One of the few areas where multilateral trade talks are making progress is the so-called Aid-for-Trade Initiative designed to remove frictional barriers to trade such as in transportation, communication and energy infrastructure. This column discusses research suggesting that both donors and recipients benefit from the aid. Aid-for-Trade, however, seems to best promote the exports of middle-income countries rather than, for instance, sub-Saharan African ones.
Financial cycles have increasingly diverged across members of the Eurozone. National macroprudential tools are thus key to managing financial imbalances and protecting Europe’s economic integration. This column discusses research suggesting that reasonable macroprudential policies by the GIIPS countries in the euro’s first decade would have helped avoid much pain in Italy, Portugal and Spain. Greece’s public debt problems were far too large and its banks could not have been shielded with macroprudential policies.
After heading the WTO for eight years, Pascal Lamy offers his farewell remarks. This column reproduces them in full. Despite global turmoil including the Great Trade Collapse and an historic shift of economic power towards emerging markets, the WTO is larger and stronger. Regional trade arrangements can contribute trade opening but they are not sufficient. There is no escape from achieving positive results in the Doha Round, but this requires adjusting the agenda to today's realities by adding new elements.
In hard times, firms tend to offer precarious temporary contracts rather than safer, long-term contracts. In light of this, this column looks at reforming employment protection. Overall, the debate amongst economists focuses far too much on the convergence of these two types of contracts. Policymakers would do well to begin looking at other, more attractive and more implementable options.
After much negotiation, Basel III regulations set capital requirements to be between 8% and 12%. This column suggests this may not be enough. It looks at how much capital banks would need to fully absorb asset shocks of the size seen in OECD countries over the last 50 years. The answer is 18% risk-weighted capital, corresponding to 9% leverage. This benchmark is highly conservative, so the true 'optimal' bank capital may be lower.
The EU justifies its funding of large-scale transport infrastructure projects by arguing that it leads to more market integration. Does it work? This column uses evidence from Britain and its Industrial Revolution to assess the extent to which transport infrastructure projects increase market integration. By comparing industrialising Britain with today’s EU, the EU’s record turns out to be quite good and its investment in large infrastructure projects has led to significant price dispersion. However, recent financial turmoil has undermined its efforts in recent years.
The intensification of the crisis has led to concerns about a possible shortage of global safe assets. At the same time, major reserve-currency issuers are losing their AAA-rating. This column considers new evidence on the recent rise of non-traditional currencies such as the Australian and Canadian dollars in global reserve portfolios. Evidence suggests that sovereign risk in advanced economies typically considered as safe is a key determinant of the growing importance of non-traditional reserve currencies.
Some European media have expressed concerns that the presence of immigrant children in schools may reduce the educational outcomes of native children. Analysing data from the Netherlands, this column finds that after controlling for differences within schools, the educational achievement of native children is almost completely unaffected by the presence of immigrant children.
The current economic and financial crisis has given rise to a vigorous debate about what training graduate and undergraduate economics students are receiving. This column argues that we don't teach enough economic and financial history, even though it is crucial in thinking about the economy. It also offers a wealth of opportunities for teachers who wish to motivate their students.
The unemployment rate in France is roughly six percentage points higher for African immigrants than for natives. Why? This column argues that the explanation is spatial: recent immigrants tend to have much longer commute times. Research suggests that in the region of 20% of the employment gap between the French minority and the French majority can be put down to commute times, but more research is needed, especially in France where research into the ethnic unemployment gap is scarce.
After decades of macroeconomic stability, structural reforms and declining inequality, mass political protests unexpectedly erupted in Brazil. This column reports new empirical evidence on protests in Brazil over the long-run to shed some light on recent events. It argues that they were driven by three main factors: corruption in public services delivery, political ineptitude in the run-off to major international events, and the political-economy effects of the electoral cycle.
Many developing countries are stuck in the middle-income gap. Focusing on Malaysia, this column argues that countries trapped in the middle-income conundrum will need to expand their ‘modern’ sectors. Traditional sectors with low productivity must shed labour, and high-productivity modern sectors (be they in goods or services) must hire more labour if they want to grow.
Will US unemployment benefits help or hinder those out of work? Much recent economic theory suggests that benefits reduce people’s likelihood of getting work. This column presents new research that looks in detail at various types of unemployment – job loser, job leaver, new entrant, re-entrant – suggesting that there is a limit to the extent that unemployment benefits reduce the amount of effort put into searching for a new job. The increase in the unemployment rate relative to job openings will persist when unemployment benefit programmes expire.
