What has happened to marginal tax rates in the US? This column argues that marginal tax rates vary so much among different groups in the US that redistributive taxes have actually damaged and interfered with the incentives and make up of the workforce.
Capital gains taxation increases the cost of capital with potentially negative implications for growth. This column uses data from international mergers and acquisitions to show that a higher capital gains tax rate in the acquiring country reduces the international takeover price. It implies a discount of 3.4% in the acquisition prices paid by US acquiring firms, given the US capital gains tax rate of 15%.
‘Sterilisation’ - where purchases of assets by a central bank are offset by withdrawals - may help the ECB to control inflation. This column discusses how the ECB’s current approach may be fraught with danger, however. In a world where sovereign default risk is perceived to be likely, the ECB’s only real hope is that its approach makes a Eurozone default impossible.
The EU’s Emissions Trading System includes all flights to, from and within Europe as eligible for regulation – something that has faced strong opposition from the US and China. With Airbus’s orders from China falling, the pressure has grown from within Europe. This column argues that for reasons of economic principle, legality and practicality, the EU should stand its ground.
With over 40 million Americans uninsured and the costs of care at an all time high, healthcare has become a major issue in this year’s presidential race. This column evaluates the ramifications of both candidates’ respective policies.
The US recovery is painfully slow and monetary policy is at its limits. Pervasive economic uncertainty appears to be holding the US back. But what is the root cause of this uncertainty? This column argues that a polarised political system is to blame. Without a political mechanism that incentivises the election of moderate politicians, the authors predict further political divergence between Republicans and Democrats over the coming years and a consequent intensification of policy uncertainty.
The economic crisis has thrown the inadequacies of macroeconomics into stark relief. This column argues that the narrow conception of the macroeconomy as a system in equilibrium is problematic. Economists should abandon entrenched theories and understand the macroeconomy as self-organising. It offers detailed suggestions on what alternative ideas economists can teach their future students that better reflect empirical evidence.
Eurozone leaders are firmly committed to a banking union, at least on paper. But do Member States agree on the current proposals? And what do these proposals leave out? This column argues that a dangerous combination of disagreements between Member States over contentious issues and pitfalls in the design of new institutions may well ensnare the Eurozone along its faltering path towards recovery.
As China becomes ever more important in the global economy, will its currency take on an international role? This column argues that in some sense, this is already happening – an increasing number of emerging-market currencies seem to track (co-move with) the renminbi – and the trend is set to continue.
What does the Arab Spring mean for development in the region? This column looks at development aid during the political transition in East Europe in the 1990s. It argues that aid donors need to be aware of the potential pitfalls.
The UK’s Independent Commission on Banking set out to make banking safer, to ensure that what just happened won’t happen again, and to change both the structure and regulation of banking as needed. But this column argues that the Commission fails to achieve any of these aims. It instead proposes a new way to make the financial system and wider economy safer.
A return to growth is urgently needed in the UK. Recovery from severe recessions was achieved in the 1930s and the 1980s in the presence of fiscal consolidation. This column examines the lessons from those experiences for today’s policymakers.
Is economic teaching keeping up with the changing economy? This column presents a new way of teaching economics in light of the continuing crises. It argues that if we are to create a better-informed public debate we must begin by improving the economics curriculum and our students’ ability and their willingness to communicate about economic ideas and issues.
Vietnam’s recent economic performance has been marred by large swings in economic and financial conditions. This column argues that the inability to respond quickly to changing conditions, the pro-growth bias of the State Bank of Vietnam, as well as a 'stop and go' policy style partly explain this. It adds that inefficient state-owned enterprises and weaknesses in the banking system need to be addressed expeditiously.
Is the sluggish growth we see in the North Atlantic economies normal? This column updates the authors’ 5 October 2012 column to include an analysis of the UK. The original column looks at 14 advanced economies over the past 140 years and shows that larger credit booms during expansions have been systematically associated with more severe and prolonged slumps. Measured against the historical benchmark, the recent US recovery has been far better than could have been expected. The same cannot be said of the UK’s growth performance.
The size of the fiscal policy multiplier – and thus the impact of austerity on GDP – has been a contentious issue since the crisis started. The IMF recently revived the debate by suggesting that the multiplier is much higher than previously thought in the current policy environment. This column discusses independent empirical research that confirms the IMF’s view – the authors’ estimate of the multiplier is in the range of 1.6.
The strength of the US recovery has become a political issue in the presidential election. The US is doing better than other advanced economies, but famous economists associated with the Romney campaign claim this is not good enough. The US, they argue, is different. Here, the masters of the 'this time is different' research genre – Carmen Reinhart and Ken Rogoff – argue that US historical performance is not different when it is properly measured, so the economy’s performance is better than expected.
