The EconomicDynamics Newsletter

                Volume 10, Issue 2, April 2009

A free electronic supplement to the Review of Economic Dynamics
distributed through the EconomicDynamics mailing list and 
also available on the web at http://www.EconomicDynamics.org/

In this issue:

- The Research Agenda: Marco Bassetto on the Quantitative Evaluation
   of Fiscal Policy Rules 
- EconomicDynamics interviews Robert Barro on Rare Events
- Society for Economic Dynamics: Letter from the President
- Review of Economic Dynamics: Letter from the Co-ordinating Editor
- Review: Asset Pricing for Dynamic Economies
- Review: Economic Growth
- Impressum
- Subscribing/Unsubscribing/Address change

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The Research Agenda: Marco Bassetto on the Quantitative Evaluation of 
Fiscal Policy Rules

Marco Bassetto is a Senior Economist in the Economic Research Department 
at the Federal Reserve Bank of Chicago. He is interested in 
political-economy models of fiscal policy and in applications of game 
theory to the analysis of macroeconomic policy more in general. This piece 
reflects the personal views of the author and not necessarily those of the 
Federal Reserve Bank of Chicago or the Federal Reserve System.

1. Introduction

In 2009, the federal government is poised to run the biggest peacetime 
deficit in the history of the United States (both in absolute value and as 
a fraction of gross domestic product, or GDP). Current projections suggest 
that large deficits will persist in future years, considerably raising the 
debt/GDP ratio and putting additional strains on future public finances, 
which will soon also be challenged by the retirement of the baby boomers.

These developments are likely to rekindle debate about the desirability of 
imposing restrictions on government indebtedness. Constraints on deficit 
financing are the norm for state and local governments in the United 
States, and they are part of the European Stability and Growth Pact (SGP) 
to which eurozone countries have committed.

There is a large political-economy literature on government deficits and 
debt. On the theoretical side, most papers derive qualitative predictions 
from stylized models. On the empirical side, many papers have studied the 
consequences of different fiscal constraints on spending and debt (see, 
e.g., Poterba, 1994 and 1995, Bohn and Inman, 1996); these papers provide 
quantitative answers, but they do not contain a model that can be used for 
welfare considerations, or to extrapolate to fiscal institutions that have 
not been used in the past.

Few papers have attempted to bridge the gap, developing quantitative 
theoretical models that can be used to study the welfare properties of 
different fiscal restrictions. As an example, Krusell and Rios-Rull (1999) 
have studied the dynamics of government redistribution under a balanced 
budget, as a function of the frequency with which government decisions are 
taken.

In this piece, I review some recent quantitative contributions that deal 
with fiscal deficits and debt, and I discuss open questions that warrant 
future consideration.

In the first set of papers, a balanced-budget restriction (BBR) is 
necessarily desirable, and the research question is whether public 
investment should be subject to the BBR in the same way as ordinary 
government expenses. The second set of papers abstracts from government 
investment, but introduces a cost of enacting a BBR, through the inability 
to smooth tax rates in response to shocks. It then becomes possible to 
discuss under what conditions a BBR actually improves welfare.

2. Does public investment deserve special treatment?

One of the main complaints about the original form of the European SGP 
concerned the lack of special provisions for public investment (see, e.g., 
Monti, 2005). Its reform in 2005 heeded these criticisms, and now 
"policies to foster research and development and innovation" are taken 
into account in evaluating whether a deficit is truly excessive (European 
Council on the Stability and Growth Pact, 2005, article 1).

Similarly, all U.S. states can borrow to pay for long-term capital 
projects. They follow what is known in public finance as the "golden 
rule," whereby a jurisdiction should balance its operating budget, but 
should be able to borrow to pay for capital improvements. This rule has a 
long tradition both in theory and actual policy, and is mostly justified 
on the grounds of "fairness": The operating budget is assumed to benefit 
current residents, who should thus bear its cost, while public 
improvements offer long-run benefits to future generations, which implies 
that it is fair to also ask them to share the burden by using debt 
financing.

How important was the 2005 reform of the SGP for restoring appropriate 
incentives to invest in public infrastructure? If a balanced-budget 
amendment were included in the U.S. Constitution, would public capital 
deserve special treatment? What other features of the environment are 
relevant in assessing the quantitative impact of different provisions? We 
look for the answers to these questions in a series of recent papers.

