Much of human knowledge is produced in the world’s university departments, yet little is known about how these hundreds of thousands of departments are best organised and led. This column explores the association between the personal research output of a department head and the department’s subsequent performance. Results suggest that if a department wants to improve its reputation in the world, then the chair should be a highly cited researcher.
Sales of state-owned assets have been proposed as a way for highly-indebted countries to ease the pain of fiscal consolidation. This column argues that, despite the potential merits of privatisation in terms of long-run efficiency, in practice it is unlikely to improve short-run fiscal solvency. Since governments rarely alienate control rights, the efficiency gains from privatisations are often small. Moreover, financial markets may not fully reflect these gains – particularly during a financial crisis. The implication is that the Troika policy of linking financial assistance to privatisations is inappropriate and self-defeating.
World-leading trade lawyer, Gary Horlick, talks to Viv Davies about the 2013 WTO Bali ministerial conference and the post-Bali agenda. Horlick discusses food security, agriculture and whether mega regional trade agreements pose a threat to the future of the WTO. They also discuss the potential benefits of the post-Bali agenda for developing countries and the ‘trade transforming’ effect of SMEs and the internet. The interview was recorded in January 2014.
In many settings, criminal behaviour can be analysed just like any other economic decision-making process, namely – as the outcome of individual choices influenced by perceived consequences. This column explains the advantages of adopting an economic approach to understanding crime. Furthermore, criminal law and crime-prevention programmes can be evaluated using the same normative techniques applied to health, education, and environmental regulation.
One popular explanation for the increase in US household debt in the years before the subprime mortgage crisis is that households with stagnating incomes borrowed more to ‘keep up with the Joneses’. This column presents recent research that questions this explanation. Low-income households in high-inequality regions in fact borrowed relatively little compared to similar households in low-inequality regions. A theoretical model in which greater local income inequality facilitates the screening of loan applicants makes predictions that are consistent with the data.
Economists have found that large-scale infrastructure investments tend to increase economic growth and reduce poverty. However, there has been relatively little research on the effects of smaller, more targeted investment projects. This column discusses recent research on the effects of the US Rural Electrification Administration, which provided subsidised loans for connecting farms to the electric grid. Counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity than similar counties that did not.
Sleep is a key determinant of educational attainment among young adults, and carries with it longstanding health implications. This column provides evidence of network effects in adolescent sleeping decisions using a novel econometric approach. Young adults respond to the sleeping behaviour of their peer group, holding constant other observables. This compounding effect suggests a group approach to solving behavioural problems associated with sleep deprivation.
The Eurozone will either struggle for decades with very high public debts, or it will restructure. This column introduces a new Geneva Special Report on the World Economy arguing that the restructuring option is workable and preferable. The plan – dubbed PADRE – would substantially lower EZ nations’ debts without cross-nation transfers and with limited moral hazard. The financing is simple. Each EZ member’s debt is reduced by the securitisation of its own share of ECB seignorage.
The global economy seems to be on the mend. In this column, IMF Chief Economist Olivier Blanchard provides a quick overview of the likely developments. The key points are that the recovery is happening as expected, but it remains fragile and uneven across major economies. Normalising monetary policy poses risks for vulnerable emerging markets and deflation is a real concern for the Eurozone.
Recent research on financial literacy casts doubt on the ability of households to make well-informed financial decisions on their own. This column presents research on optimal rules of thumb for saving and asset allocation. There is a trade-off between complexity and efficiency of financial advice, and there are many examples which show that a simple rule can do almost as well as a complicated one.
In 2004, European merger law was substantially revised, with the aim of achieving a ‘more economic approach’ to merger policy. This column discusses a recent empirical assessment of European merger cases before and after the reform. Post-reform, the outcomes of merger cases became more predictable, and the Commission prohibited fewer pro-competitive mergers. While there remains room for improvement in several aspects, the reform seems to have been successful in bringing European competition law closer to economic principles.
