The prevailing view of shadow banking is that it is all about regulatory arbitrage – evading capital requirements and exploiting ‘too big to fail’. This column focuses instead on the tradeoff between economic growth and financial stability. Shadow banking transforms risky, illiquid assets into securities that are – in good times, at least – treated like money. This alleviates the shortage of safe assets, thereby stimulating growth. However, this process builds up fragility, and can exacerbate the depth of the bust when the liquidity of shadow banking securities evaporates.
Using aggregate data can bias estimates of exchange rate pass-through by ignoring heterogeneity in price adjustment across sectors. This column uses micro-level price data to estimate pass-through for South Africa, using actual CPI weights to reflect changes in consumption bundles. The result is a micro-based estimate of pass-through with aggregation consistent enough to interest monetary policymakers.
The international financial system is not working fine and reforms of regional and global institutions are much needed. This column discusses some of the transformations that the IMF could implement in order to keep pace with the changes in the world economy. One problem for the credibility of the IMF is the G20 in its current design and organisation. Institutional reforms, however, should be combined with advances in economic policy in order to promote economic growth and financial stability.
Online markets have unusual characteristics that allow testing whether the law of one price holds. This column uses a unique dataset to demonstrate that the frictions in the price adjustments in online markets are indeed lower. The authors find that in online markets the price change is smaller, the duration of price spell – shorter, the pass-through is larger, and speed of price adjustment – faster. In the future, we can expect smaller price differentials, bringing the law of one price closer to reality.
Multinational companies’ ability to pay little corporate income tax has grabbed headlines recently. This column argues that the details of international tax rules matter for macroeconomic performance – especially in low-income countries. This emphasises the importance of the G20–OECD Action Plan on Base Erosion and Profit Shifting. However, dealing properly with tax spillovers will require a deeper global debate about the international tax architecture itself.
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