Evaluation of the financial costs of a Eurozone breakup depends critically on the interpretation of the balances central banks hold in the EZ payment system. This column, which replies to the interpretation by De Grauwe and Ji, argues that TARGET balances represent real wealth that would be lost in a breakup.
The sharp increase in the oil price between 2003 and 2008 brought back the practice of expropriating assets of independent oil companies. This column suggests that bilateral investment treaties may mitigate expropriations and allow resource-rich countries to shift a larger proportion of the risk associated with variations in natural resource prices to oil companies.
With the Global Crisis came the Great Trade Collapse, a fall in world trade much larger than the fall in GDP. This column argues that one reason behind this is that time to ship magnifies the effect of financial crises on trade. The reason is that exporters react to the increased probability of default even more so the longer the time to ship.
The US economy is struggling out of its deepest recession since the 1930s. In this climate, economic policy promises made by the presidential candidates are critical. This column reviews the facts on the state of the US economy, and how it got there, before reviewing the candidates’ promises. Given the monumental challenges, the lack of policy detail from the candidates is worrying.
Recent literature on the role of imported inputs in exchange-rate adjustments of exports implicitly assumes full exchange-rate pass-through into imported input prices, which is a rather strong assumption. This column uses intermediate input prices to investigate the effect of exchange-rate fluctuations in Switzerland. It suggests an appreciation of the currency leads to higher profit margins through the import channel and imported inputs act as a natural means for hedging exchange-rate risks.
Bouts of elevated uncertainty have been one of the defining features of the sluggish recovery from the global financial crisis. This column explores the role of uncertainty in driving macroeconomic outcomes using data from a large group of advanced countries over the past 40 years. It concludes that uncertainty appears to hinder growth.
The Eurozone body politic seems to be slowly learning the lessons for crisis management. This column argues that Latin America’s decades of financial crisis can provide key insights for Europe.
With confidence in the Eurozone at an all time low, the problem of large-scale capital flight has come to the fore. This column argues that a common deposit insurance scheme as outlined in proposals for a banking union within the Eurozone would by itself not provide a solution to the problem.
The Eurozone is attempting to resolve the problem of systemic risk within its ailing banking sector. This paper argues that while banking union within the Eurozone is a very real solution to this issue, it must be orchestrated correctly in order to succeed.
As the debate over solutions to the European debt crisis drags on, this column argues that the Eurozone can stand to learn a lot from US’s experience of debt mutualisation and deposit insurance.
With calls for a banking union to resolve the issue of banking interdependence within the Eurozone, this paper explores the reasons behind such a policy, how it should be implemented and the possible ramifications.
The Eurozone is moving towards a banking union. This column argues that if banking supervision is to be shifted to the European level, so too should resolution and recapitalisation. It outlines how the costs of resolving and recapitalising failing banks might best be handled.
The value anomaly – higher average returns on value as opposed to growth stocks – is a robust phenomenon on equity markets around the world. This column argues that the exposure to downside market risk can explain why value stocks outperform their growth counterparts. The key is to distinguish between 'bad' and 'good' downside market shocks.
Although current banking union proposals are a critical step towards resolving the Eurozone crisis, they fall short of providing an integrated resolution and supervision framework for all of Europe. In addition, emerging European countries are concerned about insufficient influence on the proposed single supervisory mechanism and the prospect of fiscal responsibility for crises elsewhere. Some countries outside the Eurozone also worry that exclusion from potential access to the ESM might tilt the playing field against local banks. This chapter makes proposals for addressing these concerns.
Economists in the Eurozone seem set on the principle of a single supervisory body to make up a part of a new banking union. This column argues that when thinking about the inner workings of this new institution, we need to learn from the mistakes of the Spanish regulators in dealing with the cajas.
On 12 September the European Commission unveiled its proposals for the transfer of supervisory responsibilities to a European level to the ECB. This is the first step towards a banking union, with the transfer of deposit insurance and resolution at a European level being the other two. This column reviews the main advantages of moving supervision to a European level and to the ECB in particular and highlights some of the resulting challenges and risks, also in relation to the other two steps as the three functions – supervision, deposit insurance, and resolution – are intimately interconnected.
A piecemeal approach towards banking union is emerging, with banking supervision first and resolution and deposit insurance at some undefined later stage. This column argues that such an approach may lead to an unstable banking union and that any attempt at banking union must include an integrated deposit insurance and resolution authority in order to be successful.
