My guest today is Frank Milne of Queen’s University.
Our topic for today will be unintended consequences. Frank has written a paper directed at policymakers to help them understand some of the pitfalls that economists have identified. The paper is directed at Australian policymakers, so some of the examples are Australia specific, though they generalize quite well to other countries.
We start where the paper starts, with a discussion of Australia’s heavy investment in commodity exports to China in the wake of the 2008 crisis. Many people mistook the temporary increase in demand for Australian mineral exports for a permanent change, leading them to over-invest in developing the Australian mining industry.
We go on to discuss many topics, with a particular focus on housing. We also touch on Frank’s work on Systemically Important Real Sectors (SIRS), which he is working on with co-author John F. Crean. SIRS are sectors with the potential to cause systemic problems in the banking sector. They feature high volatility of costs and revenues, which create the potential for large losses to lenders.
Related links:
The Diamond-Dybvig model (Wikipedia) and the original paper.
The Arrow-Debreu model (Wikipedia).
House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again by Mian and Sufi.
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