The debate over whether democracy causes economic prosperity and growth dates back millennia. Recent empirical results suggest that democratisation has a sizable positive effect on economic growth, but endogeneity and reverse causality may be driving these results. This column uses new data from surveys of democracy experts to solve the endogeneity puzzle. The positive association between democracy and economic growth is a reflection of economic turmoil causing the emergence of democratic rule, rather than democracy causing more economic growth.
Banks are regularly under scrutiny for their professional and ethical behaviour. This column assesses the role of boards in monitoring and advising conduct, and offers new insights for how to structure bank boards to prevent misconduct. Conventional board measures such as board independence and financial expertise have no measurable impact on misconduct being committed or detected. Instead, governance metrics revolving around CEO connections warrant more attention from regulators, investors, and governance activists.
Donald Trump has consistently made headlines with unusual and potentially dangerous economic policy proposals, including threatening to pull out of the WTO, renegotiating trade agreements, and imposing tariffs on imports from Mexico and China. This column explores the legal and economic dimensions of these proposals. Old and modern legal statutes could allow a US president to implement such policies, and the repercussions for the US economy could be severely negative.
Working with the wrong accounting classifications can lead to wrong conclusions in any area of economics. But it is especially treacherous in international finance, due to the importance of key currencies and the operations of multinational firms, especially global banks. Much of the analysis in international finance is still conducted under the assumption that the GDP area, decision-making unit and the currency area coincide – the so-called ‘triple coincidence’. This column illustrates the common analytical missteps that can arise by reviewing three examples from the recent past, and argues that a proper analysis of capital flows necessitates paying greater attention to basic accounting building blocks.
The objective of financial stability policy is unclear. Is it the resilience of the financial system, avoiding the costs of systemic collapse, or managing the credit cycle, containing the costs of resource misallocation and over-indebtedness? This column argues that the answers have serious implications for what can decently be delegated to independent ‘macroprudential authorities’, but have barely been debated in those terms.
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