May 2009

Eichenbaum, 30 May 2009, 13628 reads

Martin Eichenbaum of Northwestern University talks to Romesh Vaitilingam about his research on nominal rigidities and reference prices, which analyses a new weekly scanner data set from a major US retailer containing information on prices, quantities and marginal costs for every item in over 1,000 stores. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.

Véron, 30 May 2009, 20736 reads

Some blame poor accounting standards for the crisis, and many now place accounting reform atop the global agenda. But the International Accounting Standards Board suffers significant institutional weaknesses, this column argues. While the International Financial Reporting Standards are not doomed to failure, there is significant risk of globally fragmented and divergent accounting standards, which would be a loss for everyone.

Sachs, 29 May 2009, 24881 reads

Aid critics have recently been blaming aid as the source of Africa’s poverty. This column explains how Africa has long been struggling with rural poverty, tropical diseases, illiteracy, and lack of infrastructure and that the right solution is to help address these critical needs through transparent and targeted public and private investments. This includes both more aid and more market financing.

De Haas, 28 May 2009, 16535 reads

In recent months, foreign-owned banks have been accused of abandoning the emerging markets that have contributed so much to their profitability over the last decade. This column analyses a large bank-level dataset of foreign bank subsidiaries across the world, to compare lending by foreign bank subsidiaries with lending by domestic banks. Importantly, it finds that as a result of parental support, foreign bank subsidiaries do not typically rein in their lending during a financial crisis.

Elliott, 27 May 2009, 15209 reads

The economic crisis is hitting the world’s poorest countries through falling trade and commodity prices. This column argues that the US should respond by further opening its market to exports from small, poor economies. That would not only provide an additional stimulus to those economies but also strengthen US global leadership, give a boost to the Doha Round, and serve broader US national interests by helping to promote political stability in some very shaky parts of the world.

Bertola, 26 May 2009, 17492 reads

In Europe, unemployment is increasing more rapidly than in earlier comparable crises. This column attributes that to the severity of the recession and the flexibility-oriented reforms that only recently brought European unemployment down. But that does not mean that the answer is re-regulation of labour markets.

Danielsson, Keating, 25 May 2009, 16452 reads

Bank bonuses have been blamed for contributing to the crisis, and regulators and politicians are now demanding changes in compensation arrangements. Most of these calls are based on a misconception of the nature of financial risk, an inflated view of the efficacy of risk models, and an incorrect view of the incentive issues facing financial institutions. This column proposes reforms that would discipline senior managers by exposing them to the dangers of junior managers’ risk taking.

Campbell, 23 May 2009, 24207 reads

Can financial crises be averted by identifying and dealing with overpriced assets before they cause instability? This column argues that during the British Railway Mania of the 1840s, railway shares were not obviously overpriced, even at the market peak, but prices still fell dramatically. This suggests that extreme asset price reversals can be difficult to forecast and prevent ex ante, and the financial system always needs to be prepared for substantial price declines.

Broda , Ghezzi, Levy Yeyati, 22 May 2009, 41373 reads

In a new financial landscape in which leverage is limited by worldwide regulation and the gradual digestion of toxic assets will weigh on bank’s balance sheets, the US will face tougher terms to finance its external imbalance. Perfectly at odds with the global imbalance premonitions of the early 2000s, the dollar’s weakness will likely be the best gauge of the turnaround of the global crisis.

Poterba, 22 May 2009, 9013 reads

James Poterba of MIT and President of the National Bureau of Economic Research talks to Romesh Vaitilingam about his research on the economic consequences of ‘tax expenditures’ (the US term for tax deductions), and the short- and long-term prospects for tax reform in the United States book. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.

Claessens, Kose, Terrones, 22 May 2009, 46108 reads

Many analysts suggest the economic recovery may have started but others worry that the sorry state of developed countries’ financial systems will prolong the recession. Can economic activity revive absent a recovery in credit and housing markets? This column presents new research suggesting that a “creditless recovery” is possible, but it would likely be slow and shallow.

Gylfason, 21 May 2009, 10989 reads

Does every country in Africa need a currency of its own? No. This column describes the monetary zones in-the-making in Africa and how a further reduction of the number of currencies in Africa would likely encourage trade and growth and attract investors who are understandably wary of weak and volatile currencies.

