The ECB seems to be in the background during this crisis – almost helpless due to Treaty obligations and dogmatic adherence to old monetary theories. This column argues that quite the opposite is true. The ECB is a full-blooded political actor engaging in a strategy aimed at forcing EU political leaders to embrace fiscal rectitude and a quantum leap forward in European integration.
The European Financial Stability Facility was set up eighteen months ago as a response to the then Greek sovereign debt crisis. This column looks at the effect of the fund on the financial system in particular bank shareholders, the holders of bank bonds, and the holders of sovereign debts.
After a period of intense political turmoil, Greece has converged on a coalition government tasked with implementing reforms. This column argues Greece should now change from fiscal targets and debt restructuring to operational restructuring. It proposes three independent authorities with tight governance and accountability to manage healthcare procurement, monitor structural reforms, and fight corruption.
With European governments cutting back on spending, many are asking whether this could make matters worse. In the UK for instance, recent OECD estimates suggest that ‘austerity’ will lead to another recession, which in turn may lead to a higher debt-to-GDP ratio than before. As the debate heats up, this column provides some cool economic logic.
Last week’s failed auction of German debt showed that none would be immune from a blow-up of the Eurozone, and that normal central banks act as lenders of last resort to their governments. This column argues that unless the ECB starts to care explicitly about financial stability, the troubles will only get worse.
In October 2011, Christopher Sims of Princeton University shared the Nobel Prize for economics with Thomas Sargent of New York University “for their empirical research on cause and effect in the macroeconomy”. This column by one of Professor Sims’ former students – now a distinguished professor – discusses the importance of his work.
How should society fight crime? This column argues education policy should be part of the answer. Exploiting a Swedish education reform as a source of exogenous variation in years of education, it suggests that one additional year of schooling decreases the likelihood of conviction by 7.5% for males and by 11% for females.
The signatories of the UN Convention on Climate Change will meet again this week in Durban, South Africa. But time is running out if they are to come up with a successor to the Kyoto Protocol, especially with the US at loggerheads with China and India. This column proposes a novel yet pragmatic solution.
The euro has a matter of weeks to save itself, with several institutions now preparing for its collapse. Given this, why does the ECB still refuse to bail out Europe’s heavily indebted countries? This column provides an explanation. It says that the ECB may well be behaving rationally but adds that such behaviour is also foolish – and dangerous.
Emerging Asia's economies have contributed to both global imbalances and the global saving glut with current-account surpluses caused by buoyant saving and stagnant investment. This column examines the cause of these trends and argues that in Asia as a whole the situation may remain the same in the next 20 years unless governments promote financial-sector development and improvements in social safety nets, both of which will reduce the need for precautionary saving.
Recent commentary has suggested that capital inflows – long considered a positive for growth – may actually be doing more harm than good. This column presents new evidence reinforcing the conventional interpretation. It finds that volatility is the determining factor. With volatility below a threshold, an inflow of foreign capital promotes growth. But during periods of volatile growth, the effect is opposite.
Is China a market economy? This legal question matters as antidumping and anti-subsidies laws apply differently to market economies. This column deconstructs the myth that China will automatically get market-economy status at the WTO in 2016 and argues that if China wants the EU to recognise it as a market economy it should comply with the explicit criteria in EU law.
When US President Barack Obama met German Chancellor Angela Merkel earlier this month, his advice was reportedly, “I guess you guys have to be creative here”. This column wholeheartedly agrees – and lays out where that creativity is sorely needed.
The impossible trinity doctrine – that it is not possible to have a fixed exchange rate, monetary policy autonomy, and open capital markets – still holds powerful sway over policymakers and academia. But it does not reflect reality in East Asian emerging countries. Assets in different currencies and different countries are not close substitutes. Capital flows to emerging countries present serious challenges, but the trinity is not the best framework for analysing the policy options.
The most recent G20 summit led to a multilateral agreement to facilitate information sharing between tax agencies, with the US currently negotiating bilateral tax treaties with the tax havens of Switzerland and Luxembourg. But before celebrations begin, this column points out that cracking down on tax evasion comes at a cost. International investment may well suffer.
For months economists have been arguing that Germany holds the key to ending the Eurozone crisis. Should it relax its anti-inflation stance and allow the ECB to inflate away sovereign debt? Or should it write a cheque of its own to the EFSF? Neither, says this column. There is a simple solution, if only Eurozone leaders can see it. Eurobonds are the answer – but with conditions.
What is the relationship between deep preferential trade agreements and international production-sharing? This column introduces a new CEPR Policy Insight providing new evidence on the effects of deep integration on production networks trade and on the impact that production networks trade has on the likelihood of signing deeper agreements.
