Dollars are the lifeblood of global finance, so it matters that US and non-US banks have different access to dollar funding. This column shows that the 2007 funding shock disproportionately affected non-US banks, and that non-US banks transmitted this shock to US borrowers. The results suggest that access to deposits and advances from Federal Home Loan Banks can help stabilise the banking sector and the transmission channel in a crisis. The ex-post efficacy gain, however, must be weighed against any ex-ante moral hazard.
The regulation of bank capital has recently come under renewed scrutiny. This column argues that the way we implement capital regulation needs to be reconsidered because banks under-report risk, thereby escaping government intervention and maintaining market access. One possible way forward, something already implemented under Basel III, is to ask banks to satisfy a capital requirement relative to total (rather than risk-weighted) assets. Overall, simple, transparent, workable rules are what we should be aiming for.
How can we make the Eurozone work, and work for everyone? This column suggests that a lack of productivity convergence and the Eurozone’s inability to deal with asymmetric shocks are both rooted in the incompleteness and incoherence of the current Eurozone policy framework. A robust and coherent European market and policy-integration process would require implementation of the behavioural constraints and redistribution schemes that operate, not without difficulties, within established national socioeconomic systems.
How can we explain the rapid spread of the Great Recession? This column focuses on international co-movements to explain its global nature, developing a model that shows the global panic to be a rational self-fulfilling mechanism and global co-movements to occur even in countries without much economic integration. Perhaps most importantly, the global economy was ripe for panic due to historically unprecedented economic integration, tight credit, limited scope for monetary policy and limited room for fiscal policy due to high debt levels.
The macroprudential approach to banks’ capital requirements aims to internalise the systemic risk of big banks while encouraging banks to accumulate capital buffers during good times. This column presents a measure of systemic risk and risk contributions that could help economists better calculate countercyclical capital surcharges.
The rise of global value chains (GVCs) is posing new challenges to analyses of countries’ competitiveness. Commonly used measures such as gross exports and revealed comparative advantage are becoming obsolete. This column presents a new measure called ‘global-value-chain income’ that is based on the value added by countries along the international production chain. It shows how this measure can be derived from existing industry-level data and how it changes our view on a country’s competitive strengths.
Economic liberalisation can go wrong when the objectives and corporate governance of the firms in the deregulated industry are not adequately taken into account. This column presents evidence on the deregulation of the Spanish savings banks, known as ‘cajas’, which led to a dramatic expansion of lending and branching, increase in risk taking, and the final implosion of the whole savings-bank sector in Spain in 2012.
The Chinese central bank has recently dropped hints that it will quicken the pace of interest-rate reforms, moving towards a more market-determined regime. Will this reduce China’s ‘excessive’ savings and current-account surplus? This column argues that it won’t. While the interest-rate reform may carry many benefits, reducing the country’s current-account surplus is not one of them.
Should the public care about financial imbalances? This column suggests that financial imbalances are, in fact, not a main and direct concern for citizens. Of course, this does not exonerate policymakers from trying to prevent booms and busts (because they have substantial costs in terms of macroeconomic stability). Policymakers should focus on preventing the fallout of booms and busts for macroeconomic stability rather than trying to stabilise the ‘financial cycle’ as an end in itself.
How should macro-fiscal policy be coordinated in economic unions? This column argues that the received wisdom has it right, and presents new empirical evidence suggesting that there are important positive spillovers between an economic union’s lower-tier governments in the management of macro-stabilisation policies. We should pursue coordinated policies. Finding programmes and institutions that can best facilitate this coordination is the important next step, both for new and established economic unions.
Financial liberalisation has been controversial among academics and policymakers as it is not clear whom the benefits of expanded credit allocation accrue to. Using time and state-level variation across Indian states, this column finds strong evidence that financial deepening reduces rural poverty, especially among the self-employed. Financial deepening is also found to be associated with an inter-state migration trend from rural areas into the tertiary sector in urban areas.
