Greece needs debt reduction. This column argues that instead of offering another lengthening of maturities and reduction in interest rates, Eurozone leaders should seize the occasion and implement debt-for-equity swaps that would encourage foreign investment, speed privatisation and jumpstart the Greek economy.
Europe aims to implement Liquidity Coverage Ratio regulation by the end of 2014. This column discusses recent evidence on its impact. It finds that EU banks have not adjusted by reducing lending to the real economy, to SMEs, or to trade finance. Despite this adjustment, substantial liquidity risk exposure remains. Overall, the benefits of the LCR outweigh the costs by far.
At the peak of the Global Crisis, the US dollar appreciated and US Treasury yields fell, suggesting that foreign investors were purchasing US assets in general. Actually, they were fleeing only into short-term Treasury bills. This column discusses recent research showing that there are indeed no securities which are consistently a safe haven across different crisis episodes – not even US assets. However, a peculiarity of the US securities is that foreign investors do not necessarily ‘run for the exit’, even when a crisis has its epicentre in the US.
Market-based mechanisms such as cap-and-trade can tackle externality problems more efficiently than command-and-control regulations. However, politicians in the US and Europe have retreated from cap-and-trade in recent years. This column draws a parallel between Republicans’ abandonment of market-based environmental regulation and their recent disavowal of mandatory health insurance. The author argues that in practice, the alternative to market-based regulation is not an absence of regulation, but rather the return of inefficient mandates and subsidies.
How many people are poor worldwide? This column explains that the answer depends on whether one uses survey of national-accounts data to anchor country distributions of income. It then argues that night-time lights suggest that national accounts offer a better estimate. Developing world poverty may be as low as 4.5% in 2010, much lower than the path constructed by surveys.
Ukraine’s ‘February Revolution’ is threatened by the nation’s dire economic straits. The column discusses short- and long-term changes that are necessary to get the nation through this crisis and back on the track to stability.
Who wields supreme power over the ECB? This column analyses the recent ruling by the German Constitutional Court that the ECB cannot act as lender of last resort. Although seemingly couched by the referral of this decision to the European Court of Justice, this is a bid for power and the return to the pre-crisis paradigm of ‘ultra posse nemo obligatur’.
Political connections affect economic outcomes in emerging markets. This column discusses new evidence showing that something similar goes on in the US. Over the ten trading days following the announcement of Timothy Geithner as Treasury Secretary, financial firms with a connection to Geithner experienced a cumulative abnormal return of about 12% relative to other financial sector firms. This reversed when his nomination ran into trouble due to unexpected tax issues.
The economic literature has paid scarce attention to the tens of millions of people who are displaced by conflict or forcibly relocated. This column analyses outcomes for 12 million Germans relocated from central and eastern Europe following the second world war. Labour-market outcomes were generally negative, but positive for women relocated from rural areas. Interestingly, children of migrants made greater educational investments than their native counterparts.
The strong rebound of manufacturing production following the Great Recession of 2008–09 has generated renewed interest in the sector among analysts and policymakers. This column argues that a detailed look at the data suggests that claims of a US manufacturing renaissance are unwarranted. Yet, there remain factors that could support a greater contribution from the manufacturing sector to overall US growth in the years ahead.
The financial crisis showed that European banks were much more fragile than expected. This column discusses some of the changes implemented by banks since the crisis. Overall, their responses have been minor. Currently, most banks remain highly leveraged, yet yielding low returns. Redressing this could require a reduction of non-core assets and/or a slashing of operating costs. Ultimately, something has to give. European banks have yet to reach a post-crisis equilibrium.
How Americans form and dissolve families has changed dramatically since 1950. One of these changes has been an increase in assortative mating, i.e. how likely a person is to marry someone of similar educational background. This column argues that since education is an important determinant of income, these patterns of matching have had an important impact on the economy's distribution of income.
