In the wake of the crisis, forward guidance has become a prominent tool of monetary policy. This column argues that central banks should go a step further, communicating to the public the internal policy debate that goes into monetary policy formation – especially regarding uncertainty. Since policy is determined contingent on a range of possible outcomes, forward guidance would become more effective by explicitly communicating how policy would respond along this uncertain path.
Switzerland has had consistently low tax rates and a remarkably stable income distribution, although in the last 20 years the share of top incomes has risen. This column documents that the top 0.01%’s share doubled, meaning Switzerland is similar to European countries in terms of the top 1%’s income share, but closer to the US for higher top incomes. Labour incomes have grown in importance among top income earners. At the same time, however, top incomes have exhibited large and possibly increasing variations over the business cycle.
Some argue that growth across Africa is fundamentally a result of rising commodity prices and that if these prices were to collapse, so too would Africa’s growth rates. This column documents substantial shifts in the occupational structure of most African economies between 2000 and 2010 and thus provides a good reason for cautious optimism about the continent’s economic progress.
In the aftermath of the financial crisis, governments have been reducing their potential exposures to the banking system. This column argues that a fiscal backstop remains necessary for a banking system, contrary to what many policymakers claim. The main reason is that private arrangements may not be sufficient in a severe crisis. Without a credible backstop, depositors will run on a troubled banking system.
Countries facing rising risk premiums on their debt have recognised the need for structural reform, but some politicians have argued that austerity is necessary in the short run because structural reform takes too long. This column argues that financial markets can bring forward the benefits of structural reform, and therefore that such reforms should be given greater weight in the package of crisis responses.
The conflict in Ukraine and the sanctions against Russia have already affected the Russian financial markets. This column discusses the repercussions for the rest of Europe of possible disruptions in the trade and financial flows with Russia. Eastern European countries could be seriously affected by a slowdown in the Russian economy due to their close links with Russia. Western countries – despite having looser links with it – could also experience significant effects.
As prospects in key advanced economies improve, financial conditions will tighten. The effect of outward spillovers from source countries to emerging markets will depend on whether financial conditions are driven by stronger growth (real shocks) or unexpected tightening in financial conditions (money shocks) – including those due to financial stability concerns or market uncertainty about the exit path. From a recipient’s perspective, spillovers will also differ across countries – reflecting interactions between domestic fundamentals and policies with the external shock.
The Crisis affected public spending. Research and innovation is one area often highlighted as needing protection. This column does not find strong evidence that European countries sacrificed research and innovation more than other government expenditure. However, there is strong heterogeneity across countries. Innovation lagging and fiscally weak countries cut R&I spending while innovation-leading forged it ahead. Research of this divide and long-term growth is still limited.
It is well-known that World War I was expensive for Britain. The indirect economic costs were also huge. This column argues that the adverse implications of the Great War for post-war unemployment and trade – together with the legacy of a greatly increased national debt – significantly reduced the level of real GDP throughout the 1920s. A ballpark calculation suggests the loss of GDP during this period roughly doubled the total costs of the war to Britain.
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 headquarters size 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.
Among the various explanations behind global imbalances, the role of corporate saving has received relatively little attention. This column argues that corporate saving is quantitatively relevant, and proposes a theory that is consistent with the stylised facts and useful for understanding the current phase of global rebalancing. The theory implies that, while the economic contraction originating in developed countries has pushed interest rates towards the zero lower bound, the recent growth slowdown in emerging countries could push them out of it.
One of the main models in industrial organisation assumes that firms grow in a response to many small shocks that satisfy the central limit theorem. This column shows that if the shocks do not follow the central limit theorem, then the firm growth follows a jump process. Such large jumps could be due to radical innovation and are vital for the long-term success of a firm.
The landscape of portfolio investment in emerging markets has evolved considerably over the past 15 years. Financial markets have deepened and become more internationally integrated. The mix of global investors has also changed, with more money intermediated by mutual funds. This column explains that these changes have made capital flows and asset prices in these economies more sensitive to global financial shocks. However, broad-based financial deepening and improved institutions can enhance the resilience of emerging-market economies.