In Bassetto with Sargent (2006), we introduce the framework of analysis 
and apply it to the Unites States. In this research, we consider an 
economy populated by overlapping-generations of potentially mobile 
households, in which government spending is chosen period by period by 
current residents. In their decisions, voters only take into account their 
own present and future costs and benefits, while they neglect those that 
will accrue to other future residents (new people coming of age or new 
immigrants).

The government produces two types of public goods: One is durable, while 
the other is not. The environment is such that a BBR necessarily yields a 
Pareto-efficient choice for nondurable public goods: all households alive 
are assumed to benefit in the same way, and to also pay taxes in the same 
amount. A BBR forces current households to pay exactly for the services 
they get from the government, and yields correct incentives. The same does 
not happen for public investment, since current investment will have 
long-lasting benefits.

We analyze a constitutional restriction on government indebtedness that 
features two key parameters:
a. The fraction of government investment that can be excluded from the 
deficit count (e.g., 100% according to the golden rule) and
b. The maturity structure of debt, which measures how fast newly incurred 
debt has to be repaid.

Two relevant conflicts emerge in the determination of public investment: 
the first among current voters, who are heterogeneous by age and thus face 
different mortality and mobility profiles, and the second between current 
voters and future residents. With a growing population, the second effect 
always dominates under a pure BBR, leading to underinvestment: the current 
voters fully take into account the immediate cost, but they only partially 
internalize future benefits. Under further mild restrictions on the 
demographic structure and/or the maturity of debt, we obtain the intuitive 
result that allowing some issuance of debt alleviates the underinvestment.

In our quantitative calibration, we assume that the government is allowed 
to issue long-term debt that has to be repaid gradually over time through 
a sinking fund. This is a common practice among U.S. states. For this 
case, we establish the following results.

a. The golden rule, with 100% deficit financing of public capital, tends 
to perform very well. The precise amount of deficit financing that exactly 
yields an efficient outcome is not affected much by the demographic 
details.

b. When the constitutional restriction is far away from the optimum, 
demographics are important for the magnitude of the resulting distortions. 
This is not surprising, since demographics are what drives the economy 
away from Ricardian equivalence in our context.

c. When the borrowing limit treats public capital and nondurable public 
consumption in the same way, we find much bigger distortions at the state 
level than at the federal level. At the state level, people discount 
future costs and benefits because of mobility more than mortality: at most 
ages, the hazard of moving out of state is much higher than the hazard of 
death. By contrast, the hazard of moving out of the United States is 
negligible.

The quantitative results thus suggest that the current pattern of U.S. 
institutional restrictions is well matched to its theoretical benefits: 
the golden rule is practiced by the states, where benefits are likely to 
be large, but not at the federal level, where benefits would not be as 
prominent.

In Bassetto and Lepetyuk (2007), we apply the same model to European data. 
As expected, the costs of not including an investment exemption in the SGP 
turn out to be modest: European countries are about as far away from 
Ricardian equivalence as the U.S. federal government, with a somewhat 
higher hazard of emigration offsetting lower population growth.

More surprisingly, we find that the golden rule performs rather poorly in 
the context of the SGP, generating distortions from overinvestment that 
are about as big as those for underinvestment in the original version of 
the SGP, which treated operating and capital expenses symmetrically. This 
is because the SGP only counts interest payments against a country's 
deficit allowance, allowing indefinite rollover of debt principal. Thus, 
under the golden rule the additional taxes needed to pay for public 
investment would be shifted into the future much more than the benefits 
from the investment. Two possible solutions to this problem are as 
follows:
a. excluding less than 100% of investment from the deficit count (in our 
numerical results, about 50% turns out to be appropriate); and
b. excluding net, rather than gross,investment from the deficit count. By 
including depreciation in the deficit count, this strategy is equivalent 
to forcing a gradual repayment of the debt that is issued to finance 
public investment. The drawback of this strategy is that depreciation is 
difficult to measure, opening a new margin to skirt the rules.