The Doha Round of multilateral trade negotiations has passed its ten-year anniversary unspectacularly and the question is now how to salvage a decade of frustrating progress. Yet even with a new ‘Ministerial’ of the World Trade Organisation being held in mid-December, this column argues that an interim agreement for poor countries and trade is sadly out of reach.
The Eurozone could come to tatters temporarily. But the European ideal is so powerful that crisis and division will not permanently prevail. European leaders absorbed previous crises and bounced back to drive the European project forward. The same may happen again. This column discusses how the political and economic underpinning of the Eurozone must change to avoid future crises.
Simon Evenett talks to Viv Davies about the 10th Global Trade Alert report, which concludes that the protectionist threat to the world trading system is as significant now as it was in early 2009. Evenett suggests that there has been considerable resort to the use of non-tariff barriers and more murky forms of protectionism and that countries continue to circumvent WTO rules. He concludes that policymakers have reason to be seriously concerned and that the world trading system may face its greatest test yet in the year ahead. The interview was recorded on 24 November 2011. [Also read the transcript]
Germany’s central bank had to buy its government’s bond this week after a failed bond auction. This shows that i) the economic devastation from a meltdown would engulf every EZ member and ii) avoiding a meltdown will require central bank action. This column argues that German politicians and the ECB are engaging in brinkmanship to force reforms. Eventually, however, they will relent and embrace a solution involving ECB bond purchases, Eurobonds, Eurozone rule changes, and stronger reforms at the national level.
Financial innovation has brought about several new ways to trade equities: electronically, over-the-counter, through broker-dealer networks, and so on. But not all of the transactions are transparent, with many barely visible to outsiders – a practice known as ‘dark’ trades. This column finds that, in general, more ways to trade is a benefit, except when the trades are dark.
Why do governments repay external borrowing? This column argues that myopic governments seeking popularity do not default when they are poor because they would lose access to debt markets and be forced to reduce spending. And they do not default when rich because of the adverse consequences to the domestic financial sector. This explains why governments continue servicing debt when default is beneficial for the country.
The price of credit-default swaps can be used to estimate the probability of sovereign default. This column examines the case of Italy, looking at how default risk varies across maturities and how this has evolved since January 2011. It suggests that markets are pricing in a heightening of risk two years from now – mostly probably due to political tensions and the risk of deadlocked reform.
Next month the World Trade Organisation holds its eighth ministerial conference. This column by a veteran of trade negotiations sets the scene – documenting the WTO’s achievements and the challenges ahead.
European policymakers are confronting a heightened crisis characterised by a perverse and seemingly intractable interplay between sovereign debt pressures and financial-sector fragilities. This column argues that the payoffs from strengthening banks’ balance-sheets can still be large and, therefore, fiscal support is merited. But a more resolute strategy for winding down banks is also needed.
Lobbying is a primary avenue through which firms attempt to change policy. But only a few big firms lobby and lobbying is highly persistent over time. This column argues that entry costs to the political process help explain these facts. It provides evidence from a change in immigration policy that induced firms that were already lobbying and were sensitive to the policy changes to switch from lobbying on other issues towards immigration while other firms did not enter the lobbying process.
While few would argue that the financial crisis has not brought the real economy down with it, there is considerably less clarity about what the positive contribution of the financial sector is during normal times. This lead commentary in the current Vox debate on the issue focuses on the value-added of risk and government subsidies in national accounting, and makes an important distinction between risk-taking and risk management.
Policymakers and the media often rely on official estimates. But with policies that are so complex and often untested, these estimates are at best rough guesses – so why not be honest about it? This column calls for confidence intervals to be used in future policy debates.
The lack of market confidence in European banks is fed by the uncertainty about Eurozone sovereign debt. This column argues governments and banking supervisors should agree a recapitalisation package well before Christmas. It adds that the required amount to be raised by each bank should be presented as a euro amount and not as a ratio so as not to tempt banks to cut down assets instead of raising capital.
Ever since the collapse of Lehman Brothers, contagion has become the stuff of policymakers' nightmares. In recent weeks, with the very real prospect of default by European countries, the sleepless nights are returning. This column provides evidence that markets are bundling all European countries together. They believe that if Italy defaults, it would mean the end of the euro and no country would be left unscathed.
The last Global Trade Alert report back in July 2011 raised concerns that a deteriorating macroeconomic climate would lead to greater protectionism. The fear has come to pass. This column, which introduces the latest GTA report, shows that the incidence of protectionism in the third quarter of 2011 is as high as during the most troubling of 2009, when protectionist fears were at their peak. Several large trading nations have taken across-the-board measures that adversely affect many trading partners. The world trading system may face its greatest test in the year ahead.
