Diesel vehicles have never been popular in the US, but have dominated sales in Europe. This column presents new evidence explaining why this is the case. A change in preferences and the numerous competing suppliers benefited the diffusion of diesel cars. But more important was a European environmental policy that favoured CO2 reductions. As diesel vehicles are only produced by European manufacturers, this policy provided a competitive advantage for domestic producers equivalent to a 20% import duty.
The relationship between finance and growth has recently returned to the top of the policy research agenda, with several papers questioning earlier results indicating a positive link. This column suggests a different interpretation of the early findings. While there can be too much finance, as many countries have found out in recent crises, this does not imply that there is too much financial development.
Sovereign governments re-entering capital markets after debt renegotiations pay an interest rate premium for past defaults. This column presents new evidence that suggests earlier studies have underestimated this premium. This is partly due to the narrow credit history indicators used in previous studies as well as the narrow data coverage. Correcting for these problems, a sizeable and persistent default premium emerges, and one which rises on the duration of the default. The new findings are consistent with the view that financial markets help discipline governments and rationalise why governments try hard not to default.
There are more democracies in the world than non-democracies, but few of the democracies go beyond electoral competition. This column highlights the contrast between electoral democracies and liberal ones, that is, those that protect civil rights in addition to political and property rights. Liberal democracies are rare because the failure to protect minority rights is a common consequence of the emergence of democracy. They are especially uncommon in the developing world, where decolonisation and identity cleavages sparked social mobilisation.
Climate monitoring organisations report that 2015 is set to break global temperature records. Meanwhile, this December ministers will convene at the UN meeting in Paris and the WTO meeting in Nairobi to continue climate negotiations. This column reports on progress to date, arguing that small steps forward are being taken, but they are not sufficient.
Joining the Eurozone was once a near unquestionably good idea. Now, the costs of joining the monetary union are under close scrutiny. This column takes a slightly different tack, presenting an alternative perspective on how joining the euro has impacted productivity in southern Europe. It turns out that capital wasn’t allocated efficiently across firms after cheap borrowing at low interest rates, impacting total factor productivity.
Regulatory arbitrage is an essential feature of modern banking. This column presents new evidence on avoiding macroprudential policies by borrowing from abroad. Domestic non-banks borrow more from abroad after an increase in capital requirements, but not after an increase in lending standards. This is most likely because of differences in the way the two regulations apply, and suggests that we should have strong frameworks for reciprocating capital regulation.
While there is substantial evidence that multinationals are more productive than domestic firms, the evidence on productivity spillovers remains mixed. This column estimates the effects of foreign presence on the innovation of local firms. It suggests that spillovers from foreign firms to domestic firms are limited to domestic firms immediately connected to foreign firms. Requirements for foreign firms to have significant local content may therefore be justified.
Discussions continue in some circles as to whether the ECB’s emergency liquidity assistance for Greek banks is legitimate. This column assesses the underlying economics of the emergency liquidity assistance programme and the complex interrelationship between the EU, the ECB and the Greek banks. Economists must focus on the political economy of a monetary union with incomplete fiscal union if they are to understand what’s going on with emergency liquidity.
It is still not clear whether the effect of retirement on health is positive or negative. This column discusses new evidence from Japan showing that it is likely positive. In Japan, elderly people reduce their smoking and drinking after retirement. People tend to smoke and drink with their colleagues, so the result is mostly due to a peer effect.
After 2018, Greece should have market access. This column argues that without further debt relief, this is unlikely to happen. Under reasonable assumptions, its debt ratio will likely not decline, and the financing burden will increase again. Private investors will take these risks into account and will ask for a risk premium that Greece cannot afford in the long run.
Many analysts believe that German economists hold a very different view of macroeconomics. This column presents a personal view why this belief is wrong. The fact that Europe still consists of sovereign nations and that most Europeans still want to keep it that way informs much of what happens inside German economists' heads.
A number of countries have implemented various policies in an attempt to boost the performance of state-maintained schools. This column looks at the latest of these – the academies programme in England. Compared with reforms in other countries, the scale and pace of the academies programme is unprecedented. So far, academy attendance has led to gains in achievement, and the increase in autonomy has enabled schools to boost performance. It is too early, however, to tell whether the early success of sponsored academies will translate into success for the wider programme.