The potential for political influence is what most people think of when they talk about the power of the media. A new media power index, proposed in this column, aggregates power across all platforms and focuses not on markets but on voters. It measures not actual media influence but rather its potential. Using the index, the author finds that the four most powerful media companies in the US are television-based and the absolute value of the index is high. This indicates that most American voters receive their news from a small number of news sources, which creates the potential for large political influence.
The foreclosure crisis that followed the subprime crisis has had significant negative consequences for minority homeowners. This column reviews recent evidence in the racial and ethnic differences in high cost loans and in loan performance. Minority homeowners, especially black homebuyers, faced higher price of mortgage credit and had worse credit market outcomes during the crisis. This is largely due to the fact that minority borrowers are especially vulnerable to the economic downturn.
What happens to prices when a country joins a currency union, and do prices behave differently in a pegged exchange rate regime? This column sheds lights on these questions by using evidence from Latvia, whose currency was pegged to the euro before the country became a Eurozone member on 1 January 2014. The authors find that clothing retail prices in Latvia completely converged to those in other Eurozone countries.
The Global Crisis has intensified debates over the merits of financial innovation and the optimal size of the financial sector. This column presents a model in which the growth of finance is driven by the development of a financial innovation. The model can help explain the securitised mortgage debacle that triggered the latest crisis, the tech bubble in the late 1990s, and junk bonds in the 1980s. A striking implication of the model is that regulation should be toughest when finance seems most robust and when innovations are waxing strongly.
Central banks, especially in developing countries, still seek transparent and credible communication. Yet signalling intentions through forward guidance or commitment sometimes creates undesirable constraints. This column argues that central bank pronouncements phrased in terms of nominal GDP are less likely to run afoul of the supply and trade shocks so common in developing countries, compared to pronouncements phrased in terms of inflation.
The stagnating Eurozone economy requires policy action. This column argues that EZ leaders should agree a coordinated 5% tax cut, extension of budget deficit targets by 3 or 4 years, and issuance of long-term public debt to be purchased by the ECB without sterilisation.
Economic activity is highly unevenly distributed across space. Understanding what drives the agglomeration and dispersion is important for many economic and policy questions. This column describes a theoretical model of internal city structure incorporating agglomeration and dispersion and heterogeneity in local fundamentals. The authors use the division and reunification of Berlin as a natural experiment. Their findings show that both heterogeneity in locational fundamentals and agglomeration forces are important in shaping a city’s internal structure.
Adverse health or nutrition shocks to pregnant women can have significant and often long-lasting effects on the outcomes of their children, but much less is known about the effects of psychological stresses. This column discusses recent research on the effect of stress induced by the death of a parent while pregnant on the short- and long-run outcomes of children in Norway. Maternal bereavement has small but statistically significant adverse effects on birth outcomes – especially for boys – but there is no evidence of any long-run adverse effects.
Japanese corporations hold a very high level of cash on their balance sheets compared to those in other advanced countries. Such excessive corporate savings are likely to be holding back growth by preventing a more efficient use of resources. This column presents recent research showing that improving corporate governance would help unlock Japan’s corporate savings, exit deflation, and revive growth. Comprehensive corporate governance reform should be a key component of Japan’s growth strategy.
Time preference has substantial economic consequences. To a growing literature that shows patience to be an important indicator of economic outcomes, this column presents new evidence from a large administrative dataset that tracks children into adulthood. Those who reported more patient preferences as children move on to better labour market and health outcomes, and are less likely to become criminals.
The labour force participation rate in the US has fallen dramatically since 2007. This column traces this decline to three main factors: the ageing of the population, cyclical effects from the Great Recession, and an unexplained portion, which might be due to pre-existing trends unrelated to the first two. Of these three, the ageing of the population plays the largest role since it is responsible for half of the decline. Taken together, these factors suggest a roughly stable participation rate in the short-term, followed by a longer-term decline as the baby boomers continue to age. However, policy can play a
meaningful role in mitigating this trend.