In ongoing work (Bassetto, 2009), I extend the analysis to account for the 
possibility of endogenous mobility, as well as different tax bases. This 
extension of the research is particularly important to understand which 
rules are best suited for local communities, where the household location 
decision is much more likely to be affected by local amenities and taxes.

Starting from Tiebout (1956), there is a large literature in local public 
finance that considers how endogenous location affects voters' incentives. 
One of the central themes in this literature is capitalization: local 
amenities and debt are likely to be reflected in the property prices. The 
theoretical literature (see, e.g., the survey by Mieszkowski and Zodrow, 
1989) has analyzed in detail the environments that are more or less 
conducive to capitalization. Most of these papers consider static 
environments, with a few considering overlapping-generations of households 
living for two periods; thus they are difficult to use for quantitative 
policy analysis. There is also a vast empirical literature that has tried 
to estimate the magnitude of capitalization.

I develop a dynamic model with long-lived agents, in which the parameters 
of the model can be more easily related to empirical counterparts, to 
deliver quantitative predictions about the effects of different policy 
rules on the efficiency of government spending.

When the tax base is income, endogenous mobility creates two opposing 
forces on the voters' incentive to provide public capital. First, a 
congestion externality is exacerbated: when additional public capital 
makes a location more attractive, more people move to that location, 
free-riding on the original investment and diluting its benefits for the 
original residents. Second, capitalization mitigates the externality: the 
increased demand for living in the location raises property prices, which 
benefits the original residents (assumed to own their house). Thus, it is 
important whether equilibrium adjustments mainly occur through quantity 
(population size) or through price.

Early quantitative results hint that the price adjustment will be 
insufficient to provide appropriate incentives for local public 
investment. An explicit rule that favors capital investment is thus called 
for. Alternatively, zoning restrictions are needed to drastically limit 
adjustment in population size.

3. Should we impose a BBR on the federal government?

Answering this question is one of the themes in recent work by Battaglini 
and Coate (2008a, 2008b) and Azzimonti, Battaglini, and Coate (2008). In 
their work, in each period the public sector can use its resources in two 
different ways: by providing public goods or by redistributing resources 
toward favored groups ("pork-barrel spending"). Public revenues come from 
a distortionary tax on labor, and the government has access to risk-free 
borrowing and lending, but cannot issue state-contingent debt. In each 
period, each group ("district") has one representative in the 
policy-making body ("Congress"), and a random coalition forms and makes a 
decision.

In this environment, debt is potentially beneficial for tax-smoothing 
considerations, such as in Barro (1979) and Aiyagari et al. (2002). 
However, access to debt is also a potential source of inefficiency, since 
the partisan nature of some policies introduces a deficit bias akin to 
what Alesina and Tabellini (1990) and Tabellini and Alesina (1990) 
describe. Specifically, in each period, the coalition in power has the 
opportunity to appropriate government funds and redistribute them to its 
own constituents. This is ex ante undesirable, since it involves raising 
revenues with distortionary taxes and rebating the proceeds to (a random 
group of) taxpayers. However, ex post, the transfers may be beneficial to 
the group in power at the expense of the others. Running deficits 
constrains future coalitions, which may redistribute government funds in 
ways that the current coalition finds undesirable.

Battaglini and Coate (2008a, 2008b) prove that the economy will 
necessarily alternate between two regimes:
a. "Responsible policy-making," when the marginal distortions from 
taxation are sufficiently high as to discourage diversion of public funds 
for redistributive purposes and
b. "Business as usual," when public resources are less scarce and the 
coalition in power engages in such targeted spending.

Responsible policy-making will prevail when the economy inherits a high 
level of public debt, or when it faces an adverse shock such as a high 
need for the general public good (e.g., during a war). When the adverse 
shock ends, the debt level gradually drifts lower, until it reaches a 
level at which business as usual restarts.

An important observation is that a BBR is a cure for one of the symptoms 
of inefficiency, but not for its source. While a deficit bias obviously 
disappears under a BBR, pork-barrel spending does not. In a calibrated 
example, Azzimonti, Battaglini, and Coate (2008) show that the prevalence 
of pork-barrel spending actually increases under a BBR, since the 
governing coalitions are no longer subject to the fiscal discipline 
imposed by servicing large amounts of debt. This insight potentially 
applies to many other environments, and serves as a warning that curing 
deficits simply by banning them may cause undesirable consequences unless 
we have a clear understanding of the political frictions that generate 
Pareto-dominated outcomes.