Counting citations is the mainstream approach to judging a paper’s academic impact. This column summarises research into the citation lifecycle of economic papers and how it differs for papers classed as applied, applied theory, theory, or econometric methods. There is a clear-cut lifecycle for economics articles. More importantly for professional evaluation, the cycle differs markedly across fields.
Better management practices are associated with better firm performance, and the quality of management practices is also associated with per capita income. This column explores the effect of business practices on small firms in developing countries. The findings indicate that better business practices are correlated with higher productivity, higher firm profits, and higher rates of survival. Poor business practices are holding back small firms in developing countries.
Research consistently finds that men are more risk tolerant, or even risk loving, than women. This column argues that social identity, next to biology, helps explain the stark difference in risk attitudes and beliefs across genders. Men to whom identity is salient become more risk tolerant and invest more often and with more money. Identity makes men overconfident but its effects decrease with age. This is consistent with the notion that gender stereotypes have become less stark over the last decades.
The Global Crisis and its high costs have revived interest in early warning indicators of economic risks. This column presents a new set of indicators to detect vulnerabilities and assess country-specific risks of suffering a crisis. The empirical evidence confirms the usefulness of the vulnerability indicators in warning of severe recessions and crises in OECD countries. But indicators are no silver bullet and should be complemented with other monitoring tools, including expert judgement.
The public narrative on austerity is shaped by simple scatter plots purporting to portray the large negative impact of fiscal ‘austerity’ on economic growth. This column argues that, while recognising concerns about causality, economists should systematically explore correlations and multiple regressions, and test their robustness. The results reveal a mixed picture, lending partial support to the notion that fiscal choices and output growth are empirically associated.
With records of subjective wellbeing going back less than half a century, this column asks if we can know the impact of key past events on the happiness of our ancestors. It presents a new historical index that draws on millions of digitised books in the Google Books corpus of words using sentiment analysis. The index – which goes back to the 1776 US Declaration of Independence, 200 years earlier than any other index of happiness – makes it possible to analyse the historical drivers of happiness in France, Germany, Italy, Spain, the UK and the US.
Productivity growth is slowing around the world. The question is what lies behind this trend and whether it can be arrested. This column takes a historical perspective on total factor productivity growth slowdowns. International factors that heighten the risk of TFP slumps include global interest rate shocks, global oil price shocks and rising global risk aversion. Country-specific factors working in the same direction include low educational attainment, weak political systems, and overly high levels of investment. Investing in education, political development and rebalancing can mitigate the risk of TFP slumps but are unlikely to eliminate them entirely.
The international climate negotiations have moved away from targets such as keeping warming below 2°C in favour of more realistic goals. This column presents new evidence on the economic impacts of climate change. The initial impacts of climate change on welfare might be positive, but in the long run the negative effects dominate, and will be substantially higher in poor countries. Poverty reduction therefore complements greenhouse gas emissions reduction as a means to reduce the impacts of climate change.
The 2014 decline in oil prices lowered short-run inflation. Before the Global Crisis, the medium-term correlation between oil prices and inflation was weak, but it has become much stronger since the onset of the Crisis. This column suggests that following the onset of the Crisis, inflation expectations reacted quite strongly to global demand conditions and oil supply shocks. The public’s belief in the ability of monetary authorities to stabilise inflation at the medium-term horizon has deteriorated.
Suboptimal behaviour has been discussed but has not been studied extensively empirically. This column argues that the February 2014 London Underground strike enabled a sizeable fraction of commuters to find better routes. Due to the strike, many commuters were forced to experiment and around 5% stuck with these new routes after the strike was over. The strike produced an overall net benefit. Commuters seem to ‘satisfice’ and under-experiment during normal times.
In the aftermath of the Global Crisis, there have been many regulatory initiatives targeting financial institutions, especially investment funds. This column sheds light on the costs and benefits of increased financial regulation. The findings show that the indirect cost of regulation of alternative funds such as UCITS is around 2% per annum in terms of risk-adjusted returns. Policymakers should therefore carefully consider the effect of higher liquidity requirements on the returns that alternative investment funds can generate.
Designing a tournament to keep each game or round as exciting as possible for spectators is, as you might imagine, complex and nuanced. Yet, most sporting tournaments use a basic ‘knock-out’ model, and have done for years. This column argues that tournament organisers ought to be more creative, and illustrates a model and examples suggesting that tournament organisers should not confine themselves to tradition. Choosing the proper scheme is a hard but feasible goal for tournament designers.
