The European Parliament recently adopted the Single Resolution Mechanism. Though supposed to be a pillar of the European banking union, it is fraught with difficulties. This column makes a proposal for a new organisational structure that can deal with bank failure more effectively. European banks should be required to self-insure against failure. Further, the ECB should be the only financially credible player to provide liquidity for the resolution procedure. These proposals would strengthen the current banking union project, and can overcome certain political difficulties.
Awareness of inequality is rapidly rising. This column argues that commentators should focus on identifying the policies that are best suited to improving income distributions efficiently, and the politicians that support them. It is not sufficient to sound the alarm about inequality and the political reach of the super-rich.
The IMF has had a preferred creditor status throughout the history of its lending. This implies that borrowing countries are expected to give priority to meeting their obligations to the IMF over other creditors. This column reviews the onset of this preferred status, its purpose, and the way it changed after the recent Eurozone crisis. By lending €30 billion to Greece in 2010, the IMF introduced the option to permanently waive the requirement that a borrowing country is on the path to stability. This option increases the chance of moral hazard and undermines the strong framework for the preferred creditor status.
Long-term unemployment in the UK increased substantially after the recent recession. Many policy interventions have attempted to address this problem. The UK’s long-term unemployed face tougher requirements in return for their benefits – community work, training programmes, or daily visits to the Jobcentre. This column tries to assess the likely success of the UK government’s strategy by surveying the effectiveness of the ‘sticks’ and ‘carrots’ of active labour market policies.
Nauro Campos talks to Viv Davies about his recent research with Fabrizio Coricelli and Luigi Moretti that, using data from the various enlargements since the 1970s, yields new results about the benefits that both rich and relatively poor countries, with the exception of Greece, have derived from becoming EU members. Campos estimates the gain in per capita GDP to be approximately 12%. The interview was recorded on 10 April 2014.
The concept of environmental capital is throughly entrenched in policy dicussions but largely missing from mainstream economic curriculums. This column argues environmental externalities, climate change, and constraints on natural resources will constantly and deeply affect humankind’s future. The teaching of economics, especially growth economics, should stop ignoring them.
In reaction to the Crimean crisis, the EU imposed certain sanctions on Russia. Russia responded by blacklisting EU and US officials. This column discusses the comparative vulnerability of the EU and Russia amid this tit for tat pattern. In purely economic terms, the EU is in a much better position than Russia. However, political regimes also matter. The autocracy score for Russia dampens the impact that the economic sanctions would have politically. The democratic nature of the European governments would translate the sanctions imposed by Russia into great political pressure for the EU. This makes the Russian tit for tat threat realistic.
The IPCC’s Fifth Assessment Report estimates lower costs of climate change and higher costs of abatement than the Stern Review. However, current UN negotiations focus on stabilising atmospheric concentrations of greenhouse gases at even lower levels than recommended by Stern. This column argues that, given realistic estimates of the rate at which people discount the future, the UN’s target is probably too stringent. Moreover, since real-world climate policy is far from the ideal of a uniform carbon price, the costs of emission reduction are likely to be much higher than the IPCC’s estimates.
The importance of innovation activities for productivity growth has long been recognised. However, there are significant differences in the level of intangible investments across developed economies. This column describes how the EU can enhance its productivity growth and close the gap with the US. One such main channel is through investing in intangible assets and absorptive capacity. A second one is increasing production efficiency. Relevant policy recommendations are also discussed.
Most developing countries have made a great effort to eradicate illiteracy. As a result, the inequality in the distribution of education has been reduced by more than half from 1950 to 2010. However, inequality in the distribution of income has hardly changed. This column presents evidence from a new dataset on human capital inequality. The authors find that increasing returns to education, globalisation, and skill-biased technological change can explain why the fall in human capital inequality has not been sufficient to reduce income inequality.
Migration from new member states to richer countries within the EU has raised concerns that immigrants tend to abuse the welfare state. This column argues that this is not the case, and suggests the construction of a mobility assistance scheme. This scheme should be financed by the EU itself, and it would allow immigrants to receive welfare benefits in the country they have paid taxes. Such a program would not hamper mobility or distort the incentives of immigrants. It would also have important political side effects.
