June 2014

Costa-i-Font, 30 June 2014, 17659 reads

Addicts may not respond to price incentives as we would expect. This problem, combined with the fear of disproportionally taxing the poor, makes it difficult to address the consumption externalities caused by addictive substances. This column reviews recent literature showing the efficacy of minimum pricing on alcohol, and the curious result that alcohol consumption now seems to be increasing in household income.

Bonnet, Bono, Chapelle, Wasmer, 30 June 2014, 41920 reads

Thomas Piketty’s claim that the ratio of capital to national income is approaching 19th-century levels has fuelled the debate over inequality. This column argues that Piketty’s claim rests on the recent increase in the price of housing. Other forms of capital are, relative to income, at much lower levels than they were a century ago. Moreover, it is rents – not house prices – that should matter for the dynamics of wealth inequality, and rents have been stable as a proportion of national income in many countries.

Kay, Murphy, O'Toole, Siedschlag, O'Connell, 29 June 2014, 19358 reads

Small and medium-size enterprises (SMEs) often report difficulties in obtaining external finance. Based on new research, this column argues that these difficulties are not due to greater financial risks associated with SMEs. Instead, they are the result of imperfections in the market for external finance that negatively affect smaller and younger enterprises. The same research has shown that these types of firms are also the most reliant on external finance to support their investment and growth.

Pessoa, Van Reenen, 28 June 2014, 21283 reads

The fall in productivity in the UK following the Great Recession was particularly bad, whereas the hit to jobs was less severe. This column discusses recent research exploring this puzzle. Although the mystery has not been fully solved, an important part of the explanation lies in the flexibility of wages combined with very low investment.

Bown, 27 June 2014, 15577 reads

Temporary trade barriers have become more than an important bellwether for contemporary protectionism; with persistent tariff levels, they are now a primary obstacle to free trade. The World Bank’s newly updated Temporary Trade Barriers Database suggests that the Great Recession-era increases in import protection may be levelling off. Now policymakers begin to face the daunting task of dismantling all of those temporary barriers they imposed during the early phase of the crisis.

Miller, Zhang, 26 June 2014, 19721 reads

Like banks, indebted governments can be vulnerable to self-fulfilling financial crises. This column applies this insight to the Eurozone sovereign debt crisis, and explains why the ECB’s Outright Monetary Transactions policy reduced sovereign bond spreads in the Eurozone.

Borio, Disyatat, 25 June 2014, 35962 reads

Real interest rates have fallen to historic lows, and some economists are concerned that an era of secular stagnation has begun. This column highlights the role of policy frameworks and financial factors – particularly debt – in linking low real interest rates and sluggish economic growth. Policies that do not lean against booms but ease aggressively and persistently in busts induce a downward bias in interest rates over time and an upward bias in debt levels – something akin to a debt trap. Low real interest rates may thus be self-reinforcing and not always ‘natural’.

Xafa, 25 June 2014, 33437 reads

The 2012 Greek debt restructuring was the largest one in the history of sovereign defaults. This column discusses the lessons from this historically unprecedented episode. Delaying the restructuring implied that externally held debt remained higher than it would have been otherwise. Supportive crisis management is necessary for smooth restructuring to take place in a currency union.

Bryson, Forth, Zhou, 24 June 2014, 13343 reads

Publicly traded companies are the engine behind China’s growth, which raises the question of how CEO compensation works under an interventionist state. This column presents an analysis of executive compensation in China and a comparison to the West. Chinese listed firms have incentive structures similar to those of the US; in this case, effective compensation policies seem to transcend political boundaries.

Buch, Chapman, Goldberg, 24 June 2014, 14897 reads

The international transmission of liquidity shocks is one of the key questions of banking globalisation. This column discusses a project of central bank researchers from around the world who have been exploring the role of global banks in the transmission of liquidity shocks. Using micro data from individual banks and applying common methodology are of individual interest. But more importantly, it allows us to detect common features of international bank and liquidity shock transmission.

Keeling, 23 June 2014, 32221 reads

When nations declared war in 1914, migration policies changed. This column describes some of these changes and how they affected later migration incentives and patterns. Before 1914, migration had been peaceful and driven by market incentives. Since 1914, it has been shaped by politically determined quotas, legal restrictions, and flights from wars and oppression.