The focus of the financial inclusion debate has been mainly on credit and savings services. This column provides evidence that more effective payment systems can help ease small businesses’ access to external finance, ultimately resulting in faster economic growth. The success story of M-PESA in Kenya shows that mobile money technology not only increases financial inclusion of households, but also alleviates small firms’ financing constraints.
The Federal Reserve is on the verge of triggering the process of monetary policy tightening. This column argues that the rationale for that policy judgement rests on faulty analytical assumptions about the labour market, inflation dynamics, the stance of monetary policy, and the balance of risks to the economic outlook. What’s more, the current opacity of the FOMC’s near-term strategy is likely to exacerbate uncertainty and hinder the effectiveness of monetary policy in fostering the goals of maximum employment and price stability.
People tend to build their careers through job-hopping. This column adds to our growing understanding of how these job-to-job flows translate into enhanced productivity and earnings gains. Using new data, an analysis of the nature and extent of these flows by firm size and firm wages over the cycle shows that, during labour market downturns, workers tend to stay for longer on lower-paying, less productive rungs of the job ladder.
Conventional theory suggests that hierarchy and state institutions emerged due to increased productivity following the Neolithic transition to farming. This column argues that these social developments were a result of an increase in the ability of both robbers and the emergent elite to appropriate crops. Hierarchy and state institutions developed, therefore, only in regions where appropriable cereal crops had sufficient productivity advantage over non-appropriable roots and tubers.
Whether incumbent firms deter new entrants in a more concentrated market has been of major concern to antitrust authorities. This column introduces empirical evidence on the relationship between market concentration and entry in the intermediate goods market, using unique data from the Japanese auto market. The findings show a U-shaped relationship, whereby entry decreases and then increases as the market concentrates.
In the last century, real estate funding by banks grew steadily. This column argues that the unprecedented expansion of banking in mortgage lending resulted in a high degree of maturity mismatch. The solution to this problem should focus on greater maturity matching, and not using insured deposits. One avenue to do so is by securitising mortgages with little maturity transformation. Another is to create intermediaries providing mortgage loans where the lender shares in the appreciation, while assuming some risk against the occasional bust.
Understanding foreign exchange markets is key to understanding the global financial system. Yet, a clear understanding of why and how foreign exchange illiquidity materialises is still missing. This column suggests that foreign exchange liquidity can be impaired in times of flight to quality and higher global risk, and that commonality increases in distressed markets.
There is an urgent need for policymakers to fully acknowledge the extent to which conventional indicators related to gross trade are severely flawed as policy benchmarks because they fail to take into account the existence of global value chains and their increasing role in shaping the global economy. This column, which introduces a new Vox eBook, urges academics to start proposing workable indicators that are systematically produced and readily available.
Recent economic and financial events, such as the ‘taper tantrum’, have highlighted again the relevance of global factors in driving capital flows to emerging markets. This column suggests that capital flows to emerging markets move in part due to global push factors. However, sensitivity to these push factors differs greatly across types of flows and emerging markets. How much push factors affect individual emerging markets depends on their local liquidity and the composition of their foreign investor bases. Countries relying more on international funds and global banks are significantly more affected by changes in push factors.
Some argue that the increasing wealth-to-income ratios observed in many advanced economies are determined by housing and capital gains. This column considers the growing wealth-to-income ratio in an economy where capital and labour are used in two sectors: construction and manufacturing. If productivity in manufacturing grows faster than in construction – a ‘housing cost disease’ – it has adverse effects on social welfare. Concretely, the higher the appreciation of the value of housing, the lower the welfare benefit of a rising labour efficiency in manufacturing.
This chapter introduces the eBook "The Eurozone Crisis: A Consensus View of the Causes" and extracts a consensus narrative of the EZ Crisis.
Proposed remedies for the Eurozone crisis abound. But proven, working solutions are hard to come by, especially when traditional solutions – structural adjustment and monetary policy – are seen as causing problems. This column concentrates on the policy recipes prescribed on both supply-side and demand-side to jump-start economic recovery and reduce the extent and spillovers of the crisis itself. It finds that there is no easy and straightforward strategy and that there are no obvious answers. That doesn’t mean, however, that there are absolutely no answers. The alternative option to finding a way out – that is, continuing reliance on deflationary adjustment in a currency union stuck at the zero lower bound – is probably unlikely to convince anyone that structural reforms and monetary policy are back to being part of the solution.
