Today’s financial regulation is founded on the assumption that making each bank safe makes the system safe. This fallacy of composition goes a long way towards explaining how global finance became so fragile without sounding regulatory alarm bells. This column argues that mitigating the costs of financial crises necessitates taking a macroprudential perspective to complement the existing microprudential rules.
This column reflects on the Nobel Prize awarded to Paul Krugman, whose solo win surprised some. It comments on the relevance of Krugman’s contributions to new trade theory and new economic geography. The latter have been of particular interest to European economists.
Many critics argue that Chinese currency undervaluation amounts to an export subsidy and import tariff responsible for global trade imbalances. This column cautions against that equivalence. In the long run, currency devaluation does not alter export volumes, and in the short run, its effects depend on firms’ invoicing decisions. Policymakers should take care before turning to trade sanctions as a remedy.
Robert Gordon of Northwestern University talks to Romesh Vaitilingam about the causes and consequences of the economic crisis, the emerging consensus on the need for fiscal stimulus, and the challenge to the schools of thought that have dominated macroeconomics in recent decades. He argues that we will see a return to old-fashioned Keynesian (non-market clearing) analysis in macroeconomic teaching and research. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
Venture capitalists are casualties of the current crisis, as they have lost their ability to cash out their investments in the stock market. Should we worry that innovation and long-run growth are in trouble? This column summarises the evidence on venture capital and innovation, arguing that the current VC woes are unlikely to significantly dampen economic prospects.
Some policymakers are worried that Central and Eastern European firms and households that recently joined the carry trade are unprepared for the financial crisis’s macroeconomic shocks. This column presents micro-level evidence that the currency exposure is concentrated in households and firms that are better equipped to bear the risks, suggesting that aggregate risks may be smaller than feared.
To fix the world financial system, the G20 needs to look at some bold institutional reforms. The column suggests an international financial stability charter backed up by an new institution that could either be ‘light’ with a slim secretariat, or more elaborate WTO-style organisation.
A product of the confused reaction of politicians to the crisis, the G20 forum must prove its usefulness. Rather than striving to coordinate fiscal policy responses, leaders should use the G20 platform to strike common ground on long-term reforms to global financial regulation and supervision, starting by recapitalising the IMF and reforming its governance structures.
The global crisis is an opportunity for developing nations to project their interests in multilateral institutions, and gain influence in shaping economic globalisation. To make the best of this outcome, developing nations need a good sense of their interests and priorities, but also to recognize that having a greater say entails acceptance of greater responsibilities.
In 1933, US securities regulations were introduced to restore trust in financial markets. Today, a new regulatory focus is needed to address the crisis of confidence. After reviewing the status of financial regulation, this column sketches policy proposals in three key areas of securities markets.
The current crisis raises serious challenges to the maintenance of open-markets but many policy makers and analysts remain complacent in defending trade openness. This column calls on these actors to defend their convictions, and proposes further debate on the policy options required to get out of the current predicament while protectionism in its many forms.
A range of fiscal programs yield both economic stimulus and sustained environmental benefits. This column argues that Washington and Beijing should lead the way, improving their energy efficiency and building faith in the stability of the global economy.
The G20 leaders meeting in London on April 2 should complete the unfinished business of IMF reform. These are essential not only to reinstate the legitimacy and relevance of the IMF but also to support restoration of economic growth and stability to the global financial system.
The crisis has shattered predictions on the unravelling of global macroeconomic imbalances. The US dollar has resisted rather well, US treasury bonds remain the safe-heaven investment of choice, and the world economy still seems tied to US demand. These elements point to the intensification of global macroeconomic imbalances during the recovery of the global economy. This column proposes global solutions to avoid a new derailment
This column shows that globalisation reduces business cycle differences between countries– and that this feature is more marked in the current globalisation era than the first.
The crisis has produced a number of highly unusual macroeconomic effects. Preliminary estimates suggest that the US net international investment position deteriorated by over $2 trillion over 2008 − some 15% of GDP. This column explores the reasons for this unprecedented worsening.
Some 80% to 90% of world trade relies on trade finance, and there is little doubt that the trade finance market will experience difficult times in the first half of 2009 – difficulties that will contribute the global economic malaise. Public-backed institutions are responding, but are they doing enough?