Giordani, Ruta, Weisfeld, Zhu, 23 June 2014, 19755 reads

Capital controls may help countries limit large and volatile capital inflows, but they may also have spillover effects on other countries. This column discusses recent research showing that inflow restrictions have significant spillover effects as they deflect capital flows to countries with similar economic characteristics.

Cole, Cooley, 22 June 2014, 12216 reads

In the aftermath of the sub-prime crisis, the major credit rating agencies have been criticised for giving overly generous ratings to mortgage-backed securities. Whereas many commentators have blamed the ‘issuer pays’ market structure for distorting incentives, this column argues that the key distortion came from regulators’ use of private ratings to assign risk weights. This induced investors to focus on the risk weights attached to ratings rather than their information content, thus undermining the reputation mechanism that had previously kept ratings honest.

Giglio, Maggiori, Stroebel, 21 June 2014, 20597 reads

Long-run discount rates have big implications for fiscal and climate-change policies. This column estimates a discount rate for very long-run housing cash flows of 2.6%. This suggests that people are more willing than previously thought to invest today for the benefit of future generations, particularly if the benefits occur with certainty.

Hughes Hallett, 20 June 2014, 10825 reads

The UK and Scottish governments are engaged in a set of parallel and overlapping games in the economic and political arenas. This column presents research that analyses how decisions about whether to cooperate over financial regulation, fiscal rules, and the choice of currency and monetary policy, will all have far reaching implications for a newly independent Scotland and the rest of the UK.

Hansen, McMahon, Prat, 20 June 2014, 14222 reads

Central bank transparency is essential to democratic accountability. Central bankers often limit it – fearing its stifling effect on frank debate. Yet transparency may induce monetary policy committee members to be better prepared. This column discusses evidence showing that the ‘better prepared’ effect is important empirically. Exploiting a natural experiment in the Fed Open Market Committee in 1993 – and using computational linguistics tools to measure the impact of transparency on deliberation – the research shows that the net effect is a more informative deliberation process.

Weil, 20 June 2014, 12365 reads

The CEPR Business Cycle Dating Committee recently concluded that there is not yet enough evidence to call a business cycle trough in the Eurozone. Instead, the committee has announced a 'prolonged pause' in the recession. This Vox Talk discusses the possible directions that this situation could lead to and questions whether the Great Recession has harmed the Eurozone’s long-term growth prospects to the extent that meagre growth could become the 'new normal'.

Morikawa, 19 June 2014, 11249 reads

Headquarters play important strategic roles in modern companies, but downsizing of headquarters is often advocated as a cost-cutting measure. This column presents evidence from Japanese firm-level data that the size of headquarters is positively associated with firms’ overall productivity. Moreover, the benefits of ICT are greater for companies with relatively large headquarters. Downsizing headquarters to cut costs may thus be harmful for long-term company performance.

Sorsa, 18 June 2014, 27010 reads

Female labour market participation in India is lower than in other emerging markets. This column discusses the dynamics and causes of this issue. Many women have dropped out of the labour market in the recent years, or work in low-paying jobs without social benefits and with large wage differentials. Raising female labour force participation could boost economic growth up to 2.4% with a package of pro-growth and pro-women policies.

Hendry, Mizon, 18 June 2014, 69544 reads

Many central banks rely on dynamic stochastic general equilibrium models – known as DSGEs to cognoscenti. This column – which is more technical than most Vox columns – argues that the models’ mathematical basis fails when crises shift the underlying distributions of shocks. Specifically, the linchpin ‘law of iterated expectations’ fails, so economic analyses involving conditional expectations and inter-temporal derivations also fail. Like a fire station that automatically burns down whenever a big fire starts, DSGEs become unreliable when they are most needed.

CEPR Business Cycle Dating Committee, 17 June 2014, 22748 reads

The simplest business cycle dating algorithm declares recessions over after two consecutive quarters of positive GDP growth. By that metric, the Eurozone recession has been over since 2013Q1. This column argues that growth and improvements in the labour market have been so anaemic that it is too early to call the end of the Eurozone recession. Indeed, if this is what an expansion looks like, then the state of the Eurozone economy might be even worse than economists feared.

