The global financial cycle has transformed the well-known trilemma into a ‘dilemma’. Independent monetary policies are possible if and only if the capital account is managed directly or indirectly. This column argues the right policies to deal with the ‘dilemma’ should aim at curbing excessive leverage and credit growth. A combination of macroprudential policies guided by aggressive stress‐testing and tougher leverage ratios are needed. Some capital controls may also be useful.
Unconventional monetary policy is now routine, but its impact is still poorly understood. A key difficult is empirically separating policy changes – ‘shocks’ – from other factors driving the economy. This column proposes a new estimation framework for identifying monetary-policy shocks in both conventional and unconventional policy regimes and applies it to Japan. Japan’s increase in bank reserves lowered long-term interest rates in the unconventional policy regime and may have had a positive impact on inflation and the output gap.
As emerging markets slow, the fear of ‘sudden stops’ in capital flows is rising. This column presents a new taxonomy of Sudden Stops that is founded on the behaviour of gross and net capital flows. The results raise several puzzles. Given continued financial globalisation, how developing and advanced economies can protect themselves at minimum cost remains a critical topic for researchers and policymakers.
Today’s regulatory rules – especially the ineffective capital requirements – have led to costly bank failures. This column proposes a new, robust approach that uses market information but does not depend upon markets being ‘right’. Under the proposed regulatory system (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals. One key innovation is ‘Equity Recourse Notes’ that gradually ‘bail in’ equity as needed. These are superficially similar to, but fundamentally different from, 'CoCos'.
In times of economic crisis, managers often take drastic measures to survive. This column presents new research on the preferences of managers from across Europe when faced with ‘downsizing’. It seems that, when recession bites, the instincts or ‘animal spirits’ of employers that were previously suppressed by prosperity or considered to be outdated resurface. European employers predominantly resort to offering early retirement packages (and to a lesser extent buy-outs) in response to the threat of downsizing, exacerbating, in the long run, the problems associated with Europe’s ageing population. The only notable exception to this rule is the response of Danish employers, who prefer to tackle this problem by reducing the working hours of their employees.
Economic uncertainty is not good for GDP growth. This column presents a new, UK-specific measure of economic uncertainty. It shows that UK economic uncertainty is now at historically high levels and that it has been unusually persistent in recent years. There is evidence that elevated uncertainty has been a factor restraining the UK recovery. What happens to uncertainty going forward will be important for growth.
Why does capital flow from poor to rich countries? This column argues that the direction of capital flows makes economic sense given savings behaviour. But the real puzzle is why savings rates are high in poor countries and low in rich ones.
After the financial crisis, there was a shift from international to multinational banks due to supervisors’ increasingly national approach. This column provides an alternative solution that aims to keep international banking alive. What is key is that, first, national supervisors are internationally coordinated and, second, that the whole system is supported up by an appropriate fiscal backstop.
In recent years, policymakers have enthusiastically backed the fashionable ‘creative industries’. This column presents new research on the creative sector, creative occupations and innovation in the UK. The results raise questions about the dominant perception of the creative industries as an ‘innovative’ sector. Instead, it might be more appropriate for policymakers to focus on creative workers regardless of the sector in which they work.
There is much confusion about what shadow banking is and why it might create systemic risks. This column presents shadow banking as ‘all financial activities, except traditional banking, which rely on a private or public backstop to operate’. The idea that shadow banking is something that needs a backstop changes how we think about regulation. Although it won’t be easy, regulation is possible.
With ageing populations in the rich nations and booming labour forces in poor nations, immigration is sure to be a critical policy issue for decades. This column presents research that casts new light on the issue, showing that diversity of immigrants’ origin matters along with their numbers and skill levels. Europeans need to start thinking about immigration as a major, long-term economic policy question that deserves a long-term policy approach. They should move away from the Band-Aid approach that sees policy driven by current events.