Does vocational education have advantages over general education? This column presents new evidence suggesting that when economies change rapidly and the full life-cycle is taken into perspective, this advantage comes at the disadvantage of reduced employment opportunities in old age.
Are the Chinese prone to money illusion? This column uses a unique Chinese dataset and finds that, unlike their American counterparts, Chinese people are more likely to base decisions on the real value and not be fooled by inflation.
Some see recent corporate scandals and the vast personal wealth of celebrity entrepreneurs as evidence that Indian companies enjoy excessive influence and power. Others see India’s corporate sector as the fundamental driver of recent and future prosperity. At least for the period from the early 1990s to the late 2000s, this column finds that the second view is closer to the truth.
There is a large variety of pension systems across EU members. This column argues for more private retirement saving as it is necessary to maintain old-age incomes and as it may also contribute to the stability of markets for government debt. But, it adds, governments should retain important responsibilities to prevent moral hazard due to intragenerational redistribution, to facilitate risk-sharing, and to minimise the agency issues due to financial illiteracy.
In 1985, Mexico opened itself to trade and investment. In recent years, China has followed the same path with much more impressive results. But this column argues that the slow growth and crises that Mexico experienced after the initial boom should act as a warning to those optimistic about China.
We live in financially compromised times – but how many people understand them? This is especially problematic when it comes to people’s own finances. This column presents findings from a study in Germany that does not make for comfortable reading.
In Mexico, the average male worker retires at 75. In Bulgaria, he does so at 58. This column argues that an economy’s composition of occupations matters for its average effective retirement age as the nature of different occupations leads workers to retire at different ages. It suggests the differences in occupational composition explain up to 40% of the observed cross-country variation in retirement age.
The EZ crisis is approaching a tipping point beyond which market panic and slow government reaction threaten to create a generation-defining loss of jobs, savings, and pensions. This open letter to the president of the German central bank presents arguments that counter German objections to using the Eurozone’s last remaining defence against economic calamity – the ECB.
There are nearly 1,000 UNESCO World Heritage sites. These sites benefit hugely from tourism, so suspicions of fixing the judges’ verdicts are rife. This column suggests a novel way to get rid of the politicisation: random selection.
The first major crisis in the era of independent central banks is severely testing that independence – nowhere more so than the Eurozone. This column argues that the ECB is monetising the sovereign debt – a view widely held in Germany. It argues that the ECB is the Eurozone’s economic government with the power to enforce comprehensive rescue measures, up to and including a fiscal transfer union.
Harry Huizinga talks to Viv Davies about his recent paper on the EFSF. Huizinga concludes that the creation of the EFSF has resulted in the bail out of both banks and countries, that the use of EFSF funds has been expensive and inefficient, and that there is a limit to the extent to which the EFSF can be scaled up. Nevertheless, he suggests that this may be a blessing in disguise. The interview was recorded on 17 November 2012.
Following the crisis of 2008–09 a period of banking-sector vulnerability occurred in many countries. To what extent did this vulnerability result from light-touch banking regulation? This column examines the ‘unpleasant nexus’ between volatility and light-touch regulation and argues that the crisis proved that such regulation may not be able to reduce systemic risk to acceptable levels.
As the US tries to cut back its debt, the battle lines are already being drawn. Republicans are in favour of spending cuts; Democrats in favour of tax rises. Putting political ideology to one side, this column asks what objective economics has to say.
Central bankers focused too much on inflation targets and too little on financial stability – so the criticism goes. This column examines the evidence, with a look at the world’s five major central banks over the last 30 years.
The shadow banking system is vast; but why did it arise? Some view it as regulatory arbitrage while others view it as the market fulfilling investors’ demand for ‘riskless’ assets. This column explains the issues and discusses policy options.
Emerging markets face what some economists are calling a trilemma. They cannot simultaneously target exchange-rate stability, conduct an independent monetary policy, and have full financial integration. So what to do? This column looks at how Asia’s giants are responding – and in different ways.
Napster – the first peer-to-peer file sharing service – changed the music industry forever. Many people now download music without paying, often illegally. This column looks at the effect on the music industry, in particular what it means for the quality of new recorded music.
The IMF has emerged from the global crisis bigger and more powerful. But this column argues that the capital controls it required Iceland to adopt in 2008 are not of the soft and cuddly modern type that slow hot money flows. Instead they are akin to the draconian controls common in the 1950s. They violate the civil rights of Icelanders and significantly hamper economic growth.
