February 2011

Darvas, Pisani-Ferry, Sapir, 28 February 2011, 22469 reads

It is well over a year since concerns over debt sustainability in Greece began spilling out to the rest of the Eurozone. The crisis continues. This column presents a three-part plan aiming to clean up the banks, reduce Greece’s public debt, and foster growth in the peripheral economies.

Gürkaynak, Edge, 28 February 2011, 24110 reads

Studies have shown that the forecasts from dynamic stochastic general equilibrium models perform better than central banks' judgemental forecasts as well as forecasts based on statistical analysis but without a theoretical foundation. This column shows that performing better is hardly good performance given how badly all three forecasts compare with reality.

Acharya, Cooley, Engle, Richardson, 27 February 2011, 28718 reads

As part of the US policy response to the global crisis, the Dodd-Frank Financial Reform Act calls for regulators to identify systemically risky financial firms – the sort that took the US financial crisis global. But how to identify these firms remains unclear. Some claim the task is impossible. This column begs to differ and names the 10 most systemically risky financial firms in the US.

Dadush, Eidelman, 26 February 2011, 20251 reads

Reform of the international monetary system tops France’s agenda as G20 chair. But what is it about the international monetary system that needs to change? This column says that the exchange-rate system is in relatively good shape.

Reinhart, Reinhart, 25 February 2011, 18877 reads

Sudden stops and reversals in capital flows are the stuff of policymakers’ nightmares. This column builds on the last 20 years of research and argues that the capital-inflow dilemma is not an external problem – it is an eternal one.

Miles, 25 February 2011, 10877 reads

David Miles of the Bank of England's Monetary Policy Committee talks to Viv Davies about ‘Monetary Policy in Extraordinary Times’, a speech he delivered in London on 23 February 2011. Two very large shocks have hit the UK economy – the near collapse of the banking system and, more recently, a sharp increase in commodity, energy and food prices. The first shock is deflationary, the second inflationary. Miles discusses how best to set monetary policy in the wake of these shocks and analyses how regulation and monetary policy can most effectively reduce the likelihood of future financial instability. [Also read the transcript]

Patacchini , Zenou, 25 February 2011, 28248 reads

Most people agree that friends matter – not just for personal wellbeing but for achieving their goals in life. Several studies have shown this to be particularly the case in education but the detection and measure of such peer effects is often found wanting. Using detailed information on friendship networks of American high-school students, this column finds that the friends we make at age 15 to 18 have a strong and persistent effect on our lives.

Crafts, 24 February 2011, 35203 reads

What started as a subprime crisis in the US soon spread to a global crisis resulting in what some have called the Great Recession. This column argues that economists spectacularly failed to take the prevention of financial crises seriously. But since then, economists have heeded the lessons from past crises and have helped avoid the worst.

Merz, Haufler, Richter, Lucke, 24 February 2011, 20827 reads

The European rescue fund is steeped in controversy. This column argues that both the fund and the case to keep it permanently are unjustified. It says that they create the wrong incentives and that they will only further intensify the debt crisis in Europe, at the risk of undermining the foundations of the EU itself. It calls on the German government to act.

Peeters, Albers, 23 February 2011, 31997 reads

World food prices are now even higher than their peak just before the global crisis. During periods of high commodity prices, North African and Middle Eastern governments have a long tradition of subsidising food and fuel products. But this column shows that food price inflation and consequently subsidies were also high during periods when global commodity prices were falling. Now these countries have an opportunity to correct this.

Goldhaber-Fiebert, Garber, 22 February 2011, 40864 reads

Obesity – and its related illnesses – endangers the lives of millions across the world. While healthier, more physically active lifestyles can mitigate this, the question remains of how policymakers can get people to switch from being couch potatoes to keen runner beans. This column presents new evidence suggesting that for many even a nudge may suffice.

Auer, 21 February 2011, 72454 reads

This column says that low US inflation over the last 15 years is partly attributable to cheap Chinese imports. It argues that if the US trade deficit is reduced – via either Chinese inflation or a nominal appreciation of the renminbi – this disinflationary effect will be reduced. It says that the resulting inflationary impulse could be severe.