Non-bank financing originating in the shadow banking system has increasingly become an issue for policymakers. This column argues that informal financing has, in fact, been an essential element of corporate performance in China. Through reviewing the interaction between informal and formal financing, evidence suggests that informal financing simultaneously granted with formal financing (co-funding) is helpful for growth, especially for small firms.
Despite its economic and political power, details of how China’s leaders are selected are opaque. This column presents new research on how Chinese leaders are selected, suggesting that the Communist Party has avoided selecting loyal and incompetent leaders – typical of autocratic regimes – through a system of job rotation and promotion within the Party. This system has helped pairs of officials build trust by working together, allowing top politicians to choose the most competent among a pool of trustworthy subordinates.
Michael Pettis talks to Viv Davies about his recent book, "The Great Rebalancing: Trade, Conflict and the Perilous Road Ahead for the World Economy". Pettis explains how China has maintained massive, but unsustainable investment growth by artificially lowering the costs of capital, and how Germany may be endangering the euro by favouring its own development at the expense of its neighbours. Pettis maintains that we are currently undergoing a critical rebalancing of world economies, and that much of the debate about the global crisis has been caught up in ‘muddled thinking’. The interview was recorded in London on 12 February 2013.
Economists usually think of taxation as inefficient. This column argues that the anti-tax rhetoric evident in much lay discussion of public policy draws considerable support from the prevalent negative language of professional economic discourse. Optimal income taxation doesn’t have to employ the pejorative concepts of inefficiency, deadweight loss and distortion; and this column argues that it is high time for economists to discard them and make analysis of taxation and public spending distortion-free.
The call for inclusive growth – the pace and distribution of economic growth – has been unanimously broadcast by policymakers across the world. This column presents a new method for measuring it that’s in line with the absolute definition of pro-poor growth. This integrated measurement should prove useful for researchers wanting to delve deeper into the patterns and to study the sources of inclusive growth.
The global economy witnesses protracted and widespread commodity booms once in a generation. This column introduces a new and publicly available dataset on real commodity prices over 164 years for 32 commodities. The evidence suggests that policymakers and researchers should, first of all, not confuse cycles for trends in real commodity prices. Second, we should also be more aware of the fact that we live in a world of scarcity. Commodity-specific differences in supply and demand generate differential paths in real commodity prices not only in the past but, presumably, also in the future.
As the Doha Round continues to stagnate, mega FTAs such as the Trans-Pacific Partnership will likely play the leading role in trade rulemaking for some time to come, creating a 'spaghetti bowl' of trade rules. This column argues that we should multilateralise the results of mega FTAs on an issue-by-issue basis, starting with an International Supply Chain Agreement.
The last recession in the US ended in June 2009. Yet, three years on, unemployment remains high. This column argues that we need to better understand how business cycles of recession and expansion work. Detailed evidence from the US suggests that recoveries are not simply mirror images of recessions. Because of its policy relevance, economists and policymakers must acknowledge that the pattern of recession/recovery has significantly changed over the last half century.
Poverty is in ascendency as a policy issue – but it has not always been that way. This column, based on the author’s “The Idea of Antipoverty Policy”, recounts how mainstream thinking until well into the 19th century saw little scope for fighting widespread chronic poverty. The revolution came with a deeper understanding of how market and governmental failures interact with inequality to both perpetuate poverty and retard development more broadly. New policies for fighting poverty emerged and now extreme absolute poverty is at an historic low. History suggests, however, that continued progress is not assured.
In the US, fewer and fewer people are moving long distances to pursue job opportunities. Presenting new research on Mexican immigrants in the US, this column argues that there are large welfare gains from the efficient spatial allocation of labour. However, welfare gains from the movement of labour are woefully understudied. If immigrants are more willing to move for a job than natives, policymakers should allow them to do so with ease. Workers should be free to move to markets offering better opportunities.
Markets will be perusing the new Bank of England Governor’s comments for hints on his hawkishness. This column presents evidence showing that Monetary Policy Committee members tend to become more dovish as they become more experienced (i.e. after having participated in 18 or more meetings), with this tendency most marked in members with dovish preferences.