Does the publishing of voting records improve the transparency of monetary policy? This column argues voting records indeed contain informative power about future monetary policy but only if there is sufficient independence in voting across board members and if the signals about the optimal policy rate are noisy.
Real exchange rates are a headache for policymakers. Sometimes they move around too much, disrupting trade and harming business, sometimes they don’t move enough, leaving economies with fewer options for growth. This column reviews the literature on the effects of exchange-rate volatility and how to deal with them.
China’s growth since the 1980s has been phenomenally high. This column argues that it has been driven not by exports, as widely believed, but by investment. It adds that this strategy makes China’s economy unsustainable as it creates significant overcapacity in a range of sectors and leads to increasing debt. China’s road towards more consumption-driven growth will be far from smooth.
The recent huge revisions witnessed in Greek data have raised concerns also about the credibility of the EU’s fiscal data reporting system. This column argues that initially published fiscal-deficit figures tend to be to revised towards an increased deficit at subsequent publication dates, and that the proximity of elections and the business cycle explain data revisions. It says that the EU should strengthen the role of Eurostat, the EU’s statistical agency, in auditing individual countries’ fiscal accounts and encourage EU countries to adopt more stringent fiscal rules.
Politicians around the world like to argue that ‘green growth’ will create jobs and stimulate innovation. This column examines the impact of energy taxes on business, with a dataset of 11 million European firms between 1996 and 2007. The results are mixed – it seems that dirty, smoke-filled growth may well be better for the firm’s workers and their customers.
Dimitri Vayanos of the London School of Economics talks to Viv Davies about Greece and the eurozone crisis, and argues that leaving the euro would be a disaster for both Greece and Europe. They discuss the bailout package, the appointment of Lucas Papademos as Prime Minister and the benefits of a coalition government of technocrats. Vayanos maintains that the emphasis for Greece should be on deeper institutional and structural reforms. The interview was recorded on 10 November 2011.
With nominal interest rates in many western countries at or approaching the zero lower bound, economists are calling for more quantitative easing or greater fiscal expansions to generate inflation, reduce real interest rates, and rejuvenate the economy. But what if these policies fail? Or are no longer possible? This column outlines a third way: supply-side policies.
The Great Trade Collapse of 2008–09 did not give rise to rampant protectionism. This column examines the determinants of the observed pattern of trade-policy responses to the 2008 crisis, using data for seven large emerging markets that have a history of active use of trade policy. Vertical specialisation is found to be the most powerful economic factor determining trade-policy responses.
As Europe battles a life-threatening crisis, the European Commission has found time to discuss the much-maligned Common Agricultural Policy. This column, by the former OECD Director for Trade and Agriculture, argues that far from seizing the opportunity to use CAP to benefit fiscal discipline, policymakers are maintaining an outdated and inefficient system for the financial benefit of farmers.
People spend years of their lives shuffling from city to city and countless amounts of money sending goods along similar journeys – a result of so-called ‘spatial frictions’. This columns asks whether these frictions matter for the size distribution of cities, the sizes of individual cities, and the productivity of cities. The short answers are: no, yes, and it depends.
Poor countries have access to world markets and rich countries’ technologies. In principle, they should catch up. Yet the record belies this expectation. But this column argues labour productivity in manufacturing displays a clear tendency towards convergence, unconditional on the countries’ institutions or policies. The policies that matter for growth are thus those that bear on the reallocation of labour from nonconvergence to convergence activities.
For some, the fiscal problems in the US and Europe are a case of bad politics getting in the way of good economics. This column argues that there was plenty of bad economics as well. It looks at the work of the two recent Nobel Laureates in offering some clear thinking.
Europe’s surveillance of its highly-indebted countries has come under strong criticism. But these countries were also under the watch of another institution, the IMF. This column presents a report showing that the Fund is hardly without fault itself.
As Italy’s debt crisis enters the danger zone the question arises: Can Italy ever overcome its decade-old growth slump? This column shows that Italy’s growth fundamentals are all in pretty good shape, except one - good governance. Worldwide Governance Indicators show a dramatic worsening during the Berlusconi governments especially when it comes to the rule of law, government effectiveness, and control of corruption. Progress on improving these might in the end be more important for growth than the reforms the EU demands.
UPDATED: Changes in the Italian government are driven by the country’s dire debt situation. This column, which updates a 31 October column that illustrated the unsustainability of Italian debt, argues that Berlusconi’s departure is necessary but far from sufficient. Drastic, but evenly distributed measures of consolidation and reform are necessary.
