Criticism of 'offshoring' by US multinationals is widespread among politicians. The underlying assumption is that multinational corporations substitute domestic economic activity for foreign. This column presents evidence that foreign and domestic investment go hand-in-hand at the firm level. This suggests that policies penalising firms for investing abroad will hurt, rather than help, the US economy.
A good credit rating has become a key fiscal objective, even if it requires austerity when unemployment is high. Recent experience has raised doubts about the sovereign ratings provided by the credit-rating agencies. This column suggests a new way to measure credit ratings based on a country’s ability to meet its liabilities using fiscal policy. This measure would have identified and signalled to market participants signs of the impending European sovereign-debt crisis well before 2010, when the rating agencies first reacted to the crisis.
Marriage patterns have changed in the last 50 years as fertility rates declined and cohabitation became more widespread. These trends can be explained by a shift in the gains from marriage away from specialisation and towards investment in children. This column argues that different patterns in childrearing are key to understanding class differences in marriage and parenthood. Heterogeneity in preferences for – or ability to invest in – child human capital explain marriage and fertility patterns across socioeconomic groups.
Jeremy Adelman of Princeton University talks to Romesh Vaitilingam about his biography of the economist and social scientist Albert Hirschman. They discuss Hirschman’s ideas about economic development, ‘optimal’ crises and what is perhaps his most famous book among economists, "Exit, Voice and Loyalty". Adelman also speculates on what the citation would have said had Hirschman won the Nobel Prize – and explains why we should read Hirschman now. The interview was recorded in London in May 2013.
Trade reforms must be durable if countries are to reap the benefits of international specialisation and trade. Whereas Peru has sustained the reforms it carried out in the 1990s, Argentina has introduced multiple trade restrictions in recent years. This column argues that Peru’s success is due to two factors. First, Peruvian trade reform was part of a broader reform effort. Second, by highlighting the success of Asian countries and negotiating bilateral agreements, Peru’s political leaders fostered a positive vision of Peru’s role in the world economy.
A well-functioning financial system is critical for economic growth. However, some studies find a negative relationship between the two at high levels of financial development. This column discusses why this is the case and suggests some policy implications. It argues that reforms that refocus the financial system on enterprise credit and on internalising the downside risks can be beneficial.
In the debate over Scottish independence, the question of how the UK’s assets and sovereign debt would be divided has received insufficient attention. This column argues that the size of Scotland’s debt obligations would be crucial to its optimal choice of currency. Under plausible assumptions, fiscal tightening would be required to return Scottish debt to sustainable levels, and a self-fulfilling rise in borrowing costs might tempt Scotland to leave the sterling currency union. A debt-for-oil swap might be mutually beneficial for a newly independent Scotland and the continuing UK.
Distance matters – in trade, and in knowledge creation. Policies encouraging industrial clustering rely on this notion. This column presents evidence that geographic distance is a significant impediment to inter-establishment research relationships in Japan. This friction persists over decades, suggesting that advances in communication technology are no substitute for face-to-face interaction.
The 2013 Nobel laureates’ work has greatly improved our understanding of asset markets. Their blend of rigorous statistical analysis, economic theory, and respect for ‘market wisdom’ has provided a huge impetus to the field of empirical asset pricing – one of the most important and active areas of economics research. The insights gained in this field have important real-world implications, helping individuals to make better investment decisions and policymakers to design more appropriate financial regulations.
Forward guidance is the practice of communicating the future path of monetary policy instruments. This column introduces a new eBook on the subject that collects the views of central bankers from the Fed, ECB, Bank of Japan, and Bank of England together with those of scholars and market participants. Forward guidance could be the key to unwinding massive central-bank balance sheets without severe disruptions.
The EZ crisis increased north-south conflicts between bailout providers and recipients – especially between Germany and Greece. This column shows evidence that political conflict directly translated into losses of market share for German car producers in Greece – especially in areas where German armed forces committed massacres during World War II. Six decades later, memories of conflict are never far from the surface in Europe.
Much has happened since VoxEU published an eBook on the banking union in Europe one year ago. In this column, the editor of the eBook reviews the developments and plans of the past year. Many of the issues flagged by eBook contributors are still relevant and have not yet been addressed. While immediate pressures seemed to have receded, the crisis is still very much with us and is still awaiting resolution.
