The EZ ‘consensus narrative’ argues the Crisis should not be thought of as a government debt crisis in its origin. Instead it regards large intra-EZ capital flows that emerged in the decade before the Crisis as the real culprit. This column argues that while the narrative is correct, it is also incomplete. With its focus on the deficit countries, it neglects the role of Germany, by far the largest member state, and its contribution to the imbalances in the years preceding the Crisis. A narrative that does not account for the effects of the German wage moderation is incomplete.
WTO members have somehow found it extremely difficult, in the 21st century, to reach a comprehensive multilateral agreement to expand mutual gains from trade. This column argues that success in expanding global trade will depend on major trading countries’ willingness to seek new institutional paths to multilateral agreements, through new negotiating modalities, openness to the expansion of regional agreements to new members, and in establishing reciprocity expectations for members according to their development status.
Europe is experiencing an unprecedented inflow of immigrants. Casual observation suggests that far-right parties could benefit from voters’ worries about this inflow. This update to a column from September 2012 provides empirical evidence showing that the geographic proximity of immigrants is one important causal driver behind support for the far right. The link with voting outcomes depends on the type of immigration, however, not just on the total number of immigrants.
As a result of the oil price plunge, the major oil-exporting countries are facing budget deficits for the first time in years. This column goes through the evidence, suggesting that the low price environment is likely to test the relationship between governments in oil-exporting countries and their sovereign wealth funds, at a time when spending is going up.
After more than five years, negotiations surrounding the Trans-Pacific Partnership (TPP) have finally been concluded. Yet, there is a lot that needs to be done before the agreement comes into force, and there is no certainty that it will. This column examines what TPP has achieved so far, what it has still not achieved, and the next steps involved, including the likely fate of the agreement itself.
Central bank independence was supposed to end politically driven monetary policy. This column discusses new evidence showing a sizeable spike in the growth rate of cash and overnight bank deposits centred on election days. The spike is present in countries with weak political institutions, but not in OECD countries. The cycle seems to be related to the cash demand created by systemic vote buying.
The fallout from the Global Crisis and its aftermath has been deeply damaging for European output. This column uses a growth accounting framework to explore the pre-Crisis and post-Crisis growth dynamics of several European countries. The weakness of post-Crisis real GDP in the Eurozone manifested itself in a decline in employment and average hours worked. However, decomposing growth for the Eurozone as a whole conceals significant differences across European countries, in both real GDP growth and its factor inputs.
Recent studies have established a causal link between trade and rising wage inequality. This column suggests there is also a pro-poor bias of trade. In moving from autarky to trade, the relative prices of goods consumed intensively by the poor, such as food, fall more. The gains from opening to trade are estimated at 63% for the 10th percentile of the income distribution and 28% for the 90th percentile.
Economists often disagree on China’s prospects. This column provides the results from a survey of top UK-based macroeconomists by the Centre for Macroeconomics (CFM). It turns out that three quarters of the experts believe that China’s annual growth rate will be less than 6% over the next ten years or so. But the panel is divided on whether the slowdown will have a significant impact on the UK economy.
Douglass C. North was among the most important and influential economic historians and economists of the late 20th century. This column highlights four of his major contributions: his pioneering work in quantitative economic history, or ‘cliometrics’; his similarly fundamental work using neoclassical economics to understand institutions; his critique of theory for explaining long-term economic and institutional change; and the distinction he drew between institutions and organisations.
Douglass North, economic historian and co-recipient of the 1993 Nobel Memorial Prize in Economic Sciences, passed away this week. This column pays tribute to one of the great social scientific pioneers of the modern era – focusing on one particular example of how North drew on historical, empirical and theoretical evidence to understand the interactions between institutions and economic change.
Interest rates have been extremely low since the Global Crisis. This column surveys the recent debate over whether they will remain low, or return to normal. While an unequivocal answer is not possible, the evidence suggests a significant decline in average real rates – perhaps to as low as 1%.
Not much is known about the drivers of gender diversity in monetary policy committees. This column presents new research suggesting that gender preferences may be endogenous with respect to the overall structural and institutional settings. Higher female representation is associated with higher levels of central bank independence and lower involvement of the central bank in both banking and financial sector supervision.
Seven years after its crisis, Iceland has staged an economic recovery. This column suggests that despite its overall success, the current economic situation in Iceland is not devoid of problems. Insufficient competition in certain areas keeps real wages lower in Iceland compared to other Nordic countries. The current government in power seems not to have learned enough from the crash of 2008. Finally, Iceland still needs to bring to justice more of those responsible for breaking the law while breaking the banks.