The EU’s Eastern Partnership is currently in turmoil. Armenia and Ukraine – two of the four partner countries (which also include Moldova and Georgia) did not initial association agreements. This column discusses the role of Russia in discouraging such negotiations. The soft power of the EU was apparently no match for the hard power of Russia in the cases of Armenia and Ukraine. A successful partnership would require peaceful international relations between the four partners, and solving their conflicts with Russia.
Corporate saving has sharply increased over the last two decades, but there has been relatively little research on its determinants. This column presents recent work that estimates Asian firms’ cash flow sensitivity of cash. The impact of cash flow on the increase in firms’ cash holdings is positive and statistically significant, and larger and more highly significant for smaller firms. Since smaller firms are more likely to be financially constrained, these results suggest that Asian firms – especially smaller ones – save more when their cash flow increases in order to finance future investments
Alejandro Jara talks to Viv Davies about the 2013 WTO Bali ministerial conference and the recent Vox report, ‘Building on Bali’, co-edited with Simon Evenett. Jara presents his views on the post-Bali agenda, mega regional trade agreements and trade protectionism. They also discuss the extent to which the ‘global value chain revolution’ has changed the nature and focus of international trade and trade agreements. Jara concludes by presenting policy recommendations for the way forward. The interview was recorded in January 2014.
Efficient retail payments are associated not only with lower direct costs but also with indirect benefits, and ultimately – with enhanced economic growth. This column presents research on different retail payment habits in the Eurozone. A correlation exists between the forms of payment in a country and its recent economic fortune. There are a number of methods to promote more efficient payments. The biggest challenge to increase the efficiency of retail payments in Europe is the heavy regulation and barriers to entry of new payment methods.
The economic benefits and costs of mitigating global warming are widely debated. This column shows that based on current scientific knowledge and standard economic principles, a simple formula for the marginal damage of emissions can be constructed. The formula considerably strengthens the case for carbon taxation versus caps, allows straightforward calculation of the ‘global carbon debt’ rich nations owe to poor nations and future generations, and offers a yardstick for carbon capture and storage investments.
Economic research finds little evidence in support of the hypothesis that an increase in minimum wages significantly affects employment – either positively or negatively. This column discusses a study of the impact of minimum-wage changes on turnover rates. Minimum-wage increases are associated with a lower probability that a job will end, and with a lower probability that an unemployed person will find work. The former effect is established only for newly hired workers. Increases in the minimum wages are also associated with more stable jobs for all low educated workers. Thus, the trade-off between fewer jobs with higher wages and more job stability versus easier access to jobs should be taken into account in the minimum-wage policy debates.
Since China is growing rapidly, one might expect Chinese households to borrow against their future income. In fact, Chinese households save 30.5% of their income – compared to about 5% in OECD countries. This column discusses recent research linking the Chinese saving puzzle to China’s one-child policy. The savings rate of households with twins is about 6–7 percentage points lower than that of households with an only child. Demographic factors can explain an estimated 35–45% of the 20 percentage-point rise in China’s household saving rate between 1983 and 2011.
Japan’s sovereign debt-to-GDP ratio is higher than any country in Europe and more than twice the OECD average. This column explains why Japan’s massive government debt did not wreak havoc in the past. Robust domestic saving and a temporary inflow of foreign capital caused by the Global Crisis have prevented a crisis thus far. As both of these factors become less applicable the government faces pressure to reduce debt-to-GDP ratio can be brought under control quickly.
The Federal Reserve has begun to ‘taper’ its programme of quantitative easing. The ‘taper tantrum’ that followed the announcement of tapering in May 2013 suggests that the normalisation of rich countries’ unconventional monetary policies may lead to capital outflows and currency depreciations in emerging markets. This column presents the results of recent World Bank research into these effects. In the baseline scenario, the unwinding of QE is predicted to reduce capital inflows by about 10%, or 0.6% of developing-country GDP by 2016. However, if markets react abruptly, capital flows could decline by as much as 80% for several months.
Nicholas Crafts talks to Viv Davies about his recent work on the threatening issue of public debt in the Eurozone. Crafts maintains that the implicit fault line in the EZ is evident; several EZ economies face a long period of fiscal consolidation and low growth and that a different sort of central bank might be preferable. They also discuss the challenges and constraints of banking, fiscal and federal union. The interview was recorded in London on 17 January 2014.