The IMF has recently revised its position on capital controls, acknowledging that they may help prevent financial crises. This column examines the effects of capital controls imposed during the Great Depression. Capital controls appear not to have been successfully used as tools for rescuing banking systems, stimulating domestic output, or for raising prices. Rather they appear to have been maintained as a means for restricting trade and repayment of foreign debts.
Six years after the Global Crisis exploded and the recovery is still not going well. Pre-Crisis GDP levels have been surpassed, but few advanced economies have returned to pre-Crisis growth rates despite years of near-zero interest rates. Worryingly, the recent growth is fragranced with hints of new financial bubbles.
Just like the East Asian Tigers, the Lions of Africa are now growing much faster than the developed economies. However, this column shows that the growth escalators in Africa are different than in East Asia. The East Asian Tigers benefitted from a rapidly expanding manufacturing sector. The African Lions are benefitting from increases in productivity in the service sector, while the agricultural sector remains unproductive.
Africa has generated a lot of enthusiasm lately. The cynical view of the continent as a hopeless basket case has been replaced by the lofty narrative of Africa Rising. This column argues that Africa’s progress is impressive, and there is more to the story than a commodity boom. But Africa is at a crossroads. The opportunities are huge, but the road ahead is long, and will require persistent and patient effort from policymakers as well as business.
Grade inflation is widely viewed as detrimental, compromising the quality of education and reducing the information content of student transcripts for employers. This column argues that there may be benefits to allowing grade inflation when universities’ investment decisions are taken into account. With grade inflation, student transcripts convey less information, so employers rely less on transcripts and more on universities’ reputations. This incentivises universities to make costly investments to improve the quality of their education and the average ability of their graduates.
Pessimists have been predicting slowing rates of invention and innovation for centuries, and they have been consistently wrong. This chapter argues that if the US does experience secular stagnation over the next decade or two, it will be self-inflicted. The US must address its infrastructure, education, and training needs. Moreover, it must support aggregate demand to repair the damage caused by the Great Recession and bring the long-term unemployed back into the labour market.
From a peak of about 5% in 1986, the world real interest rate fell to about 2% before the Global Crisis, and to approximately 0% in 2012. This chapter discusses the major factors behind this decline both before and during the Crisis, and argues that most of them are still relevant. Indeed, the legacies of the Crisis may imply an even lower natural rate in future. This would be bad news for monetary policy, but good news for fiscal policy and debt overhang.
Larry Summers’ speech at the IMF’s 2013 Annual Research Conference raised the spectre of secular stagnation. This chapter outlines three reasons to take this possibility seriously: recent experience suggests the zero lower bound matters more than previously thought; there had been a secular decline in real interest rates even before the Global Crisis; and deleveraging and demographic trends will weaken future demand. Since even unconventional policies may struggle to deal with secular stagnation, a major rethinking of macroeconomic policy is required.
Japan’s two-decade-long malaise and the Great Recession have renewed interest in the secular stagnation hypothesis, but until recently this theory has not been explicitly formalised. This chapter explains the core logic of a new model that does just that. In the model, an increase in inequality, a slowdown in population growth, and a tightening of borrowing limits all reduce the equilibrium real interest rate. Unlike in other recent models, a period of deleveraging puts even more downward pressure on the real interest rate so that it becomes permanently negative.
The concerns of economic nationalists about cross-border takeovers are rooted in the idea that foreign enterprises extract the most valuable assets from top performing domestic firms. Practical concerns about economic efficiency of cross-border M&A markets hinge on whether takeovers transfer underperforming domestic economic resources toward more productive uses at foreign enterprises. How then to reconcile these concerns when forming policies about cross-border activity? It’s all in the timing.
US real GDP has grown at a turtle-like pace of only 2.1% per year in the last four years, despite a rapid decline in the unemployment rate from 10% to 6%. This column argues that US economic growth will continue to be slow for the next 25 to 40 years – not because of a slowdown in technological growth, but rather because of four ‘headwinds’: demographics, education, inequality, and government debt.
