EU leaders don’t determine the pace of climate change. Demand reduction by some consumers only lowers fossil fuel consumption to the degree that resource owners decide to curtail their supply. Ultimately, the volume of fossil fuel burnt globally depends upon the rate of extraction and this is in the hands of oil producers who care about carbon’s intertemporal price path. Policies aimed at lowering carbon demand without concern for the price path of carbon may backfire.
In previous decades, economists were famous for ignoring everything they couldn’t measure; now they assign a monetary value to almost anything. Recent research on happiness provides a new approach to guide courts in setting financial compensation in tort cases for individuals’ losses from bereavement.
Here is an evaluation of progress on IMF reform by one of the world’s most eminent scholars of the global financial system.
Real-time policy-making requires real-time monitoring. The recent turmoil in international financial markets, for example, raised concerns that it would dampen euro-area growth prospects. Surveys of the euro-area in August and September revealed that business expectations had indeed deteriorated. Interpreting such data in real time is notoriously difficult. Statistical techniques provide a systematic and more reliable means of extracting real-time indicators from current data: “€-coin”, a monthly indicator published by the Banca d'Italia and CEPR, is a useful tool to monitor the evolution of the euro-area growth as the financial turmoil unfolds.
Those urging China to adopt a more flexible exchange-rate regime sell the policy advice on the ground that it will substantially speed up the adjustment of global current accounts and that it will also substantially enhance the effectiveness of China’s domestic macroeconomic policies. Both supposed benefits may be exaggerated.
Here's some deep thinking on the linkages between monetary policy and financial instability. The trouble with inflation targeting in present circumstances is that constant inflation gives you no information about whether your monetary policy has hit the Wicksellian ‘natural rate’. Inflation targeting might mislead us into pursuing a policy that is actively damaging to financial stability.
Euro-area housing prices have risen almost as much as those of the US. For decades, euro-area housing prices have followed those of the US quite closely. Are Euro-area housing prices headed for a slump?
Pension reforms around the world spur institutionalised saving and have the potential to create a new class of activist shareholders: pension funds. While many of these pension funds indeed attempt to affect corporate policies, the net effect of an increase in institutionalised saving on corporate governance and shareholder discipline need not be positive.
Foreign exchange is used for cross-border trade in goods and assets, so two weighted exchange rates affect the international adjustment process: the financially-weighted exchange rate index operates via the valuation channel, and trade-weighted index via net exports. The importance of the valuation channel is secularly increasing, in line with the rapid growth in the gross levels of foreign assets and liabilities.
Trains use three times less energy than cars to transport people; six times less energy than trucks to move freight. Trains use and emit just one-fifth the amount of carbon dioxide. Governments can help fight global warming by using competition policy and tax incentives to induce transportation customers to switch to rail.
Germany’s equilibrium rate of unemployment has not fallen as much over the past two decades as in the Netherlands, Denmark, Ireland, and Britain. Unlike those successful reformers, Germany has not yet finished its supply-side homework. If it backslides now, it and the rest of Europe will pay the price when the next downturn comes.
According to official statistics, Japan seems to have almost pulled out of its crippling deflation. The Japanese inflation statistics, however, are calculated using outdated methods that are well-known to overstate inflation. Recent research suggests that true Japanese deflation is probably 1 to 2 percentage points worse than suggested by official statistics.
Following their suspension in mid- 2006, and their resuscitation in early 2007, the multilateral trade negotiations of the WTO’s Doha Development Agenda appear once more to be on the brink of collapse. Several reasons have been advanced for their lack of success; high on everyone’s list is the central role of agriculture. We ask why a sector that contributes so little to rich countries’ GDP should be able to sabotage global economy-wide trade talks.
The new ‘Lisbon Treaty’ agreed this weekend preserves most of the substance of the failed Constitution; it will serve the EU well. As usual, Europe has taken a step forward by creating a new disequilibrium; new Treaty revisions are likely to be proposed even before all the provisions of this present one have been implemented.
The era when the EU focused on internal integration, leaving its external policy to be a by-product of internal dynamics, is over. In today’s fast-changing and challenging international environment, external economic relations have become too central an issue to the EU for it to remain a fragmented power. This column introduces a series of columns discussing how Europe might boost its influence in the world of economic policy-making.
Uneven supervision gave an edge to risk takers in some nations on the up side, but the pain is being felt all around Europe on the downside. To avoid future crises, all mortgage originators should be regulated, banks should have to retain their “equity” or first loss risk, the rating agencies should be more transparent and independent, and Europe’s coordination failure among national supervisors should be fixed.
VoxEU.org has had almost 1.2 million page views (4.7 million total hits) during the site’s 4 month life and visits from 90,000 distinct IP addresses. The US IP addresses accounts for a third of the visits with Europe taking up most of the rest. Asia-based visitors amount to about 10% of the traffic. The top article has been viewed more than 16,000 times.
Common sense suggests that the euro should have stimulated trade in financial assets among Eurozone nations. Empirical research confirms this, but finds a much larger effect in bonds than equities. Also, euro ‘outsiders’ seem to benefit from lower transaction costs to diversify risk when purchasing euro assets, but the gain is around half what the insiders get and with a potential diversion effect that penalises firms which want to raise capital on international markets.
