Many lenders hire loan officers to screen soft information that may otherwise be ignored by credit scoring. However, in addition to their compensation costs, loan officers may have characteristics, such as being overly cautious, that could distort their decisions. This column documents the performance of loan officers using data from a Chinese lender. Despite the distortions, the loan officers contribute three times their pay in annual profits above what the lender could have earned by itself, even with the benefit of hindsight.
Governments sometimes promote reforms that increase access to education for a large share of the population. These reforms may lower the returns to education by altering returns to skills, education quality, and peer effects. This column examines a 1961 Italian reform that increased enrolment in university STEM majors among students who had previously been denied access. The reform ultimately failed to raise their incomes.
It is often argued that for poor countries, increases in agricultural productivity result in higher non-agricultural output, but the theory is ambiguous and the empirical evidence is limited. This column presents evidence from a natural experiment provided by China’s early 1980s agricultural reforms. Higher agricultural output induced by the reforms led to quantitatively important growth in non-agricultural output. This growth appears to be primarily due to rural savings increasing the supply of capital to the non-agricultural sector.
Decisions involving charitable giving often occur under the shadow of risk. A common finding is that potential donors give less when there is greater risk that their donation will have less impact. While this behaviour could be fully rationalised by standard economic models, this column shows that an additional mechanism is relevant – the use of risk as an excuse not to give. In light of this finding, this column also discusses how charities may benefit from structuring their donation requests in particular ways.
The Editors wish to thank all our readers and wish them a healthful and restful holiday break. Vox will start posting again on 2 January 2014.
Commodity prices have been falling in the US. This column argues that monetary policy has played a determining role in the falling prices trend. Monetary tightening is highly anticipated in the US, which is likely to raise short-term interest rates. At the same time, the ECB and Bank of Japan have enhanced monetary stimulus through quantitative easing. As a result, the dollar has appreciated against the euro and the yen. In this way, commodities can be down in terms of dollars and up in terms of other currencies.
There has been interest among both sports fans and academics in whether pressure from home crowds affects decision making of officials. This column investigates this problem using new data from cricket matches. The authors find that neutral umpires decrease the bias against away teams, making neutral officials very important for a fair contest.
Christmas may be not so merry as we hope. Economists have argued that gift giving is an inefficient way to allocate resources, and it is widely suggested that Christmas brings a peak in prices and the number of suicides, or even disrupts the business cycle. This column discusses some conventional wisdom about Christmas and shows that economic research in fact runs counter to some of these common beliefs.
The Financial Stability Board’s recent consultative document proposes dividing global systemically important banks into holding companies and operating subsidiaries so as to insulate the latter from a major loss. This column poses the question of what will happen after the holding company is liquidated or written down in order to recapitalise the operating subsidiary – a question as yet unanswered by the Financial Stability Board.
Macroecomics has changed in a number of ways since the global crisis. For example, there is now more emphasis on modeling the financial sector, self-fulfilling panics, herd behaviour and the new role of demand. This Vox Talk discusses these changes as well as those areas in macroeconomics that are currently perhaps not researched enough. Wouter den Haan explains the inadequacy of the conventional 'rational expectations' approach, quantitative easing, endogenous risk and deleveraging and refers to current CEPR research that reflects the changes. He concludes by reminding us that the 'baby boomers' issue could be the basis of the next crisis.
Expectations are critical for macroeconomics and financial markets. But the expectation-formation process is not well understood. This column discusses some empirical characteristics of forecast disagreement from professional forecasters in the US, and discusses the ‘information frictions’ that underlie the heterogeneity of expectations.
Eurozone deflation is likely to become reality when the annual inflation figure for 2014 is announced in January. This column argues that the ECB should develop a strategy that works in the Eurozone’s unique financial setting, instead of following the Fed’s lead. The author proposes that the ECB should pursue ‘quantitative easing for the people’, such as sending each adult citizen a €500 cheque.
Franklin Allen, Professor of Finance and Economics at Imperial College London, and Director of CEPR's Financial Economics Programme, talks to Viv Davies about current challenges in financial economics. Allen presents what he thinks will be the main focus of the FE Programme going forward. He also discusses banking union in Europe, how financial economics has changed since the crisis and what he considers to be the major risks now facing the Eurozone.
Foreign direct investment is an essential element in 21st century development strategies. This column discusses new evidence that estimates the importance of financial liquidity as a driver of such flows into emerging-market economies. Financial liquidity considerations are key determinants of the size and ownership structure of these investments.
Banking has recently proven much more fragile than expected. This column argues that the Basel III regulatory response overlooks the interactions between different kinds of prudential policies, and the link between prudential policy and competition policy. Capital and liquidity requirements are partially substitutable, so an increase in one requirement should generally be accompanied by a decrease in the other. Increased competitive pressure calls for tighter solvency requirements, whereas increased disclosure requirements or the introduction of public signals may require tighter liquidity requirements.