The global value chain revolution has changed trade and trade agreements. Trade now matters for making goods as well as selling them. Trade governance has shifted away from the WTO towards megaregional agreements. This column argues that 21st-century regionalism is not fundamentally about discrimination, and that its benefits and costs are best thought of as network externalities and harmonisation costs respectively. More research is needed to determine how the megaregional trade agreements across the Pacific and Atlantic will fit with the WTO.
Since the East Asian financial crisis of 1997, the emphasis on regional monetary cooperation has grown. This column discusses recent research into intra-regional exchange rate misalignments. In the aftermath of the Global Financial Crisis, investors in the US and Europe withdrew from emerging markets, causing a depreciation of emerging-market currencies against the US dollar. At the same time, the appreciation of the Japanese yen – fuelled in part by intra-regional capital flows – has increased the misalignment of intra-regional exchange rates.
The majority of recent US bills loosen gun restrictions, thus rekindling the discussion about the relationship between guns and crime. This column presents research that investigates the effect of gun control on suicide. Using background checks as a proxy for gun ownership, the study finds a positive link between the access to guns and firearm suicide rates. This suggests that an increased availability of a particular suicide method can lead to more suicides.
The dramatic fall in consumption during the Great Recession was accompanied by an equally dramatic increase in household debt in the years preceding it. This column examines the relationship between household debt and consumption behaviour, and the channels through which this link operates. The column concludes that the relationship is driven almost entirely by the presence of financial constraints, such as liquidity or borrowing limits.
The lifting of transitional access restrictions for Romanian and Bulgarian workers is a hotly debated topic in the EU with big implications for public finances in destination countries. This column presents analysis of immigrants in Sweden, which never imposed access restrictions when these two countries joined the EU. Romanian and Bulgarian migrants to Sweden under this unrestricted regime make a sizeable positive contribution to Swedish public finances. Contributions can be expected to be even larger in the UK and Ireland.
The Single Supervisory Mechanism – a key pillar of the Eurozone banking union – will transfer supervision of Europe’s largest banks to the ECB. Before taking over this role, the ECB will conduct an Asset Quality Review to identify these banks’ capital shortfalls. This column discusses recent estimates of these shortfalls based on publicly available data. Estimates such as these can defend against political efforts to blunt the AQR’s effectiveness. The results suggest that many banks’ capital needs can be met with common equity issuance and bail-ins, but that public backstops might still be necessary in some cases.
Lab and field experiments help us understand human behaviour as they increase our confidence in causal effects in regard to different economic problems. This column highlights the relevance of experimental data and discusses the value of lab in comparison to field experiments. While lab experiments are the only applicable way-to-go in a number of situations, they tend to inflate scrutiny. This could artificially modify behaviour, and would potentially threaten the causal interpretation of the estimates. The debate about lab versus field experiments is far from settled. However, what economists do agree about is that to obtain convincing causal effects relating to human behaviour, a joint consideration of a number of methods would be superior to using any single one in isolation.
The ‘shadow banking’ sector is a loose title given to the financial sector that exists outside the regulatory perimeter but mimics some structures and functions of banks. This column introduces a new CEPR Policy Insight that looks into what we have learned about shadow banking since the Global Crisis.
Parents worry that their children waste too many hours playing video games or watching TV that would be better spent studying. Whereas past research has focused on teenagers, this column presents evidence on the causal effects of study and leisure hours for children of elementary school age, when key lifetime habits are being developed. Video entertainment is found to be a less significant determinant of time spent studying than parental involvement (such as supervision).
Empirical research finds that import prices do not fully adjust to exchange-rate changes. In other word, there is a limited response of trade to exchange-rate fluctuations. This column argues that part of this pass-through puzzle is explained by quality. Exchange-rate movements are more strongly absorbed into the export prices of higher quality goods. Therefore, the volume of their exports would be less responsive to exchange-rate shocks, leading to an incomplete exchange-rate pass-through.