Shome, Rathinam, 20 February 2011, 15018 reads

The world anticipates many things from India over the coming years, but what does India expect from the rest of the world? This column explores India’s immediate and long-term concerns for the G20. It argues that India is focused on achieving a global framework for more inclusive economic growth that encompasses developed and developing countries, as well as emerging markets.

Campanella, 20 February 2011, 50559 reads

At the February 2011 European Council meeting, Angela Merkel and Nicolas Sarkozy called on their Eurozone counterparts to sign up to a new pact for closer economic coordination. This column argues that introducing constitutional fiscal rules across Europe would be an important step towards fiscal sustainability, but that their rigidity should be offset by a more flexible economic design.

Sinn, 19 February 2011, 12288 reads

According to their government accounts, Ireland, Portugal, and Spain only need €310 billion. This column argues that analysts calling for a larger fund must have something else in mind, for example, using EU capital to reduce national debt via debt buybacks. While debt buybacks are reasonable, granting EU loans for this purpose is not.

Cherkashin , Demidova , Kee, Krishna, 19 February 2011, 13847 reads

Trade preferences, such as those removing restrictions on Madagascar’s exports to the US, have long been a controversial policy. Some argue that it removes incentives for firms to become more competitive as they simply divert their trade to the preferred market. This column argues using counterfactual simulations that trade preferences can increase trade for the provider country, the receiver country, and other trading partners as well.

Danielsson, 18 February 2011, 22778 reads

Financial models are widely blamed for underestimating and thus mispricing risk prior to the crisis. This column analyses how the models failed and questions their prominent use in the post-crisis reform process. It argues that over-relying on market data and statistical forecasting models has the potential to further destabilise the financial system and increase systemic risk.

Cooper, Kempf, 18 February 2011, 16912 reads

Before the surprising 2007 collapse of Northern Rock, it was taken for granted that bank runs were things of the past. But their return and the modifications of deposit insurance schemes lead many to question the credibility of the government’s commitment. What makes a run on a bank? And when should the government intervene? This column provides some answers.

Reade, Volz, 18 February 2011, 26240 reads

China is grappling with rising inflation. This column argues that the Chinese government, instead of focusing on micro-managing the economy, should grant its central bank room for further reform of its monetary policy. To make more efficient use of the interest-rate instrument, China's policymakers will need to further loosen the dollar peg.

Lerner, 18 February 2011, 12841 reads

Josh Lerner of Harvard Business School talks to Viv Davies about his book, co-authored with Mark Schankerman, ‘The Comingled Code: Open Source and Economic Development’. Lerner discusses the economic impact of open source software and its relationship with innovation and growth. Drawing from a new database, Lerner describes how open source and proprietary software interact and suggests how government policy should ensure that open source competes effectively with proprietary software. The interview was recorded by telephone on 14 February 2011. [Also read the transcript]

Cavallo, Díaz, 17 February 2011, 20457 reads

With growing inflation in China, policymakers are facing tough decisions. This column argues that if the government is to curb inflation without allowing for the deflation of the tradables, it should do so though sector focused policies. Monetary policy is already committed to the objective of preventing deflation of the tradables and to dampen the credit cycle that is behind asset bubbles.

Persaud, 16 February 2011, 21630 reads

Criticism of China’s exchange-rate policy continues throughout the US. This column argues that the US is in fact the exchange rate manipulator, due to its ongoing quantitative easing. What the US needs to do for a sustainable turnaround is to learn from other successful economies like China and Germany – not de-rail them.

Martin, Ventura, 16 February 2011, 25104 reads

Modern economies often experience large movements in asset prices that have significant macroeconomic effects. Yet many of these movements in asset prices seem unrelated to economic fundamentals and are often termed “bubbles”. This column explains how recent advances in the theory of rational bubbles can help us to understand these movements in asset prices and their macroeconomic implications.

Pavlova, Rigobon, 15 February 2011, 19088 reads

International macro-finance is a new area of open economy macroeconomics that brings portfolio choice and asset pricing considerations into models of international macroeconomics. This column argues that the recent global crisis illustrates just how important these considerations are. It surveys recent developments in international macro-finance and suggests several promising directions for future research.

