Can European countries share their debts? This column argues that higher government indebtedness means larger household net financial assets. Thus, any pooling of European legacy debt would be considered unacceptable by countries with less government debt unless it also involved the pooling of households’ financial assets. Yet, this would be legally and technically insurmountable. The EU must face forced Ricardian equivalence: the countries with the largest legacy-debt burdens must reduce them by increasing the tax burden or, alternatively, reduce their budget expenditure.
Somali piracy has created a major externality due to disruption to shipping, especially in the Gulf of Aden. How costly is this anarchy? This column analyses micro-data on individual shipping contracts and finds that piracy increased transport costs by around 8%. The $120 million in net revenues that pirates generate are more than offset by the costs borne by the shipping industry, which lie between $0.9 billion and $3.3 billion.
Brazilian exports of goods and services have grown sharply in recent years, tripling since 2000. This column argues that Brazil’s export performance depends mostly on favourable geographical and sector composition effects and that a recent slowdown in industrial exports, production, and investments are not related to insufficient demand but rather supply-side inefficiencies and rising costs. Policymakers ought to aim for urgent progress on the nation’s microeconomic reforms agenda, an increase in the investment-to-GDP ratio, and improvements in human capital.
So far, discussions around Europe’s prospective banking union have focused only on the supervision of banks. This column argues that policymakers must also think about the resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority could incorporate domestic and cross-border effects. A cost-benefit analysis of a hypothetical resolution of the top 25 European banks shows that the UK, Spain, Sweden, and the Netherlands would be the main winners.
Policymakers everywhere are concerned about currency wars. Are quantitative easing and managed exchange rates bad for the global economy? This column looks at the hard empirical evidence, arguing that, in fact, Japan is behaving rather responsibly and that other strong economies have themselves benefited from undervalued currencies. That said, it is true that politicians’ short time horizons often lead to stealthy policy and large swings in exchange rates. Economists should therefore aim to promote longer-run cosmopolitan interests rather than shorter-run nationalistic agendas where possible.
Can the euro exist without fiscal or political union? This column draws on the history of the US – especially its assumption of states’ debt after the War of Independence – to investigate which path might best serve the Eurozone. History tells us that unions require a well-constitutionalised system of restraint on fiscal behaviour, both at the federal level and at that of individual states.
The IMF’s role in past systemic banking crises has been hotly debated. Indeed, prominent intellectuals have criticised the Fund for creating or exacerbating crises. This column discusses new evidence showing that IMF lending programmes are in fact associated with a lower probability of banking crises occurring in future.
What would the overt monetary financing of fiscal deficits involve? This column explains the differences between “printing money”, quantitative easing, and overt monetary finance. Lord Turner’s proposed “helicopter drop” raises issues for banks’ balance sheets and central bank independence.
What causes fewer women than men to choose high-earning potential subjects such as engineering, economics or science at undergraduate level? This column presents new evidence from an accidental natural experiment in Italy, suggesting mixed-gender classes at the high-school level reduce the number of women pursuing these subjects. These results suggest that gender-separated classrooms are an effective way to increase women’s career opportunities and salaries.
Although its economic development has been impressive, recent events have sparked debate about India’s gender inequality. This column argues that Indian women’s levels of entrepreneurship and participation in the labour force are some of the lowest in the world. India’s economic growth and shared prosperity depends upon successfully utilising both its male and female workforce, and improving this balance is an important step towards sharing the benefits of India’s growth. Economically and socially, gender equality should be a no-brainer for policymakers.
Until 2012, the past decade saw Indonesia’s growth maintain a respectable momentum. This column argues that recent hints of political dirigisme presents Indonesia with a stark development choice. Policymakers can continue their tightening of political control – staving off the trade effects of a global crisis in the run up to elections next year – or they can orient the economy outward, with complementary policies to sustain long-term growth.
Eurozone policy seems driven by market sentiment. This column argues that fear and panic led to excessive, and possibly self-defeating, austerity in the south while failing to induce offsetting stimulus in the north. The resulting deflation bias produced the double-dip recession and perhaps more dire consequences. As it becomes obvious that austerity produces unnecessary suffering, millions may seek liberation from ‘euro shackles’.
Publishing in economics is a very tough game, especially for young scholars trying to establish a research record while on a tenure clock. This column discusses new research that shows the age profile of authors in top journals has distinctly shifted away from young scholars. In 1993, half the authors of top-level articles were under 35 and 90% were under 50. Today, only a third are under 35.
