The "international currency war" mentioned by Brazil's finance minister poses massive dangers for the world trade and financial systems. This column by one of the world's most respected international economists argues that there is a better way. The G3 should engage in quantitative easing so they all can export more to each other. For the emerging markets, the danger lies in inflation, asset bubbles, and trade retaliation. To shield their key manufacturing sectors, they should encourage the domestic demand for manufactures.
Total foreign exchange holdings are larger than ever, largely due to reserve accumulation by emerging and developing economies. This column investigates the driving forces behind the accumulation of foreign exchange reserves and finds that exchange-rate smoothing, rather than precautionary stockpiling, is the main driver.
How should policymakers deal with global imbalances? This column argues that a return to the Plaza Accord of the 1980s with an exclusive focus on the exchange rate could well dilute the G20’s other agendas and may not even work in practice. The best solution is instead to focus on structural reforms.
How do trade and labour market institutions affect employment during a crisis? This column finds that trade openness leads to sharper drops in employment, but also faster recoveries. High severance pay dampens employment contraction and very high unemployment benefits are associated with a stronger contraction. These findings suggest that global employment is set to remain stagnant for 2010 before recovering in 2011.
The European Commission recently authorised the merger between Orange and T-Mobile, which will create a single network with 37% of all UK mobile subscribers. While the merger's approval is subject to certain undertakings, this column presents evidence that these do not go far enough to address concerns that competition and consumer surplus will be significantly reduced.
Many countries in Europe now have a coalition government. This column uses data from Italy to argue that this comes at a cost. It finds a positive and significant relationship between the political instability caused and a rise in government yields, making today’s fiscal adjustments even more difficult and painful.
Recent estimates suggest as many as 23% of US mortgages are “underwater” –the value of the home collateralising the mortgage has fallen below the loan’s balance. This column outlines a proposal to remove the threat of strategic default in these cases – one that it argues is not only fair but also the most likely to allow the US housing market to recover.
Women’s economic empowerment has been a defining feature of the last century. Yet while women today comprise more than half of the global workforce, their wages and economic opportunities still lag behind those of men. This column takes a closer look at the economic landscape for women and how it compares across countries, using the Economist Intelligence Unit’s new Women’s Economic Opportunity Index as a guide.
EU trade policy has accomplished little of substance during the past decade. This column, a contribution to the ongoing VoxEU debate on The Future of EU Trade Policy, identifies five reality checks that should be taken on board as the European Commission and the Member States reformulate their approach to commercial relations.
While committees of experts are becoming more common in public policy, how best to design them remains an open question. This column asks what external experts bring to the table. Examining behavioural differences between internal and external members of the Bank of England’s Monetary Policy Committee, it shows that differences in behaviour are driven by differences in information and in approaches to monetary policy.
Are conflicts worth it? This column argues that they can be. While wars are extremely damaging, they can be in the interests of one party if they help reveal the true balance of power and thereby change the stakes in eventual negotiations. This explains why small countries take on superpowers with no chance of winning and why unions go on strike against laws already passed.
Juan Dolado of Universidad Carlos III de Madrid talks to Romesh Vaitilingam about why unemployment in Spain has risen so much higher than elsewhere in Europe during the Great Recession. He discusses the pressing need to address the great divide in the Spanish labour market between permanent and temporary employment contracts. The interview was recorded at the annual congress of the European Economic Association in Glasgow in August 2010.
What do countries need for sustainable financial development? This column argues that protection of property rights is necessary but not sufficient. Using a sample of 160 countries from 1960 to 2005, it finds that checks and balances on power and political stability are the vital ingredients.
While many policymakers concerned with suppressing the global crisis are looking to the Great Depression as a guide, this column suggests that many are missing a trick. In a new book, the authors argue that the Federal Home Loan Bank, set up to solve the financial crises of the 1930s, is an unparalleled source of housing finance expertise which, with reform, could be vital to policymakers today.
What happens to inflation during a downturn? This column documents the behaviour of inflation during 25 episodes of persistent large output gaps in 14 advanced economies over the last 40 years. It finds that such episodes bring about significant disinflation, although inflation tends to bottom out at low positive rates. Recent developments in advanced economies appear consistent with this disinflationary effect.