Parker, 17 June 2014, 17154 reads

Governments around the world are searching for macro-stimulation instruments. This column discusses evidence showing that rebate-type payments policies generate substantial increases in demand for goods and services. In particular, a large portion of tax rebates are spent rapidly on arrival.

Giavazzi, Petkov, Schiantarelli, 16 June 2014, 15204 reads

The persistence of cultural attitudes is an important determinant of the success of institutional reforms, and of the impact of immigration on a country’s culture. This column presents evidence from a study of European immigrants to the US. Some cultural traits – such as deep religious values – are highly persistent, whereas others – such as attitudes towards cooperation and redistribution – change more quickly. Many cultural attitudes evolve significantly between the second and fourth generations, and the persistence of different attitudes varies across countries of origin.

Davis, Hausman, 16 June 2014, 13787 reads

Estimating the economic value of energy transmission is difficult because investments in transmission capacity are endogenous to market conditions. This column presents recent research that takes advantage of a natural experiment to generate a credible counterfactual. The unexpected closure of the San Onofre Nuclear Generating Station in California increased generation costs by $350 million per year; it also led to increased carbon emissions worth $320 million annually.

Teulings, 15 June 2014, 33523 reads

Income inequality has increased worldwide in recent years. This column discusses the role of technological progress, globalisation, and the liberalisation of labour-market institutions in this growing inequality. The liberalisation of labour market institutions has made labour markets more flexible and created many jobs. But beyond a certain point, the net effect of further liberalisation might be negative for society.

Gylfason, Martínez-Zarzoso, Wijkman, 14 June 2014, 10515 reads

The Ukraine saw EU soft power met by Russian hard power. This column argues that the EU should counter this hard power using trade policy, among other policies. EU members should agree a common policy and seek support from others to execute this policy. To date, the EU’s response has been too little, too late.

Gereffi , Luo, 14 June 2014, 17695 reads

The explosion of trade in intermediate goods has created new development opportunities, but many of the jobs at the bottom of global value chains are low-paid, insecure, and dangerous. This column argues that participation in global value chains brings risks as well as opportunities. The gains from ‘moving up the global value chain’ are not equally distributed – large, professional, high-tech firms with diversified export markets, and high-skilled workers with formalised contracts benefit the most.

Stroebel, Maggiori, Giglio, 14 June 2014, 18413 reads

The existence of house-price bubbles and market efficiency are among the fundamental debates in finance, especially popular in current years. This column describes a recent test of one of the prominent models of bubbles, exploiting a unique feature of the housing markets in the UK and in Singapore. The results show that no infinitely lived bubble was present in these markets.

Doran, Borjas, 13 June 2014, 10312 reads

Research so far has been inconclusive about the effect of losing and gaining productive peers on one’s own output. This column defines peers in three distinct ways and checks which types of peers matter, focusing on mathematicians shortly after the collapse of the Soviet Union. Losing intellectual competitors results in an increase in one’s output, whereas losing collaborators reduces it. Competition for resources and positive spillovers from high-quality peers are simultaneously at force, explaining the divergent findings in the peer effects literature.

Campos, 13 June 2014, 11579 reads

The 2014 FIFA World Cup is upon us. This column argues that there will be plenty of partying, but also plenty of protests fuelled by the gross mismanagement and limited economic benefits from hosting the Cup. Stadia may be ready, but much planned infrastructure has already been abandoned. Indeed, rent-seeking may be one reason nations bid for the Cup. Since the returns to transportation infrastructure are higher in poor countries, the international community should work to stamp out corruption so that poor countries can continue to host mega-events like the World Cup.

Vegh, Vuletin, 12 June 2014, 21094 reads

The question of whether fiscal policy should be pro- or countercyclical has become increasingly relevant during the recession. This column provides causal evidence from South American countries showing the success of countercyclical policy in improving social indicators of economic success, combined with correlative evidence from Europe. This represents a strike against the case for austerity-led growth.

Gans, 11 June 2014, 17579 reads

Netflix recently agreed to pay Comcast for faster access to Comcast’s customers, intensifying the debate over ‘net neutrality’ – the principle that internet service providers should treat all data equally. This column argues that without net neutrality regulation, ISPs can capture the benefits of higher-quality content, thereby discouraging innovation from content providers. To be effective, net-neutrality regulation must prevent content-based price discrimination on both sides of the market.