Snower, 20 May 2009, 12265 reads

Under the threat of the financial crisis, US banks have received, without much controversy, huge bailouts. This column argues that the rescue plan ought to act as an automatic stabiliser, providing large bailouts to those institutions whose toxic assets turn out to be worth little and smaller bailouts to those whose toxic assets are worth more. But that is precisely what the Geithner Plan doesn’t do.

Corden, 19 May 2009, 10768 reads

Conservative critics of fiscal stimulus policies usually criticise such policies because of the public debt burden they create. This column introduces a new CEPR Policy Insight, which takes a close look at the Keynesian theory underlying the policy of fiscal stimulus being undertaken or considered in many countries, led by the US

Cotter, 19 May 2009, 68676 reads

Each economy has suffered a unique variant of the global financial crisis. This column details the perilous situation facing Ireland’s banking and property sectors. It says that the government responded poorly, particularly early in the crisis. Most indicators remain quite negative, though there are glimmers of evidence that the economy may begin to improve.

Sibert, 18 May 2009, 102617 reads

Greedy bankers are getting most of the blame for the current financial crisis. This column explains bankers did behave badly for mainly three reasons. They committed cognitive errors involving biases towards their own prior beliefs; too many male bankers high on testosterone took too much risk, and a flawed compensation structure rewarded perceived short-term competency rather than long-run results.

Evenett, 16 May 2009, 10662 reads

Policymakers on both sides of the Atlantic have pointed to what they see as the "green shoots" of economic recovery. However, this column shows that the people who undertake international trade aren't taking a sanguine view about trade protectionism. Governments need to eschew all forms of beggar-thy-neighbour policy and follow the five steps described below. This is no time for premature self-congratulation on a victory over protectionism.

Allen, 15 May 2009, 190284 reads

It is still not clear among economic historians why the Industrial Revolution actually took place in 18th century Britain. This column explains that it is the British Empire’s success in international trade that created Britain’s high wage, cheap energy economy, and it was the spring board for the Industrial Revolution.

Milligan, Stabile, 15 May 2009, 37519 reads

Since the 1990s, many countries have reformed their systems of transfers to low income families with an eye toward improving work incentives. This column shows, using Canadian data, that well-designed income transfers can not only help families make their way back to employment, but also improve the educational, mental health, and behavioural outcomes of the next generation.

Katz, 15 May 2009, 16833 reads

Lawrence Katz of Harvard University talks to Romesh Vaitilingam about his book (co-authored with Claudia Goldin), The Race between Education and Technology, a history of US economic inequality and the roles of technological change and the pace of educational advance in affecting the wage structure. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.

Laborde, Bouët, 14 May 2009, 15466 reads

The current financial crisis has fostered a demand for protectionism and put the Doha Round at the back of the agenda. This column argues that a failed Doha Development Agenda would send the wrong signal in terms of global governance and could lead to an unravelling of the past 15 years of trade liberalisation.

Bell, Brooks, Moore, 13 May 2009, 32573 reads

It is widely believed that the current credit squeeze, leading to bank failures, is a modern phenomenon arising from the interplay of a historically unique set of circumstances that could not have been foreseen. But a team of academics – a finance professor and two medieval historians – at the University of Reading’s ICMA Centre has documented a medieval credit crunch that bears remarkable parallels with the current crisis.

Frot, 13 May 2009, 16781 reads

Developing countries are expected to be severely hit by the recent financial crisis. This column says that based on previous crises, aid flows to developing countries should be down by 13%. However, donor countries’ pledges may soften the shock this time around.

Cavallo, Cottani, 12 May 2009, 18767 reads

Economists’ opionions diverge greatly on how to resolve China’s “dollar trap”. This column suggests all US creditors need to do is demand that the US government swap nominal US Treasury bills, notes, and bonds for inflation-adjusted instruments. This will reduce the incentive of the US government to “inflate its way out of debt”, protect the value of emerging market reserves and redcue the risk of a resurgence in world inflation.