Weak investment is a key macroeconomic problem in the Eurozone, and the new European Commission has proposed an ‘Investment Plan’ to complement existing policy initiatives. In this column, the Commission’s Chief Economist explains the key rationale behind the Investment Plan.
Migration is heavily influenced by social networks. Nonetheless, little is known about the underlying mechanisms. This column uses a new dataset from China to disentangle the effects of strong and weak ties on the migration decision. The findings indicate that strong and weak ties act as complements. Having many weak ties with an urban area amplifies the positive impact of having a strong tie in the same area.
The recent dramatic fall in oil prices has renewed the interest in the importance of shocks in the oil price volatility. This column presents results from new research on the role of shocks and speculation on oil prices. The authors find that when speculation is short in duration, it has the weakest impact on oil prices and demand shocks have the largest. However, when speculation is allowed to have short- and long-term effects, it is the main contributor to the volatility of oil prices.
Argentina is the only country in the world that was 'developed’ in 1900 and ‘developing’ in 2000. Various explanations highlight the roles of trade openness, political institutions, financial integration, financial development, and macroeconomic instability. No study has so far attempted a quantitative assessment of the relative importance of each of these competing factors. This column presents new evidence suggesting that financial development and institutional change are two main factors behind the unusual growth trajectory of Argentina over the last century.
Growth and inequality are back at the centre of the economic debate. This column presents a framework for interpreting Thomas Piketty’s data based on Paul Romer’s model of endogenous growth. Two balanced growth regimes are possible in this framework: one (‘merit’) with a low capital–output ratio, a high interest rate, and high growth; and another (‘rent’) with a higher capital–output ratio, a somewhat lower interest rate, and much lower growth. An increase in the returns to physical capital accumulation compared to innovation could explain a shift from ‘merit’ to ‘rent’.
Sub-Saharan Africa has been growing steadily over the past decade. The main question that policymakers should face is how to sustain the region’s progress. This column argues that the positive growth is due both to good policies and higher prices of certain commodities (such as oil, gas, and minerals). To ensure sustainability governments should not rely only on these higher rents but rather implement policies that take advantage of them.
Regulators forced up capital requirements after the Global Crisis – triggering fears in the banking industry of dire effects. This column – by former BIS Chief Economist Steve Cecchetti – introduces a new CEPR Policy Insight that argues that the capital increases had little impact on anything but bank profitability. Lending spreads and interest margins are nearly unchanged, while credit growth remains robust everywhere but in Europe. Perhaps the requirements should be raised further.
Since the Global Crisis, concerns have grown that advanced economies are suffering from secular stagnation. This column discusses the lessons that can be learnt from the economic transition of central and eastern Europe and the emerging-market crises of the late 1990s and early 2000s. Structural reform is particularly costly in the context of a debt overhang and an overvalued exchange rate. However, the crux is not debt restructuring per se, but whether economic governance changes credibly for the better following it.
The recent focus on central banks’ balance sheet policies has brought new interest to the question of how they deal with the international finance constraint. This column gives historical perspective to the issue by examining the policies of the Banque de France during the gold standard. The Banque used its domestic portfolio to stabilise interest rates rather than using exchange rate intervention. This sheds new light on the standard view that discount rates and capital controls were the primary monetary policy instruments during the gold standard.
Macroprudentialism is now part of the standard macroeconomic toolkit but it involves a set of relatively untested policies. This column introduces a new VoX eBook that collects the thinking of a broad range of leading US and European economists on the matter. A consensus emerges on broad objectives of macroprudential supervision, but important disagreements remain among the authors.
Driving while intoxicated is a serious problem in the US. What policymakers disagree about is how best to discourage drunk driving. This column argues that the perceived risk for detection has a deterrent effect on drunk driving. Harsher sanctions do not convey the desired effect if the perceived risk for detection is low. The best policy thus should increase the probability of detection or manipulate peoples’ beliefs for such a risk.
Eurozone financial integration is reversing, with 2013 cross-border capital flows at 40% of their 2007 level. This column discusses research showing that banking integration has in fact strengthened in the rest of the world.
Obesity has a similar impact on global GDP as smoking, and around 60% of obese people are in developing countries. This column discusses the seriousness of the problem, and argues that more policy action is warranted – particularly in the form of low-risk, low-cost behavioural interventions.
Central bank credibility is critically linked to communication and commitment. This column analyses the historical evolution of credibility, showing its prewar peak and the subsequent dip from which it did not fully recover until the 1980s. Inflation targeting has played a key role in establishing credibility in both developed and emerging market economies.
Dozens of nations think they are in the ‘middle-income trap’. Lant Pritchett and Larry Summers present new evidence that this trap is actually just growth reverting to its mean. This matters since belief in the ‘trap’ can lead governments to misinterpret current challenges. For lower-middle-income nations the 21st century beckons, but there are still 19th century problems to address. Moreover, sustaining rapid growth requires both parts of creative destruction, but only one is popular with governments and economic elites.