In ongoing work, Azzimonti, Battaglini, and Coate (2008) evaluate 
quantitatively the consequences of a balanced-budget amendment to the U.S. 
constitution. Their preliminary results show that the welfare consequences 
depend on the initial level of debt. When the government is not initially 
subject to a BBR and debt is at any of the values in the support of the 
associated ergodic distribution, introducing a BBR would never be 
desirable.

Azzimonti, Battaglini and Coate's calibration struggles to match the 
pattern of peacetime deficits, since the shock-absorbing role of 
government debt is minor in response to typical business-cycle shocks. 
This may be of concern because the cyclical behavior of spending is used 
to identify the magnitude of political distortions. Nonetheless, the match 
to the actual variability of spending and debt is quite good when the 
possibility of large shocks such as World War II is introduced, and their 
work represents an important step in developing a dynamic quantitative 
model of the costs of partisan policymaking.

4. Where should we go next?

The papers described in the previous sections are but one step in bringing 
quantitative economic modeling to the optimal design of fiscal 
institutions. Future work will have to develop in three dimensions:

a. Robustness

The previous analysis relies on specific political-economic frictions. To 
what extent do the implications generalize to other settings? As an 
example, let me briefly speculate on the robustness of the results about 
the golden rule.

It is straightforward to see that the rule would be much more beneficial 
if we assumed that operating budgets are subject to a deficit bias arising 
from partisan policymaking, while public investment is purely for the 
common good, as in Peletier, Dur, and Swank (1999), Azzimonti (2004), or 
Battaglini and Coate (2007). However, this assumption is at odds with the 
observation that "pork projects" are often capital items (e.g., the now 
infamous "bridge to nowhere").

Consider instead the following scenario, vaguely inspired by work of 
Rogoff and Sibert (1988), Rogoff (1990), and Besley and Smart (2007). 
Suppose that it takes time for voters to correctly assess the benefits of 
a long-term project (e.g., investment in renewable energy resources). 
Then, in the short run, it is difficult for the voters to distinguish the 
farsighted politicians, who are able to discern good projects, from the 
incompetent ones, who may pick projects more or less at random. This 
difficulty may bias policymaking to short-term projects, for which 
competence may be easier to signal to voters. Is this an important 
quantitative force? Only by developing models that are more detailed will 
we be able to gain confidence in the robustness of the institutional 
recommendations.

b. Analysis of other fiscal institutions

In this discussion, I have only addressed two specific questions. In 
practice, there are of course countless other dimensions of fiscal 
institutions worth considering. Taking again inspiration from current 
events, the stimulus package signed into law by President Obama on 
February 17 contains substantial transfers from the federal government to 
state governments. Moreover, federal matching is a standard feature for 
some expense items (such as interstate highways) but not in others 
(education). How large should a federal match be, and in what 
circumstances should it be granted? Are externalities from public goods 
quantitatively more important for this question, or is it more important 
to pay attention to insurance and discipline (see, e.g., Persson and 
Tabellini, 1996a and 1996b, or Sanguinetti and Tommasi, 2004)?

These questions are important not just for the United States, since 
transfers from the central government to regional/provincial governments 
are or have been prominent in a number of countries (e.g., Argentina, 
Brazil, or Italy).

c. Tax base

Should we rely more or less on property taxes, rather than income taxes, 
to finance government expenditures? Two provocative papers by Rangel 
(2005) and Conley and Rangel (2001) argue that land taxes (based on pure 
acreage, not value) would be very beneficial for intertemporal incentives. 
As we discuss in Bassetto (2009), the drawback of pure land taxes is that 
they would be unable to generate substantial revenues without dragging the 
value of the marginal land to zero, at which point the scheme unravels. 
Does this imply that we should move towards income or sales taxes? Or 
should we instead consider property taxes, which may have beneficial 
capitalization effects but distort capital accumulation?

d. Intergenerational accounting

In the works cited previously, what represents a deficit is clearly 
defined, and government debt captures well the intertemporal effects of 
fiscal policy. Yet Auerbach and Kotlikoff (along with various coauthors) 
have forcefully argued for intergenerational accounting as a more 
comprehensive and appropriate measure (see, e.g., Auerbach, Gokhale, and 
Kotlikoff, 1991 and 1994, and Kotlikoff, 1992).