Since capital flows to and from hedge funds are strongly related to past performance, an exogenous liquidity shock can trigger a vicious cycle of outflows and declining performance. Therefore, ‘noise’ trades – usually thought of as erratic – may in fact be persistent. Based on recent research, this column argues that there can be multiple equilibria with different levels of liquidity and informational efficiency, and that the high-information equilibrium can under certain conditions be unstable. The model provides a lens through which to interpret the ‘Quant Meltdown’ of August 2007 and the recent financial crisis.
A recent literature shows that access to formal savings devices improves entrepreneurial outcomes in developing economies. This column presents research comparing the effect of saving in formal accounts with alternative, less formal measures. Findings suggest that entrepreneurs use formal saving to insulate themselves from household consumption commitments.
Research supervision, unlike the quality of academic research, is rarely assessed. This column proposes an index that quantifies the quality of research supervision. It shows that, on average, good researchers make good supervisors. However, many excellent researchers do not excel at supervision, and many not well-published researchers make good supervisors. Such an index could be an additional motivational factor for academics.
Italy’s labour market productivity has been stagnating in the past decade despite numerous reforms. This column gives an explanation why this is so. By focusing exclusively on flexibility, past labour market reforms have completely neglected incentives. There is severe allocative malfunctioning in the Italian labour market. Wages do not reflect sector productivity in the short run, while in the long run they rise in sectors in which productivity falls. Thus, a comprehensive reform of the collective bargaining system is crucial.
Stijn Claessens talks to Viv Davies about the recent IMF book titled 'Global Crises: Causes, Consequences and Policy Responses', co-edited with M Ayhan Kose, Luc Laeven, and Fabian Valencia. The book provides a comprehensive overview of current research into financial crises and the policy lessons learned. They discuss crisis prevention and management, and the crisis in the Eurozone. The interview was recorded in April 2014.
Household deleveraging in the US has impeded consumption and market activity in recent years, holding back the recovery. Despite substantial progress in balance sheet repair, a key question is whether deleveraging has ended or whether further adjustment is needed. This column presents time-varying equilibrium estimates of the household debt-to-income ratio determined by economic fundamentals. Taking into account the latest available data, the estimates suggest that the household deleveraging process may have ended at the end of 2013.
In retrospect, it is striking that the sovereign bond spreads of peripheral Eurozone countries surged while the economic conditions were gradually deteriorating. This column provides a new explanation for this phenomenon. It suggests that the markets in credit default swap indices have exacerbated shocks to economic fundamentals. The same change in fundamentals had a higher impact on the spread during the crisis period than it had previously.
One common measure of trade linked international production networks is the so-called VAX ratio, i.e. the ratio of value-added exports to gross exports. This column argues that this measure is not well-behaved at the sector, bilateral, or bilateral sector level, and does not capture important features of international production sharing. A new gross trade accounting framework is proposed that can better track countries’ movements up and down global value chains.
The secular stagnation hypothesis is back. Several prominent economists claim that the US may have entered a prolonged period of anaemic economic growth caused by weak aggregate demand. This column argues that the build-up of trade deficits caused by the appreciation of the dollar can explain most of the decline in manufacturing employment, output and investment in the US. Aggressive monetary policy targeted at increasing inflation could help by effectively taxing the inflow of foreign reserves, thereby leading to a depreciation of the dollar.
The causes and consequences of rising inequality have stirred a lively debate on appropriate policy responses. This column reviews how governments have successfully used fiscal policy to address distributive concerns. It also examines the policy alternatives that countries can pursue in order to reduce income and wealth inequality at a minimum cost to efficiency. Such policies include exploitation of property taxes, reductions in tax deductions that favour upper-income groups, investing in increasing the human capital of low-income groups, and reforming social benefits.
Forecasters have a poor reputation for predicting recessions. This column quantifies their ability to do so, and explores several reasons why both official and private forecasters may fail to call a recession before it happens.
