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Misery index (economics)

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The misery index is an economic indicator , created by economist Arthur Okun . The index helps determine how the average citizen is doing economically and is calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate . It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country.

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36-414: Harvard Economist Robert Barro created what he dubbed the "Barro Misery Index" (BMI), in 1999. The BMI takes the sum of the inflation and unemployment rates, and adds to that the interest rate, plus (minus) the shortfall (surplus) between the actual and trend rate of GDP growth. In the late 2000s, Johns Hopkins economist Steve Hanke built upon Barro's misery index and began applying it to countries beyond

72-590: A B.S. in physics from the California Institute of Technology in 1965, where he was a student of Richard Feynman , but he realized he "wouldn't be close to the top in those fields." He then turned to economics and earned a Ph.D. from Harvard University in 1970. He first reached wide notice with a 1974 paper, "Are Government Bonds Net Wealth?" It argued that under certain assumptions, present governmental borrowing would be matched by increased bequests to future generations to pay future taxes expected to pay down

108-403: A bond also has an impact on the interest rate risk. Indeed, longer maturity meaning higher interest rate risk and shorter maturity meaning lower interest rate risk. If a central bank purchases a government security, such as a bond or treasury bill , it increases the money supply because a Central Bank injects liquidity (cash) into the economy. Doing this lowers the government bond's yield. On

144-466: A doctorate from the University of Chicago and teaches at Harvard. Barro has four children: Jennifer, Lisa, Jason, and Josh , who is a journalist. Government bonds A government bond or sovereign bond is a form of bond issued by a government to support public spending . It generally includes a commitment to pay periodic interest , called coupon payments , and to repay the face value on

180-498: A national government was issued by the Bank of England in 1694 to raise money to fund a war against France. The form of these bonds was both lottery and annuity. The Bank of England and government bonds were introduced in England by William III of England (also called William of Orange), who financed England's war efforts by copying the approach of issuing bonds and raising government debt from

216-562: A negative correlation between a similar "stagflation index" and corporate amalgamation (i.e. mergers and acquisitions ) in the United States since the 1930s. In their theory, stagflation is a form of political economic sabotage employed by corporations to achieve differential accumulation , in this case as an alternative to amalgamation when merger and acquisition opportunities have run out. A 2001 paper looking at large-scale surveys in Europe and

252-527: Is a 1988 paper that he coauthored with Gary Becker , "A Reformulation of the Economic Theory of Fertility" published in the Quarterly Journal of Economics , which is influential in thinking about "infinite time horizon" modelling. Subsequently, Barro began investigating the influence of religion and popular culture on political economy by working with his wife, Rachel McCleary . Barro believes that

288-415: Is a widely cited and read graduate-level textbook on the theory and evidence concerning long-run economic growth. Barro's research in the 1990s was focused mainly on the theoretical and empirical determinants of growth: he gave fundamental contributions to the theory of endogenous growth, with particular attention to the links between innovation and public investment on one side and growth on the other side. He

324-456: Is an American macroeconomist and the Paul M. Warburg Professor of Economics at Harvard University . Barro is considered one of the founders of new classical macroeconomics , along with Robert Lucas Jr. and Thomas J. Sargent . He is currently a senior fellow at Stanford University 's Hoover Institution and co-editor of the influential Quarterly Journal of Economics . Barro graduated with

360-402: Is that the bonds are exempt from state and local taxes. The bonds are sold through an auction system by the government. The bonds are buying and selling on the secondary market , the financial market in which financial instruments such as stock , bond , option and futures are traded. TreasuryDirect is the official website where investors can purchase treasury securities directly from

396-478: Is the risk that the value of the currency a bond pays out will decline over time. Investors expect some amount of inflation, so the risk is that the inflation rate will be higher than expected. Many governments issue inflation-indexed bonds , which protect investors against inflation risk by linking both interest payments and maturity payments to a consumer price index. In the UK these bonds are called Index-linked bonds. In

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432-629: The Keynesian multiplier is less than one. He believes that for every dollar the government borrows and spends, spending elsewhere in the economy falls by almost the same amount. Barro's work has been central to many of the economic and public policy debates of the last 30 years, including business cycle theory, growth theory, the neoclassical synthesis and public policy. Barro received an honorary doctorate from Universidad Francisco Marroquin . The Research Papers in Economics (RePEc) project ranked him as