Policymakers are worried that the number of inventors coming from the West is dwindling. Is the rising cost of higher education putting off innovative individuals? And are China, India and other emerging economies right to invest so heavily in academic subjects that produce inventors? This column argues that the number of inventors can be increased through the right educational policy. New research based on data from Finland and the US provides a justification for the policies adopted by emerging economies, and for Western policymakers’ worries about the decline of interest in Engineering and Science.
Recent austerity policies have been guided by ideology rather than research. This column discusses research that reconciles disparate estimates of fiscal multipliers in the literature. It finds that common identification assumptions are problematic. Matching methods based on propensity scores show how contractionary austerity really is, especially in economies operating below potential.
The proper level for bank supervision is mired in detail. This column argues that the higher the cross-border externalities and the lower the country heterogeneity, the more likely supranational regulation is desirable. This framework informs the various initiatives for improving cross-border supervision, including a better understanding of the sources of political-economy constraints that so frequently are an obstacle to integration.
Oil has often been linked to interstate wars. This column argues that asymmetries in endowments of natural resources are important determinants of territorial conflict. When one country has oil near its border with an oil-less country, the probability of conflict is between three and four times as large as when neither country has oil. In contrast, when the oil is very far from the border, the probability of conflict is not significantly higher than between countries with no oil.
Since the mid-2000s competitiveness indicators for Italy have been providing conflicting signals. This column argues that producer prices and labour costs have actually moved hand in hand since 1992, and that the rise in the real effective exchange rate based on labour costs can be attributed to price-cost divergences in its main trading partners. Due to the internationalisation of production processes and fading share of labour in overall costs, price-based indicators may be more appropriate to assess external competitiveness.
Migration is a hot-button issue across the globe. This column summarises new evidence on the patterns of skilled-worker migration, focusing on the specific case of inventors. A novel data source that traces worldwide migration flows for inventors suggests that, excluding a few nuances, the economic incentives for general migration also seem to influence inventors’ migration decisions.
The US imprisons more young people at a higher rate than any other nation. This column argues that, at a tremendous cost, incarcerating juveniles only serves to reduce their educational attainment and increase the probability of incarceration as an adult. New research suggests that using the numerous available alternatives will probably not only save the US money in the short run – as well as giving juvenile criminals better prospects in the future – but will also reduce future crime and thus future expenditures in the long run.
Eurozone national central banks that take a national perspective risk politicising the ECB’s monetary policy. This column argues that this is a significant risk that should be overcome with a fundamental overhaul of the Eurosystem. A central element would be to take the ‘national’ out of the EZ’s national central banks. Just as US regional Fed banks encompass more than one US state, EZ ‘national’ central banks area of responsibility should be redrawn along economic geography lines rather than nation lines. An example of such a proposal is provided.
According to the IMF, last decade saw a number of countries actively managing their exchange rates. Is this a good way for emerging economies to protect themselves from the large swings of international markets? This column presents a new ‘pseudo-flexible’ exchange rate policy for emerging economies that is both sustainable and allows for accumulating reserves in conjunction with domestic debt; resulting in low exchange-rate volatility.
The Global Crisis hit sovereign credit ratings in very different ways. This column discusses research into the determinants of emerging markets’ sovereign credit-default swap spreads from 2004 to 2012. The key factors are trade openness and state fragility in the pre-Crisis period, external debt/GDP ratio and inflation in the Crisis period, and inflation and public debt/GDP ratio in the post-Crisis period. Asian countries enjoy lower sovereign spreads than Latin American countries, and this gap widened during and after the Crisis.
Expanding road infrastructure is often justified on the basis of its presumed effects on exports. Yet, available evidence on to what extent these effects really materialise is very limited due to difficulties faced in convincingly identifying true casual relationships. Historical road networks can help overcome this endogeneity challenge. This column provides evidence for Peru based on the Inca road network and suggests that improvements in road infrastructure have had a significant impact on firms’ exports and thereby on job creation.
How well has OMT done? This column attempts to temper Mario Draghi’s recent plaudits that “it’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent times”. Yes, OMT should provide unlimited liquidity to troubled countries, but not at the expense of necessary structural reforms. The ECB should cover Eurozone countries’ current expenditures, but should not pay off all long-term debt holders. That way, capital markets will be disciplined and incentives for implementing economic reforms will be maintained.
During the Great Recession, 25 of 33 OECD countries have used some version of short-time work, a form of publicly subsidised working-time reductions. This column argues that despite its popularity, knowledge of the macroeconomic effects of this measure is limited. Using Germany as a case study, it’s clear that the existence of a short-time work system stabilises the economy and reduces job losses by roughly 20% during a recession. However, short-time work is a lot less effective for Anglo-Saxon labour markets.