Levy Yeyati, Pienknagura, 10 June 2014, 17702 reads

Latin America’s inequality has fallen, driven by a reduction in the educational wage premium. This column discusses potential driving forces behind this phenomenon and argues that while this is a positive outcome, it may reflect a deeper malaise. A preliminary evaluation suggests that supply changes are more important than de-industrialisation. But lacklustre PISA scores support a more dismal hypothesis. The premium decrease may mirror a decline in education quality.

Weale, Wieladek, 10 June 2014, 22359 reads

After reducing their policy rates close to zero in response to the global financial crisis, the Bank of England and the Federal Reserve began purchasing assets. This column assesses the effect of these asset purchases on output and inflation. In line with previous studies, the authors find that asset purchase announcements are associated with increases in both output and inflation in both countries. They also find that quantitative easing had a larger impact on UK inflation, which suggests that the UK Phillips curve is steeper.

Menon, 09 June 2014, 12769 reads

With the rise of mega-regional trade agreements, the world trade system resembles a jigsaw puzzle. This column discusses the difficulties involved in consolidating free trade agreements at the regional level, and argues that piecing together the blocs around the world will be even more challenging. A potential way forward is to return to the most widely used modality of trade liberalisation – unilateral actions – but this time involving the multilateralisation of preferences rather than unreciprocated reductions in tariff rates.

Coyle, 09 June 2014, 12550 reads

As a measure of economic activity, GDP is imperfect, but no more so than any single indicator of the whole economy. Yet public policy debate about the economy is often focused on GDP growth to the exclusion of other important considerations. This Vox Talk argues the case for a ‘dashboard’ of alternative indicators that, in addition to measuring economic activity, could also capture social welfare, sustainability and the benefits of innovation.

Cerutti, Claessens, Ratnovski, 08 June 2014, 20648 reads

‘Global liquidity’ is often used to describe the impact of low US and EZ interest rates on the rest of the world. The concept is critical for understanding the global financial cycle and international spillovers. This column defines global liquidity as the ease of financing in cross-border markets and points to its potential drivers. To limit their exposures to global liquidity fluctuations nations can embrace better macro policy frameworks, consider capital flow management tools, and more stringently regulate and supervise banks.

Danielsson, James, Valenzuela, Zer, 08 June 2014, 25070 reads

Risk forecasting is central to financial regulations, risk management, and macroprudential policy. This column raises concerns about the reliance on risk forecasting, since risk forecast models have high levels of model risk – especially when the models are needed the most, during crises. Policymakers should be wary of relying solely on such models. Formal model-risk analysis should be a part of the regulatory design process.

Hatton, 07 June 2014, 13399 reads

In the recent European Parliament elections, right-wing populist parties made significant gains. Commentators have linked the rise of these parties to growing anti-immigration sentiment in the wake of the crisis. This column examines the extent to which public opinion has in fact shifted against immigration. Survey data shows that there was no Europe-wide surge in anti-immigration opinion between 2006 and 2010, although there was a marked change in Spain, Greece, and Ireland. This suggests that populist parties’ success cannot be attributed to anti-immigration sentiment alone.

Armstrong, Caselli, Chadha, den Haan, 07 June 2014, 21366 reads

Would Scotland be better off in economic terms as an independent country? Not according to an overwhelming majority of respondents to the third monthly survey of the Centre for Macroeconomics (CFM), summarised in this column. As the Scottish electorate prepares to vote on independence in September, a smaller majority of the CFM experts agree that the UK would be acting in its own economic interests by ruling out a monetary union with an independent Scotland.

Azmat, Petrongolo, 07 June 2014, 24900 reads

There are considerable gender differences in pay and employment levels, and in the type of labour-market activities. This column reviews experimental studies that address different aspects of these problems. Three channels are explored: gender discrimination on the labour market, differences in individual and group preferences, and productivity. Despite recent experimental advances, gender differences in labour-market success have only been partially explained.

Murphy, Vasios, Vause, 06 June 2014, 12720 reads

Initial margin models are often procyclical, raising margin requirements at times of market stress, which can exacerbate that stress. This column proposes quantitative measures of procyclicality both over the cycle and over liquidity planning horizons. If market participants disclosed these procyclicality measures of their margin models, this could help counterparties to anticipate potential increases in margin requirements, and to prepare accordingly.