In the Eurozone, rising dependency ratios, tougher financial regulation, debt overhang, and poor productivity growth are exerting downward pressure on equilibrium real interest rates. A key question is whether these trends are truly ‘secular’, or whether policy can improve matters. This chapter argues that there is significant scope to increase the efficiency of financial intermediation in the Eurozone, and that the potential for structural reforms remains much greater than in other advanced economies. Reforms that could help avoid secular stagnation in the long run would also boost demand today.
The persistence of low Eurozone inflation undermines private and public debt sustainability – especially in the periphery where the overhang is greatest. However, since bubbles and unsustainable borrowing supported demand before the Global Crisis, this chapter argues that higher inflation cannot be a permanent cure for secular stagnation. Instead, a targeted quantitative easing programme and increased public investment would help rebalance Eurozone demand. At the global level, population growth in Asia and Africa will provide ample investment opportunities if they can be fully integrated into the world economy.
Racial gaps in wages are often attributed to discrimination but data limitations make drawing strong conclusions difficult. Economists usually distinguish between taste-based and statistical discrimination. This column presents evidence from a new test of taste-based discrimination. Examining hiring decisions in the English Fantasy Premier League, the authors do not find that employers discriminate based on race. One explanation for this is that good productivity measures minimise the opportunities for statistical discrimination, which according to studies drives the racial difference in market outcomes.
Increasing longevity yields large economic benefits. However, public policies do not take into account the heterogeneity in these benefits across the population. This column presents simulated experimental findings about the heterogeneity in the value of statistical life. There is heterogeneity over the life-cycle, as well as prominent ‘black-white’ and ‘female-male’ gaps in the value of life, driven by differences in the labour income across these groups. The findings suggest that one-size-fits-all policies would not correctly reflect the individual willingness to pay to reduce mortality risk.
Many drugs sold in poor countries are counterfeit or substandard, endangering patients’ health and fostering drug resistance. Since drug quality is difficult to observe, pharmacies in weakly regulated markets may have little incentive to improve quality. However, larger markets allow firms to reorganise production and invest in technologies that reduce the marginal cost of quality. This column discusses how the entry of a new pharmacy chain in India led incumbents to both cut prices and raise drug quality.
A typical Oxford University econometrics exam question might take the form: “Data mining is bad, so mining with more candidate variables than observations must be pernicious. Discuss.” Similar questions may well be asked at other academic institutions, but there may be few outside Oxford University where the candidates are expected to refute both myths. This column explains why that is the right answer.
Natural disasters affect firm activities both directly and indirectly. One prominent indirect effect is on firms’ transaction partners, in particular – their banks. This column shows how damage to banks affects firm activities, such as capital investment and exports, using as a natural experiment Japan’s 1995 Kobe earthquake. Bank damage has a significant and negative impact on both firm investment and on exports but this effect does not last very long.
Separatism is on the rise in Europe. This column argues that, while the Eurozone Crisis is certainly reinforcing regional tensions, the underlying causes are globalisation and the deepening of the European project. Independence campaigners want access to the larger European market, while unfettering their regions from the centralised control of national governments. Renegotiating the terms of the relationship between national and regional governments is preferable to resorting to political threats or the use of force.
High US unemployment rates following the crisis are a primary policy concern, but are poorly explained by existing models. This column introduces a new model of frictional labour and product markets. Price rigidities yield testable predictions pointing to the source of unemployment and product market tightness. Evidence suggests that unemployment fluctuations are driven mostly by aggregate demand shocks.
Peer review is at the heart of academic economics, but there are few professional rewards for submitting detailed referee reports on time. This column reports the results from an experimental study of referee motivation. Shorter deadlines ‘nudged’ referees to submit reports earlier. Cash incentives also reduced turnaround times, suggesting that any ‘crowding out’ of intrinsic motivation is small. Social incentives – publication of turnaround times – were more effective for tenured referees than shorter deadlines or cash incentives.