School voucher programmes that are meant to allow students who could not otherwise afford private schools to attend them are often hotly, and often emotionally, debated. This column presents findings based on the PISA survey of private education in 72 countries and regions. Evidence suggests that in countries with basic government-provided education, private schools occupy a high-quality market niche. Overall, the education policy menu should include improvement of public education standards as well as vouchers, which policymakers in countries with better public education should not adopt without considering their distributional and efficiency implications. While they can be beneficial, voucher schemes do not enhance overall equality of opportunities and efficiency in countries where governments supply high-quality education.
The regulation of big banks has been in the spotlight for many reasons. This column adds to the list. Examining evidence for more than 80 countries for the years 1995-2009, banking systems are shown to be highly concentrated. In many cases, the banks are so big that bank-specific credit-growth fluctuations affect the macroeconomy.
Economic geography typically predicts positive returns to urban scale. This column argues that China faces unprecedented challenges in the face of a new wave of urban migration. Accelerating urbanisation has been and will continue to be – if managed correctly – an opportunity for sustaining economic growth by capturing the benefits from urban agglomeration.
FDI flows tend to come in waves and concentrate in certain sectors. This column examines episodes of large gross foreign direct investment inflows - surges – at the sectoral level in emerging markets. It suggests that surges in the financial sector are associated with boom-bust cycles in domestic GDP and with expansions of credit in foreign currency. Moreover, restrictions on other forms of capital inflows tend to increase the likelihood of surges in financial-sector FDI.
In the wake of the Great Recession, world trade has faltered. Responsible officials turned a blind eye to fresh liberalisation and condoned a quiet resurgence of protectionist measures. This column argues that the global economy needs strong medicine to rebound, and that successful WTO trade talks are part of the elixir.
The European sovereign-debt crisis has raised many questions regarding the link between sovereigns and banks. This column goes to the heart of one and shows that tensions in Eurozone government-bond markets were transmitted internationally through the bank lending channel. Lending by European banks with sizeable exposures to sovereign debt from the troubled Eurozone countries became impaired after the start of the crisis, resulting in a reallocation away from foreign (especially US) markets.
The current wave of monetary expansion by central banks has reignited calls for a return to the gold standard. But would this monetary system work today? This column argues that it probably would not. The successful pre-1914 gold standard was based a very peculiar gold-market microstructure, which provided central bankers with non-negligible discretionary power. Such microstructural foundations would be neither replicable nor desirable today.
US-based credit-rating agencies are regularly subject to condemnation for causing or amplifying financial crises – the Eurozone Crisis in particular. Should Europe try to set up a European agency to counter this? This column discusses evidence that shows that the largest German rating agency was more aggressive than the US Big Three both in terms of a lower level and a higher propensity to quickly downgrade Eurozone problem countries.
Commodity exporters have been both blessed and cursed by the boom-and-bust nature of commodity-price and demand swings. This column presents a new metric that computes the additional income arising from changes in the real purchasing value of output as a result of changes in relative prices. Focusing on Latin America, it’s clear that although its recent terms-of-trade boom is of similar magnitude to that seen in the 1970s, the associated income windfall has been much larger. The current weakening of external current-account balances in Latin America – even if driven by higher domestic investment – warrants close monitoring.
Many central banks have recently employed unprecedented expansionary monetary policy, keeping interest rates at near-zero levels for an extended period of time. Quantitative easing interventions have been employed to affect asset prices directly, most notably in government-bond and mortgage markets, in order to keep sovereign and mortgage borrowing costs low. CEPR recently organised a conference to discuss existing theory and empirical evidence on the implications of an extended phase of unconventional monetary policy. This short column outlines the key issues and also includes a Vox Views video summary of the event.
The Global Crisis sparked a vibrant debate about what factors were to blame. This column addresses one of the core questions of this debate: are global imbalances or excessive credit growth key suspects? Presenting new research, it’s clear that the painful adjustment in the real-estate markets of the US, Spain and other affected countries in the aftermath of the Crisis, and the key importance of momentum effects, call for further research on policies that can mitigate possible bubble-dynamics.
Evaluations of economic substance often depend on an assessment of whether a particular party’s income claims look more like equity or debt, or on a present value calculation of the efficiency benefits of the transaction. The column argues that the property-theory of the firm provides an alternative and simpler approach. According to this theory, the fundamental question is: Did control change?
There is growing interest in understanding and quantifying the costs and benefits of migration. This column presents new research suggesting that migration benefits practically all origin and destination countries. OECD countries benefit because of greater domestic product variety and, in turn, most countries that are the source of migration countries benefit because the remittances sent by migrants more than offset the costs associated with smaller market size.