In the context of distortionary taxation, a similar point is made formally 
in Bassetto and Kocherlakota (2004): When the government has the power to 
tax (or subsidize) past income, the same allocation can be supported by 
arbitrary paths for government debt (for an application to Social 
Security, see Grochulski and Kocherlakota, 2007). This is particularly an 
issue in models of "new dynamic public finance," where the fiscal 
distortions arise purely out of asymmetric information between the private 
sector and the fiscal authority. In these papers, the ability to tax past 
income is always present, and the deficit path may be correspondingly 
indeterminate.

Several papers have looked at the political-economy of intergenerational 
accounting, particularly from the perspective of social security (see, 
e.g., Cooley and Soares, 1996, Galasso, 1999, Song, Storesletten, and 
Zilibotti, 2007, and Bassetto, 2008). The introduction of a 
balanced-budget restriction would most likely interact with the 
considerations raised in these papers.

e. Timing of institutional reforms

Policy choices are endogenous in the work described previously, but 
institutional constraints are taken as given, and the goal of the research 
is to assess the welfare properties of imposing alternative restrictions 
on fiscal policy. A separate but important issue is when an institutional 
reform takes place, and how. In the case of U.S. states, the introduction 
of balanced-budget requirements dates back to the aftermath of the state 
defaults of the 1840s (see, e.g., Secrist, 1914). These constitutional 
reforms took place at a time when access to borrowing for states was 
severely disrupted; indeed, a renewed commitment to fiscal responsibility 
could be viewed as a way of restoring access to credit markets. This is 
but one example of a general pattern, whereby major fiscal reforms often 
follow a public finance crisis (for some other examples, see Sargent, 
1983a and 1983b). The largely ineffective Gramm-Rudman-Hollings Act of 
1985 could also be seen in this light - it was a preventative measure that 
was enacted out of concern for the consequences of the then-unprecedented 
deficits of the Reagan era.

While these considerations warrant a more systematic analysis, they 
suggest to me that now may be the perfect time for economists to engage in 
a debate over the fiscal institutions that will serve the United States 
for the next generation and beyond.

Selected references to the papers mentioned are available in 
the web version of this newsletter at
http://www.EconomicDynamics.org/newsletter.htm

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EconomicDynamics Interviews Robert Barro on Rare Events

Robert Barro is the Paul M. Warburg Professor of Economics at Harvard 
University and a senior fellow of the Hoover Institution of Stanford 
University. He is currently interested in the interplay between religion 
and political economy and the impact of rare disasters on asset markets.

EconomicDynamics: In your recent work, you have emphasized the impact of 
rare, but large, events on the economy, in particular interest rates and 
premia. Does the current crisis correspond to the large event you had in 
mind, and what does this imply for interest rates in the medium term?

Robert Barro: In our study, we defined a macroeconomic crisis as a 
decline (over one or more years) of per capita real GDP or consumption by 
10% or more. We do not yet know whether the U.S. situation will fall into 
this range--the probability at present, given the stock-market 
performance, is around 25%. However, the current crisis is global, and 
several countries will likely end up in the depression range. Iceland and 
Russia, I think, are already there.

If the probability of disaster goes up--as it did last year after the 
spring--the real interest rate on safe assets, such as indexed U.S. 
Treasury bonds, should go down. The expected real return on risky assets, 
such as stocks, should go up (corresponding to a fall in stock prices). 
Thus, the equity premium goes up. Effects on nominal interest rates depend 
also on expectations of inflation. With low expected inflation over the 
short term, short-term nominal rates, such as on U.S. Treasury Bills, 
should become very low. Interest rates on medium term bonds should be 
higher than the short-term rates.

ED: The Great Moderation of the last two decades was characterized by 
dampened economic fluctuations and lower equity premia. Following your 
theory, can we interpret the latter as a consequence of the market putting 
lower probabilities on large events during this lull in fluctuations?

