Can the drying up of trade finance help explain the recent collapse in exports relative to output? This column looks at the effect that trade finance had on exports during the 1990s Japanese financial crisis using firm-level data. It suggests that the direct effect of declining bank health on exports caused at least a third of the decline in Japan’s exports at the time.
China’s financial liberalisation remains incomplete. The behaviour of short-term market-determined interest rates is influenced by regulated rates. This column says that China should further liberalise its retail interest rates to allow all interest rates to better reflect liquidity conditions and the scarcity of capital.
The effects of distance on trade and of trade on income have puzzled economists for centuries. This column presents new evidence from a natural experiment – the 1967-1975 closure of the Suez Canal. Results suggest that a 10% decrease in ocean distance results in a 5% increase in trade. Also, it estimates that every dollar of increased trade raises income by about 25 cents.
Joel Waldfogel of the University of Minnesota’s Carlson School talks to Romesh Vaitilingam about his new book, Scroogenomics. They discuss his measurements of the deadweight loss of Christmas gift giving over time and across countries, the motivations that people have for giving, and his ideas for encouraging charitable giving at the holidays. The interview was recorded in London in December 2009.
Does the type of electoral system affect fiscal policy around elections? This column shows that electoral systems allowing immediate re-election in Latin America have a considerable impact on government spending. On the positive side, fiscal management shows a slight improvement around elections.
Does ethno-linguistic fractionalisation stifle economic growth? This column presents new evidence that considers how fractionalisation changes over time and treats it as both a cause and an effect of economic growth. While fractionalisation is found to have a negative effect on growth, it also changes over time, contrary to conventional wisdom.
Spreads on government bonds in the EU15 have risen dramatically since the Lehman default in September 2008. This column shows that financial markets’ reactions were not random but rather reflect an intensification of risk concerns, especially regarding the state of public finances. German bonds have acquired a ‘safe-haven' status that they did not have before.
A strong financial sector is essential to a modern economy, but private actions can impose enormous costs on taxpayers; a balance must be struck. This column explains why the UK Government believes that there is a case for increasing the costs of risk-taking to banks and their shareholders while reducing those borne by taxpayers.
Current practice of national crisis resolution is threatening the EU’s single banking market. The financial trilemma suggests that policymakers can only choose two out of the following three objectives: financial stability, financial integration, and national financial policies. This column argues that EU burden-sharing rules among governments can save the single market.
A review of the estimates of climate policy costs produces biased estimates for the more ambitious objectives – such as those compatible with the 2°C of the EU and the G8 – since only the most optimistic results are reported for such targets. This column shows that unbiased estimates predict highly variable costs for the most difficult scenarios.
Do different types of legal system have a lasting effect on the economy? The emerging consensus would argue “yes”. This column suggests that types of legal system can change depending on the culture and political institutions of the country. Determining the effect on the economy is not straightforward.
Public concerns regarding globalisation remain as economists still do not agree on trade’s effect on the labour market. This column focuses on the effect of increased trade on permanent income shocks experienced by workers in the US. It suggests that increased import penetration is associated with increased risk to worker incomes.
Many observers blame regulatory failure for the financial crisis, arguing for closer international coordination of national regulation. This column argues for the opposite. Regulatory convergence creates instability. Instead, regulatory diversity is needed to reduce market herding and the resulting systemic risks. This diversity can be achieved through stronger democratic oversight of regulators.
As the US debt-to-GDP ratio rises towards 100%, policymakers will be tempted to inflate away the debt. This column examines that option and suggests that it is not far-fetched. US inflation of 6% for four years would reduce the debt-to-GDP ratio by 20%, a scenario similar to what happened following WWII.
Jonathan Morduch of New York University talks to Romesh Vaitilingam about his new book, Portfolios of the Poor: How the World’s Poor Live on $2 a Day – co-authored with Daryl Collins, Stuart Rutherford and Orlanda Ruthven – which reports on the yearlong ‘financial diaries’ of villagers and slum dwellers in Bangladesh, India, and South Africa. The interview was recorded in New York in August 2009.