Democracy often seems bureaucratic with high ‘transaction costs’, while autocracies seem to get things done at lower cost. This column discusses historical research that refutes this. It finds empirical support from Soviet archives for a political security/usability tradeoff. Regimes that are secure from public scrutiny tend to be more costly to operate.
The third arrow of Abenomics aims at reviving growth in Japan. This column presents research showing that revamping Japan’s dual labour markets to increase productivity should be an important component of the growth strategy. An increase in the level of employment protection of regular workers tends to increase duality, while an increase in the protection of temporary workers has the opposite effect. Reducing the difference in the employment protection would help to reduce the labour-market duality, and reducing the duality results in a higher growth. This would lead to a decrease in unemployment, and could help to exit deflation.
Though taxing corporations may be a political no-brainer, it may be a big economic mistake. This column discusses recent research showing that the tax is not paid primarily by rich corporate shareholders. They can, and do, move their capital away from countries that have high corporate rates. Eliminating the US corporate tax by, for example, taxing accrued global corporate profits as personal income can produce dramatic increases in US investment, output, real wages, and saving. Modest gains accrue to early generations with very sizable gains going to young and future generations, both skilled and unskilled.
The European Banking Union matures in 2014, with the ECB assuming its role as single supervisor. This column outlines the transition to the new steady state. This will involve a comprehensive balance sheet assessment, new rules regarding recapitalisation, restructuring, and resolution, and the determination of how recapitalisation costs are distributed across taxpayers in different European nations.
During the Great Recession, UK real wages have fallen rather than the usual unemployment reaction. Nevertheless, this column argues that a structural break in the wage inflation/unemployment trade-off has not occurred. There has been a constant relationship between real wages and productivity since 1860. The key to the constancy is to the joint modelling of dynamics, location shifts, relevant variables and non-linearities.
There is a wave of fashionable pessimism over the future growth of Latin America. This column distinguishes between two main types of concerns – related to the trend of the long-term growth, and to the cyclical vulnerabilities of the region. While the first type is partially justified, the second type is not because such concerns overlook two fundamental changes in Latin American economies. First, the de-dollarisation of financial contracts reduces the adverse effects of currency depreciations. Second, a more credible monetary policy was implemented with a substantial decline in the exchange rate pass-through to inflation.
The link between higher national income and higher national life satisfaction is critical to economic policymaking. This column presents new evidence that the connection is hump-shaped. There is a clear, positive relation in the poorer nations and regions, but it flattens out at around $30,000–$35,000, and then turns negative.
Fiscal sustainability has become a hot topic as a result of the European sovereign debt crisis, but it matters in normal times, too. This column argues that financial sector reforms are essential to ensure fiscal sustainability in the future. Although emerging market reforms undertaken in the aftermath of the financial crises of the 1990s were beneficial, complacency is not warranted. In the US, political gridlock must be overcome to reform entitlements and the tax system. In the Eurozone, creating a sovereign debt restructuring mechanism should be a priority.
Efforts to limit immigration are being implemented in many rich nations. Restricting immigration to these advanced ageing economies could be an economic boon or bane. This column presents recent work examining the labour market and fiscal impacts of restricting immigration, taking the UK government’s stated goal as an example. The results suggest that a significant reduction in net migration would have strong negative effects on the UK economy.
Angus Deaton talks to Viv Davies about his recent book ‘The Great Escape: health, wealth and the origins of inequality’, that explains how inequality is the catalyst for the great escape from poverty and how the world is better because of it. They discuss the state of inequality in the US, economic growth in China and India and the ineffectiveness of international aid. Deaton stresses the importance of understanding that human well being will be achieved only through a holistic approach. The interview was recorded on 17 October 2013.
A key question in economics is whether poor countries will automatically close the income gap with rich countries. However, different empirical methods yield different answers – growth regressions suggest convergence, whereas tests of distribution dynamics suggest divergence. This column discusses recent research that reconciles these two strands of the literature. It extends the benchmark growth regression model to include a parameter that determines the share of new technologies a country can adopt each year. The result is that, although each country converges to a growth path, the growth paths themselves may diverge.