RB: A decrease in disaster probability would have the effect of 
lowering the equity premium. And the rise in price-earnings ratios up to 
2007 is consistent with this reasoning. However, it's hard to determine 
equity premia on a high-frequency basis, such as annually, because stock 
returns are so volatile. Thus, even 20 years is not a long time for 
computing the expected rate of return on equity (based on the observed 
average return).

ED: Beyond the themes just discussed, where do you see you research agenda 
on disaster probabilities bringing you?

RB: As a general matter, I think the rare-disasters perspective is 
important for many aspects of finance and macroeconomics. As an example, 
Gabaix (2009) applies this framework to explaining ten puzzles in asset 
pricing. The approach is also promising for understanding puzzles related 
to exchange rates and interest rates. An example involves the carry 
trade--borrowing in a low-interest-rate currency such as the Yen and 
investing in a high-interest-rate currency. This strategy can appear to be 
profitable for a long time but then suffer greatly in a disaster 
situation. Thus, the streak of high returns is not really a puzzle in a 
setting that allows for the chance of rare disasters. This setting is 
analogous to the persistently high returns achieved for years by AIG (and 
perhaps also Harvard University's endowment).

At present, I am working with various co-authors on extensions of the 
previous research. One project estimates the form of the size distribution 
of disaster events (using a Pareto or power-law distribution, which has 
been used to explain patterns in city sizes, stock-market price movements, 
and many other phenomena). This method for pinning down the fat tail of 
the disaster distribution seems to lead to a better explanation of the 
equity premium. I am also working on the interplay between stock-market 
crashes and depressions to see how properties of the stock-market crash 
(What is the size of the crash? Is it accompanied by a financial crisis? 
Is it local or regional or global? Is it war related?) affects predictions 
for macroeconomic outcomes. I am also studying the nature of recoveries 
from macroeconomic disasters (notably wars and financial crises) and 
assessing the durations of depressions. Another extension, being pursued 
by my student Jose Ursua, will assess the Great Influenza Epidemic of 
1918-20 as a possible source of the macroeconomic disaster that showed up 
in many countries, including the U.S. and Canada, with a trough around 
1921. (By the way, President Wilson suffered from the flu in 1919 and this 
illness may have led to the harsh Versailles Treaty that likely caused 
WWII, and Max Weber--a key figure in the social science of religion--died 
of the flu in 1920.)

ED: Gabaix (2009) shows that a large range of puzzles can be explained by 
rare disasters. There have been (partially) successful attempts to address 
these puzzles with non-standard preferences such as hyperbolic discounting 
and loss aversion. You worked with Epstein-Zin preferences. Could the 
issue rather be framed in terms of preference formation? Would, for 
example, loss aversion reduce the need for disasters to explain data?

RB: In many contexts, shifting disaster probabilities have effects on 
asset prices that resemble those from shifting preferences--specifically, 
from changing degrees of risk aversion. Of course, I am myself inclined 
toward models in which preferences are stable and other factors move 
around. But the key matter is how to distinguish these approaches 
empirically. One difference is that changes in disaster probabilities have 
implications for the actual future course of disasters, whereas shifting 
preferences do not have these implications. The key challenge is to make 
these different predictions operational in a context where the frequency 
and size distributions of actual disasters are hard to pin down with short 
samples of data.

ED: In early work, you initiated a rich literature on the Ricardian 
Equivalence. After much additional theoretical and empirical work, do you 
think the Ricardian Equivalence holds? And if not, how and why?

RB: I think Ricardian Equivalence provides the right baseline in 
thinking about fiscal deficits. Then reasonable analyses have to specify 
precisely in which dimensions the results depart from this 
equivalence--and, thereby, have implications for interest rates, 
investment, and so on. Much of the research in this area, such as 
tax-smoothing ideas, look more like public finance, rather than 
macroeconomics, per se. Tax smoothing has important empirical predictions 
about how fiscal deficits should and do behave--for example, the 
prediction that deficits are large in wars and depressions. 
Political-economy elements, such as the strategic debt model (originally 
crafted to explain the large Reagan budget deficits), have also been 
important.