The Eurozone is currently suffering from the affects of having an interdependent banking sector without a unified body to oversee it or to rescue it in times of crisis. This column argues that the current situation is unsustainable and that the ECB should assume these responsibilities for the sake of the Eurozone as a whole.
With most of the debate around banking union in the Eurozone focusing primarily on the financial institutions it will regulate, this column argues that the issue of sovereign debt of the members of the Eurozone needs also to be taken into account.
In this Vox Talk from 2008, Alvin Roth talks to Romesh Vaitilingam about some of the research for which he was recently awarded the Nobel Memorial Prize in Economic Sciences (with Lloyd Shapley). They discuss his work designing markets for kidney exchange, mechanisms for school choice in New York and Boston, and efficient systems for getting doctors and economists into their first jobs. Roth also explains the significance of repugnance as a constraint on markets.
The state of the US middle class has been a key issue this election season as middle-income workers have experienced relative wage losses in the last decade. Skill-biased technology change has previously been identified as a major cause of this polarisation of wages in the US. But this column shows that there is also an empirical link between offshoring by US firms and the polarisation of the US labour market.
An EZ banking union is on the way, but nobody yet knows what it will look like. Which banks are to be regulated, by whom and how? Regulation goes hand-in-hand with bank rescue (in cases of illiquidity) and bank resolution (in cases of insolvency). But who pays for the rescue? Who organises the resolution and under whose law? This column introduces a new Vox eBook in which the world’s leading experts examine the issues and make concrete recommendations.
Countries have various mechanisms that provide lending when a bank fails. But when bank problems far exceed available resources, central banks must be lenders of last resort, even when their role is clouded to mitigate moral hazard. This column explains the ECB is ill-equipped to act as such a lender; it doesn’t have enough control due to coordination problems across countries. The column argues this must change. The ECB must be the lender of last resort and this involves a Eurozone banking union.
As a banking union within the Eurozone seems ever more likely, this column looks at banking union as a way of responding to the crisis, but also as a way of preventing the next one.
The Eurozone crisis has shown that the traditional approach of EU supervisory cooperation is not enough. This column argues the gaps in cross-border bank regulations have to be addressed on three levels: A short-term crisis resolution mechanism for the Eurozone, a functioning banking union, and stronger cooperation agreements across the EU and beyond. Critically, such reforms have to start from the resolution component.
As the debate regarding banking union in the Eurozone rolls on, this column tackles the subject from a different angle – outlining the political economy ramifications of such an undertaking.
While financial reform is underway around the world, this column argues that much more needs to be done.
The surge in African apparel exports that followed the launch of new US trade preferences in 2000 gave hope that African industrialisation was around the corner. Ten years down the road, the success was all but forgotten. This column shows this is because US trade policies inadvertently turned Africa into a temporary trade corridor for China.
Supervisory failures were key to the 2008 financial crisis. This column argues that supervisory governance has improved but that more is needed. The reforms should include a separation of macro- and micro-supervision since this allows for checks and balances that complement and strengthen governance.
The recent focus on impact evaluation within development economics has led to increased pressure on aid agencies to provide evidence from randomised controlled trials. This column argues this reinforces a political bias towards immediately verifiable and media-packaged results at the expense of more long-term and complex processes such as institutional development.
Will the new Basel rules make monetary policy less effective? This column looks at how banks responded to the introduction of the Dutch quantitative liquidity requirement. It concludes that a liquidity rule does influence lending rates and volumes in the interbank money market. These effects, however, are at least partially intended and the overall effect of a binding liquidity rule is still positive.
Youth unemployment in the Eurozone looks like a social and economic disaster in the making – 30%, 40%, even 50% of young people sitting on their hands instead of building skills and experience. This column argues the headline numbers are misleading. While youth unemployment is a serious problem, a large share of EZ youth are not in the labour force, so the headline figures overstate the labour-market ‘scar tissue’ that will be left over from the crisis.
Using data series recently released by the World Bank (2011) on natural capital and other forms of countries’ wealth, this column revisits some of the conclusions reached in the literature on the relationship between natural resource abundance and income levels. The findings support the assertion that there is no clear deterministic evidence of natural resource abundance as a curse or a blessing; therefore, the effect on a country depends on other determinants.
Innovation is the heart of economic growth. This column presents evidence that the structure of a nation’s banking sector matters for innovation. The authors present evidence that when the banking market is very competitive and dominated by large banks, lenders are less able to fund innovation, as lending relationships can no longer be sustained.