Why is it that large movements in exchange rates have small effects on international prices? What does this mean for a crisis-stricken Eurozone? Using firm-level data, this column presents new research that investigates this exchange rate ‘disconnect’. Evidence suggests that the prices of the largest firms – with their disproportionately large share of trade – are insulated from exchange rate movements. The international competitiveness effects of a euro devaluation are therefore likely to be modest, given major exporters’ reliance on global supply chains.
Do economists and policymakers know how to design a federal bank for Europe? Is there a template? This column explores the history of the US Federal Reserve, gleaning lessons for the future of the European banking system. Getting to grips with the historical and empirical details shows how different the two really are. Overall, evidence suggests that the mechanism of the TARGET system might well create demand for Europe to move further towards fiscal federalism.
Explanations for the persecution of minorities rarely contain economic considerations. But what is the relationship between ethnic conflict and the economy? This column argues that economic factors are, in fact, important. Using historical evidence, it is clear that the persecution and expelling of Jewish people by pre-modern European states is linked to agrarian variations. Based on historical weather data, evidence suggests that during the 15th and 16th centuries, colder temperatures made it significantly more likely that a Jewish community would be expelled.
Recent policy and academic debates have begun to influence Eurozone reform. But how sound is the advice we give out? This column argues that calls for a Eurozone or full-fledged EU superstate are overstated. Yes, developing an adequate system of European banking supervision is a matter of urgency if we hope to tackle the threat posed by an overdeveloped and opaque financial system. But calling for a superstate misunderstands the reasons politicians introduced the euro in the first place.
The stock market is a powerful tool for controlling corporations’ behaviour. But which is better, a highly liquid market or a number of large blockholders? This column argues in favour of liquidity. Evidence suggests that policymakers should not reduce stock liquidity through greater regulation. While the idea that liquidity encourages short-term trading – rather than long-term governance – sounds intuitive, deeper analysis shows that liquidity is beneficial because it encourages large shareholders to form in the first place, and allows shareholders to punish underperforming firms through selling their stake.
Retailing has experienced disruptive technology progress in recent decades – what might be called Walmartisation. This column explains how the entry of global retail chains may transform the retail sector and the supplying industries in the host economies. Focusing on the Romanian case, it shows that a 10% increase in the number of foreign chains’ outlets is associated with a 2.4% to 2.6% increase in the productivity in the supplying industries.
Discussion of currency wars has broken out again in the run-up to this week’s G20 finance ministers' meeting in Moscow. This column points to the underlying policy choices responsible for the recurring currency disputes and the feeble ex-post rationalisations for them.
The appointments of Papademos in Greece and Monti in Italy in 2011 are examples of leadership changes meant to bring more competent people into government. This column aims at understanding why governments sometimes appoint economic policymakers with economics training but often do not. It suggests that levels of economics education among finance ministers are substantially higher in new democracies than in old ones and that the appointment of an economics PhD as a central bank president is 22% more likely during a banking crisis.
The new year has provided cheer for macroeconomic optimists. This column by Olivier Blanchard, one of the world’s leading economists, argues that important progress has been made in putting the crisis behind us, but that recovery continues to be hampered by the need for fiscal consolidation and a weak financial system.
Economists everywhere recognise the Taylor rule’s importance in monetary policymakers’ decisions. But exactly how important is it? This column aims to analyse the Taylor rule’s influence on US monetary policy by estimating the policy preferences of the Fed. There is a high degree of reluctance to let the interest rate deviate from the Taylor rule and, contrary to the literature and current policy debates, it seems large deviations from the Taylor rule between 2001 and 2006 were in fact due to negative demand-side shocks. During this period, there is in fact no evidence to support the notion of a decreased weight on the Taylor rule.
Economists and policymakers are increasingly concerned that central-bank independence is being threatened. This column argues that central banks are not losing their independence, but that their room for manoeuvre is being eroded by a lack of structural reforms and fiscal adjustment. The financial crisis has caused mission creep, pushing central banks well beyond their comfort zones and as the time comes to pull back, independent monetary policy could still be powerless against fiscal dominance.
Governments around the world are fostering industrial ‘clusters’, hoping to create agglomeration economies. Using the political division of Germany in 1949, this column argues that heightened firm density can raise costs for incumbent firms in addition to the often-cited agglomeration benefits. This is important for policymakers contemplating efforts to promote their local areas by targeted cluster initiatives and bidding to attract large firms. Policy efforts that are neutral in orientation – such as physical infrastructure investments or improving the generation and dissemination of knowledge – may be more effective alternatives.