The wonders of the internet age cast doubt on the idea that technological progress is stagnating. Worryingly, however, some fraction of US job losses has become permanent after almost every recession since 1970. This chapter argues that persistent joblessness is unlikely to be a purely macroeconomic phenomenon. Although the US welfare system remains less generous than many European ones, it has become substantially more generous over time. Alongside targeted investments in education and training, radical structural reforms to America’s safety net are needed to ensure it does less to discourage employment.
After the Great Depression, secular stagnation turned out to be a figment of economists’ imaginations. This chapter argues that it is still too soon to tell if this will also be the case after the Great Recession. However, the risks of secular stagnation are much greater in depressed Eurozone economies than in the US, due to less favourable demographics, lower productivity growth, the burden of fiscal consolidation, and the ECB’s strict focus on low inflation.
In the aftermath of the Great Recession, many economists are persuaded that slow growth is here to stay. This chapter argues that technological progress – particularly in areas such as computing, materials, and genetic engineering – will prove the pessimists wrong. The indirect effects of science on productivity through the tools it provides scientific research may dwarf the direct effects in the long run. Although technological advances may polarise labour markets, they also bring widespread benefits that are not accurately reflected in aggregate statistics.
Job transitions in the US banking between the regulatory and private sector – or the revolving door – have been under intense scrutiny, receiving both criticism and more benign views. However, the lack of systematic data makes drawing strong conclusions difficult. This column sheds light on these discussions by the use of new and unique data of career paths of current and former regulators, spanning 25 years. The results suggest lower employment spells of regulatory personnel in more recent years and for workers with higher education. Tightening the revolving door without altering other aspects of worker incentives may further create challenges for regulatory agencies to seek and retain talent.
The Great Recession is often compared to Japan’s stagnation since 1990 and the Great Depression of the 1930s. This chapter argues that the key feature of these episodes is the bursting of a debt-financed asset bubble, and that such ‘balance sheet recessions’ take a long time to recover from. There is no need to suffer secular stagnation if the government offsets private sector deleveraging with fiscal stimulus. However, until the general public understands the fallacy of composition, democracies will struggle to implement such policies during balance sheet recessions.
The Italian economy is reported to have slipped back into recession in the first part of 2014. This characterisation is based on a criterion for a recession standard in Europe – two successive quarters of negative growth. However, there are other criteria to define a recession. US standards would treat Italy’s economic situation as one, six-year-long recession. Whereas one cannot say whether one criterion is superior to the other, announcing a recession has further implications.
The secular decline in real interest rates over the last two decades indicates a growing shortage of safe assets – a shortage that became acute during the Global Crisis. Given the still-depressed levels of real rates and the sluggish investment recovery, this chapter conjectures that the shortage of safe assets will remain a structural drag on the economy, undermining financial stability and straining monetary policy during contractions. Under these conditions, an additional important aspect of public infrastructure investment is the government’s ability to issue safe debt against such projects.
WTO dispute settlement is well-known for its high-profile cases – e.g., US-EU clashes over bananas, hormone-treated beef, genetically modified organisms, subsidies to Boeing and Airbus, etc. – some of which cover annual trade in the billions of dollars. Are the trade stakes from such disputes representative of the WTO caseload? This column presents evidence from a newly available data set and reveals some surprising facts about the prevalence of both large and small WTO disputes.
Exporting goods requires services. This column discusses new evidence showing that the improvement in services regulations that took place over the 1990s and 2000s in Spain substantially increased the volume of exports of manufacturing firms, especially of large corporations.
There is indisputable evidence that manufacturing employment as a share of total employment in the US has been declining. This column argues that focusing on employment masks important signs of growth of the manufacturing sector. Using most up-to-date data, the authors reason that the US manufacturing base is growing larger, more productive and competitive. The expansion of operations abroad by US manufacturing multinationals leads to particularly strong increases in economic activity – including creation of greater numbers of high-paying manufacturing jobs – by those same firms in the US domestic economy.