Does culture affect long-run growth? This column argues that countries with a more individualist culture have enjoyed higher long-run growth than countries with a more collectivist culture. Individualist culture attaches social status rewards to personal achievements and thus provides not only monetary incentives for innovation but also social status rewards.
A large body of research has linked the gold standard to the severity of the Great Depression. This column argues that while economic historians have focused on the role of tightened US monetary policy, not enough attention has been given to the role of France, whose share of world gold reserves soared from 7% in 1926 to 27% in 1932. It suggests that France’s policies directly account for about half of the 30% deflation experienced in 1930 and 1931.
Do differences in tastes impede gains from trade? This column says that that may be the case only in special circumstances. In fact, the effects of trade liberalization may be entirely unaffected by the distribution of foreign tastes and coincide with those of a representative agent approach.
With the recent wave of bank bailouts and mergers, competition in the sector has surely been affected. This column introduces a new Policy Insight arguing that a trade-off between regulation and competition in the banking sector, while complex, does exist. The optimal policy requires coordination between regulation and competition policy depending on the level of competition in the market.
David O’Sullivan, Director General for Trade at the European Commission, talks to Viv Davies about the issues and challenges in setting the direction for future EU trade policy. As a contribution to the VoxEU debate on "The future of EU trade policy", O’Sullivan discusses the EU’s responsibility within the world trading system, trade governance and the WTO, the role of reciprocity, the BRICs and the importance of successfully concluding the Doha Development Agenda; he also comments on the issue of ‘multilateralising regionalism’. The interview was recorded on 15 September 2010.
While debate rages over the appropriate size and timing of fiscal expansions, this column points out that much less attention is devoted to role of the automatic stabilisers in the tax and transfer system. It compares these stabilisers in Europe and the US, finding that social transfers play a key role in the stabilisation of disposable incomes and consumer demand.
No one likes sitting in a traffic jam, but what can be done about them? This column says the time has come for general road tolls on all roads across all of Europe.
Our understanding of the recent recovery in world trade would be incomplete without a consideration of the export inducements put in place during the past 12 to 18 months by major trading nations. This column summarises the findings of the seventh report of the Global Trade Alert, including a regional focus on Latin America.
What impact will fiscal policy have on current-account imbalances in the years to come? Using data from a large and diverse panel of countries, this column finds that a strengthening in the fiscal balance by 1 percentage point of GDP is, on average, associated with a current-account improvement of 0.2-0.3 percentage points of GDP.
While countries rush to enact more and more free-trade agreements, not enough is known about their impact. This column presents evidence suggesting that free-trade agreements are more discriminatory than their preferential tariffs suggest. It finds a stark increase in contingent protection as free-trade agreements cause a 10%-30% increase in the number of antidumping disputes against non-member countries.
What can we learn from US President Obama’s fiscal stimulus? This column argues that channelling the stimulus package through state governments exposed it to agency costs, free-riding problem, and political expediency. As a result, the stimulus has failed to meet its objectives at the state level. The lesson is that fiscal stimulus should be conducted centrally.
The role of financial institutions in the global crisis has led to a consensus that financial regulation must change. This column argues that the banking lobby, far from depleted, has struck back with a vengeance. It has managed to postpone the much needed regulation for a time when the need for it will be forgotten.
Despite the encouraging results from the stress tests of the EU’s banking sector, market confidence in the financial system remains subdued. This column argues that while most of the sovereign debt held by EU banks is on their banking books, the EU stress test only considered their smaller trading book exposures. Market participants do not have the luxury of being so selective.
Foreign-currency loans in Eastern Europe are seen as a major threat to financial stability. Why then are they so widespread? This column presents evidence from over 100,000 loans made by a Bulgarian bank between 2003 and 2007. It finds that one-third of foreign-currency loans were actually requested in local currency by the firm, suggesting that banks are pushing them.
Europe’s fiscal crisis has called into question the fiscal credibility of some of its largest members. This column argues that some elements in the European Commission’s reform proposals may actually weaken accountability instead of strengthening it.
Is the global economic recovery about to grind to a halt? This column provides evidence on economic performance in the decade after a macroeconomic crisis. It finds that growth is much slower and as well as several episodes of “double dips”. It adds that many of these economies experience plain “bad luck” that strikes at a time when the economy remains highly vulnerable.
