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Annual Review of Economics - Early Publication
Reviews in Advance appear online ahead of the full published volume. View expected publication dates for upcoming volumes.
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Fiscal Federalism in the Twenty-First Century
First published online: 20 May 2024More LessFiscal federalism concerns the division of policy responsibilities among different levels of government. Many current economic and policy developments, such as globalization, environmental crises, and rising inequality, may not appear to be favorable to fiscal federalism, yet countries are further decentralizing their fiscal systems. We summarize the efficiency and equity aspects of fiscal decentralization, fiscal competition, fiscal externalities, and intergovernmental grants. The review introduces readers to theoretical reasons for/against a federalist structure. We discuss how federalism relates to classic problems in economics: externalities, inequality, spillovers, information, and aspects of political economy. Our review integrates both theory and empirics, while also focusing on the variety of federal systems in different countries, both developing and developed. We conclude by discussing how fiscal federalism is being shaped by economic, technological, and environmental changes, while discussing the effects of globalization, polarization, and global crises on the future of federal systems.
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From Happiness Data to Economic Conclusions
First published online: 20 May 2024More LessHappiness data—survey respondents’ self-reported well-being (SWB)—have become increasingly common in economics research, with recent calls to use them in policymaking. Researchers have used SWB data in novel ways—for example, to learn about welfare or preferences when choice data are unavailable or difficult to interpret. Focusing on leading examples of this pioneering research, the first part of this review uses a simple theoretical framework to reverse-engineer some of the crucial assumptions that underlie existing applications. The second part discusses evidence bearing on these assumptions and provides practical advice to the agencies and institutions that generate SWB data, the researchers who use them, and the policymakers who may use the resulting research. While we advocate creative uses of SWB data in economics, we caution that their use in policy will likely require both additional data collection and further research to better understand the data.
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Why Survey-Based Subjective Expectations Are Meaningful and Important
First published online: 09 May 2024More LessFor decades, households’ subjective expectations elicited via surveys have been considered meaningless because they often differ substantially from the forecasts of professionals and ex-post realizations. In sharp contrast, the literature we review shows that household characteristics and the ways in which households collect and process economic information help us understand previously considered puzzling facts about their subjective expectations. In turn, subjective expectations contribute to explain heterogeneous consumption, saving, investment, and debt choices as well as different reactions by similar households to the same monetary and fiscal policy measures. Matching microdata on households’ characteristics with the price signals the same households observe, their subjective expectations, and their real-world economic decisions is crucial to establishing these facts. Our growing understanding of households’ subjective expectations inspires several theoretical and empirical research directions and begets the design of innovative and more effective policy instruments.
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Climate Change Economics over Time and Space
First published online: 01 May 2024More LessWith average temperature ranging from −20°C at the North Pole to 30°C at the Equator and with global warming expected to reach 1.4°C to 4.5°C by the year 2100, it is clear that climate change will have vastly different effects across the globe. Given the abundance of land in northern latitudes, if population and economic activity could freely move across space, the economic cost of global warming would be greatly reduced. However, spatial frictions are real: migrants face barriers, trade and transportation are costly, physical infrastructure is not footloose, and knowledge embedded in clusters of economic activity diffuses only imperfectly. Thus, the economic cost of climate change is intimately connected to these spatial frictions. Building on earlier integrated assessment models (IAMs) that largely ignored space, in the past decade there has been significant progress in developing dynamic spatial integrated assessment models (S-IAMs) aimed at providing a more realistic evaluation of the economic cost of climate change, both locally and globally. This review discusses this progress and provides a guide for future work in this area.
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Negative Interest Rate Policies: A Survey
First published online: 01 May 2024More LessThis article surveys studies on the impact of central bank negative interest rate policies (NIRP). It reviews recent research on the effects of NIRP on financial markets, banks, households, firms, and the macroeconomy. Overall, policy rate cuts when interest rates are negative propagated along the yield curve, with the first policy cut below zero contributing significantly to the fall in longer-term yields. Lending and deposit rates also decreased following the adoption of NIRP. Based on the experience so far, bank lending volumes rose, and bank profits did not significantly deteriorate, although there was considerable heterogeneity in the effects. The impact of NIRP on inflation and output appears to have been comparable to that of conventional interest rate cuts.
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The New Economics of Industrial Policy
First published online: 01 May 2024More LessWe discuss the considerable literature that has developed in recent years providing rigorous evidence on how industrial policies work. This literature is a significant improvement over the earlier generation of empirical work, which was largely correlational and marred by interpretational problems. On the whole, the recent crop of papers offers a more positive take on industrial policy. We review the standard rationales and critiques of industrial policy and provide a broad overview of new empirical approaches to measurement. We discuss how the recent literature, paying close attention to measurement, causal inference, and economic structure, is offering a nuanced and contextual understanding of the effects of industrial policy. We re-evaluate the East Asian experience with industrial policy in light of recent results. Finally, we conclude by reviewing how industrial policy is being reshaped by a new understanding of governance, a richer set of policy instruments beyond subsidies, and the reality of deindustrialization.
