What politicians should know but don’t have time to ask?

  • Most of us think politicians are unable to come with deep reforms because pain related to reforms comes today, hurting politicians popularity, and benefits come tomorrow, boosting someone else popularity
  • This view may be wrong, as the recent paper by N.Jaimovich and S.Rebelo argues that good news about the future increases output today.


  • Authors present a neoclassical growth model that has some novelty features, and show that expansion today is caused by news about positive permament TFP (total factor productivity) increase in the future
  • In this model recessions are not generated by bad news, they appear when expectations shaped by good news are not fulfilled
  • Model is able to explain well the recent phenomena, such as lower volatility and more persistence in output. So authors provide a complementary explanation to the great moderation story, it’s not – as argued by Stock and Watson (2003) – Stock_Watson_on_great_moderation{#p118} – better monetary policy or lower volatility of shocks, it is the ICT deepening that increased the amount of information and the ability to process information efficiently (just think about economists’ blogs contribution to this higher ability, it is so important that one fo major investment banks came up with a tool for its investment clients to search the blogospere and extract signals)

The expectations, stupid!

While one cannot expect politicians to know that intertemporal utility optimisation exists, they should probably pay a close attention to J-R paper as there are several interesting implications:

(1) Creating good expectations can have sizeable growth benefitts in the short run, which increases the chances of being reelected

(2) If facts are less optimistic the news-driven expectations economy may plunge into recession even when fundametals are as strogn as before the good news arrived

(3) Expectations are of key importance, but so is credibility

J-R paper does not talk about government, in their model positive TFP shock could be news that Internet will improve productivity in many sectors in few years time. However in many countries government credible commitment to growth strategy may also serve as positive TFP shock. For example in many countries that are in early stages of e-administration and e-economy, a credible vision followed by robust implementation may have immediate positive effects on current growth. Such visions and strategies do exist, take a look at what Singapore in planning to do, or its intelligent nation strategy iN2015

But remember, once you promise and your words are believed, you must deliver on your promises, otherwise you will pay dear.