Europeans worry about competition from low-wage economies. This column looks at the basis of the success of the 19th-century Lancashire cotton industry faced with a similar situation. The message is that the productivity benefits of a successful agglomeration can underpin both high wages and competitive advantage in world trade. Policymakers can support such agglomerations by easing land-use restrictions, promoting investments in transport, and providing local public goods.
The 2013 Nobel Prize in economics goes to Lars Hansen, Eugene Fama, and Robert Shiller. This column describes the significance of their contributions in the context of the broader literature. The prizes are well deserved. Their careful investigation of data – informed by deep understanding of theory – taught us much of what we know about asset pricing.
The recent showdown over the US debt ceiling can be thought of as a game of chicken over the repayment of sovereign debt, with potentially severe consequences. This column describes an analogous historical episode in Spain, in which city delegates in the Cortes resisted tax increases, and Phillip II responded by suspending payments on a portion of the sovereign debt. By the time the cities caved to a doubling of their tax contribution two years later, the resulting bank failures and credit freeze had caused lasting economic damage.
Europe is set to finally approve new insurance regulation, Solvency II. This column argues that the final text should respect three fundamental principles to ensure solvency.
Stabilisation policy should focus on the frequencies consumers care most about. This column presents evidence from stock-market returns suggesting that consumers are willing to pay the most to avoid – and are therefore most concerned about – fluctuations that last tens or hundreds of years. Modern macroeconomic theory tends to view the role of monetary policy as smoothing out inflation and unemployment over the business cycle. The authors’ findings suggest that resources would be better spent on policies that smooth out longer-run fluctuations.
The Eurozone’s tangle of conflicting goals – a series of ‘trilemmas’ – is not without precedent. This column argues that it is reminiscent of the interwar situation. The interwar slump was so intractable not just due to financial issues, but also a crisis of democracy, of social stability, and of the international political system. The big difference in the EZ is that nations cannot go off the euro as they went off the gold standard. That is why the initial EZ crisis may not have been so acute as some of the gold standard sudden stops, but the recovery or bounce back is painfully slow and protracted.
Many analysts blame uncertainty for at least part of advance nations’ poor economic performance since the crisis. This column discusses new research showing that the economic impact of monetary policy is dampened when uncertainty is high. This means that high uncertainty forces monetary policymakers into a trade-off between acting decisively and acting correctly as policy must be more aggressive than otherwise in order to stabilise economic activity. The finding is particularly stark when uncertainty measures from financial markets are utilised.
The state of labour markets in advanced economies remains dismal despite recent signs of growth. This column explains the IMF’s logic behind the advice it provided on labour markets during the Great Recession. It argues that flexibility is crucial both at the micro level, i.e. on worker reallocation, and at the macro level, e.g. on collective agreements. It suggests that the IMF approach is close to the consensus among labour-market researchers.
In the aftermath of the global financial crisis, few would dispute the risks of excessive borrowing. But which debts should one worry about – public or private? This column presents new research on the interplay of public and private debts since 1870 in 17 advanced economies. History demonstrates that excessive private-sector borrowing plays a greater role than fiscal profligacy in generating financial instability. However, when the credit boom collapses, the government’s capacity to alleviate the downturn is limited by the prevailing level of public debt.
The establishment of the International Criminal Court has increased the commitment of the international community to prosecute malevolent dictators. This column argues that such commitment creates perverse incentives that can provoke dictators to intensify violence in order to ‘blackmail’ international leaders into accepting a peace more favourable to the dictator.
Modest recoveries in employment following the crisis mask severe youth unemployment. Because labour market struggles during the early stages of working life can have persistent negative effects, understanding job-finding networks among youth is key to forming pro-employment policies. This column analyses the transition from schooling to working life of Swedish youth. Close familial ties are important in job searches, especially among the less educated. Preliminary evidence suggests that family association can signal worker ability.
The Federal Open Market Committee has used various forms of forward guidance to influence the views of businesses, investors and households about where monetary policy is likely to be headed. This column by the President of the San Francisco Fed presents his views on the benefits, limitations and future role of forward policy guidance.
Fiscal consolidation, and public concern that its pain be fairly spread, is putting tax systems under considerable pressure. This column takes stock of how they have been faring, and how they could do better.