VoxEU.org today launches the Global Crisis Debate. The aim is: 1) To broaden the discussion into a truly global debate, and 2) To make the Global Crisis Debate the dominant intellectual forum on the crisis. Thanks to the partnership with the UK government, analysis on the Global Crisis Debate feeds into preparations for the April Summit via the UK Government's web site LondonSummit.gov.uk.
While national policy considerations dominate debates on macroeconomic policies, this column argues that these debates need to take into account the global consequences of their policy choices. The sum of individual macroeconomic policy choices will determine whether large imbalances remain a defining feature of the global economy – and thus the risk of future trouble.
This column introduces the latest ICMB-CEPR Geneva Report – written this year by Markus Brunnermeier, Andrew Crockett, Charles Goodhart, Avinash Persaud, and Hyun Shin. The report discusses how world leaders should think about financial regulation reform, making a number of specific proposals.
This column assesses trade costs for manufacturing industries in the EU. It demonstrates that, although tariffs on trade within the EU were abolished decades ago, significant barriers remain, and countries continue to integrate. Today, the most substantial policy-induced costs are technical barriers to trade, such as packaging and labelling requirements.
This column explains how US tax policies have induced greater investment in renewable energy production and an electricity grid unable to harness it. It argues for a tax code that offers financial incentives to make new grid investments, lest the US find itself with a power grid that can't transport green electricity to the nation's growth centres – the ultimate bridge to nowhere.
This column presents Marty Feldstein’s views on the euro. He suggests that tough economic conditions in Europe may cause substantial economic policy disagreements among the Eurozone countries and that one or more countries might actually withdraw from the Eurozone.
Financial crises are historically associated with the “4 deadly D’s”: Sharp economic downturns follow banking crises; with government revenues dragged down, fiscal deficits worsen; deficits lead to debt; as debt piles up rating downgrades follow. For the most fortunate countries, the crisis does not lead to the deadliest D: default, but for many it has.
This column measures the quality of university economics research in Europe and the UK by concentrating on within-journal rankings of influential articles. The UK and Europe are doing relatively well, and top-level research output is not concentrated at half a dozen world-famous institutions. Science-funding policies by European governments should reflect this diversity.
Jeff Madrick, editor of Challenge magazine, talks to Romesh Vaitilingam about his new book, The Case for Big Government (Princeton University Press), the impact of the economic crisis, and policy priorities for the Obama administration. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
The financial crisis is now hitting several of the non-euro-area new member states hard, highlighting the shortcomings of Europe’s monetary architecture. Crisis management in the euro area has had the unintended consequence of putting non euro-area new member states at disadvantage. Without decisive action, a new political and economic divide within Europe may emerge.
In a pair of Vox columns, one of the world’s most respected macroeconomists suggests that the consensus view of the crisis’s causes and cures is flawed. This first column focuses on the crisis’s deep causes. Global excess demand for safe assets played a role in building the "accident waiting to happen". Now, investors’ fears of unknown unknowns – Knightian uncertainty – is why the waiting mountains of cash are not acting as “stabilising speculation”.
Here is an unconventional view of what governments must do. Frozen credit markets prolong the recession and keep us on the edge of financial meltdown. The ineffectiveness of existing policy to kick-start credit markets and bank lending is due to investors’ fear of “unknown unknowns”. Ordinary restructuring-and-liquidation recipes won’t work until the government provides insurance against such systemic events. Recent actions by the US and UK get it partially right.
This column argues that the German fiscal stimulus package is good, but could and should have come earlier. Moreover, it probably should have been bigger, and it definitely ought to have been better designed. The most important and lasting outcome of the package may well be the new government deficit rule, with its binding correction mechanism.
This column studies the growth and investment consequences of WTO/GATT accessions. Accessions tend to raise income but only for countries that were subject to rigorous accession procedures. Commitments associated with accessions are also found to be helpful especially for countries with poor governance.
This column argues responses to the recession should not be based on unrealistic expectations of rational behaviour. It argues that models of bounded rationality provide reasons that traditional macroeconomic policy responses may fall short and suggests more sophisticated solutions that could break the crisis’s psychological hold on markets.