Nobel laureate, Christopher Sims, talks to Viv Davies about the institutional restructuring needed to put the Eurozone on a path to sustainable recovery. Sims contrasts the structural differences of the US, Japan and the UK with the Eurozone; they discuss the role of the ECB, eurobonds, a common fiscal commitment, and the rationale for country-level default. They also discuss Sims' prophetic paper on "The Precarious Fiscal Foundations of EMU" (1999), in which he wrote about the risks of a euro crisis.The interview was recorded in Brussels on 21 September 2012.
Trade barriers such as transportation costs and tariffs reduce international trade. But when these trade barriers come down, do they increase international trade equally among countries? This column presents evidence from OECD countries that trade costs have a differential impact depending on the trade intensity of the countries involved. When they already trade a lot, country pairs hardly benefit. But bilateral trade grows faster when the initial trade relationship was thin.
Switzerland has pegged its currency to the euro at a level that helps it sustain a 12% current-account surplus and one of the lowest unemployment rates in Europe. This column argues that the Swiss peg involves currency manipulation that is, as far as Europe is concerned, the same order of magnitude as China’s intervention. It has had a significant impact on the euro exchange rate and a non-negligible effect on the EZ economy.
Consumer surplus in any market equals the area between the demand curve and the industry marginal-revenue curve. This column argues this observation has powerful implications for understanding rent seeking and price controls. For example, a price control reduces consumer surplus in an otherwise-competitive market with convex demand whenever supply is more elastic than demand.
Economic policymakers across Europe have sought to increase labour market flexibility by promoting the use of temporary employment. This column points to a possible trade-off between efficiency and equity when deregulating labour markets, suggesting that flexible forms of employment can be both a boon and a bane for labour markets and for society as a whole.
It is common these days to read and hear Europeans calling for a ‘new growth model.' This column argues that the end of complacency in Europe is a good thing, but this loss of confidence could be dangerous. It also discusses what needs to be done to make the European economic model different.
EZ leadership is on course to installing an all-male ECB Executive Board that will be in place till 2018. The wider Governing Council would consist of 23 men and zero women. This open letter, signed by distinguished macroeconomists from across the spectrum, urges the Eurogroup to reconsider their position and nominate one of the many qualified female candidates. Economists are encouraged to add their signatures to this letter.
Liikanen, Vickers, and Volcker all question current banking-trading links. This column offers analytic scaffolding for thinking about the separation of banking and trading. Banking generates low risk returns from relationship-based activities; trading generates high-risk returns from short-term concentrated positions. The two are linked since trading allows banks to profit from the ‘spare’ banking capital, but deeper financial markets magnify problems of managing and regulating trading by banks.
Political pressures are rising again in Europe. This column argues that reactions in parliaments, central banks and on the street are well within the bounds of predictable reactions to hard times. These developments change nothing of significance in the calculus concerning the eventual success of the Eurozone crisis response.
Many argue that the financial sector is in dire need of reform but there is always the danger of solving one problem by creating another. This column outlines the findings of the Committee for International Economic Policy and Reform. It takes stock of the traditional case for financial liberalisation and asks which principles have withstood the test of recent events and which ones now need re-thinking.
As in every downturn, youth unemployment is a serious concern. This column looks at apprenticeship policy in England. It argues that England is a long way off the apprentice numbers of countries like Germany but with a clear strategy, some nudging, and flexibility, England could realistically aim for the prize that has so far eluded it – higher skills and high youth participation in the workforce.
For many observers, one central flaw of the Eurozone is that countries lose the ability to manipulate their exchange rates to suit their needs. But this article argues that flexible exchange rates are often more likely to make things worse than make things better.
International investment patterns play an important role in policy debates ranging from global imbalances to banking crises. This column shows that history should not be neglected on this score. It suggests that 10% to 15% of the cross-country variation in US investors’ foreign bond holdings is explained by this 'history effect', which reflects fixed costs of market entry and exit together with endogenous learning.
Cultural generalisations are dangerous. Sometimes, however, statistical relationships are so strong that it is worth pondering their significance. Are some groups more likely to take responsibility for their personal behaviour than others with respect to their sexual behaviour, physical fitness, financial dependency on the federal government? The fearless social scientist will not shrink from confronting these questions.
Even before the crisis, many economists warned that financial innovation has a dark side. This column uses new cross-country data on financial innovation and provides evidence that financial innovation can lead to more volatility, more fragility, and more severe losses. But it also finds evidence of improved growth opportunities, better financing, and increased R&D expenditure.
There is a long list of culprits when it comes to assigning blame for the financial crisis. This column argues economists are among the guilty, having succumbed to an intellectual virus of theory-induced blindness. It adds this calls for an intellectual reinvestment in models of heterogeneous, interacting agents, following in the footsteps of other social scientists. This will require a sense of academic adventure sadly absent in the pre-crisis period.