Selected references to the papers mentioned are available in 
the web version of this newsletter at 
http://www.EconomicDynamics.org/newsletter.htm

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Society for Economic Dynamics: Letter from the President

Dear SED Members and Friends:

The developments reported in my last letter proceed apace. Richard 
Rogerson will be taking over as SED President at the end of the upcoming 
meetings in Istanbul. The handover at the RED has taken place with 
Gianluca Violante proving a very worthy successor to Narayana 
Kocherlakota, who continues to be active.

As you know the upcoming meetings will take place in Istanbul, Turkey July 
2-4, 2009. They are hosted by Bahceshir University. Our co-chairs Jesus 
Fernandez-Villaverde and Martin Schneider have put together a fantastic 
program including a great set of plenary speakers: Matt Jackson, Tim Kehoe 
and Chris Sims. Submissions were up this year by 16%, and there will be a 
record 429 papers in 12 parallel sessions. Our local organizers Nezih 
Guner, Refet Gurkaynak, Selo Imrohoroglu Gokce Kolasin and Kamil Yilmaz 
have lined up some great venues and activities. All the details can be 
found at http://www.economicdynamics.org/sed2009.htm. I look forward to 
seeing all of you in Istanbul.

For 2010, we plan to hold the meetings in Montreal. Montreal is a great 
city, and I expect we will put together our usual strong scientific 
program. Tentatively for 2011 we plan to go to Gent Belgium, and we will 
probably switch from alternating one year in North America, one year 
overseas to one year in North America with two years overseas.

Sadly I must report that because our Treasurer Ellen McGrattan avoided 
investing in mortgage backed securities, we are ineligible for TARP 
bailout funds.

Best Regards.

David Levine, President
Society for Economic Dynamics

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Review of Economic Dynamics: Letter from the Co-ordinating Editor

Since January 1st, I have been serving as Coordinating Editor of the 
Review of Economic Dynamics. I feel very privileged to have this job. Tom 
Cooley, Gary Hansen and Narayana Kocherlakota, my predecessors, all did a 
phenomenal effort in rapidly getting the journal off the ground and in 
turning it into one of the success stories among Economics journals. On 
behalf of the Society, I thank Narayana Kocherlakota for the superb job he 
did in the last three and a half years as Coordinating Editor of RED.

Large part of the success of RED is due to the outstanding work of our 
Editorial Board, able to select high-quality papers among the many 
submissions we receive every year, and to turn very good papers into 
excellent ones through a constructive and fast refereeing process. I thank 
all the members of the Editorial Board for their dedication.

Over the next few months, we will have to replace some of our Editors and 
Associate Editors. I will keep using the same recipe of success of my 
predecessors, which is a mix of experience and new talent. Peter Ireland, 
who has served the RED for many years has already announced his 
resignation as Associate Editor, starting from July 1st, 2009. I wish to 
thank him for the outstanding service he has provided to the journal 
throughout his tenure. I am delighted to announce that Giorgio Primiceri 
(Northwestern) has accepted to take his place among our Associate Editors.

Now in its twelfth year of publications, RED is in excellent health and 
its reputation continues to grow well beyond members of the Society. The 
table below shows the ISI Impact Factor (one of the best known and most 
widely used indicator of a journal's quality) for RED and for a number of 
"competitors". The impact factor of a given journal for year t is 
calculated as the number times s articles published in year t-1 and t-2 
were cited in all journals during year t.

ISI Impact Factor Comparison
 				2007	2006	2005	2004	2003
Journal of Monetary Economics	1.48	1.38	1.66	1.58	1.15
Review of Economic Dynamics	0.97	0.84	0.48	0.63	0.60
J. of Money, Credit and Banking	0.95	1.16	0.98	0.92	0.84
International Economic Review	0.92	1.03	1.28	0.82	0.84
J. of Econ Dynamics and Control	0.70	0.78	0.69	0.48	0.69
Macroeconomic Dynamics		0.45	0.51	0.52	0.50	0.73

Two facts stand out. First, RED shows the highest gradient since 2003. 
Second, it has already caught up with IER and, JMBC, journals with a much 
longer history.

The review process at RED is fast, without compromising quality, which is 
what any serious academic journal should do. Last year we received over 
200 submissions, and the average time until first decision was only 12 
weeks. I believe this is one of the best records among Economics journals.