Critics argue that WTO rules are antagonistic to human rights. This column examines how WTO members have sought to promote human rights and trade, and what they have done when these obligations compete. It concludes that WTO rules are not antagonistic to human rights, though some members’ trade policy decisions have created conflicts.
2008 was the year of asymmetric financial shocks for the Eurozone, but 2009 will be the year of the symmetric economic shock. All of Europe is slipping simultaneously towards recession and the threat of deflation. Here one of the world’s leading international economists explains that a common monetary policy response is optimal. Euro interest rates should be cut to zero and quantitative easing undertaken, all complemented by fiscal expansion by Eurozone nations that can afford it. What started as the euro’s greatest challenge could be its salvation, but only if policy makers act swiftly.
This Wednesday Mr Geithner will be confirmed as the new Secretary of Treasury. Never before in US history has this position been so important. Mr Geithner’s decisions in the next few weeks will have a dramatic impact on the length and the depth of this recession and will shape the financial sector for decades to come. This column offers the new arrival a few suggestions.
This column says the WTO should suspend its formal negotiations for the next twelve months and attempt to head off a wave of protection in the interim. This would enhance the chances for the ultimate success of the Doha Round.
While the UK’s provision of official development assistance stagnated over the last quarter-century, charitable donations for development increased seven-fold. Giving for development has grown faster than both total household income and giving for all other causes combined. Would an increase in government assistance risk crowding out private donations?
This column provides evidence that there is great deal of difference between the governance standards of the economies in which sovereign wealth funds have been established and the standards of the industrial economies in which they are seeking to invest. It also discusses how the expansion of asset holdings of sovereign wealth funds may reduce official reserve holdings.
Jonathan Parker of Northwestern University talks to Romesh Vaitilingam about the effectiveness of fiscal stimulus measures, beginning with his research on the impact of the US income tax rebates of 2001 and 2008 on household spending. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
This column argues that the introduction of the euro has not changed the historical pattern of member countries’ business cycle correlations. The IMF outlook for economic activity over the next few years implies that the current recession will not change it either.
There are growing concerns about deflation. This column argues that inflation remains the far more relevant danger and cautions against lowering Eurozone interest rates too quickly
Institutional failures impede international trade, but they do not impose uniform costs on firms as tariffs do. This column says that institutional insecurity, in addition to lowering the total volume of trade, may discourage the most productive firms from exporting to a country. Improving governance can then produce big gains from trade.
Following the analysis of the crisis’s causes in the yesterday’s column, this column suggests that the new financial regulatory system should impose effective reserve requirements on deposit-taking banks, and impose capital requirements for virtually all financial institutions with these requirements being counter-cyclical to dampen the boom-bust cycle.
Why didn’t the most recent run-up in oil prices have dramatic effects as in the 1970s? Here one of the world’s leading macroeconomists surveys a variety of explanations: i) developed countries are now less energy-intensive, ii) wages are more flexible, iii) the US auto industry is relatively smaller, iv) monetary policy now targets core inflation, and recent shocks were to industrial demand, not oil supply.
This column shows that German banks with more competent supervisory board members suffered smaller losses in the subprime crisis. Improving bank governance is therefore desirable – from both the public and private perspectives – and may be more robust than other regulatory tools.
This column explains how lack of regulation and failed monetary policy caused the failure of financial markets and then illustrates the banking crisis with simple arithmetic. It concludes that the automatic adjustment of free markets is ineffective in producing a recovery from this recession.
A key source of the today’s economic weakness is uncertainty that led firms to postpone investment and hiring decisions. This column, by the authors whose model forecast the recession as far back as June 2008, report that the key measures of uncertainty have dropped so rapidly that they believe growth will resume by mid-2009. This means any additional economic stimulus has to be enacted quickly. Delaying to the summer may mean the economic medicine is administered just as the patient is leave the hospital.
The global crisis is a challenge to and an opportunity for the economics profession. Here one of the profession’s most innovative thinkers reflects on how and why economists failed to see the crisis coming, what they should tell governments to do about it, and what young economists should be working on to help us avoid future crises.