The IMF loans to Greece, Ireland and Portugal are considered controversial by some analysts. This column argues that these loans – granted without having agreed on convincing paths to manageable debt levels – constituted a substantial departure from IMF principles. The situation is costly for Europe and, having now permanently changed the principles guiding large IMF loans, it will be costly for crises to come. A serious rethink of the management and decision-making structure of the IMF is needed.
Liquidity requirements like the Basel III Liquidity Coverage Ratio are aimed at reducing banks’ reliance on short-term funding. This may have implications for the implementation of monetary policy, which usually operates through short-term interbank interest rates. This column looks at how banks reacted to the Dutch quantitative liquidity requirement. The authors conclude that liquidity requirements will only reduce overnight interest rates if they cause an aggregate liquidity shortage.
Exiting from unconventional monetary policies is a key challenge facing policymakers in advanced nations and a key worry for everyone else. This column introduces the new 'Geneva Report' on the subject, Exit Strategies, by Alan Blinder, Thomas Jordan, Donald Kohn and Frederic Mishkin. The report considers what the post-exit world will look like, how we can get there and the long-run impact on central banking.
Robert Shiller of Yale University has just been awarded the Nobel Memorial Prize in Economic Sciences (with Eugene Fama and Lars Peter Hansen). In this interview recorded in May 2012, he talks to Romesh Vaitilingam about his book, ‘Finance and the Good Society’, which argues that even after the crisis, rather than condemning finance, we need to reclaim it for the common good. They discuss financial innovation, personal morality, the importance of education and the contribution that finance can make to our lives.
Help-to-Buy was set up to stimulate the economy and help working people buy a home. Critics worry that it has no supply effect and thus just pushes up house prices. This column argues that the policy will boost supply and that it could also become a useful macroprudential tool. The Financial Policy Committee, in conjunction with others, could adjust parameters to manage volatility and avoid bubbles.
The decriminalisation of cannabis is a policy that divides policymakers sharply. This column uses evidence from the Netherlands to show a positive connection between early cannabis use and easy access to cannabis through coffeeshops. The policy implications, however, require further research. Closing coffeeshops could result in some potential users searching in the black market where hard drugs are available as well.
During the ‘Scramble for Africa,’ the arbitrary design of colonial borders partitioned many ethnicities across two or more contemporary African states. This column presents recent research that exploits this quasi-experiment to study the effect of institutions on development. The overall effect of institutions is insignificant; but this masks considerable heterogeneity driven by diminishing government influence in remote areas. These findings conflict with previous cross-country work in economics, but support arguments put forward by the African historiography.
The depreciation of the yen by 19% since December 2012 has been a concern for many of Japan’s trading partners. Is it really bad news? This column explains that the answer depends on the structure of global value chains. It describes two approaches to incorporate the international fragmentation of production in measures of price competitiveness that can provide new insights.
The recent launch of negotiations on a transatlantic trade and investment deal has been widely welcomed by policymakers. This column warns that the aspect of the deal that provokes the greatest excitement – its focus on regulatory barriers like mandatory product standards– should evoke the greatest concern. Regional harmonisation may increase intra-regional trade yet exports from excluded developing countries could be hurt.
Soviet Russia’s industrialisation was a pivotal episode in the 20th century, and economic historians have spent decades debating the role of Stalin’s policies in bringing it about. This column argues that Stalin’s industrialisation was disastrous even in purely economic terms. The brutal policy of collectivisation devastated productivity, both in manufacturing and in agriculture. The massive welfare losses in the years 1928-40 outweighed any hypothetical gains from Stalin’s policies after 1940, and Russia would have been better off under a continuation of the ‘New Economic Policy’.
The rules of sports are complex and involve the interaction of many self-interested agents. This column uses game theory to analyse the rules of the qualification tournament in the UEFA zone for the 2014 FIFA World Cup. It shows that cases could arise where a team would have to avoid winning to advance. It also lays out the general intuition for thinking about how rules misalign incentives in sport tournaments.
Leaning-against-the-wind monetary policy may lead to a Fisherian debt deflation, since it may lower prices below the anticipated level and therefore raise real debt above what was anticipated. This is what the Riksbank has done by keeping average inflation significantly below the inflation target for a long period. This has caused household real debt to be substantially higher than it would have been if inflation had been on target.