In sum, when you submit to RED, you are guaranteed a very quick 
turnaround, highly competent refereeing, and a chance of publishing on a 
journal whose reputation is growing at a fast pace.

At RED, we continue with the tradition of publishing special issues 
(approximately one every 1-2 years) representing the best research at the 
frontier of topics which are of special interest to members of the 
Society. Currently, we are planning two special issues.

The first one, "Cross-Sectional Facts for Macroeconomists," s being edited 
by Dirk Krueger, Fabrizio Perri, Luigi Pistaferri and me. Its aim is to 
document empirical regularities about cross-sectional distributions of 
income, hours, consumption and wealth for a number of countries. The 
underlying micro-data will be made available to the public in a 
user-friendly format. We hope that this issue will become a standard 
reference for all of us working with heterogeneous-agents models of the 
macroeconomy. The issue will be published in January 2010 and the 
evolution of the individual papers can be monitored in real time here.

The second special issue on "Sources of Business Cycle Fluctuations" is 
being edited by Stephanie Schmitt-Grohe and Martin Uribe. Even though this 
project is at an earlier stage, nine papers have already been selected out 
of almost fifty high-quality submissions. These papers will be presented 
in a mini-conference within the SED meetings in Istanbul.

Finally, precisely with the SED meetings approaching, I want to echo the 
words Narayana Kocherlakota wrote in his letter in 2005, when he took over 
as Coordinating Editor: If you have a paper that is a good fit for the SED 
meetings (it needs not be a macro paper), and you are not sending it to a 
top general-interest journal, submit it to the Review of Economic 
Dynamics!

I look forward to receiving your submissions.

Yours,

Gianluca Violante, Co-ordinating Editor
Review of Economic Dynamics

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Review: Asset Pricing for Dynamic Economies

Asset Pricing for Dynamic Economies
by Sumru Altug and Pamela Labadie

This book offers an introduction into dynamic economics using asset 
pricing as the guiding theme. It is useful to graduate students of both 
macroeconomics and financial economics in that it offer in the same 
language and approach a unified treatment of discrete time dynamic 
economies. This book is self-contained: it offers the basic tools and goes 
through the basic models, in each case discussing various extension, 
empirical issues and suggesting exercises. As implied by the title, it 
starts with the basic asset pricing models APT, CAPM and CCAPM. It covers 
also production economies, non-separable utility, q-theory of investment, 
real business cycles, international asset markets, cash-in-advance, 
frictions, borrowing constraints and overlapping generations. The level of 
the treatment should make any graduate student comfortable with the 
material. Plenty of references are offered for further developments and 
readings. Instructors should also find plenty of inspiration for new 
approaches to teaching.

Asset Pricing for Dynamic Economies is published by Cambridge University 
Press.

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Review: Economic Growth

Economic Growth: Theory and Numerical Solution Methods
by Alfonso Novales, Esther Fernandez and Jesus Ruiz

Over the past years, a number of textbooks have been published that 
present computational methods for dynamic general equilibrum models. 
Typically, they would concentrate on business cycle models and only 
mention growth models in passing. The new book by Novales, Fernandez and 
Ruiz does the opposite: focus on numerical solution methods for growth 
models, with the addition of extensions on business cycles models (and 
growth theory, too).

The main sections cover the Neoclassical growth model, optimal growth in 
continuous and discrete time, endogenous growth and monetary economies. 
For each topic, the theory is introduced with various extensions, then 
numerical solution methods are discussed, along with some exercises. Note 
that Excel and Matlab codes are available on the web for various 
applications.

The book is self-contained and aimed at graduate students, but can also be 
used as a reference book. The unusually high cost for a graduate textbook 
(US$199) may discourage its widespread adoption, though, until the 
paperback version is published.

Economic Growth is published by Springer.

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Impressum

The EconomicDynamics Newsletter is a free supplement to the Review of
Economic Dynamics. It is distributed through the EconomicDynamics mailing
list and archived at http://www.EconomicDynamics.org/newsletter.htm. The
responsible editors are Christian Zimmermann (RED associate editor),
[log in to unmask] and Gianluca Violante (RED coordinating 
editor), [log in to unmask]

The EconomicDynamics Newsletter is published twice a year in April and
November.

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