Europe has no shortage of opinions on international economic affairs, but these suffer from a shortage of impact. The EU could become more influential by reforming its external representation. The IMF is the place to start. Here is a proposal.
Ireland is the only country that must hold a referendum to endorse the new Reform Treaty. Treaty debate is likely to be fairly low-key and the referendum is likely to yield a ‘yes’ vote.
Mechanism design theory is a major breakthrough in the modern economic analysis of institutions and markets. It revolutionalised the way economists think about optimal institutions and regulation when governments don't “know it all.” It has had a major impact on current policy-making and will continue to do so in the future.
Obesity is a becoming a major health problem in Europe and it's driven to some extent by rising junk food consumption. Junk food has negative externalities and recent research finds that its demand is fairly elastic. If it is so natural to tax cigarettes, why not tax junk food as well?
Sovereign wealth funds are politically so hot that they competed with the summer's financial crisis for media attention - both politicians and the press have expressed concern about their activities. Not many corporates have complained, however, and some like Barclays and Blackstone have welcomed sovereign wealth fund investment. How are sovereign wealth funds apt to respond?
Do low levels of short-term interest encourage risk-taking that can be considered ‘excessive’? Do low interest rates imply higher credit risk in the short-run? In the medium-run? New empirical research suggests that the answers are a resounding ‘yes’, a subtle ‘no’ and a qualifying ‘it depends’.
Gender discrimination is economically inefficient since it prevents equalisation of marginal products. Recent simulations based on calibrated macro models indicate that the economic loss is large. In one thought experiment, the research suggests that a very large fraction of the income differences between many nations and the US is due to gender inequality.
The subprime crisis was first characterised as a liquidity crisis, but a month and billions of dollars of liquidity injections later, the situation has not improved. Perhaps it was not about liquidity, after all.
Global tariff-cutting over the past decade was dominated by preferential trade agreements. These deals stimulate trade among members, but by creating tariff discrimination, they also divert trade from non-members. Recent research suggests that the majority of the world’s preferential deals created more trade than they diverted and so constitute a constructive force in the world economy.
Research has long shown that workers who take temp jobs subsequently do better in the labour market. New research from the US suggests that the positive effects seem mostly to occur because those working for temp agencies have a higher chance of subsequently working for higher-wage firms.
Recent research suggests that improvements in information and communication technology are affecting the spatial growth of services today in the same way electricity promoted the concentration of manufacturing at the turn of the 20th century.
Empirical research shows that EMU improves economic performance, but is also associated with higher inequality and lower social spending. This casts doubt on the political sustainability of EMU without social-policy integration and much deeper financial market development. Thinking about EMU’s future, it would be wrong and dangerous to disregard the implications for income inequality and its remedies.
Fear of China’s industry mirrors that of Japan’s in the 1980s when the Japanese were poised to take over the world’s manufacturing and it was the yen that was undervalued. Then as now, competition is painful for US and European firms, but firms don’t stand still. Some fail, others adapt, and the best of them not only survive, they thrive.
Having too few members of parliament means parliament is likely to be un-representative, but it seems that having too many makes it easy for vested interests to buy influence. Simple logic suggests that the optimal number of MEPs should be proportional to the square root of the population. Empirical work suggests that nations with a much higher number of MEPs tend to be plagued by red-tape and corruption.
Emerging nation debts are desirable for moving capital from richer to poorer countries, where it is relatively scarce. However, debt crises in emerging nations have negative effects on the global financial system. New research suggests that if emerging economies’ debt payments were negatively related to the world real interest rates prevailing on the maturity of their debt contracts, the risk of default and its volatility would be significantly reduced. A switch to such debt contracts would decrease the incidence of sovereign debt crises.
Anti-reformists in Europe claim to be protecting Europe’s weak and poor. Nothing could be further from the truth. Labour-market flexibility, deregulation of the service industry, pension reforms and greater competition in university funding might harm the interest of well-connected, privileged citizens but it would open up opportunities for Europe’s youth and disadvantaged groups. A real left-wing agenda would embrace reform.
Globalisation may call for retrenchment of governments’ redistribution activity, but if private insurance and financial markets are to be able to replace the income smoothing, we need stronger supervisory, regulation, and antitrust actions.
The new Australian labour code is such a massive break with Western labour traditions that it merits global attention. It is an extreme change with no economic rationale. Social scientists would love to see the data the new law generates; it would be a great ‘natural experiment.’ For the sake of Australians, however, it would be great to see the upcoming election put an end to the experiment.
What are the fundamental causes of differences in income per capita across countries? Although there is still little consensus on the answers to this question, it is often argued that social attitudes such as trust are one of the main determinants of economic development.
As the dollar has started to slide, the question is: how far, how fast? This column, which is based on Paul Krugman’s recent Economic Policy article suggests the answers are: pretty far and pretty fast.
With few exceptions, European universities do very poorly in international rankings. Recent empirical work suggests that spending and budgetary autonomy account for the poor performance of most European universities on the one hand, and the excellent performance of the few European stars on the other.