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What do burgers and economic theory have in common? The Economist uses the Big Mac index as a lighthearted guide to whether currencies are over or under-valued. Here's how it works.

Using micro-level data, we construct a credit spread index with considerable predictive power for future economic activity. We decompose the credit spread into a component that captures firm-specific information on expected defaults and a residual component–– the excess bond premium. Shocks to the excess bond premium that are orthogonal to the current state of the economy lead to declines in economic activity and asset prices. An increase in the excess bond premium appears to reflect a reduction in the risk-bearing capacity of the financial sector, which induces a contraction in the supply of credit and a deterioration in macroeconomic conditions.

Treasury Inflation-Protected Securities (TIPS) are frequently thought of as risk-free real bonds. Using no-arbitrage term structure models, we show that TIPS yields exceeded risk-free real yields by as much as 100 basis points when TIPS were first issued and up to 300 basis points during the 2007–2008 financial crisis. This spread predominantly reflects the poorer liquidity of TIPS relative to nominal Treasury securities. Other factors, including the indexation lag and the embedded deflation protection in TIPS, play a much smaller role. Ignoring this spread also significantly distorts the informational content of TIPS break-even inflation, a widely used proxy for expected inflation.

Since increases in public pensions are generally related to prices or wages or combinations of them, the impact of inflation on the real value of benefits can often be neglected, especially in the case of indexation to prices. With high and accelerating/ decelerating inflation like that currently prevailing in Hungary, however, this is not the case. (i) With fast inflation of basic necessities, the proportional indexation of benefits in progress devalues the lowest benefits, which have to pay for above-the-average consumption share of these goods. (ii) Annual lumpy increases of these benefits entail too high an intra-year drop in the real value of benefits. (iii) With accelerating inflation, the declining real value of delayed initial benefits may incentivise immediate retirement. (iv) With unindexed parameter values (like progressivity bending points), the initial benefits structure unintentionally changes.

As a result of unfavorable demographic processes, the pension systems in the Central and Eastern European (CEE) EU countries face significant challenges, which has made the implementation of reforms inevitable in the last decade. Relying on economic theory, this paper analyses the effects of the Hungarian pension reforms in comparison with those of other CEE countries, and discusses the consequences from the point of view of social policy and the sustainability of the pension schemes. We explore the reasons why the reforms in Hungary ultimately did not improve sustainability but rather contributed to dismantling the social care system. Therefore, the Hungarian case provides useful lessons for other countries, and at the same time underlines the importance of automatic adjustment mechanisms. The study pays particular attention to the theoretical analysis of pension indexation because its accurate quantitative effects are far from being sufficiently clarified in the literature, although it is vital for a thoughtful evaluation of pension reforms.

Az Európai Bizottság a magyar nyugdíjrendszer reformját kéri. Ennek egy lehetséges iránya lehetne a jelenlegi német nyugdíjrendszer egy javított verziójának implementálása. Ez a magyar nyugdíjrendszer számos problémáját - így például a régi és új nyugdíjak „szétcsúszása\" - megoldaná, s minden érintett számára jobban áttekinthetové tenné a rendszert, s egyben utat nyitna további fontos racionalizálási lépések felé is. Ilyen lehet egy jobb, méltányosabb özvegyi nyugdíjrendszer, a nyugdíjmegosztás rendszerszeru alkalmazása, a korhatár-indexálás, valamint az állami és különbözo kiegészíto nyugdíjrendszerekbol kapott nyugdíjak egymáshoz való észszerubb viszonya is. Ezzel ráadásul Magyarország is csatlakozna azon országok mindinkább bovülo sorához, amelyek az utóbbi idokben a német nyugdíjrendszer bizonyos elemeit bevezették.·

Shared appreciation mortgages (SAMs) feature mortgage payments that adjust with house prices. They are designed to stave off borrower default by providing payment relief when house prices fall. Some argue that SAMs may help prevent the next foreclosure crisis. However, home owners' gains from payment relief are mortgage lenders' losses. A general equilibrium model in which financial intermediaries channel savings from saver to borrower households shows that indexation of mortgage payments to aggregate house prices increases financial fragility, reduces risk-sharing, and leads to expensive financial sector bailouts. In contrast, indexation to local house prices reduces financial fragility and improves risk-sharing.

We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero lower bound, the optimal inflation rate is low, typically <2% even after considering a variety of extensions, including optimal stabilization policy, price indexation, endogenous and state-dependent price stickiness, capital formation, model uncertainty, and downward nominal wage rigidities. On the normative side, price-level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability. These results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero bound episodes.

Indexes have gained favor over the past decade as a tool to measure social vulnerability to hazards. Numerous index designs have been put forward, yet we still know very little about their reliability. This research investigates the methods of social vulnerability index construction, examining decisions related to indicator selection, scale of analysis, measurement error, data transformation, normalization, and weighting. Each of these stages is imbued with uncertainty due to choices made by the index developer. The study applies Monte Carlo-based uncertainty analysis to assess and visualize uncertainty for a hierarchical social vulnerability index. Confidence limits are computed for the index rankings, leading to a finding of a high magnitude of uncertainty. The performance of the index compared to alternative configurations is strong in some places but statistically biased in about a third of the census tracts. The variability of index rankings is also assessed, indicating that index precision decreases with increasing vulnerability. Uncertainty analysis provides a useful, yet largely unapplied stage of index production that highlights places where the model is most reliable. If applied to the creation of social vulnerability indexes, output metrics can be produced with a greater degree of precision, transparency, and credibility.

The CIRI Human Rights Data Project provides information about government respect for a broad array of human rights in nearly every country in the world. Covering twenty-six years, fifteen separate human rights practices, and 195 countries, it is one of the largest human rights data sets in the world. This essay provides an overview of the CIRI project and our response to some critiques of the CIRI physical integrity rights index. Compared to the Political Terror Scale (PTS), the CIRI physical integrity rights index is focused on government human rights practices, can be disaggregated, is more transparent in its construction, and is more replicable because of the transparency of our coding rules. Furthermore, unlike the PTS, the unidimensionality of the CIRI index has been demonstrated empirically. For these reasons, the CIRI index is a more valid index of physical integrity rights.