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Macroeconomic Vulnerabilities in the Twenty-First Century: A Preliminary Taxonomy

Macroeconomic Vulnerabilities in the Twenty-First Century: A Preliminary Taxonomy. J. Bradford DeLong U.C. Berkeley and NBER July 2002 Draft 2.0: Conference Draft. Old Macroeconomic Vulnerabilities. Confidence shocks that reduced investment. Overly contractionary monetary policies.

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Macroeconomic Vulnerabilities in the Twenty-First Century: A Preliminary Taxonomy

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  1. Macroeconomic Vulnerabilities in the Twenty-First Century: A Preliminary Taxonomy J. Bradford DeLongU.C. Berkeley and NBERJuly 2002Draft 2.0: Conference Draft

  2. Old Macroeconomic Vulnerabilities • Confidence shocks that reduced investment. • Overly contractionary monetary policies. • Self-reinforcing debt-deflation mechanisms. • Loss of central bank reputation. • Persistent deficits and political need for the central bank to finance the government's deficit.

  3. Magnitude of Our Current Technological Revolutions • Industrial Revolution in textiles: 10% per year productivity gain. • Second Industrial Revolution in electric power: 9% per year. • Today (Nordhaus): 58% per year. • Salience of new technology: at between 5% and 7% of gross expenditure, two to three times as salient as was steam or the electron

  4. Five Possible Effects on Macroeconomic Vulnerabilities • Uncertainty and asset price volatility. • Inventories and information technology. • Institutions of macroeconomic management. • Labor market rigidities and productivity growth. • Financial market sophistication and regulatory surveillance.

  5. Uncertainty and Asset Price Volatility

  6. Inventories and Information Technology

  7. Productivity Growth and the Labor Market

  8. Governmental Capacity • Capacity to manage the macroeconomy • Example of Japan • Administrative capacities not used atrophy quickly • Capacity to regulate financial markets • Increasing sophistication of instruments • LTCM

  9. Conclusion • Three things we think we know: • More asset price vulnerability • Reduced inventory mistakes • Greasing the wheels of the labor market • Three things we don’t know: • Magnitudes? • Degraded macro management capability? • Dealing with more sophisticated financial structures?

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