent worldwide devaluation of commodities, the problems don't stop there. A growing inability for developed nations to deal effectively with structural issues in their non tradable sectors, contributes to political and social polarization both locally and nationally. Also at stake, are broader questions regarding the capacity for long term growth.
One issue in this regard, is a lack of understanding how a nation's budgets work differently from either local or state budgets. National budgets in particular, tend to have have exposure to the international or exogenous wealth of tradable sectors. In a recent post, David Glasner notes that national budgets are not analogous to local budgets, and he explains: "In the intertemporal context, consumers have a given resource endowment but prices are not known." Potential contributions from exogenous forms of wealth aren't easy to determine (hence price uncertainty), given the fact they are shared by multiple nations for resource coordination potential.
The relationship of endogenous to exogenous resource capacity needs to be better understood, especially since the former has such a strong correlation with nominal income. The endogenous/exogenous relationship also has bearing on the ability of nations to maintain general equilibrium conditions, which in turn allows sufficient knowledge use capacity to continue on asymmetric terms. These are also the forms of sticky wages which matter most in general equilibrium, for endogenous non tradable sector activity.
Central bankers have fallen short, in part due to their inability to consider the correlations between endogenous and exogenous factors of aggregate wealth. As a result, they have prioritized financial stability over nominal stability, which only destabilizes the relation of income to existing equilibrium. This in turn has the effect of reducing asset valuations, and also the value of existing exogenous wealth. Which is vitally important, because maintenance of international wealth capacity, can preserve the primary links nations hold with one another.
Present economic circumstance are somewhat different than what existed in the Great Recession, because the main problems are more exogenous in nature. By way of comparison, the financial crisis included a lack of response to internal structural problems. Lack of resolution in this regard only contributed to current circumstance. In that central bankers believed they actually "took care" of the problems stemming from the Great Recession, this likely has bearing on their slow response and denial of the fact that little has actually been resolved.
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