Policymakers blame the undervalued RMB for the global imbalances. Here one of the world’s leading development economists argues that the undervalued currency boosts China’s growth, and this, in turn, is good for the world’s recovery and the alleviation of poverty. China could maintain its growth without trade imbalances if it could introduce industrial subsidies to offset a rising yuan. It is better to subsidise tradables directly than to subsidise them indirectly through the exchange rate. This may run afoul of WTO rules, but that doesn’t diminish the economic case for the policy.
Must China let its exchange rate appreciate to reduce global imbalances? This column says the appropriate yardstick to measure currency undervaluation is based on the Balassa-Samuelson effect. That measure says the renminbi is undervalued by only 12%. A gradual renminbi appreciation will be sustained only if Chinese corporate and public savings are lowered.
The structure of contracts in financial markets is deeply rooted in history. This column retraces the origins of financial contracting and explains why mutual fund banking proposals are wrong headed. It proposes to shift more of the functions of our current banking system away from limited liability back into partnerships. This would involve requiring hedge funds to be entirely separated from banks.
The demand for up-to-date economic indicators has led researchers to use Google to improve the predictive power of their models. This column presents evidence from the US and Italy that using search trends on Google significantly increases the accuracy of forecasting unemployment.
Following the last run on a British bank over 130 years ago, Walter Bagehot argued that central banks should act as a lender of last resort. While such policies have been followed by central banks in today’s crisis, this column updates the recommendation by suggesting central banks should also act as a “liquidity provider of last resort”.
The NYU Stern group – authors of the influential book Restoring Financial Stability: How to Repair a Failed System – have completed a new ebook that assesses the strengths and weaknesses of the US financial reform legislation. This column introduces the new ebook.
Paul Krugman reflects on the life and career of Paul Samuelson.
It is clear from the recent WTO ministerial meeting in Geneva that a successful conclusion to the Doha Round is a long way off. But long stoppages have been commonplace in earlier liberalisation efforts. This column outlines some of these delays in an effort to better understand the current standstill.
Hot countries tend to be poorer. This column uses the cross-century, cross-country variation in climatic temperatures to estimate the effects of historic temperature upon current incomes. The negative relationship between current temperature and income appears due to temperature variations in the 18th and 19th centuries. That suggests that the consequences of climate change may be felt for a very long time.
Accumulating large foreign exchange reserves is a costly insurance strategy for developing countries. This column says that commodity-exporting countries might do better by hedging their risk with financial instruments, thereby reducing the need to hold precautionary reserves. Yet few do so.
Over a billion people live without basic electricity. This column calculates the emissions required to make basic energy services available to all and to grant developing countries’ citizens future access to energy services equal to those enjoyed by rich countries’ citizens at comparable stages of development. These calculations imply some very stark, very different implications for burden sharing. Moreover, they mean that meeting aggregate global emissions targets without sacrificing developing countries basic energy needs will require revolutionary improvements in the technology.
Painful tax increases will be necessary to restore fiscal balance after exiting the crisis. This column shows that wages are higher in US states with lower corporate income taxes – a reminder that efforts to tax firms more heavily create burdens that will be distributed among stakeholders, including many groups that governments otherwise attempt to help, such as workers.
The third report of Global Trade Alert contains the latest assessment of protectionist dynamics at work in the world economy with a focus on the Asia-Pacific region.
Greece’s public debt is in turmoil. This column says that the country is nowhere near defaulting, but the Greek government should heed the financial markets’ warning and end three decades of fiscal profligacy. It suggests that Greece adopt immediate deep spending cuts and reform its budgetary process to credibly enforce discipline.
In spite of its global nature, the current crisis dealt a much smaller blow to emerging markets than its predecessor, the Russian/Long-Term Capital Management crisis of 1998. Although stronger fundamentals are part of the explanation, this column argues that the readiness of the international community to provide lender of last resort facilities played a key role and has major implications for the design of a new international financial architecture.
What microeconomic forces drove the structural transformation of India’s economy in recent decades? This column studies firm-level data and portrays a dynamic economy driven by the growth of private and foreign firms. But the Indian economy did not go through an industrial shakeout phase driven by creative destruction. The endurance of incumbent firms prevented a dramatic microeconomic transformation.