A popular view among economic commentators is that rich countries face a serious risk of deflation, and should adopt aggressive macroeconomic stimulus policies to ward it off. This column argues that despite similar headline inflation rates, the US, Europe, and Japan in fact face very different macroeconomic conditions. In the US, much of the recent disinflation is attributable to positive supply-side developments. In Europe, an aggressive round of quantitative easing might encourage policymakers to delay the reforms that are necessary to avoid a prolonged Japanese-style malaise.
Despite substantial integration, national borders still provide a large obstacle to trade in Europe. This column shows that much of these ‘iceberg costs’ can be attributed to underdeveloped infrastructure, namely roads. Improving international roadways to the level of national ones could substantially raise gains to trade.
There is growing evidence that adverse infant health can have lasting effects on human capital formation and economic outcomes in adulthood. Among others, the poor environmental conditions have been linked to increased infant mortality and poor health. This column looks at the long-run effects of early-life pollution exposure. Using the Clean Air Act enacted in 1970 as a policy experiment, the study finds an association between reduced pollution and labour-market outcomes 30 years later. Reduced-pollution increases labour-force participation rate for affected individuals, which translates into a 1% increase in annual earning for an average individual in a cohort.
Whereas the Millennium Development Goal of reducing extreme poverty by half was achieved by 2010, the global hunger rate has only fallen by a third since 1990. Differences in survey design may account for part of this discrepancy. This column presents the results of a recent experiment in which households were randomly assigned to different survey designs. These different designs yield vastly different hunger estimates, ranging from 19% to 68% of the population being hungry.
Criticism of Gross Domestic Product (GDP) as an indicator of the health of the economy has grown in recent years, in part because of a new focus on measures of subjective well-being or ‘happiness’. This column argues that the debate needs to distinguish between the different purposes of measurement: economic activity, social welfare, and sustainability are distinct concepts and cannot be captured by a single indicator. There are good arguments for paying less attention to GDP and more to indicators of welfare and sustainability, but it would be a mistake to adjust or replace GDP.
A new literature is trying to understand the economic effects of violent conflict through micro studies. This column argues that cooperation between the cross-country literature and micro studies is needed to better assess the economic costs of conflicts and hence inform policymakers on the benefits of a military or diplomatic intervention.
Vicky Pryce talks to Viv Davies about her recent book ‘Prisonomics: Behind bars in Britain’s failing prisons’, which analyses the economic and social costs and consequences of women in prison and women’s prisons in the UK. Pryce presents the case for penal reform and provides a number of policy recommendations. The interview was recorded in London in January 2014.
All firms need capital. Much research addresses the choice between issuing various types of securities – for example, between issuing debt and equity. However, another method of financing has received relatively little attention – selling non-core assets, such as property, divisions, or financial investments. This article explains the conditions under which an asset sale is the preferred means of raising capital, and highlights how a manager should go about deciding between selling assets and issuing securities.
The recent crisis revealed that lending by foreign banks can be more cyclical than that by domestic banks. This column presents research showing that bank ownership structure mattered, at least in the case of the UK. Foreign bank branches cut their lending more sharply than did foreign subsidiaries, thus, amplifying the domestic credit cycle. This finding suggests policymakers should pay close attention to risks that stem from foreign bank branches when they are ‘alive’, not only when they are ‘dead’ and pose an even greater financial instability.
Rich people typically lean right politically. Are they motivated by deeply moral views or self-interest? This column argues that money makes you right-wing. It shows that lottery winners in the UK are more likely to switch their allegiance from left to right.
Income inequality has been growing in many economies over the past two decades, and it is currently historically high. This column adds two new contributors to the popular explanations of increased inequality. Fiscal consolidations, especially those following the recent crisis, can increase inequality, mostly by affecting the long-term unemployment. A second source that leads to a persistent increase in inequality is capital account liberalisation. Therefore, the effects of these policies on inequality should be taken into account when deciding upon policy designs.