Some scholars view capital inflows as contractionary, but many policymakers view them as expansionary. Evidence supports the policymakers. This column introduces an analytic framework that knits together the two views. For a given policy rate, bond inflows lead to currency appreciation and are contractionary, while non-bond inflows lead to an appreciation but also to a decrease in the cost of borrowing, and thus may be expansionary.
Central banks around the world have been shouldering ever-increasing policy burdens beyond their core mandate of stabilising prices. This column considers the social welfare implications when central banks take on additional mandates that are usually the domain of other policymakers. Additional mandates are shown to worsen trade-offs faced by the central bank, while distorting the incentives of other policymakers. Central bank ‘mandate creep’ may be detrimental to welfare.
The British government has placed productivity at the centre of its economic growth agenda. Yet, despite the economy recovering to pre-Crisis levels, productivity has slowed. This column argues that we mustn’t lose sight of investing in productivity as a sure-fire and long-term guard against slow growth, outlining a range of strategies to get to a healthy level of investment.
How a host country can best assimilate immigrants is understandably on the minds of West European governments. This column presents new evidence that immigrants in Italy who live in neighbourhoods with a large share of non-Italians are significantly less likely to be in employment than their counterparts in less segregated areas. Furthermore, the negative effect of a large migrant share on employment is magnified by the presence of illegal immigrants in the neighbourhood. This suggests that keeping a large share of illegal immigrants in a country may exert negative externalities on those migrants who have legal status.
Large exchange rate swings remain a prominent and recurring feature of the world economy. This column uses household consumption patterns to examine the distributional impact of the devaluation of the peso during Mexico’s ‘Tequila Crisis’. Cost of living increases are found to be 1.25 to 1.6 times higher for the poor compared to the rich. In the interests of equity, exchange rate policy should take account of such distributional impacts.
Indices of economic freedom refer mostly to the recent past, making policy prescriptions difficult to draw. This column presents a new historical index of economic liberty covering 21 OECD countries for the period 1850-2007. Over time, progress in economic liberty has derived from different factors, but improvements in legal structures and property rights emerge as the main forces behind the long-term gains.
Greece’s trade deficit declined by 10% of GDP between 2007 and 2012, removing one of the great imbalances of the pre-Crisis years. Exports actually fell over the period, however, worsening the country’s economic crisis. This column compares Greece’s actual export performance with a benchmark for the expected trade response to the reduction in net capital. Greece’s exports should have increased by 25%, and export underperformance was responsible for a third of the country’s GDP decline. While labour markets have adjusted to the new economic environment, product markets seem to be hindering the recovery of competitiveness.
Recent events in Europe provide ample evidence that the political aftershocks of financial crises can be severe. This column uses a new dataset that covers elections and crises in 20 advanced economies going back to 1870 to systematically study the political aftermath of financial crises. Far-right parties are the biggest beneficiaries of financial crises, while the fractionalisation of parliaments complicates post-crisis governance. These effects are not observed following normal recessions or severe non-financial macroeconomic shocks.
The Eurozone needs fixing, but it is impossible to agree upon the steps to be taken without agreement on what went wrong. This column introduces a new CEPR Policy Insight that presents a consensus-narrative of the causes of the EZ Crisis. It was authored by a dozen leading economists from across the spectrum. The consensus narrative is supported by a long and growing list of economists.
Human development provides a long-run view of well-being. This column presents a new historical index of human development covering 157 countries from the mid-19th century. The index gives a comprehensive view on human development on the global scale, and stresses the health and knowledge dimensions of well-being.
As the recent Financial Stability Board decision on loss-absorbing capital shows, repairing the financial system is still a work in progress. This column reviews the author’s new book on the matter, Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risks. It argues that financial institutions should be required to put up capital against the mismatch between each type of risk they hold and their natural capacity to hold that type of risk.
Iceland and Greece were both seriously affected by the Global Crisis, yet their experiences with the implemented IMF programmes have been quite different. In Iceland the programme has been a success, whereas the one in Greece has been a failure. This column explains why this happened. First, Iceland’s external debt was de jure private, while Greece’s external debt was sovereign debt. Second, Iceland has its own currency, making it easy to create a current account surplus through a lower exchange rate. Finally, the government of Iceland took full ownership of the IMF programme, which was not the case in Greece.