Adverse shocks to poor households can cause significant long-term damage to their well being. This column argues that stabilisation policies ought to make protecting vulnerable families and children from shocks a central priority rather than ad hoc and ancillary in development strategies. Countries’ future economic growth and human development are at stake.
Is the trinity impossible? This column traces the evolution of the three aspects of the trilemma – exchange rate stability, monetary independence, and financial integration – across countries over the last four decades. A rise in one trilemma variable does result in a drop of a linear weighted sum of the other two.
Alan Krueger of Princeton University talks to Romesh Vaitilingam about his research on the influence of age and income on people’s reported experiences of physical pain. The interview was recorded at a workshop on happiness research at the Centre for Economic Performance in London in October 2008.
In this column Jagdish Bhagwati sounds the alarm on Obama’s eloquent silence on key trade issues and his failure to balance his protectionist appointments with powerful trade proponents that would produce a “team of rivals”. Multilateral free trade is being dangerously let down.
Reservation policies, by giving voters the ability to observe the effectiveness of women leaders, might pave the way for improving women’s access to political office and reducing statistical discrimination. This column summarises India’s experience with quotas for women in public office.
Paul Krugman suggests that his Nobel-prize-winning “core-periphery” model was perhaps more relevant a century ago than today. This appears to be true in terms of overall manufacturing concentrations in Europe and North America, which are unravelling. Large-scale agglomeration forces, however, are alive and well in the developing world, as are localised sectoral clustering phenomena in industrialised countries.
How will the shrinking labour force pay for the pensions and healthcare of the growing elderly? This column argues that linking retirement ages to longevity would alleviate a significant part of the deterioration in public finances and ensure that the burden of adjustment is carried by those gaining from increases in longevity.
Much of today’s financial regulation assumes that risk can be accurately measured – that financial engineers, like civil engineers, can design safe products with sophisticated maths informed by historical estimates. But, as the crisis has shown, the laws of finance react to financial engineers’ creations, rendering risk calculations invalid. Regulators should rely on simpler methods.
There is a vast empirical literature analysing the impact of financial openness on economic growth but far less attention has been paid to its effects on productivity growth. This is surprising given the strong evidence that productivity growth is the main driver of long-term economic growth. This column argues that financial openness in fact has a positive impact on productivity growth, although the effects are subtle.
This column argues that national governments ought to credibly commit themselves to not bailing out their banks if the worst comes. But it would be far from easy to do so.
Critics argue that in-kind welfare programmes do not work and foster widespread administrative fraud and abuse. In fact, they are remarkably effective in improving the lives of poor children. This column proposes incremental reforms of existing programmes in the US.
Government guarantees for financial institutions that are "too big to fail" seem unavoidable, but such insurance against insolvency imposes major costs and may increase the risk of crisis. This column argues for the necessity of non-conventional regulatory solutions to make big banks pay for their implicit insurance. Progressive capital ratios may be one such solution.
This column says that the two central stylised facts of population growth – Gibrat's Law and Zipf’s Law – do not hold in a wider sample of rural and urban areas. Analysis using new data that describe population patterns in both urban and rural areas suggests that populations experience a divide, as the dense grow and the sparse depopulate.
As the global economic crisis goes south, developing countries' central banks must cope with financial turmoil. Recent experience in Latin America, this column argues, cautions against pouring money into the financial system. Countries that relied on prompt corrective actions managed crises well, while those relying on central bank money suffered greater instability.
Does poverty cause civil conflict? This column presents the latest evidence, which shows that droughts in Sub-Saharan Africa that reduce income raise the likelihood of violence.
We need a combination of psychology and economics to understand people's savings and investment decisions, says David Laibson of Harvard University in an interview with Romesh Vaitilingam. We can then build institutions that help people do what they want to do. The interview was recorded at the Centre for Economic Performance in London, where Laibson was delivering the Lionel Robbins Memorial Lectures in November 2007.
No one knows exactly how to stop the global economic crisis, but all agree that fiscal stimulus has a key role to play. By reducing the length and depth of the recession, it should reduce bankruptcies, foreclosures, and further asset-price drops. This column presents the main logic in a recent IMF paper authored by one of the world’s leading macroeconomists, Oliver Blanchard, and others.