Economic activity in Latin American countries in the past decade has been shifting from manufacturing to services. This column argues that this so-called ‘tertiarisation’ that the region experienced is not due to shift in less skill-intensive, non-tradable activities. Provided education and training do not lag behind, services are likely to remain key driver of growth.
The WTO’s dispute settlement procedure was set up to help governments challenge policies that contravene WTO agreements. This column argues that two recent cases show that cases can be settled without resolving the problem and sometimes at the expense of other trading partners. This is an abuse of the system and a step backwards for the world trading system.
The world of international trade has been in constant evolution since the rise of containerisation. This column makes the case for the need to upgrade our toolbox for trade policy analysis. An upgraded "Trade Policy Analysis 2.0" would be based on firm-level statistics and a much more refined product disaggregation, both of which are now becoming widely available.
Schools with greater autonomy often perform well, but there is disagreement over whether this is due to better management or cherry-picking of students. Based on interviews with over 1,800 head teachers, this column finds that management quality is strongly correlated with pupil performance. Autonomous schools have better management, and this result does not appear to be driven by pupil composition or other observable factors. However, autonomy for head teachers is not enough – accountability to school governors is also needed.
The Global Financial Crisis has triggered a reduction in cross-border bank lending. This column uses evidence from an updated bank ownership database to show that global banking is not becoming more fragmented. It is rather going through structural transformations. Banks from countries hit by crises are reducing their foreign presence, while banks from emerging and developing markets are stepping into the void.
In the face of the zero lower bound, the ECB’s reduced its balance sheet by a third. This column introduces a new CEPR Policy Insight by former central-bank governor Athanasios Orphanides, which argues that the outcome has been economic stagnation and harmful disinflation. It explores alternative explanations for this policy, including the role of politics in managing the Eurozone crisis and proposes balance-sheet policy to help fulfil the ECB’s mandate in the face of the Fed’s tightening.
Governments run the world’s largest financial institutions. The size of government activities has grown in recent decades but comprehensive estimates are unavailable. This column presents new evidence on the costs of government credit support. It argues that governments tend to understate credit costs and the consequences of that could be considerable. Cost underreporting may lead to overinvestment and capital misallocation, could encourage the over-reliance on credit, reduce transparency, and cause a build-up of financial risk.
The negative consequences of dual labour markets have been extensively documented, but so far little attention has been paid to their effects on workers’ on-the-job training and cognitive skills. This column discusses evidence from PIAAC – an exam for adults designed by the OECD in 2013. Temporary contracts are associated with a reduction of 8–16 percentage points in the probability of receiving on-the-job training, and this training gap can explain up to half of the gap in numeracy scores between permanent and temporary workers.
The WTO’s Aid-for-Trade Initiative, based on the belief that exporting improves the productivity of firms, is meant to bring about growth and reduce poverty. However, we know very little about whether exporting improves firm performance, and if so, through what mechanisms. This column, based on a randomised control trial in Egypt, unravels the channels through which exporting increased the productivity of rug manufacturers.
Cultural diversity is increasing globally. This column examines diversity from the point of view of entrepreneurship. It demonstrates that cultural diversity breeds entrepreneurship – but the nature of the diversity is critical. Recent migrants, rather than the descendants of past migrants, create the conditions for a more dynamic entrepreneurial environment. This effect is most clearly substantiated in terms of knowledge-intensive start-ups.
The events of the last five years have been a forceful reminder of the interconnections among nations. There has been renewed debate on the optimal way to combine fiscal, monetary, and financial policies to deal with international spillovers, and on the scope for coordination of such policies. This column discusses the highlights of a recent IMF conference on “Cross-Border Spillovers”, and applies the lessons to the challenges of the US and the Eurozone exiting from their unconventional monetary policies.
In the aftermath of the Great Recession, there remains a large number of long-term unemployed across countries. This column argues that policies targeting the long-term unemployed, if effective, may have substantial benefits for the aggregate labour markets. However, evidence of the effectiveness of active labour market policies varies across policies and populations. It is, therefore, crucial to add an evaluative component to new and existing labour market policies.
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
Greece is currently implementing a fiscal adjustment programme aimed at tackling tax evasion. This column discusses the impact of recent tax administration reforms on tax compliance in Greece. The intensification of audits, enforcement of penalties, and efficient collection of past debts can induce tax compliance and raise the collected revenue. These findings could contribute to the successful conclusion of the fiscal consolidation programme.
Today’s Eurozone fiscal discipline is the amalgamation of reforms implemented over ten years, with the latest and largest changes agreed in crisis settings. This column argues that the result fosters neither growth nor stability since actual fiscal policy has been powerfully procyclical. The focus on intermediate targets has distracted attention from the final objectives – debt sustainability and economic convergence. A drastic simplification of the current rules is proposed.