Ravallion, 14 February 2011, 27636 reads

For how long have we cared about poverty? Tracing the number of references to the word “poverty” in books published since 1700, this column shows that there was marked increase between 1740 and 1790, culminating in a “Poverty Enlightenment”. Attention then faded through the 19th and 20th centuries, leaving room for the second Poverty Enlightenment in 1960 – and interest in poverty still rising.

Krishna, Mitra, Sundaram, 13 February 2011, 17113 reads

Trade liberalisation is often controversial in developing countries. This column argues that uneven exposure to trade across the various regions of South Asia has stifled the poverty-alleviating impact of trade liberalisation. It claims this research underscores the importance of developing ports, transport, and communications infrastructure to help ensure wider access and exposure to international markets and the benefits they can bring.

De Haas, van Horen, 13 February 2011, 14393 reads

Cross-border bank lending fell dramatically during the global crisis, but lending to some countries declined far more severely than to others. Recreating the monthly lending flows of the 118 largest international banks, this column finds that banks with head offices farther away from their customers are less reliable funding sources during a crisis, suggesting that the nationality of foreign banks matters.

Boustan, Margo, 12 February 2011, 18422 reads

Economists and sociologists have long maintained that mass movement of whites to US suburbs harmed remaining inner city residents by reducing the tax base and fostering isolated racial enclaves. This column argues that white suburbanisation had a silver lining – it indirectly contributed to the rise in black homeownership.

Da Costa, de Laiglesia, Melguizo, Martinez, 12 February 2011, 13768 reads

Informal employment remains pervasive in Latin America and the Caribbean. Many workers, not just the disadvantaged, are informal and contribute irregularly, if at all, to a pension plan. This column argues that governments should consider extending social pensions and stimulating individual saving.

Dittmar, 11 February 2011, 141505 reads

Despite the revolutionary technological advance of the printing press in the 15th century, there is precious little economic evidence of its benefits. Using data on 200 European cities between 1450 and 1600, this column finds that economic growth was higher by as much as 60 percentage points in cities that adopted the technology.

Gros, Mayer, 11 February 2011, 23778 reads

It is almost a year since commentators began suggesting the idea of a European Monetary Fund. This column, by two of the main proponents, argues that since then the Eurozone has created an emergency funding mechanism, but not a Fund. Europe’s leaders urgently need to take steps towards creating a credible mechanism that can deal with overly indebted countries.

Propper, 11 February 2011, 11079 reads

Britain’s coalition government is proposing significant healthcare reforms, which include promoting greater competition between providers and changing the way that care is commissioned. Carol Propper of the Centre for Market and Public Organisation talks to Romesh Vaitilingam about the evidence for some of the claims and counterclaims about the likely impact of the reforms. The interview was recorded at the University of Bristol in February 2011. [Also read the transcript]

Bossone, 11 February 2011, 21228 reads

In the years leading up to the global crisis, the IMF routinely failed to detect the vulnerabilities that brought the global economy to its knees – even once the turmoil had begun. How could the organisation mandated to oversee international finance stability have been so blind? Here one of the contributors to the Independent Evaluation Office report speaks in his own capacity about the failings of the IMF.

Mian, Trebbi, Sufi, 10 February 2011, 29160 reads

Several academics, policymakers, and regulators emphasise the role of foreclosures in the Great Recession and subsequent global crisis. This column provides one of the first attempts to show this empirically. Using micro-level data from all US states, it shows that foreclosures had a significant negative effect on house prices, residential investment, durable consumption – and consequently the real economy.

Perotti, Flannery, 09 February 2011, 29472 reads

Contingent Convertible (CoCo) bonds have been suggested as a way to ensure that banks keep aside enough capital to help them through financial crises. This column proposes a market-triggered CoCo buffer to maintain risk incentives during periods of high leverage. It argues that this will also activate risk information discovery through the market prices of bank securities and increase activism by outside shareholders.

Ali, Dadush, 09 February 2011, 26180 reads

Intermediate inputs – the parts and materials imported to make products for consumption domestically and abroad – are a growing force in world trade. This column argues that without better measurement of intermediate imports we run the risk of overestimating the growth effects of exports and severely underestimating the cost of protection and the crucial role that inputs play in enhancing efficiency.