The global crisis has led policymakers in the EU and the US to broaden their central banks' mandates to include greater banking supervision. This column argues that this new responsibility should be seen as an evolution of the central bank specialisation as a monetary agent rather than a reversal of the specialisation trend.
Most scientists agree that climate change is underway or at least on the horizon. This column introduces the author's book 'Climatopolis: How Our Cities will Thrive in Our Hotter Future.' It outlines an optimism and an irony: Urban economic growth may have caused climate change, but through the free market, it will also help us to adapt to it.
Paul Seabright of the Toulouse School of Economics talks to Romesh Vaitilingam about his book ‘The Company of Strangers: A Natural History of Economic Life’, recently issued in a revised version, which applies the ideas about social trust and social fragility to the financial crisis. Among other things, he outlines the three lessons mistakenly learned from the experience of the 1930s. The interview was recorded at the annual congress of the European Economic Association in Glasgow in August 2010.
Was the subprime crisis inevitable? This column looks at how the last mortgage crisis in the 1930s shaped the policy landscape in the US, arguing that it eventually led to the emergence of private securitisation in the 1990s, a surge in homebuilding and homeownership, and a second great mortgage crisis that was just around the corner.
The recent recession that followed the global crisis has often been compared with the Great Depression. This column argues that an important but neglected lesson from that period is that policymakers should be firmly focused on fostering labour market flexibility and maintaining the employability of those out of work, rather than on short fixes that actually cause unemployment to persist.
Why do so many Japanese firms risk their profits by invoicing their exporters in foreign currencies? This column, based on firm-level interview data, suggests that such invoicing may be motivated by the fact that many Japanese firms export their goods to foreign subsidiaries facing local competitors. Invoicing in foreign currencies concentrates currency risk at the company headquarters.
One of the striking features in the buildup to the global crisis was the extent of risk taken on by highly leveraged financial institutions. This column blames such behaviour on the limited liability status of these institutions. Using data on British banks from 1878 to 1912, it finds that the banks with greater liability for their debts took on less risk.
This autumn, the European Commission will set out the future direction for the EU’s trade policy. In this column its Chief Trade Economist calls on Vox contributors to engage in the debate about what that direction should be.
Is international trade a source of widening wage inequality in industrial countries? This column shows that export activity in Germany contributes to wage inequality among workers with different levels of skill, but diminishes wage gaps in German manufacturing between men and women and between German citizens and non-citizens.
Is offsetting your carbon footprint always a good thing? This column questions the criteria used to label carbon footprints, arguing they can disadvantage developing countries. It suggests a variety of ways to overcome that problem.
Are low interest rates storing up more trouble for the future? This column argues that low interest rates have been necessary to sustain large current-account imbalances. With global imbalances unlikely to be redressed any time soon, low interest rates may be the best option for a while longer – but this policy is not without its risks.
The role of naked credit default swaps in the global crisis is an ongoing source of controversy. This column seeks to add some formal analysis to the debate. Its model finds that speculative side bets can have significant effects on economic fundamentals, including the terms of financing, the likelihood of default, and the scale and composition of investment expenditures.
The return from a fiscal stimulus – the fiscal multiplier – remains one of the most controversial topics in economics today. This column considers the influence of expectations, of variation in recessions and expansions, and of different components of government spending. It finds that the size of the multiplier varies considerably over the business cycle: between 0 and 0.5 in expansions and between 1 and 1.5 in recessions.
Eric Chaney of Harvard University talks to Romesh Vaitilingam about his research on the evolution of institutions in the Islamic world and the relationship with economic development. Among other things, they discuss the rise and fall of Muslim science; and the balance of power between ‘church’ and ‘state’ in times of catastrophe. The interview was recorded at the annual congress of the European Economic Association in Glasgow in August 2010.
As WTO trade talks languish, what’s driving the surge in regional trade agreements? This column says that regionalism is being driven in large part by the domino effect, in which nations excluded from a trade agreement launch their own negotiations to redress trade diversion. This dynamic is more of a challenge to the WTO than a threat at the moment, but it should not be neglected.
The answers to “How much should people sacrifice today for the benefit of those living several decades from now?” vary widely. This column suggests that people’s distaste for uncertainty – ambiguity aversion – favours immediate, rapid cuts in greenhouse gas emissions.