What have we learned from the Eurozone crisis? This column argues that, very much unfortunately, we haven’t learned that much. In desperate need of a way out of the current impasse, economists and policymakers are imagining a menu of solutions. A grand panacea seems implausible, at present. So the way to proceed should follow the time-honoured European method – ‘functionalism’. The EU and the ECB must focus on modest tasks, dealing with them one by one, if we are to find our way out of the current mess.
Evidence suggests that people are more likely to behave in a pro-social way if they are aware of others who behave in such a manner. This column finds evidence for this phenomenon among blood donors. For every unit increase in a donor’s motivation, there is a 44% spillover in motivation to their fellow tenant. There is an overall increase in donation rates due to such a social multiplier of 17.9 percentage points, instead of the 10 percentage points obtained by calling an isolated donor.
The EZ Crisis is a long way from finished. The latest VoxEU eBook presents a consensus view of what caused the Crisis and why. It argues that this was a classic ‘sudden stop’ crisis – not a public-debt crisis. Excessive, cross-border lending and borrowing among EZ members in the pre-Crisis years – much of which ended up in non-traded sectors – was why Greece’s deficit deceit in 2009 could trigger such a massive crisis. The ultimate causes were policy failures that allowed the imbalances to get so large, a lack of institutions to absorb shocks at the EZ level, and poor crisis management.
Greece needs debt restructuring. Yet, to get debt reduction, the Greek government is required to implement structural reforms. This column proposes a way to square the circle by introducing a Structural Reform Index in Greek loan contracts. The central feature of the proposal is the linkage of debt relief to progress in structural reforms. The features and conditions of the proposal should make it desirable both for Greece and the German government and other creditors.
The past five years have given European countries useful insights on what works in crisis resolution. The lessons should be viewed as forward-looking contributions to the institutional and policy reform agenda in Europe, especially in the Eurozone. The Eurozone is not doomed, it just needs better economic and financial policies.
The problems in the Eurozone are not a side effect of the Global Crisis but rather date back to the Maastricht treaty. This chapter proposes a few possible remedies. First, it is necessary to make debt restructuring possible within the Eurozone. In particular, the risk loop between sovereigns and banks needs to be stopped through more diversified balance sheets. The second suggestion involves more shared sovereignty, not only for debtor countries, but also for creditors. At a minimum, the Eurozone needs a fiscal backstop for its banking union.
At the birth of the euro, the fiscal, financial, and monetary institutions in Europe were not sufficiently developed. This chapter describes these inefficiencies and the role they played in the Eurozone crisis. Instability in the Eurozone grew out of a disruptive deadlock between national governments forced to address and correct fundamental weaknesses in their national economies on their own, and the EZ-level policymaking. The future of the Eurozone therefore rests on developing an institutional framework that can credibly deliver stability at the EZ level.
Economists were early critics of the design of the Eurozone, though many of their warnings went unheeded. This column discusses some fundamental design flaws, and how they have contributed to recent crises. National booms and busts lead to large external imbalances, and without individual lenders of last resort – national central banks – these cycles lead some members to experience liquidity crises that degenerated into solvency crises. One credible solution to these design failures is the formation of a political union, however member states are unlikely to find this appealing.
No-one is optimistic about the Eurozone’s prospects. This column highlights the major causes of the Eurozone crisis, highlighting that many US economists thought the euro a bad idea from the outset. Previous emerging market crises have important lessons for Europe – if Alexis Tsipras were able to shift gears in the way that Kim dae Jung did in Korea and Lula did in Brazil, he would better serve his country.
The Eurozone crisis started as a sudden stop to cross-border capital inflows. This chapter suggests that countries with current-account surpluses did not endure lasting financial stress. The balance of payments crisis then became a public debt crisis, where the public debt which mattered was that owed to foreigners. Overall, the crisis proved much more difficult to deal with given the predominance of bank financing, thinly capitalised banks, the absence of a common mechanism to deal with failing banks, and the absence of a common lender of last resort.
The Eurozone is weak. This column presents an analysis of its two prime weaknesses – the lack of economic and fiscal policy discipline leading to the build-up of huge public and private debt levels and a loss of competitiveness, and the lack of credible mechanisms for crisis response that would reign in moral hazard problems and establish market discipline. Completing the currency union’s architecture and achieving credibility for its rules are key, given the heterogeneity and rigidity of its member countries' economies.