Chairman Bernanke’s hints about the end of quantitative easing (QE) have produced volatility in financial markets. This column argues that financial markets were startled because an end to QE is likely to cause capital losses for bond holders since term premium is substantially negative. Bank regulators should be alert to the possibility. This fundamental explanation is teamed with widespread confusion among market participants about how quantitative easing actually works.
Every academic has an opinion about what makes a good department. This column brings evidence from French economics departments. It suggests that larger departments are associated with slightly more but no better publications per academic. And while diversity in terms of researcher quality lowers average publication quality, diversity in research topics increases it.
The Eurozone has been going through an existential crisis since 2010. The column discusses research that draws an analogy between the careful planning in the 1980s leading to the creation of the euro and the planning that led to the Bretton Woods system. The outcome for the Eurozone, as in the earlier creation of a man-made international system, may be similar – collapse or at least major reworking.
It’s currently very trendy in Italy to blame Angela Merkel, Mario Monti, and austerity measures for the current recession. This column argues that while the severity of the downturn is clearly a cyclical phenomenon, the inability of the country to grow out of it is the legacy of more than a decade of a lack of reforms in credit, product and labour markets. This lack of reform has suffocated innovation and productivity growth, resulting in wage dynamics that are completely decoupled from labour productivity and demand conditions.
Is financial globalisation in retreat? This column suggests it might be. There’s been a recent and significant retreat in European financial integration and a retrenchment of global banking (although capital inflows into emerging markets and FDI are only just below their recent peaks). What are we to make of this shift? A more compartmentalised global financial system could certainly reduce the likelihood of a financial crisis spreading from one country to the next. But there is now a danger that the pendulum could swing too far, Policymakers should therefore do more to remove limitations on FDI and investor purchases of foreign equities and bonds, balancing the trade-off between the need for stability and the need to provide financing for economic growth.
In response to the civil lawsuit filed by the US Department of Justice in February 2013, Standard & Poor's affirms that its ratings were "objective, independent and uninfluenced by conflicts of interest". This column presents empirical evidence opposing this claim. The data suggests a systematic rating bias in favour of the agencies' largest issuer clients.
Unemployment is once again the bane of the US and Europe. This column highlights an intriguing association between home ownership and high unemployment using US state-level data. Given the heavy subsidisation of and rise in home ownership, this association merits more attention from economists.
Russian involvement in Cyprus was widely recognised during the acute phase of the most recent EZ crisis. This column argues that some of this is driven by corruption-linked money laundering. Using official Russian statistics, the authors estimate a standard model of FDI location to identify usual patterns related to nations with lax anti-money laundering measures such as Cyprus and the British Virgin Islands. Funds from such nations were biased towards locating investments in the most corrupt Russian regions compared to a group of genuine foreign investors.
Do higher government wages reduce corruption? This column argues that they do, but only in relatively poor countries. When a country’s poor, higher government wages reduce bureaucrats’ incentive to extract illegal incomes. However, as income per capita rises, higher government wages gradually lose their effectiveness in combating corruption.
What has driven Italian sovereign spreads movements? This column presents new research looking into increased volatility in sovereign debt since the summer of 2011. Shocks in investor risk appetite, news related to the Eurozone debt crisis, and consistently bad news in Italy, have been important drivers of Italian sovereign spreads. These findings mean that we need to reduce country-specific vulnerabilities as well as sorting out the Eurozone.
Abenomics is all the rage. Japan’s GDP grew at an annual rate of 3.5% in the first quarter, the stock market went up by almost 30% since December, and despite some uncertainties, sentiments, consumption, and exports are all picking up. However inflation is at -0.9% and survey-based inflation expectation has remained flat. Is inflation going to happen at all? This column argues the answer crucially hinges upon the implementation of structural reforms, especially in the labour market.
The doom-loop between banks and the national governments played a dominant role in the Eurozone crisis for Ireland and Cyprus. A Eurozone banking union is usually viewed as the solution. This column argues that the doom-loop cannot be undone as long as banks hold oversized amounts of their government’s debt. A simple solution would be to apply the general rule that banks are prohibited from holding more than a quarter of their capital in government bonds of any single sovereign.