Japan is under new leadership, bringing fresh attempts to tackle deflation. This column argues that the lessons we can learn are Going forward, a change of party politics with every change of government will likely become a recurring event in Japan. In order to restore people’s confidence in the fiscal management and social security system in the light of that prospect, institutional systems should be designed in a way to allow flexibility, premised on the fact that the government cannot make commitments into the remote future. Political leaders – whether they belong to the ruling or opposition parties – need to come up with new ideas toward achieving that end.
Eurozone labour markets are under stress. This column explores the connections between labour-market reform and macroeconomic policy, arguing that with its large differences in firing costs, normal Eurozone monetary policy is inappropriate for several Eurozone countries. If the efficacy of the ECB’s policy is impaired because there is no harmonisation of firing costs, tensions will continue to rise within the Eurozone.
Surprisingly, manufacturing in some advanced economies is experiencing something of a renaissance. This column argues that the renaissance will unfold in new, unexpected ways. Manufacturing value added will continue to rise, but the impact on jobs will be muted – particularly for the unskilled. A range of innovations has opened a once-in-a-generation opportunity to build new platforms, but better skills and new strategies will be needed.
For most of the postwar period, rich nations had much lower average tariffs than developing nations, but they frequently applied variable protection – dumping duties etc. – in reaction to business cycles and exchange-rate movements. Massive, unilateral tariff-cutting by developing nations since the 1990s evened out the averages. This column presents new evidence that emerging economies are now tying variable protection more closely to business cycles and exchange rates – just like the high-income economies.
Commodity price shocks are frequently considered among the most important potential threats to the global economy. However, since the second half of the 1980s, energy prices have experienced very large changes, with arguably limited effects on global GDP developments. This column presents evidence that oil shocks just aren’t what they used to be when it comes to macroeconomic effects.
In spite of its policy relevance, academics and policymakers cannot agree on who bears the brunt of a tax on labour. This column uses meta-regression techniques to argue that economic institutions, the tax wedge definition, and the time horizon are crucial in determining who actually pays. Results based on 52 empirical papers suggest that in the long run, workers bear between two thirds of the tax burden in Continental and Anglo-Saxon economies, and nearly 90% in Nordic ones.
Investment in transport plays an important role in a country’s economic development. This column assesses Indian industries that are moving out of the congested big cities in search of cheaper land and buildings, facilitated by major highways. The Golden Quadrilateral highway project -- a huge, country-wide highway building project connecting four major Indian cities -- significantly influences the success of industries’ exodus from the big cities. It is clear that although highway investments are expensive, the costs of not investing may be too high.
A large body of research has shown ethnic diversity to have a negative impact on development. This column suggests that it is the unequal concentration of wealth across ethnic lines that is detrimental for development rather than diversity per se. It shows that ethnic inequality, measured using ethno-linguistic maps and satellite images of light density at night, is associated with lower GDP per capita, worse living conditions, and lower levels of education.
How much does media bias affect electoral outcomes? This column examines the Italian case, where Berlusconi, the prime minister, has controlled six out of seven national channels for ten years. It exploits exogenous variation in viewers' exposure to Berlusconi using random switchovers from analogue to digital TV that increased free national channels tenfold. It argues the switch has caused a drop in Berlusconi’s vote share by 5.5 to 7.5 percentage points.
Japan switched to five-day weeks for its primary and junior high schools and saw an increase in educational inequality. This column discusses new evidence suggesting a loose tie between number of days at school and inequality. Importantly, this tie reflects the fact that homes with university-educated parents tend to offset the official reduction in hours with additional tuition.
Since the early 1980s, the financial cycle has re-emerged as a major force driving the macroeconomy, but economic analysis has not caught up. This column argues that macroeconomics without the financial cycle is like Hamlet without the Prince. Economic analysis and policies – monetary, fiscal, and prudential – should be adjusted to fully account for the financial cycles, but here more analytic work is needed. The question of how we address the bust and balance-sheet recession that follow the boom deserves special attention.
Southern EU members are struggling with sluggish growth. This column argues that they should look to Central Europeans for inspiration. Central Europeans made remarkable progress – improving the efficiency of government spending and the business climate. Central Europeans could best support the European project by continuing to vigorously pursue convergence with richer EU members. What better way to reinvigorate Europe and restore confidence in the European economic model?