Economists widely view exchange rate changes as unpredictable. This column explains a new currency trading strategy with economically valuable and statistically significant currency excess returns. The returns are generated primarily by spot exchange rate returns, rather than interest differentials. The strategy’s performance can be explained by speculator-hedger interactions in the currency market in the presence of time-varying capital constraints on speculators.
Though in the past two years substantial progress has been made in completing the structure of Europe’s Economic and Monetary Union, not all economic inconsistencies have been solved. This column discusses three main challenges that still need to be addressed. First, sound fiscal policies need to be conducted while keeping sustainable welfare systems. Second is the conflict between policy objectives and economic realities – vulnerable economies cannot reduce their debts and simultaneously gain competitiveness. Third, financial stability and integrated financial markets cannot be established unless the relationship between banks and their sovereigns is reformed. Addressing each of these challenges is important, and it could benefit all Eurozone members.
On 19 October 2010, Angela Merkel and Nicolas Sarkozy agreed that in future, sovereign bailouts from the European Stability Mechanism would require that losses be imposed on private creditors. This agreement was blamed for the increase in sovereign spreads in late 2010 and early 2011. This column discusses recent research on the market reaction to the surprise announcement at Deauville. With the exception of Greece, the rise in spreads was within the range of variability established in the previous 20 days.
Financial crises are generally preceded by credit booms and a build-up of external debts. Although it is unclear whether Turkey is experiencing a financial bubble, as of 2013, 58% of the corporate sector’s debt was denominated in foreign currencies. This column argues that this explains the Central Bank of Turkey’s interventions to prop up the value of the Turkish lira. Given the relatively low level of reserves and the unfolding corruption scandal, it is a critical question how long the Bank can continue to do so.
The presumed success of Japanese post-war industrial policy has been used to advocate similar policies in other countries. Key to such arguments then is the empirical demonstration of the policies’ effects. This column presents research making use of a novel dataset that allows controlling for industry heterogeneity across many disaggregated industries. The effects of the quota removal on productivity were significantly positive, while the effects of tariffs on labour productivity were insignificant.
In 2008, Icelandic banks were too big to fail and too big to save. The government’s rescue attempts had devastating systemic consequences in Iceland since – as it turned out – they were too big for the state to rescue. This column discusses research that shows how this was a classic case of banks gambling for resurrection.
Before the financial crisis, the world economy was characterised by large and growing current account imbalances. Since the onset of the crisis, the current account imbalances of the US and China have decreased to half their pre-crisis levels. This column highlights the implications of the reduction in the current account surplus for China, and gives policy recommendations. A restructuring of the economy is needed, and reversing of policies that depress consumption and prevent real appreciation.
Democratic governments tend to accumulate excessive debt. This column proposes a new rule – the ‘Catenarian Fiscal Discipline’ – which allows a fiscally disciplined incumbent to limit the debt-making of the next officeholder. This way, fiscal discipline today can lead to fiscal discipline in the future. Such a rule would require that we broaden our notion of representative democracy by recognising the fact that a current government already has various implicit ways of limiting what its elected successors can do.
Vox has launched a new tab – JMP Vox – that features short Vox columns written by PhD candidates on their Job Market Papers. The main goal is to provide a platform for excellent research that will not appear in journals or major discussion paper series for years. It is also a means for established economists to more easily track the research of the youngest members of the profession.
During the past few decades, immigration in Ireland has been steadily increasing. This column discusses how this change affects public attitudes towards immigration, and the factors that influence these attitudes. Not surprisingly, the recent economic crisis has had a negative impact on the perception towards immigration. At the same time, the Irish are becoming more tolerant towards people from very different backgrounds.
The Eurozone crisis exposed weaknesses in the Eurozone’s design. This column – by Nobelist Joe Stiglitz and World Bank Chief Economist Kaushik Basu – argues that the Eurozone’s financial architecture can be improved by amending the Treaty of Lisbon to permit appropriately structured cross-country liability for sovereign debt incurred by EZ members.