The monetary-fiscal policy connection is under scrutiny by the German Constitutional Court in the context of the ECB’s OMT bond-buying programme. This column argues that most analyses are deeply flawed by the misapplication of private-company default principles to the central bank. ECB bond-buying transforms public bonds into monetary base, and sovereign-default risk into inflation risk. The real question is: What is the non-inflationary limit to money-base expansion? This depends upon the economic situation and is much higher in the current liquidity-trap setting.
If cartels are a clear and ever-present violation of market economics, what can authorities do to combat them? This column presents new research that helps economists understand cartels better. The better the information we have about the formation of cartels, the better governments around the world will catch them out.
Commentators increasingly talk about the steady rise of protectionism. This column presents evidence from the newest Global Trade Alert report to suggest that they’re right: the past twelve months have seen a quiet, artful, wide-ranging assault on free trade. Little of this has showed up in traditional monitoring. Protectionism in Q4 2012 and Q1 2013 far exceeds anything seen since the onset of the global financial crisis.
Uncertainty is intrinsic in climate-change economics. This column argues that it’s here to stay. There will be no accurate predictive tool for predicting economic growth, the emergence of clean-energy technology, or economic vulnerability in light of climate change in the near future. But this is not an excuse not to think about climate economics. Research and policy would do well to be more explicit about what we don’t know. We should avoid subjective guesses, and focus more on credible forecasts from empirically sound, if uncertain, models.
An ongoing German Constitutional Court case threatens to make the Eurozone Crisis much worse. This column argues that a Eurozone breakup could well be self-fulfilling given the absence of large-scale fiscal backstopping. The ECB’s Outright Monetary Transactions (OMT) programme has so far blocked speculation that could lead to such a breakup. A German court ruling against the OMT would destroy the programme’s credibility. The court would be wise to dismiss the case, if it does not want to risk becoming a threat to Eurozone stability and to taxpayers in Germany and beyond.
What has been the impact of high-speed internet on political participation? This column reports new evidence from Italy and the formation of Beppe Grillo’s Five Star Movement. Largely through social media, broadband internet has enabled a fledgling political movement to reach a large number of people, overcoming the costly barriers to entry usually associated with new political parties. And it is this reach that has encouraged some disillusioned voters back to the ballot box.
The WTO risks losing its centricity in the world trading system due to its focus on 20th century trade issues and lack of progress in the Doha Round. This column introduces a new eBook that looks at how Asia meanwhile built a deep network of supply chains and is experimenting with new forms of regional trade governance. Asia’s experience of open trade-led development offers lessons for other regions. Better coherence is also vital between Asia’s regional trade rules and global trade governance.
The slave trade continues to shape modern Africa. This column analyzes environmental shocks to the supply side of the trans-Atlantic slave trade and their long-term effects. During warm periods, African ports exported fewer slaves because lower agricultural productivity raised slavers' costs. These temperature fluctuations had long-run impacts, and ports that experienced a warmer period during the decades when the slave trade was most active appear more developed today.
Young children’s cognitive and non-cognitive development significantly affects outcomes for them later on in life. This column asks what effect reading to young children has. Evidence suggests that children should be regularly read to, especially by their parents. Although reading has little effect on non-cognitive skills, the benefits to cognitive development are huge.
Global banking regulation is undergoing a massive reform, known as Basel III. This column argues that the proposed reforms will fail to correct flaws in the old system. The new rules are even more complicated, opaque and open to manipulation. What is needed is a radical shift to prudential rule based on a straight capital ratio.
Does anybody have a clear vision of the desirable financial system of the future? This column has one. It gives simple answers to 12 simple questions panellists at a recent IMF conference failed to answer.
Free trade agreements are often signed in conjunction with other bilateral economic agreements such as investment agreements, double taxation treaties, or even currency agreements. This column argues that this trend reflects the greater complexity of 21st century economic integration – especially the intertwining of FDI and trade in goods and services. Economists should analyse the effects of all such agreement conjointly. Failing to do so may result in attributing trade booms to the wrong policies.