Jim O’Neill, head of global economic research at Goldman Sachs, talks to Romesh Vaitilingam about the crisis and its impact on the emerging giants of the world economy, the BRICs (Brazil, Russia, India and China). They also discuss the value of economic research in both the commercial and academic spheres, and how the economics profession has come out of the crisis. The interview was recorded in London in September 2009.
It has been shown that poor trade infrastructure is a key reason for Africa's weak exports. This column goes a step further and provides evidence that the delays in inland transport are the most crucial factor restricting Sub-Saharan Africa's trade. Policy makers’ focus on foreign trade policy may therefore be misguided.
Market distress has eased since the height of the crisis, suggesting that some government policies have been successful. But which ones? This column argues markets are calmed by policies that form part of a strategy; ad-hoc policies add to market fears.
The costs and benefits of carbon tariffs have been extensively discussed in terms of competitiveness and carbon leakage. This column says global welfare should be the focus. EU tariffs against developing country exports would increase global welfare and the proceeds from the tariff could help poorer exporting countries reduce the carbon intensity of their economies.
Mitigating climate change while maintaining economic growth will require a wide portfolio of technologies. This column says too little has been done to turn on the “green innovation machine”. It says governments in developed economies should price carbon, subsidise research, and facilitate technology transfer to developing countries.
Are credit bubbles dangerous? This column presents long-run historical data showing that, over the past 140 years, episodes of financial instability were often the result of "credit booms gone wrong". Recent years witnessed an unprecedented expansion in the role of credit in the macroeconomy. It is a mishap of history that – just as credit matters more than ever before – the reigning doctrine gives it no role in central bank policies.
The study of sports is beginning to tell us more and more about the operation of labour markets and incentives. This column looks at football to verify that wages reflect marginal productivity. It shows that two-footedness – the rare ability to use both feet to pass, tackle, and shoot – commands a large wage premium.
China and other key developing countries must participate for any global carbon deal to succeed, but they make a strong case for a free pass. What can be done? This column says that they could commit now to accept pre-specified future emission reduction targets in order to effectively address these concerns.
In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, even larger increases in the price of oil were associated with much milder movements. This column attributes the difference in the US to more flexible labour markets and more credible monetary policy during the Great Moderation.
The Penn World Table is a major data source for many studies of economic growth. This column reveals that its GDP statistics are surprisingly sensitive to revisions – GDP growth for the same country at the same point in time changes across successive versions. Researchers analysing annual data may obtain more robust results by using national accounts data, even though they are not PPP-adjusted.
The purpose of a cap-and-trade system is to help in the fight against global climate change. This column warns that a unilateral approach could increase global emissions by shifting production to more carbon-intensive methods abroad. Acting alone, the EU’s Emission Trading Scheme may be doing more harm than good.
The EU is committed to limiting the rise in global average temperature to 2°C above pre-industrial levels and aims to achieve this through a range of policy instruments. This column warns that climate policy need not cost a lot, but imperfect implementation could cause hundreds of billions of euros’ worth of unnecessary welfare losses.
Demetrios Papademetriou, president and co-founder of the Migration Policy Institute in Washington DC, talks to Romesh Vaitilingam about the key elements of wise migration policy both at a time of economic crisis and for the longer term. The interview was recorded at the Global Economic Symposium in Schleswig-Holstein in September 2009.
The subprime crisis became the global crisis when the 2007 financial shock mutated into a full-blown global economic crisis in September 2008. This column attributes the rapid transmission of financial stress to the surprise of the crisis. Using historical data, it shows that crises with a pronounced surprise element tend to result in more widespread contagion.
The international transmission of exchange rate movements depends on which currencies are used for the invoicing of international trade. This column presents transaction-level evidence on how exporters choose their invoicing currency. Industry structure, macroeconomic volatility, and the bargaining strength of the importing firm affect invoicing choices.
Did US bankruptcy laws exacerbate the housing crisis? This column says that a 2005 reform that made declaring personal bankruptcy more difficult increased mortgage defaults and home foreclosures. It recommends reversing that legislation to reduce the number of foreclosures, which have high social costs.