There is a strong link between entrepreneurship and growth – young firms were responsible for almost all net job creation in the US economy over the last 30 years. This column presents new research into the responsiveness of firms of different ages to investment opportunities. Firms aged 0–23 months create about twice the total number of new jobs in response to local income shocks than firms that are more than six years old.
Growth in Russia comes from few natural-resource-linked sectors and to a few firms; the economy is currently less diversified than it was during the Soviet times. This column presents evidence that the emergence of new firms is not the binding constraint on diversification: it is the poor survival odds of new firms, created by long, deep Russian economic slumps. More competition would help to drive out less efficient, older firms, and create space for young and efficient ones to survive and thrive.
The world has globalised massively yet some worry that academic publication has not. This column provides new evidence from 76,046 papers published during 1985-2004 in the top 202 economics journals. It shows that GDP per capita accounts for 75% of the variation in the country-focus of publications, suggesting the overrepresentation of the US is not an anomaly. Yet a closer look at top-five journals reveals a US bias that cannot be explained by data or researcher quality.
Remittances are one of the most important financial flows to developing countries – more than three times the level of official development assistance. This column presents recent research on remittance flows from Italy. Their limited volatility and countercyclical behaviour with respect to macroeconomic conditions in the recipient country help mitigate developing countries’ vulnerability to external shocks. Better access to financial services for migrants can foster remittance flows.
The investment decline in the UK that has followed after the recent crisis is hardly a surprise. What is baffling is that at the same time, corporate bond issuance has remained strong. This column discusses this puzzling pattern and provides possible explanations for it. Heterogeneity among companies is one possible argument, where firms with capital market access invest, and those without – do not. However, evidence from 2012 shows that investment across companies with capital fell as well. Thus, other factors – such as the increased financial uncertainty – could play a role in the investment decisions of companies.
Compared to coal and oil, shale gas offers the prospect of greater energy independence and lower emissions of carbon dioxide and other pollutants. However, fracking is controversial due to the local externalities it creates – particularly because of the potential for groundwater contamination. This column presents evidence on the size of these externalities from a recent study of house prices. The effect attributable to groundwater contamination risk varies from 10% to 22% of the value of the house, depending on its distance from the shale gas well.
Charles Wyplosz talks to Viv Davies about the recent Special Geneva Report, ‘The PADRE Plan: politically acceptable debt restructuring in the Eurozone’, co-authored with Pierre Pâris and published jointly by CEPR and ICMB. Wyplosz explains how debt restructuring can be managed in a safe way, why it would not have an inflationary effect and how moral hazard could be mitigated, if not eliminated. The interview was recorded in January 2014.
Employment in traditional middle-class jobs has fallen sharply over the last few decades. At the same time, middle-class wages have been stagnant. This column reviews recent research on job polarisation and presents a new study that explicitly links job polarisation with the changes in workers' wages. Job polarisation has a substantial negative effect on middle-skill workers.
There is an urgent need for job creation in Africa yet something seems to be stunting firm growth. This column shows that African firms are about 20% smaller than their counterparts in other locations. It suggests small firms put the brake on growth as the burden of dealing with government and labour costs may increase with size, or perhaps as they start facing trust issues between managers and workers.
Inequality is currently a prominent topic of debate in Western democracies. In democratic countries, we might expect rising inequality to be partially offset by an increase in political support for redistribution. This column argues that the relationship between democracy, redistribution, and inequality is more complicated than that. Elites in newly democratised countries may hold on to power in other ways, the liberalisation of occupational choice may increase inequality among previously excluded groups, and the middle classes may redistribute income away from the poor as well as the rich.
External imbalances within the Eurozone grew substantially between the introduction of the euro in 1999 and the global financial crisis of 2008–09. Using new empirical evidence, this column argues that imbalances in the Eurozone periphery were mainly driven by a domestic demand boom, triggered by greater financial integration, with changes in the periphery’s competitiveness playing only a minor role. Internal devaluation may thus have been of limited effectiveness in restoring external balances, although better external competitiveness may eventually boost medium-term growth.