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Modern Industrial Policy and the World Trade Organization
First published online: 01 May 2024More LessThis article surveys the economics of industrial policy as it relates to the World Trade Organization (WTO). Motivated by concern that the modern use of industrial policy is emerging in ways that threaten cooperation in the international trading system, the article begins with the basic historical economic framework for tying industrial policy to underlying market failures. It then introduces the dominant economic understanding of the role played by the WTO, examining the WTO's rules on subsidies (and thus industrial policy), the unease with the evolution of the trading system's subsidy rules, gaps in knowledge, and important data and measurement shortcomings. The main part of the article examines four areas in which modern industrial policy operates differently and has become especially important for the trading system: China, supply chain resilience, supply chain responsiveness, and climate change. The article identifies the evidence to date, open questions, and potential paths forward for economic research to help inform policymakers’ efforts to restore international economic cooperation in trade and industrial policy.
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A Practical Guide to Weak Instruments
First published online: 26 April 2024More LessWe survey the weak instrumental variables (IV) literature with the aim of giving simple advice to applied researchers. This literature focuses heavily on the problem of size inflation in two-stage least squares (2SLS) two-tailed t-tests that arises if instruments are weak. A common standard for acceptable instrument strength is a first-stage F of 10, which renders this size inflation modest. However, 2SLS suffers from other important problems that exist at much higher levels of instrument strength. In particular, 2SLS standard errors tend to be artificially small in samples where the 2SLS estimate is close to ordinary least squares (OLS). This power asymmetry means the t-test has inflated power to detect false positive effects when the OLS bias is positive. The Anderson-Rubin (AR) test avoids this problem and should be used in lieu of the t-test even with strong instruments. We illustrate the practical importance of this issue in IV papers published in the American Economic Review from 2011 to 2023. Use of the AR test often reverses t-test results. In particular, IV estimates that are close to OLS and significant according to the t-test are often insignificant according to AR. We also show that for first-stage F in the 10–20 range there is a high probability that OLS estimates will be closer to the truth than 2SLS. Hence we advocate a higher standard of instrument strength in applied work.
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Automation: Theory, Evidence, and Outlook
First published online: 25 April 2024More LessThis article reviews the literature on automation and its impact on labor markets, wages, factor shares, and productivity. I first introduce the task model and explain why this framework offers a compelling way to think about recent labor market trends and the effects of automation technologies. The task model clarifies that automation technologies operate by substituting capital for labor in a widening range of tasks. This substitution reduces costs, creating a positive productivity effect, but it also reduces employment opportunities for workers displaced from automated tasks, creating a negative displacement effect. I survey the empirical literature and conclude that there is wide qualitative support for the implications of task models and the displacement effects of automation. I conclude by discussing shortcomings of the existing literature and avenues for future research.
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Experiments About Institutions
First published online: 25 April 2024More LessInstitutions are a key determinant of economic growth, but the critical junctures in which institutions can change are not precisely defined. For example, such junctures are often identified ex post, raising several methodological problems: a selection on the outcome of institutional change; an inability to study beliefs, which are central to coordination and thus the process of institutional change; and an inability to conduct experiments to identify causal effects. We argue that critical junctures are identifiable in real time as moments of deep uncertainty about future institutions. Consistent with this conception, the papers reviewed (a) examine changes to institutions, i.e., the fundamental rules of the game; (b) are real-time studies of plausible critical junctures; and (c) use field experiments to achieve causal identification. We also advocate for more systematic measurement of beliefs about future institutions to identify critical junctures as they happen and provide an empirical proof of concept. Such work is urgent given contemporary critical junctures arising from democratic backsliding, state fragility, climate change, and conflicts over the rights of the marginalized.
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Fertility in High-Income Countries: Trends, Patterns, Determinants, and Consequences
First published online: 17 April 2024More LessHigh-income countries have generally experienced falling fertility in recent decades. In most of these countries, the total fertility rate is now below the level that implies a stable population in the long run. This has led to concerns among economists, policymakers, and the wider public about the economic consequences of low fertility and population decline. In this contribution, we aim to (a) describe the main determinants of low fertility in high-income countries, (b) assess its potential economic consequences, (c) discuss adjustment mechanisms for individuals and economies, (d) propose a simple economic framework to analyze the long-run economic impact of low fertility, and (e) draw lessons for economic policymakers to react appropriately. While the economic challenges of low fertility are substantial, a thoughtful and consistent policy response can mitigate most of the adverse consequences.
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Industrial Policy and the Great Divergence
First published online: 09 April 2024More LessWe discuss recent work evaluating the role of the government in shaping the economy during the long nineteenth century, a practice we refer to as industrial policy. States deployed a vast variety of different policies aimed primarily, but not exclusively, at fostering industrialization. A thin but growing literature has started to evaluate the economic effects of these policies, but many questions remain open for study.
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