Recent turmoil in emerging markets has shifted attention to the vulnerability of the developed world to events in emerging economies. We propose new metrics to gauge the systemic exposure of the European banking system to emerging markets and argue that these metrics should be part of the macroprudential tools of the European Systemic Risk Board.
The global nature of the recent financial crisis required a coordinated response from central banks. After the fall of Lehman Brothers, several of them simultaneously reduced their policy rates, and the Fed extended dollar swap lines to its overseas counterparts. However, the second phase of the crisis has put increasing strain on international cooperation. This column presents two explanations. First, the Eurozone crisis threatens the solvency of governments, thus creating conflict over who will pay the costs of maintaining financial stability. Second, unconventional monetary policy has had spillover effects in developing countries.
The causes of the Eurozone’s slow growth are much debated. This column argues that fiscal consolidation will be less of a drag going forward but that the ongoing recovery remains fragile. A policy strategy is needed to support the recovery based on three mutually reinforcing elements – reducing policy uncertainty, repairing the financial system, and undertaking structural reforms.
The publication of attributed voting records and minutes of the ECB council’s meetings would increase the influence of national governments and discourage pro-Eurozone behaviour. This column argues that this would be undesirable. Publishing non-attributed summary minutes, however, would enhance the ECB’s accountability towards the public.
In absolute terms, the Great Recession affected the unemployment rate of non-Western immigrants more than that of native workers in the Netherlands. However, this merely reflects their generally weak labour-market position – job-finding rates are much lower for non-Western immigrants than they are for natives. There is little difference between the cyclical sensitivity of these two groups’ unemployment or job-finding rates. In relative terms, the labour-market position of non-Western immigrants is bad, but the Great Recession did not make it worse.
So-called ‘helicopter money’ policies – those in which government spending or transfers to households are paid for by printing money – involve both monetary and fiscal policy. This means they require extraordinary cooperation between the government and the central bank, which potentially undermines central-bank independence. However, emergency policies of this type may be justified during extreme systemic crises. Injections of helicopter money can increase net wealth and thus stimulate spending, and this mechanism is particularly important when conventional monetary policy is stuck at the zero lower bound.
The ICT revolution has fostered internationalisation of production networks, but the impact has been uneven across sectors. This column presents evidence that ICT interacts with monitoring difficulties to explain differences in international firm organisation at the sector level. ICT is one way that developing nations can ascend in the global supply chain. Those countries that invest in ICT technologies gain a comparative advantage in harder-to-monitor industries, which tend to be more skill-intensive.
In response to the Global Crisis and Great Recession central banks have embarked on a variety of unconventional monetary policies. This column, part of a two-column series, reviews the range of unconventional measures that have been implemented or proposed. The second instalment will compare the various policies.
Return migrants have major social and economic consequences for their countries of origin. This column uses Egyptian household-level data to analyse the effects of migrants returning from neighbouring Arab countries. Start-up firms by returnees are more likely to survive, and returnee families tend to have more children. These results imply that return migration may not be an unmitigated blessing for Egypt.
There is now widespread agreement that ‘deep’ history matters for comparative development. Recent research has shown that ancestry – the transmission of genetic and cultural traits across generations – matters more than the history of geographic regions. This column argues that long-term divergences in inherited traits can create barriers to the diffusion of technology. The greater a population’s genetic distance to the population on the technological frontier, the lower its relative income will be. Development policies should aim at reducing barriers to exchange and communication.
Decreasing world market share in exports threatens France’s recovery. Traditional determinants of exports do not fully explain the downturn. This paper presents a novel explanation for France’s declining exports: the real-estate boom. Strong profitability in the construction industry, led by rising house prices, diverted capital and labour from export-intensive industries. These results suggest a strong warning against policies supporting property ownership as an end in itself.
The monetary policy for Eurozone members is one-size-fits-all in an economic area rife with economic differences. Does this really make a difference? This column argues that even if each EZ member state had a fully independent monetary authority, monetary policies would likely still appear highly synchronised across EZ members.
Government spending is procyclical in developing countries, exacerbating the business cycle. However, an analysis of tax policy is also required in order to properly assess the overall stance of fiscal policy. This column presents recent research showing that tax policy tends to be procyclical in developing countries and acyclical in developed countries. Although some developing countries have managed to escape the procyclical fiscal policy trap, some developed nations – notably Eurozone members – are falling into it.