468-533: The Seven Dutch Provinces , where he ruled as a stadtholder . Later, governments in Europe started following the trend and issuing perpetual bonds (bonds with no maturity date) to fund wars and other government spending. The use of perpetual bonds ceased in the 20th century, and currently governments issue bonds of limited term to maturity. During the American Revolution , in order to raise money,

504-463: The information asymmetry argument to the role of central banks and concluded that central banks, to have credibility in inflation fighting, must be locked into inflation targets that they cannot violate to reduce unemployment. In the 1970s, economist Arthur Okun developed the concept of the Misery Index , which Jimmy Carter publicized during his 1976 presidential campaign , and Ronald Reagan did

540-499: The maturity date. For example, a bondholder invests $ 20,000, called face value or principal, into a 10-year government bond with a 10% annual coupon; the government would pay the bondholder 10% interest ($ 2000 in this case) each year and repay the $ 20,000 original face value at the date of maturity (i.e. after 10 years). Government bonds can be denominated in a foreign currency or the government's domestic currency. Countries with less stable economies tend to denominate their bonds in

576-599: The Canadian government offered a yield of 1.34%, while 10-year government bonds issued by the Brazilian government offered a yield of 12.84%. Governments close to a default are sometimes referred to as being in a sovereign debt crisis . The Dutch Republic became the first state to finance its debt through bonds when it assumed bonds issued by the city of Amsterdam in 1517. The average interest rate at that time fluctuated around 20%. The first official government bond issued by

612-404: The U.S. government started to issue bonds - called loan certificates. The total amount generated by bonds was $ 27 million and helped finance the war. A government bond in a country's own currency is strictly speaking a risk-free bond , because the government can if necessary create additional currency in order to redeem the bond at maturity . For most governments, this is possible only through

648-687: The US these bonds are called Series I bonds . Also referred to as market risk , all bonds are subject to interest rate risk . Interest rate changes can affect the value of a bond. If the interest rates fall, then the bond prices rise and if the interest rates rise, bond prices fall. When interest rates rise, bonds are more attractive because investors can earn higher coupon rate, thereby holding period risk may occur. Interest rate and bond price have negative correlation. Lower fixed-rate bond coupon rates meaning higher interest rate risk and higher fixed-rate bond coupon rates meaning lower interest rate risk. Maturity of

684-426: The United States concluded that unemployment more heavily influences unhappiness than inflation. This implies that the basic misery index underweights the unhappiness attributable to the unemployment rate: "the estimates suggest that people would trade off a 1-percentage-point increase in the employment rate for a 1.7-percentage-point increase in the inflation rate." Some economists, such as Hooi Hooi Lean , posit that

720-464: The United States, the Securities and Exchange Commission (SEC) has designated ten rating agencies as nationally recognized statistical rating organizations . Currency risk is the risk that the value of the currency a bond pays out will decline compared to the holder's reference currency. For example, a German investor would consider United States bonds to have more currency risk than German bonds (since

756-578: The United States. His modified misery index is the sum of the interest, inflation, and unemployment rates, minus the year-over-year percent change in per-capita GDP growth. In 2013 Hanke constructed a World Table of Misery Index Scores by exclusively relying on data reported by the Economist Intelligence Unit. This table includes a list of 89 countries, ranked from worst to best, with data as of December 31, 2013 (see table below). Political economists Jonathan Nitzan and Shimshon Bichler found

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792-400: The classic textbook Money, Employment, and Inflation in 1976. In 1976, he authored another influential paper, " Rational expectations and the role of monetary policy " in which he argued that information asymmetries would cause real effects as rational economic actors in response to uncertainty but not in response to expected monetary policy changes. In it and other essays, he investigated

828-491: The components of the Misery Index drive the crime rate to a degree. Using data from 1960 to 2005, they have found that the Misery Index and the crime rate correlate strongly and that the Misery Index seems to lead the crime rate by a year or so. In fact, the correlation is so strong that the two can be said to be cointegrated , and stronger than correlation with either the unemployment rate or inflation rate alone. The data for

864-444: The contrary, when a Central Bank is fighting against inflation then a Central Bank decreases the money supply. These actions of increasing or decreasing the amount of money in the banking system are called monetary policy . In the UK, government bonds are called gilts . Older issues have names such as "Treasury Stock" and newer issues are called "Treasury Gilt". Inflation-indexed gilts are called Index-linked gilts ., which means