Jappelli, Padula, 08 February 2011, 23514 reads

Previous research has suggested that low levels of financial literacy can often be blamed for poor financial decisions by individuals, with knock-on effects for the wider economy. This column adds empirical evidence based on cross-country aggregate and micro-data, showing that indeed countries with higher financial literacy also have higher saving rates and greater wealth.

Masciandaro, Nieto, Quintyn, 07 February 2011, 16279 reads

The European Banking Authority was established on 1 January 2011 with the chief objective of ensuring common regulatory and supervisory standards across the EU. This column asks whether it can achieve this objective under its current governance objectives. It suggests that he European Banking Authority is at least in part restricted in its ability to function.

Dadush, Stancil, 06 February 2011, 17243 reads

The recent fiscal problems in Greece, Ireland, Italy, Portugal, and Spain have left the single currency in need of rescue. But this column argues that this is only part of the problem. Until leaders deal with the core issues – the periphery’s lost competitiveness and misaligned economic structures – Europe’s rescue will ultimately fail.

Manasse, 05 February 2011, 13251 reads

Recent press reports suggest that Greece and Ireland may be allowed to buy back some of their debt. This column provides an example to show that if the purpose of the restructuring is to reduce the burden of payments for the debtor and to have creditors share the losses, a unilateral partial default or a debt swap would be preferable to a buyback.

Hau, Tze Chua, Lai, 05 February 2011, 16954 reads

Fear of contagion across asset classes is again stalking European sovereign bond markets. This column discusses how shocks to bank stocks spread to non-financial stocks in 2007 and 2008. It finds that equity fire sales by mutual funds had a surprisingly large and devastating effect on the price of non-financial stocks. Could the sale of bonds trigger a similar reaction?

Baldwin, 04 February 2011, 17831 reads

The financial crisis and the ensuing recession have prompted reappraisals of macroeconomic theory. This column introduces Policy Insight No 53 authored by Axel Leijonhuvd that argues that it is time to stop thinking of the macroeconomy as an electrical circuit; we must think of an economy as an “open system” and adapt our methods to the nature of the economy.

Rancière, Kumhof, 04 February 2011, 34398 reads

Of the many origins of the global crisis, one that has received comparatively little attention is income inequality. This column provides a theoretical framework for understanding the connection between inequality, leverage and financial crises. It shows how rising inequality in a climate of rising consumption can lead poorer households to increase their leverage, thereby making a crisis more likely.

Sutherland, 04 February 2011, 9385 reads

Peter Sutherland, former director general of the World Trade Organization, talks to Viv Davies about the recently published interim report on ‘The Doha Round: Setting a deadline, defining a final deal’. He explains why Doha has stalled and presents the case for its immediate completion. He maintains it is crucial that governments now commit to concluding Doha by the end of 2011 or else the round is doomed and all that has been achieved will be lost, with disastrous consequences for world trade. The interview was recorded by telephone on 1 February 2011. [Also read the transcript]

Bloom, Draca, Van Reenen, 03 February 2011, 22436 reads

Chinese exports are often blamed for job losses and firm closures in developed economies. This column tracks the performance of more than half a million manufacturing firms in 12 European countries over the past decade. It finds that competition with Chinese exports is directly responsible for around 15% of technical change and an annual benefit of almost €10 billion in these countries – the wider productivity effects may well be larger.

Groshenny, 02 February 2011, 18064 reads

Was monetary policy in the US too easy between 2002 and 2006? This column argues "no”. It shows that the large and persistent deviations from the Taylor rule over that period were indeed consistent with the pursuit of the Federal Reserve's dual mandate.

Cahuc, Carcillo, 02 February 2011, 17699 reads

In October 2007 France introduced an exemption on income tax and social security contributions for overtime work. In the second of two columns on the labour market, the authors show that this reform has had no significant impact on hours worked and that it induced workers and employers to manipulate the overtime hours they declare in order to optimise their tax situation.

Cahuc, Carcillo, 01 February 2011, 17500 reads

One method for combating unemployment during the global crisis has been the use of short-time work schemes that allow employers to temporarily reduce hours worked while compensating workers for the induced loss of income. In the first of two columns on labour markets, the authors present new evidence establishing that these schemes do indeed reduce unemployment. But they are no panacea and are not without their own problems.