Fuad Hasanov

INCOME INEQUALITY, ECONOMIC GROWTH, AND THE DISTRIBUTION OF INCOME GAINS: EVIDENCE FROM THE U.S. STATES*

This paper first investigates a relationship between economic growth and income inequality using U.S. states data, a state cost-of-living deflator, and nonlinearity. It then explores the distribution of income gains among different income groups. We find that the impact of inequality on growth is nonlinear. Lowering inequality or increasing it substantially reduces growth; thus stable inequality may be good for growth. Economic growth affects incomes of the poor, the middle-income group, and the rich similarly with the elasticity of one. Education and labor market policies become important in promoting growth and improving income gains of the poor.

The Leap of the Tiger: How Malaysia Can Escape the Middle-Income Trap

Only a few European economies and Korea and Taiwan Province of China reached high-income status during 1970-2010. Malaysia’s real income per capita increased to 26 percent of the U.S. level in 2010 from 20 percent in 1970. Despite relatively strong growth and a substantial improvement in export sophistication, Malaysia’s total factor productivity lagged behind that of Korea and Taiwan Province of China. We argue that what characterizes their experience in contrast to Malaysia’s is the creation of technologies by domestic firms and a push to leapfrog to the technological frontier at an early stage of development.

A Finance Approach to Estimating Consumption Parameters

This paper relates consumption economics more closely to an aggregate financial variable than in any previous research. We compile the net real rate of return on a synthetic mutual fund (SMF) encompassing all major classes of financial assets and residential real estate. Return on the SMF better represents the market return of financial portfolio theory than any measure in use today and we demonstrate its merit in an expected utility model to estimate consumption parameters, the coefficient of relative risk aversion (CRRA), and intertemporal elasticity of substitution (IES). The estimates are stable across varying time periods and alternative measures of consumption.

The Volatility Trap: Why Do Big Savers Invest Relatively Little?

The more a country saves, the less it invests as a share of saving. We build a “store-or-sow” model of growth with precautionary saving and investment to study the nonlinear relationship between investment and saving. We contend that income volatility is an important variable for explaining saving and investment dynamics. Our results indicate that as permanent volatility increases, both investment and saving increase until a threshold at which point investment plummets while precautionary saving surges. In contrast, with larger volatility of temporary shocks, investment falls and precautionary saving gradually increases. Faced with high permanent volatility, big savers invest relatively little.

Housing, Household Portfolio, and Intertemporal Elasticity of Substitution

This paper investigates the impact of the inclusion of housing in a household portfolio on households intertemporal decision making. Residential housing is one of the principal assets households hold, and thus changes in housing return can affect household consumption over time. We assess whether the inclusion of housing in the household portfolio affects one of the important parameters of the intertemporal choice, the intertemporal elasticity of substitution (IES). The IES measures how a change in asset return affects households consumption growth. Since the use of aggregate time series data presents potential aggregation problems, we estimate a consumer model using household-level data, in particular the Consumer Expenditure Survey (CEX), and thus account for household heterogeneity and demographics. Moreover, utilizing a household-level data set, we estimate IES parameters for different groups of assetholders: stockholders, bondholders, and homeowners. Our results indicate that a higher housing return positively affects consumption growth, and housing is an important asset to account for in the household portfolio. The estimation with the portfolio return that includes housing results in the IES of about 0.3, which is lower than that obtained using the Treasury bill rate. The estimation is also more robust to alternative sets of instruments and for different groups of assetholders.

Public Debt Dynamics and Debt Feedback

We study the dynamics of U.S. public debt in a parsimonious VAR. We find that including debt feedback ensures the stationarity of debt while standard VARs excluding debt may imply an explosive debt path. We also find that the response of debt to inflation or interest shocks is not robust and depends on the policy regime. The recent past suggests that a positive shock to inflation increases debt while the same to interest rate decreases it. Positive shocks to growth and primary surplus unambiguously reduce debt.

Sharp Instrument: A Stab at Identifying the Causes of Economic Growth

We shed new light on the determinants of growth by tackling the blunt and weak instrument problems in the empirical growth literature. As an instrument for each endogenous variable, we propose average values of the same variable in neighboring countries. This method has the advantage of producing variable-specific and time-varying—namely, “sharp”—and strong instruments. We find that export sophistication is the only robust determinant of growth among standard growth determinants such as human capital, trade, financial development, and institutions. Our results suggest that other growth determinants may be important to the extent they help improve export sophistication.

Riding the Energy Transition : Oil Beyond 2040

Recent technological developments and past technology transitions suggest that the world could be on the verge of a profound shift in transportation technology. The return of the electric car and its adoption, like that of the motor vehicle in place of horses in early 20th century, could cut oil consumption substantially in the coming decades. Our analysis suggests that oil as the main fuel for transportation could have a much shorter life span left than commonly assumed. In the fast adoption scenario, oil prices could converge to the level of coal prices, about

The Rate of Interest or the Rate of Return: Estimating Intertemporal Elasticity of Substitution

15 per barrel in 2015 prices by the early 2040s. In this possible future, oil could become the new coal.

Measuring and Analyzing Returns on Aggregate Residential Housing

This paper investigates whether the rate of interest such as the Treasury bill rate or the rate of return such as the return on a household portfolio is more relevant to the household’s intertemporal decision making. In a current era, households are diversifiers (to use Tobin’s 1958 term) and hold portfolios of assets rather than a simple loan. A portfolio of assets earns a composite return accounting for capital gains, taxes, and inflation, and rational agents make spending decisions based on expected total returns on a portfolio rather than on the return on a single asset. The total composite measure we use includes financial assets such as stocks and bonds and a real asset, residential housing. In particular, we estimate the intertemporal elasticity of substitution, namely, how a change in the asset or portfolio return affects household’s consumption growth. The estimates obtained using real after-tax composite return are about 0.15-0.3 and are more robust to linear and nonlinear estimations, different consumption measures, and various time periods than those obtained by using individual asset returns such as the Treasury bill rate.