The EZ crisis has taken a turn for the worse. This column, the joint work of the five members of the ‘German Council of Economic Experts’, proposes a novel solution to the crisis – the European Redemption Pact and an associated European Redemption Fund. This would – like Eurobonds – create a joint debt vehicle, but unlike Eurobonds it would be temporary, say 25 years. Its aim would be to ease down the current unsustainable levels while implementing credible fiscal policy reforms in all EZ nations.
Fiscal consolidation is just one of the many ugly phases that we will have to get used to in the coming years. Yet how can governments reduce their debts without making things even uglier? This column argues that although today’s debts are the highest since World War II, there is much to be learned from previous attempts.
Many poor people no longer live in poor countries. Of the 10 countries that contribute most to global poverty, six are middle-income countries. For many aid organisations, ‘middle-income’ means they no longer qualify for the same financial aid. This column argues that such a policy would be failing up to a billion people.
During the global crisis, Iceland was hit by the biggest banking crisis any country has ever suffered. This column reviews the role of the IMF in Iceland’s recovery. It argues that the IMF programme was not perfectly designed but successful. Iceland re-entered capital markets less than three years after the crisis.
Financial institutions played a leading role in the global crisis, and policymakers are under pressure to do something about them. This column argues that before any draconian measures are passed, we need to be reminded of the benefits of the financial sector and the innovation it provides.
A recent G20 communiqué on the Doha Development Agenda has got economists excited. According to a new book introduced in this column, negotiators now have an opportunity to critically assess what is on the table and to develop a more relevant agenda and more effective ways of achieving reforms. The book aims to provide empirical evidence to inform the choices ahead.
Argentina's economic woes are always a topical subject, and a particularly relevant example for the Eurozone current crisis. This column weighs up Argentina's post-election outlook from a balanced perspective.
The Eurozone crisis is escalating as governments have failed dismally in their attempts to restore confidence. This column argues that the interventions have been too little and too weak, leaving the EZ crisis with no end in sight. To back up its case it looks at 19th century finance in the US.
As the global economic downturn grinds on, more companies are acknowledging that labour costs aren’t always the most important factor when deciding where to build their next factory. This column argues that, in times of recession, some companies find that bringing their business home can give them a competitive edge.
Does all work and no play make Jack a dumb boy as well as a dull one? This column presents one of the first empirical studies on the effects of sporting activity on the cognitive ability of children in Germany.
Wouter den Haan of the London School of Economics talks to Viv Davies about his lead commentary in the current Vox Debate on the value of the financial sector. He argues that standard measures of the sector's economic contribution overestimate its true value to a modern economy. They also discuss the views of other notable economists, as well as how regulation could curb excesses in the sector and prevent socially negative spillovers. The interview was recorded in London on 1 November 2011. [Also read the transcript]
Greek Prime Minister Papandreou made a stand this week. Even though he was backed down, this column argues that he did the EZ a favour by providing an opportunity to change course. One way or another, a disorderly Greek default is in the cards with its attendant contagion. At that point a real solution is inevitable – one that requires EZ leaders and the ECB to play on the same side with credible rules for all.
Well-developed financial systems play a crucial role in stimulating growth but are associated with more frequent financial shocks and higher macroeconomic risk, as the financial crisis of 2007–09 reminded us. This column argues that the goal of financial regulation must be to reduce systemic risk without eliminating the financial sector’s contribution to long-term economic growth.
On the back of the Eurozone sovereign-debt crisis, EU countries have agreed on new measures to reduce levels of public debt. This column looks at the fiscal corrections required by some European countries and argues that, if enforced soon, the costs may weigh heavily on the benefits.
Jobs and the lack of them are top of the agenda for policymakers and increasingly groups of protestors gathered in the financial districts of New York, London, and elsewhere. Unemployment in these countries is in danger of reaching 10%. In Germany, however, unemployment is below 7%. Some hail it as a miracle. This column finds a scientific – and far less inspiring – explanation.
A stock-market collapse such as the one after the 2008 Lehman Brothers default is followed by more pessimistic assessments of the likelihood of future collapses in surveys and by lower price-dividend ratios. This column argues this reaction of expectations and asset prices can be explained by Bayesian decision theory. The key is to appreciate that market participants know little about the drivers of such crashes. They revise their beliefs and learn over time.
According to the famous White House saying, policymakers should never let a crisis go to waste. This column argues that economists shouldn’t do so either. Instead of cursing about cuts in research funding, they should look at cheaper ways to evaluate policy – perhaps through mechanism experiments.
With the Bank of England recently announcing an additional £75 billion of quantitative easing, a reasonable question to ask is whether the last £200 billion has made any difference. This argues that QE may have helped boost real GDP by as much as 2% and inflation by 1.5%, similar to the effect from a drop in the base rate of around 300 basis points.