Gibson, 06 June 2014, 27778 reads

Common understanding among academic economists is that ‘top five’ publications are qualitatively more valuable than lesser ones. This column presents recent research showing the effect of top publications (versus others) on salaries in the University of California system. Publications in prestigious journals have similar effects on salaries compared to other publications, with one notable exception.

Micossi, 05 June 2014, 21658 reads

The European banking union is in pressing need of a unified banking resolution mechanism, but public bail-in has become increasingly unpopular. This column details new legislation towards a single resolution mechanism in the EU that minimises public exposure. The shareholders of an insolvent bank will be the first to take the hit, followed by creditors, before the public. This has the advantage also of mitigating moral hazard.

Eichengreen, Rose, 05 June 2014, 28966 reads

Since the global financial crisis of 2008–2009, opposition to the use of capital controls has weakened, and some economists have advocated their use as a macroprudential policy instrument. This column shows that capital controls have rarely been used in this way in the past. Rather than moving with short-term macroeconomic variables, capital controls have tended to vary with financial, political, and institutional development. This may be because governments have other macroeconomic policy instruments at their disposal, or because suddenly imposing capital controls would send a bad signal.

Temin, 04 June 2014, 22858 reads

Increasing the interaction between economic history and development could benefit both subfields. This column points how some recent insights from economic history can be relevant for development. The Black Death led to an improvement in agricultural technology, changed the status of women, and increased wages. This process helped the Industrial Revolution, but the technology boom was not profitable in low-income countries. These findings suggest an underlying problem of development could be the demographic patterns that keep wages low.

Buti, Mohl, 04 June 2014, 19854 reads

Investment in the Eurozone is forecast to remain below trend until 2015, with a particularly large shortfall in the periphery. Low investment reduces aggregate demand, thus lowering short-term growth, and it also hampers medium-term growth through its effect on the capital stock. This column highlights three causes of low Eurozone investment – reduced public investment, financial fragmentation, and heightened uncertainty – and proposes a series of remedies.

Brunnermeier, Sannikov, 03 June 2014, 17697 reads

Eurozone monetary policy transmission is broken. A key aspect of this is the failure of credit to get to small and medium enterprises, and consumers. This column uses the ‘I theory of money’ to diagnosis the problem and propose ‘prudently designed’ asset-backed securitisation as the cure. This would transform illiquid SME and consumer loans into a liquid asset class that would broaden the transmission mechanism while providing a lasting intermediation market for this segment in the Eurozone.

Harrison, 03 June 2014, 74164 reads

The Great War offers lessons for today. But this column argues from recent research that many so-called lessons are misunderstood. Secretive, authoritarian regimes become dangerous when they fear the future. Deterrence matters. Other aspects also demand re-evaluation.

di Mauro, Pappadà, 02 June 2014, 15682 reads

Trade imbalances in the Eurozone require relative price adjustments. This column argues that the traditional ‘elasticity’ approach is lacking when thinking about the adjustment magnitude. Exports adjust when exporting firms sell more (intensive margin) and new firms start exporting (extensive margin). The extensive-margin reaction depends upon the fatness of firm-level productivity distributions. Surplus-country distributions have fatter tails than deficit countries, suggesting that the price adjustment magnitude may be larger than traditional calculations suggest.

Krusell, Smith, 01 June 2014, 86352 reads

Thomas Piketty’s new book has been widely praised for its empirical contribution, but his prediction of rising inequality rests on economic theory. This column argues that Piketty’s pessimistic forecast is based on an extreme – and unrealistic – assumption about households’ saving behaviour. According to standard theory, the wealth–income ratio would increase only modestly as growth falls, so declining growth would not be a powerful force for generating high inequality.

Beaudry, Galizia, Portier, 01 June 2014, 30607 reads

Hayek viewed recessions as working out excessive investments; Keynes viewed them as demand shortages. This column argues that they may not be as mutually exclusive as many think. Recessions may reflect periods of liquidation but this may be associated with inefficient adjustment involving unemployment and precautionary savings. Stimulative policy may be desirable even if it delays the full recovery.

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