‘Global liquidity’ focuses on the role of cross-border banking in the international transmission of financial conditions. This column argues that when global banks apply more lenient conditions on national banks by supplying wholesale funding, national banks transmit the more lenient conditions to their borrowers through greater availability of local credit. Researchers and policymakers would do well to recognise the role of global liquidity as a key concept in international finance.
The World Bank’s ‘Doing Business’ data collection project is under threat from large nations who score poorly, especially China. This column argues that although there are problems with country rankings, the underlying data is very valuable for empirical researchers. The Doing Business project should continue quantifying different dimensions of the business environment, but reduce its focus on country rankings.
The EU encourages regional cohesion through transfers for structural changes and development. This column presents new research suggesting that some poorer countries don't benefit as well as we might expect. This is likely to be because of worse technological and institutional absorptive capacity. Structural transfers need reform, and policymakers would do well to focus on recipients’ absorptive capacity.
Spain and Britain have similar debt problems. So why does Spain face far higher sovereign-interest rates? Is this because Eurozone membership makes national economies vulnerable to self-fulfilling debt crises? This column argues that EZ membership does not fully explain this discrepancy. A central bank can provide an effective backstop to national debt both in monetary unions and in countries with their own currency. EZ members are more vulnerable to debt crises to the extent that the ECB cannot count on the joint support of national fiscal authorities.
Europe has been postponing the recapitalisation of its banking sector. This column argues that it has been doing so for far too long. Without such a recapitalisation, the danger is that economic stagnation will continue for a long period, thereby putting Europe on a course towards Japanese-style inertia and the proliferation of zombie banks.
This week, the European Commission will almost certainly impose substantial interim tariffs on solar panels that it believes Chinese firms are dumping in the EU. This column explores the recent history of this case, including public clashes not only between the Commission and China but also between EU member states and Brussels. What’s actually new in this case isn’t so obvious.
Contrary to received wisdom, entrepreneurial clusters in the US – like Silicon Valley – are seen as success stories. But what is the rationale behind these clusters? Do they actually work? This column reviews the evidence and discusses localised policies currently being pursued in the US. In general, our understanding of what works remains limited and economists should more thoroughly pursue researching the effects of entrepreneurial clusters.
During the decades of globalisation, flows of foreign direct investment have surged in parallel with extensive policy momentum. This column examines whether the net aggregate gain from FDI is positive using a large panel of firms from 30 European countries. It turns out that even very large increases in FDI are not important for country-level productivity growth.
Making international trade easier and less bureaucratic – trade facilitation in WTO jargon – is one of the few areas where WTO talks are still making progress. This column discusses recent research that looks at the distribution of gains from trade facilitation among exporters of different sizes. Firm-level data from many developing countries show that firms of all sizes export more in response to improved trade facilitation.
Bank competition policy seeks to balance efficiency with incentives to take risk. This calls for an intermediate degree of competition. This column argues that although the traditional policy tools are rules on entry/exit and the consolidation of banks, the Crisis showed that a focus on market structure alone is misplaced. There are other, newer ways in which competition policy can support financial stability: dealing with too-big-to fail and other structural issues in banking, as well as facilitating crisis management.
How will the new members of ASEAN catch up? This column argues that the gap in income is closing between the two groups within ASEAN: the newly industrialising economies and the older members. However, a marked cost of this convergence has been increasing income inequality within individual countries. To remedy this, and to increase overall convergence, a number of conditions must be simultaneously met: investment in social infrastructure, especially education and health; improving the investment climate; and land reform that directly redresses asset inequality.
Will harsh sanctions against Iran change its politics? This column models the effects of sanctions to include both economic and political factors. The impact of an oil boycott is considerable, and economic costs act as powerful incentives to move toward democracy. However, initial positive effects turn negative after around seven years because efforts to adjust to sanctions undermine their economic and political impact. Sanctions only work in the short to medium term.