Inadequately dealing with high public debt is the central cause of the continuing crisis. This column argues that, while other failures of the institutional framework have been recognised and partly dealt with, the failure to deal with the legacy excess debt may continue to haunt us for decades. Even worse, the failure to complement fiscal rules with an effective sovereign restructuring regime may be setting us up to repeat the same mistakes.
What are the main lessons to be drawn from the European financial crisis? This column argues that the Eurozone really is at a major cross-roads. Without a common fiscal policy, and without adequate institutions for aggregate demand management, European leaders have to constantly alter the rules. Currency risk will be the major concern of financial markets, much more than in the past, due to how Europe has dealt with the Greek crisis.
The focus of European policymaking in the 1990s was on meeting a set of nominal criteria. This chapter argues that instead the focus should be on institutional reform and convergence. The main issues that need to be addressed are related to state capacity (tax collection), property rights protection, investor rights, red tape, and administrative-bureaucratic quality. If Europe is to proceed with an even closer union, it should set up institutional rather than nominal targets.
The sovereign debt and banking crises of 2010-12 have led to significant changes in the institutions of the Eurozone. The credibility of common policies regarding budgetary discipline and economic convergence remains weak. This chapter proposes that the way forward is to gradually bring common economic policies under the oversight of the European Parliament and to strengthen the role of the Commission. The picture must be completed with getting national parliaments more involved in the European policy process. The present state of the Eurozone could be seen as a sort of political equilibrium, likely to be economically unstable.
In the lead up to the global financial crisis, there was a substantial credit boom in advanced economies. In the Eurozone, cross-border flows played an especially important role in the boom-bust cycle. This column examines how the common currency and linkages between member states contributed to the Eurozone crisis. A very strong relationship between pre-crisis levels of external imbalances and macroeconomic performance since 2008 is observed. The findings point to the importance of delinking banks and sovereigns, and the need for macro-financial policies that manage the risks associated with excessive international debt flows.
In response to the Crisis, the ECB provided liquidity to banks on a massive scale and intervened in sovereign debt markets. This column argues that bank bailout policies and non-standard monetary policies by the ECB had a significant impact on default risks of sovereigns and banks in the Eurozone. The results, however, show that neither of the two policies was an unqualified success. Policies which are intended to reduce default risk can therefore have opposite effects if they are not properly designed.
Deflation is a threat to the macroeconomy. Japan had suffered from deflation for more than a decade, and now, Europe is facing it. To combat deflation under the zero interest bound, the Bank of Japan and the European Central Bank have resorted to quantitative easing, or increasing the money supply. This column explores its effectiveness, through the application of novel methods to distinguish signals from noises.
The productivity of a firm depends on its interaction with its suppliers and customers. This column uses unique data from Japan to investigate the wholesalers’ role in transaction networks, considering both sides of the transaction. The likelihood that a firm uses wholesalers increases with smaller buyer-side firms and larger seller-side firms. In addition, wholesalers tend to be located closer to their manufacturing buyers and further from their manufacturing sellers than manufacturers are to their direct manufacturing partners.
When looking at the potential effects of a trade policy, trade economists usually insist on the real income effects, often dismissing its unemployment effects as of second-order importance, whereas policymakers and the public at large tend to voice concerns about jobs gained or lost. This column presents a quantitative framework that weighs both concerns, which is especially important when real incomes and the unemployment rates move in the same direction following a trade reform.
Economists tend to focus on reforms that came after 1979 when explaining China’s soaring economic growth. This column argues that they shouldn’t. Mao’s policies also had a huge effect and should not be ignored. Economists and policymakers would do well to look further back in history. A long-term perspective might also help them bust a few myths along the way.
A nation’s hard power is based on its ability to coerce, while its soft power depends on the attractiveness of its culture, political ideals, and policies. This column shows that a country’s soft power has measureable effects on its exports. Countries that are admired for their positive global influence export more, holding other things constant.
The risk that asset price bubbles pose for financial stability is still not clear. Drawing on 140 years of data, this column argues that leverage is the critical determinant of crisis damage. When fuelled by credit booms, asset price bubbles are associated with high financial crisis risk; upon collapse, they coincide with weaker growth and slower recoveries. Highly leveraged housing bubbles are the worst case of all.