900-490: The currency of a country with a more stable economy (i.e. a hard currency ). All bonds carry default risk; that is, the possibility that the government will be unable to pay bondholders. Bonds from countries with less stable economies are usually considered to be higher risk. International credit rating agencies provide ratings for each country's bonds. Bondholders generally demand higher yields from riskier bonds. For instance, on May 24, 2016, 10-year government bonds issued by

936-444: The dollar may go down relative to the euro); similarly, a United States investor would consider German bonds to have more currency risk than United States bonds (since the euro may go down relative to the dollar). A bond paying in a currency that does not have a history of keeping its value may not be a good deal even if a high interest rate is offered. The currency risk is determined by the fluctuation of exchange rates. Inflation risk

972-407: The fifth most influential economist in the world, as of March 2016, based on his academic contributions. Finally, Barro has been an outspoken opponent of stimulus spending, calling Obama's stimulus bill "garbage" and "the worst bill since the 1930s." Robert Barro is married to Rachel McCleary . Together they have made critical contributions to the field of religion and economics. McCleary holds

1008-681: The future than other European government bonds, which has influenced the development of pension and life insurance markets in the respective countries. A conventional UK gilt might look like this – "Treasury stock 3% 2020". On the 27 of April 2019 the United Kingdom 10Y Government Bond had a 1.145% yield. Central Bank Rate is 0.10% and the United Kingdom rating is AA, according to Standard & Poor's . The U.S. Treasury offered several types of bonds with various maturities. Certain bonds may pay interest, others not. These bonds could be: The principal argument for investors to hold U.S. government bonds

1044-562: The government bonds; thus a lowering of current taxes , financed by the issuance of government bonds , would have no effect on the public's spending on consumer goods . The paper was in direct response to Alan Blinder and Robert Solow 's results, which had implied that the long term implications of government borrowing would be compensated for by the wealth effect . The paper is among the most cited in macroeconomics . Its implications of his Ricardian equivalence are still being debated. Barro collaborated with Herschel Grossman to produce

1080-513: The influential 1971 article "A General Disequilibrium Model of Income and Employment", which for many years held the distinction of being the most cited article published in the American Economic Review . The article explored the idea that disequilibrium in one market can have spillover effects to another market, creating a distinction between notional demand and effective demand . Barro and Grossman expanded on their work and produced

1116-625: The issue of new bonds, as the governments have no possibility to create currency. (The issue of bonds which are then bought by the central bank with newly created currency in the process of "quantitative easing" may be regarded as de facto direct state financing from the central bank, which is outlawed officially for independent central banks.) There have been instances where a government has chosen to default on its domestic currency debt rather than create additional currency, such as Russia in 1998 (the "ruble crisis" ) (see national bankruptcy ). Investors may use rating agencies to assess credit risk. In

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1152-536: The misery index is obtained from unemployment data published by the U.S. Department of Labor ( U3 ) and the Inflation Rate ( CPI-U ) from the Bureau of Labor Statistics . The exact methods used for measuring unemployment and inflation have changed over time, although past data is usually normalized so that past and future metrics are comparable. Robert Barro Robert Joseph Barro (born September 28, 1944)

1188-446: The real effects of monetary changes through which he could significantly contribute to the clarification of the exact circumstances of the validity of the policy-ineffectiveness proposition . While he has revisited the topic since then and critically appraised the paper, it was important in integrating the role of money into neoclassical economics and into the synthesis of general equilibrium and macroeconomic models. In 1983, he applied

1224-420: The same in his 1980 presidential campaign . Numerous sources incorrectly credit Barro with this because of the similarity of name with his own "Barro Misery Index." Barro's version first appeared in a 1999 BusinessWeek article. His 1984 Macroeconomics textbook remains a standard for explaining the subject, and his 1995 book, with Columbia University economist Xavier Sala-i-Martin , on Economic Growth ,

1260-544: The value of the gilt rises with inflation. They are fixed-interest securities issued by the British government in order to raise money. The issuance of gilts is managed by the UK Debt Management Office , an executive agency of HM Treasury . Prior to April 1998, gilts were issued by the Bank of England . Purchase and sales services are managed by Computershare . UK gilts have maturities stretching much further into

1296-704: Was a pioneer in the econometric analysis of the main factors associated with growth in the modern era. Barro served as Vice President of the American Economic Association in 1998, and served on its Executive Committee from 1987 to 1990. He has been a research associate at the NBER since 1978. He was elected a Fellow of the Econometric Society in 1980, and was elected to the American Academy of Arts and Sciences in 1988. Another often-cited work

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