What distributional effect do natural-resource booms have on wealth, income and economic power? Using Australia as a case study, this column argues that resource booms tend to exacerbate inequality. The distributional impact of commodity-price shocks in Australia yield important lessons for primary producers from the developmental south, and it’s important for resource-rich developing countries to design appropriate policies to tackle this inequality.
Efficiency standards appear to be at the centre of US climate policy. But is this policy effective? This column argues that, thinking laterally, evidence suggests that there are reasons to be suspicious. If the US is to focus so heavily on energy efficiency, we ought to have a better understanding of its effectiveness.
Justin Lin talks to Viv Davies about his new book, ‘Against the Consensus: Reflections on the Great Recession’. Lin presents his thoughts on the cause of the crisis and argues that conventional theories provide inadequate solutions, suggesting that the crisis originated in global imbalances arising from the wealth effect of excess liquidity created by US financial deregulation and loose monetary policy.They discuss Lin's recommendation for a Global Marshall Plan and a new supranational global reserve currency. Lin also presents his views on industrial policy.
Can international trade be good for the environment? This column assesses the EU-Chinese anti-dumping dispute in detail, and argues that trade could well be the saviour of solar power. Trade was good for protecting against things like sulphur dioxide, in the case of automobiles, 30 years ago. The same is true of trade in solar equipment today. Westerners should celebrate the contribution of trade to reducing the cost of solar power, not block it with protectionist anti-dumping measures.
The Eurozone’s debt crisis is getting worse despite appearances to the contrary. How can we end it? This column presents five major options for reducing crisis countries’ debt. Looking into the details, it seems the only option that is both realistic and effective is for countries to default by selling monetised debt to the ECB. Moral hazard aside, burying the debt seems to be the only way we can end the crisis.
The ECB recently changed its monetary policy communication strategy to include a form of forward guidance. This column, written by ECB Executive Board Member Peter Praet, explains the new thinking and argues that it has contributed to more clarity over the ECB’s assessment of the outlook and its reaction function as well as helping to stabilise money-market conditions and anchor expectations more firmly.
The collapse of the Weimar Republic was a turning point in world history, bringing the murderous Nazi regime to power. This column argues that contrary to most conceptions of social capital, there can be negative outcomes to well-connected societies. Independent of ideology, dense social networks in interwar Germany greatly helped the Nazi party to rapidly and widely disseminate its messages. Putnam’s claims about the benefits of social capital for democracy need to be reassessed.
Commodities are usually advertised as having the same returns and less volatility than equities. This column presents the results of a recent CEPR working paper showing that previous studies based on rather restrictive assumptions produced biased results that favoured commodities over equities. Using an alternative methodology, co-movement between traditional asset and commodity markets seems to be symmetric and occurs most of the time. What changes is the strength of the relationship. The returns of equities and commodities have become more integrated in the aftermath of the subprime crisis, a result that questions the diversification benefits of commodities.
Food prices in international markets have spiked three times in the past five years. Most governments responded by altering trade restrictions to insulate the domestic market. Did this work? This column presents new research suggesting that altering trade restrictions has less impact than is commonly thought. Since there are other options – such as conditional cash transfers – that could better, more efficiently and more equitably protect against poverty, it is time we sought a multilateral agreement to desist from changing restrictions on trade when international food prices spike.
Lax financial-sector regulation was the fulcrum of the Global Crisis and policymakers reacted by introducing sweeping reforms. But has it had any impact? This column reviews evidence from bank stock returns showing that four major reforms in the US and Europe have reduced bailout expectations – especially for systemic banks. The strongest effects were found for the Dodd-Frank Act (especially the Volcker rule); the German restructuring law had little effect.
Increasingly, economists and cultural critics are arguing that wine tasting is junk science. This column argues that the problem with wine tasting lies not with the impossibility to consistently tell a good wine from a bad wine but with how the wines are ranked. If a new system of game-theory-based rating and ranking using the Shapley value were implemented, wine tasting might get a better hearing from its critics.