Fears that the financial crisis will have a significant negative impact on long-term UK economic growth are unfounded, according to a majority of the UK macroeconomics profession surveyed by the Centre for Macroeconomics (CFM). What’s more, the inaugural CFM survey, summarised in this column, indicates some optimism about the UK’s immediate capacity for higher growth: while roughly half of the respondents share the views of the Office of Budget Responsibility, the other half is substantially more optimistic about the capacity for the economy to recover.
Discussions of global value chains (GVCs) have permeated international organisations’ research and policy agendas. This column presents a critical view on some of the recent policy recommendations that urge for as much liberalisation of trade in goods and services as possible. These proposals cannot be automatically applied to developing countries without some type of government intervention.
Human behaviour in times of financial crises is difficult to understand, but critical to policymaking. This column discusses new evidence showing that personal experience in financial markets can dramatically change risk tolerance. A cleanly identified historical episode demonstrates that even without losses, negative shocks not only modify risk appetite, but can also create ‘leverage cycles’. These, in turn, have the potential to make markets extremely fragile. Remarkably, those who witnessed this episode but were not directly threatened by it, did not change their own behaviour. Thus, personal experience can be a powerful determinant of investors’ actions and can eventually affect aggregate instability.
Some view the improvements in current accounts for Greece, Italy, Portugal, and Spain as short-lived – the result of a temporary compression of import demand that is likely to be reversed as the recession eases. This column argues the contrary, based on the fact that their improving trade balances reflect better export performance. This development points toward a fundamental stabilisation of the competitiveness of these economies.
Geoff Mulgan talks to Romesh Vaitilingam about his recent book, 'The Locust and the Bee: Predators and Creators in Capitalism's Future'. Mulgan suggests that the economic crisis was a dramatic reminder that capitalism can both produce and destroy, but that it also provides a historic opportunity to choose a radically different future for capitalism - one that maximizes its creative power yet minimizes its destructive force. They discuss the importance of social innovation and the creative economy. The interview was recorded in May 2013.
Contagious bank runs are an important source of systemic risk. However, with observational data it is near-impossible to disentangle the contagion of bank runs from other potential causes of correlated deposit withdrawals across banks. This column discusses an experimental investigation of the mechanisms behind contagion. The authors find that panic-based deposit withdrawals can be strongly contagious across banks, but only if depositors know that the banks are economically related.
In the wake of the recent crisis, the debate about the economic benefits from EU membership has intensified. This column presents new results about the benefits countries derive from becoming EU members, using data from the 1980s and 2004 enlargements. There are substantial positive pay-offs, with a gain in per capita GDP of approximately 12%. Despite differences across countries, the evidence shows that the benefits of EU membership outweighed the costs for most countries – except for Greece. An important research question would be to identify factors that allow countries to better exploit EU entry.
The ‘deadly embrace’ between banks and their government has strengthened with the EZ Crisis. This column argues that this has mostly been consequence rather than a cause of the Crisis. Moreover, adverse bank-sovereign negative feedback depends on the economy-wide effects of the sovereign risk, not just the banks’ direct exposure. Loosening the embrace requires sound public finances and well-capitalized, well-supervised banks – including the banking union project.
Measures of economic freedom provide useful cross-country comparisons, but lack the time dimension to track intertemporal progress. This column presents a new measure and extends it back in time to tell a history of economic freedom over the course of the twentieth century.
The growth of international trade in intermediate inputs means that standard trade statistics can give a misleading picture of the real patterns of production behind world trade. This column introduces an accounting framework that decomposes traditional trade flows into components that better reflect the underlying location of the value addition linked to exports.
The impact of tighter regulatory capital requirements during an economic upswing is a key question in macroprudential policy. This column discusses research suggesting that an increase of 15 basis points in aggregate capital ratios of banks operating in the UK is associated with a median reduction of around 1.4% in the level of lending after 16 quarters. The impact on quarterly GDP growth is statistically insignificant, a result that is consistent with firms substituting away from bank credit and towards that supplied via bond markets.