Hufbauer, Stephenson, 11 May 2009, 17631 reads

The crisis has delivered a particularly strong blow to export revenues of small developing countries. These nations have limited room for deploying anti-cyclical packages and, as a group, do not account for a significant amount of total world trade. They should thus be temporarily awarded policy space to adopt trade measures to counter the impact of the current economic crisis.

Beck, Hesse, Kick, von Westernhagen, 09 May 2009, 23749 reads

Issues of banking stability are currently intensively debated in Germany and elsewhere. This column looks at German banks and suggests that privately-owned banks are more profitable and better capitalised than savings and cooperative banks, but also take more risk. This higher risk taking results in higher default probability and higher “proximity to insolvency” of privately-owned banks.

Humpage, 08 May 2009, 56560 reads

China recently called for SDRs to replace the dollar as the international reserve currency and diminish the US economic supremacy. This column argues that because of the huge network benefits associated with using dollars, SDRs are not likely to supplant the dollar anytime soon as an international reserve unit, especially with the euro as a more viable competitor.

Varian, 08 May 2009, 20840 reads

Hal Varian, on leave from the University of California, Berkeley, talks to Romesh Vaitilingam about the kinds of things he thinks about as chief economist at Google – using the tools of economics to analyse business opportunities, making money out of search and content, and forecasting (including Google’s flu forecasts). The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.

Tanaka, 07 May 2009, 27115 reads

Global trade is collapsing at an unprecedented rate, but not evenly across the globe. This column argues that ‘vertical specialisation’ – the internationalisation of manufacturing supply chains – accounts for the amplification of Japan’s drop in trade. The good news is that once OECD countries start to recover, the amplification should work in reverse, boosting Japanese exports and imports at an accelerating rate.

Kannan, Terrones, Scott, 06 May 2009, 38020 reads

Two features of the current recession – its association with a deep financial crisis and its highly synchronised nature – suggest that it is likely to be unusually severe and followed by a weaker-than-average recovery. Current and near- term policy responses are the key to understand how the recession will evolve this time.

Watson, 05 May 2009, 12999 reads

Low-income Americans are less likely to be married. Recent research suggests that low-income people wait on marriage while striving for a higher economic status, with that status determined by the peer group.

Kubarych, 04 May 2009, 16444 reads

The financial crisis is not over but it seems less scary since the US stock market decided that most big banks will survive. This column provides a current scoreboard of the crisis game and reminds everybody that the underlying problems are hardly resolved. A lot of banks sorely need capital and need to raise it relatively cheaply.

Chan-Lau, Espinosa-Vega, Giesecke, Solé, 02 May 2009, 18780 reads

The current financial crisis has underscored the problem of institutions that are too connected to be allowed to fail. This column suggests new methodologies that could form the basis for policies and regulation to address the too-connected-to-fail problem.

Francois, Woerz, 02 May 2009, 24679 reads

Is the current collapse in trade unprecedented, inconsistent with the general level of economic downturn, and indicative of a trade-related set of problems calling for trade-specific solutions? This column, by carefully comparing real and nominal trade trends, finds that trade seems to be a victim of non-trade weaknesses in credit and demand. While we should maintain a rearguard action on the protectionism front, the cure for the symptoms lies in curing the underlying illness.

Antolin, Stewart, 01 May 2009, 22562 reads

The current crisis has reduced the value of retirement assets by nearly 25%. This column examines policymakers’ reponses to the impact of the financial crisis on global pension assets in light of international best practices, highlights the continued importance of private pensions, and suggests ways to improve the regulation, supervision, design and management of these funds.

Gordon, 01 May 2009, 55994 reads

When will the US economy turn around? World renown macroeconomist Bob Gordon – a member of the NBER Business Cycle Dating Committee since 1978 – documents a surprisingly robust link between the business cycle trough and the lagged peak in unemployment claims. According to this link, springtime for the US economy is just around the corner.

Gros, 01 May 2009, 26370 reads

Today’s general consensus is that a key factor behind the Great Depression was the breakdown of the US banking system and that we must avoid large-scale bank failures this time around at all costs. However, this column shows that commercial banks actually do relatively well during recessions. It is the financial sector outside banking – in other words, investment banking – that suffers huge losses.