In the wake of the Global Crisis, several central banks have adopted unconventional monetary policies. This column presents new evidence from Japan on the transmission of monetary policy through banks’ balance sheets. Overall, the evidence suggests that bank net worth affects loan supply, that the effect depends on monetary policy and economic growth, and that this bank balance sheet channel has a significant impact on firms’ financing and investment. Exiting from unconventional monetary policies when bank balance sheets are weak could thus have a severe adverse impact on investment.
What is the impact of migration on the UK economy and how effective are the current government’s migration policies? Among respondents to the fifth monthly survey of the Centre for Macroeconomics (CFM), reported in this column, there is overwhelming support for the view that migration will increase the average income of current UK inhabitants. Moreover, the panel of experts thinks that current government policies are not effective in attracting the ‘best and brightest’ – in fact, they may even be doing the opposite.
The extent to which lifetime incomes are determined by inherited wealth is a politically sensitive issue, but long-run evidence on this question is limited. This column presents evidence on Swedish inheritance flows since the early 19th century. Despite a long history of aristocracy, accumulated capital was small relative to income in pre-industrial Sweden. In more recent times, Sweden stands out as a country where the return of capital has not automatically translated into a return of inherited wealth.
Immigration continues to be a hotly debated topic in most OECD countries. Economic models emphasising the benefits of immigration for natives have typically neglected unemployment and redistribution – precisely the things voters are most concerned about. This column analyses the effects of immigration in a world with labour market rigidities and income redistribution. In two-thirds of the 20 countries analysed, both high-skilled and low-skilled natives would benefit from a small increase in immigration from current levels. The average welfare gains from immigration are 1.25% and 1.00% for high- and low-skilled natives, respectively.
Faced with daunting levels of public debt, it may be tempting to inflate away the burden. Some recent research has endorsed such a policy, but this column argues that it is infeasible. The rule of thumb that suggests an inflation rate four percentage points higher would reduce debt by 20% ignores creditor composition and maturity details, even if a 6% inflation rate were achievable. The hard truth is that there is no easy way out of debt.
This column reports on empirical evidence showing that monetary policy shocks in the UK had a bigger impact on inflation, equity prices, and the exchange rate during the inflation targeting period. Related changes in the transmission of policy shocks to bond yields point to more efficient management of long run inflation expectations.
China’s frustration with the slow progress of IMF governance reform has contributed to the evolution of a China-led architecture that locks out the West – the latest examples being the New Development Bank and the Credit Reserve Arrangement established by the BRICS. This column argues that these institutions are not a threat to the IMF and the World Bank, but they complicate global economic governance. It is unlikely that Europe’s ‘troika’ model – where the IMF works jointly with regional financing facilities – will be possible in Asia. We perhaps need a New Bretton Woods.
As governments are struggling to construct a global financial safety net, they must take into consideration the lessons from the recent crisis. To help in this task, this column presents findings from an updated database on deposit insurance arrangements from around the world through 2013. The number of countries with explicit deposit insurance programmes has continued to increase but differences across countries are observed. Although it is too early to draw conclusions about the reliability of further insurance deposit expansion as a tool for managing a future crisis, insurance fulfilled its primary purpose – it prevented open runs on bank deposits.
Today’s international institutions have roots in the tenuous interwar peace. This column details the importance of Austria as a prototype for international aid and development. In the case of Austria, the interwar powers realized the inefficacy of a punitive peace, and instituted a system by which private credit markets would assist development in a mutually beneficial relationship. The Austrian ‘success story’ is key to understanding today’s international relations.
Researchers use various measures of individual risk attitudes to help explain a wide variety of economic behaviours, including investment decisions and firms’ entry and exit decisions. This column presents recent evidence showing that such measures are very context-specific and need to be used with caution, since the very same people can sometimes appear to be risk taking and sometimes appear to be risk averse, depending on the specific measure used. These discrepancies may arise because people have imprecise preferences under risk, and their responses are liable to be influenced by the particular methods used to elicit them.
Hoping to attract more FDI, developing countries are increasingly entering stricter investment agreements. But there is no conclusive evidence that such agreements serve them well. This column argues that contagion may help explain this trend. Competition between developing countries for FDI from developed ones could drive the diffusion of international investment agreements.