Recent growth in trade has decelerated significantly since its sharp recovery in 2010. This column discusses the role of global value chains in international trade and their contribution to the trade slowdown. Trade in complex products organised by global value chains, in particular motor vehicles, has been more sensitive to global downturn than has trade in simple products. Thus, either focusing on simpler products less dependent on global value chains, or diversifying the export folios, could be useful in reducing the risk of a slowdown in global merchandise.
Inadequate disclosure by banks increased funding costs and contributed to the recent crisis. This column presents quantitative indices to measure progress of disclosure between banks and over time. Internationally, disclosure has improved since 2000. However, more information alone is not sufficient to solve the problem. More needs to be done to ensure that the information provided is useful to investors, and that investors are incentivised to use this information. The ongoing reform agenda aims to address this.
Gregory Clark talks to Viv Davies about his new book titled "The Son Also Rises: Surnames and the History of Social Mobility". Using surname data from eight countries, the study concludes that fate and social status is determined by ancestry and that social mobility rates are lower than conventionally estimated, they do not vary across societies and are resistant to social policies. Effectively, capitalism has not led to pervasive, rapid mobility. The interview was recorded in London in March 2014.
In 2013, policymakers began discussing when and how to ‘taper’ the Federal Reserve’s quantitative easing policy. This column presents evidence on the effect of Fed officials’ public statements on emerging-market financial conditions. Statements by Chairman Bernanke had a large effect on asset prices, whereas the market largely ignored statements by Fed Presidents. Emerging markets with stronger fundamentals experienced larger stock-market declines, larger increases in credit default swap spreads, and larger currency depreciations than countries with weaker fundamentals.
When the law of one price is violated it can be difficult to determine a product’s contribution to the CPI. Does a low price competitor discount also on quality, or are market frictions at play? This column examines key product characteristics to separately identify these effects. Chinese firms discount both on price and quality, while Taiwanese firms use their productivity advantage to dynamically take advantage of market frictions.
In a world of volatile capital flows, emerging markets are increasingly resorting to managing their exchange rates. But does this strategy increase their susceptibility to crisis? This column argues that while intermediate regimes as a class are the most susceptible to crises, ‘managed floats’ – a subclass within such regimes – behave much more like pure floats, with significantly lower risks and fewer crises. ‘Managed floating’, however, is a nebulous concept; a characterisation of more crisis prone regimes suggests that it is not the degree of exchange rate management alone, but the way the exchange rate is managed, that matters. Greater against-the-wind intervention by the central bank to prevent currency overvaluation reduces, while greater intervention to defend an overvalued currency raises, the crisis likelihood.
In recent years credit growth in Latin America has been very strong, and countries have become more reliant on foreign bond issuances. This column argues that these phenomena are linked, and may have led to vulnerabilities which domestic and international supervisors are not well-equipped to assess. There is no systematic information on firms’ currency mismatches and hedging activities, and none that includes those of subsidiaries that may be located in other jurisdictions, preventing an accurate analysis of the true risks.
The EZ debt overhang needs to be fixed. This column argues that making market discipline credible requires an orderly debt restructuring mechanism combined with a strictly regulated temporary mutualisation scheme or a well-designed debt conversion scheme. This combination could reduce the current debt overhang in an orderly fashion and cement strong incentives against over-borrowing in the future.
The recent financial crisis was followed by discussions about that went wrong in the securitisation markets. This column describes some empirical work in the area of informational problems in the securitisation markets. In particular, it examines the tranche structure of deals in the private-label residential mortgage-backed securities (RMBS) markets. The role the equity tranche played in mitigating the information problems in the period up to the crisis is discussed. A larger equity tranche is related to superior ex-post default performance, as predicted by some models of contracting under asymmetric information.
The Bali agreement last December has given new hope that the WTO is not dead. The recent announcement that negotiations on the reductions of tariffs on environmental goods are to resume gives hope that the triple-win outcome of the Doha round – for trade, for development and for the environment – might materialise, at least partly. Or does it? This column argues that unless the field of negotiations is widened, the initiative will not help much.