Liquidity risks can be a primary source of bank failures. As such, there are arguments not to rely on a single metric for providing supervision. This column describes research on detailed cases of failed and near-failed institutions, which helps highlight gaps in current practices of liquidity stress testing. It also gives guidance on how to design liquidity stress tests. Deposit insurance coverage, the heterogeneity of lending commitments, distinction between different types of repos, committed facilities, and derivative transactions should receive increased attention when designing liquidity stress tests.
The euro has appreciated sharply since July 2012. This column introduces a CEPR Policy Insight which argues that the strong euro is not the result of a ‘currency war’. The Eurozone suffers from an overly restrictive monetary policy. The sooner the ECB adopts a more aggressive monetary stance, the sooner the recovery will take hold. Easier Eurozone monetary conditions will lead to a temporarily depreciated euro, which will support aggregate economic activity and help inflation stay close to 2%.
Ethnic favouritism is a longstanding problem in Africa. This column presents new evidence of this phenomenon and how democracy affects it. Data on road building in Kenya confirms strong ethnic favouritism that disappears during periods of democracy.
The Federal Reserve’s ‘taper talk’ in spring 2013 has been blamed for outflows of capital from emerging markets. This column argues that global growth prospects and uncertainty are more important drivers of emerging-market capital flows than US monetary policy. Although crises can affect very different countries simultaneously, over time investors begin to discriminate between countries according to their fundamentals. Domestic investors play an increasingly important – and potentially stabilising – role. During a financial crisis, ‘retrenchment’ by domestic investors can offset foreign investors’ withdrawals of capital.
The US is supposed to be the land of opportunity. This column presents evidence that is better thought of as the ‘lands of opportunity’. Economic mobility varies dramatically across US cities. Some have upward-income mobility comparable to the most mobile countries in the world. Others have rates below that of any developed country. These geographical differences are correlated with five factors: segregation, income inequality, local school quality, social capital, and family structure.
Greece’s austerity package included an unprecedented increase in the VAT rate, but the resulting increase in revenue was much lower than expected. This column links this disappointing result to the ‘transparency response’ of firms to higher tax rates. In countries like Greece with poor tax monitoring, firms face a tradeoff when deciding whether to declare their activity. Transparency is a necessary condition for accessing external finance, but it also means having to pay tax. Improving credit conditions for small and medium-size Greek firms might shift this tradeoff in favour of transparency.
In a slow-growth, high-unemployment continent, Germany’s performance stands out. The success is often ascribed to the politically difficult Hartz labour-market reforms. This column discusses evidence to the contrary. The Hartz reforms played no essential role. Rather, the key was the threat of offshoring to central Europe together with the pre-Hartz structure and autonomy of the German labour-market institutions. This structure allowed trade unions to make wage concessions necessary to adapt to the new realities. Other nations should decentralise bargaining to the firm level while keeping workers’ representatives.
Before the introduction of the euro, it was hoped that by promoting increased intra-regional trade it would increase business-cycle synchronisation within the Eurozone, and thus help it to fulfil the criteria for an optimum currency area. This column presents recent research that compares the evolution of business-cycle synchronisation in the Eurozone and east Asia. While the euro has had some impact on business-cycle synchronisation in the Eurozone, it has done so not through increased intra-regional trade intensity, but rather through some other channel – most likely financial integration.
The evidence about the effect of declined lending during the Great Recession on the employment is quite limited. This column presents new research on the problem focusing on the case of Spain. A large part of credit to non-financial firms before the crisis came from weak banks, which solvency was strongly eroded during the crisis. As a result, firms that relied heavily on loans from such weak banks displayed significantly higher employment reduction in comparison to similar, less exposed firms. The bulk of employment destruction was driven by firm closures, which carries higher economic costs than downsizing, and could potentially make the recession more protracted.