Received wisdom would make you think that you need lots of small firms that are innovating in order to push productivity in an economy. This column provides data suggesting that large firms with high productivity growth can act as technological leaders and supply the economy with a continuous stream of innovations. Overly strong patent protection can significantly reduce growth and increase inequality.
Small and medium-sized enterprises are supposed to be the key to growth, everywhere. These enterprises are risky, and when they are so important to the well-being of an economy, someone must bear the risk of funding them. This column argues that there is a real need for policymakers to focus on how we finance SMEs, as getting the institutions and structures right can pay dividends in the long run.
Following an anaemic performance with severe imbalances in the 1990s and a debilitating financial crisis in 2001, Turkey enjoyed a period of rapid economic growth. Since about 2007 onwards, however, economic growth has slowed significantly and productivity growth has stagnated. This column argues that, rather than providing another example of the ‘stop-and-go’ cycles typical of emerging economies, the Turkish economy's ups and downs during this era reflect institutional improvements in the immediate aftermath of its financial crisis, followed by an ominous slide in the quality of these economic and political institutions.
Urbanisation in India is taking many twists and turns. Organised manufacturing is moving out of urban areas, while unorganised manufacturing is transitioning towards urban areas. As the fourth greatest energy consumer in the world, how the country manages this ongoing industrialisation and urbanisation process will have important environmental implications. This column looks at the relationship between growth, geography, and energy efficiency in manufacturing in India. Electricity consumption per unit of output has declined in urban and rural areas, but these overall trends mask substantial variation between states and substantial potential for further efficiency improvements in energy-intensive industries.
The IMF, together with CEPR and the Central Bank of Ireland, put on a conference that drew lessons from Ireland’s bailout package titled “Ireland: Lessons from its Recovery from the Bank-Sovereign Loop”. This column summarises the contributions by Eichengreen, Fatás and Schoenmaker, as well as panel comments by Christine Lagarde, Benoît Coeuré, Michael Noonan, and Valdis Dombrovskis.
In light of the Great Recession, we continue to learn new ways in which economic downturns directly affect the labour market. This column suggests that following an adverse demand shock, individuals exit local labour markets primarily through migration, but that has become less prominent in the Great Recession. Faced with declining economic prospects, workers are becoming more likely to stay put, without re-entering the labour market.
Fracking has driven an oil and natural gas boom in the US over the past decade. This column examines the impact these mining activities have had on local and regional economies. US counties enjoy significant economic benefits, including increased wages and new job creation. These effects grow as the geographic radius is extended to include neighbouring areas in the region. The results suggest that the fracking boom provided some insulation for these areas during the Great Recession, and lowered national unemployment by as much as 0.5%.
No-one is sure what the Fed’s long-delayed nominal interest rate hikes will bring, and there has been much speculation on what the equilibrium rate might look like when the Fed acts. This column argues that it would be foolish to attempt to pin down a precise value for the steady-state real rate. A better approach is to predict the plausible range of values, and evidence suggests that the equilibrium rate will range from a little above zero up to 2%.
The terrorist attacks in Paris are a horrible reminder that terrorism is now a systematic part of the global economy. This column presents a list of past Vox columns that deal with terrorism from an economic perspective. Particularly insightful is Alan Krueger’s column, “What makes a terrorist?”
Trade in intermediate inputs now accounts for as much as two-thirds of international trade. Firms must decide which segments of their production processes to own and which to outsource. Using global plant-level data, this column empirically examines firms’ organisational choices along value chains. Decisions to integrate or outsource upstream and downstream functions are found to depend on demand elasticity relative to the substitutability of inputs. These results provide strong evidence that integration decisions are driven by contractual frictions.
Climate change can affect agricultural productivity and the incentives of people to remain in rural areas. This column looks at the effects of warming trends on rural-urban and international migration. In middle-income economies, higher temperatures increased emigration rates to urban areas and to other countries. In very poor countries, however, higher temperatures reduced the probability of emigration to cities or to other countries, consistent with the presence of liquidity constraints.
Measured as a percentage of its GDP, Greece’s debt is higher than that of Portugal and Ireland. This column discusses a range of new techniques for measuring the debts of Greece, Ireland, and Portugal. It argues that plausible alternative measures of indebtedness suggest that Greece is anywhere from as much as 50% more indebted than Portugal and Ireland to as little as half as indebted. The most reasonable measures imply that Greece is far less indebted than is commonly reported.
Voluntary disclosure programmes offer tax evaders the opportunity to come clean with reduced penalties. This column uses data from the US and Germany to examine the merits of such programmes. They are found to increase tax evasion, but also to significantly lower administrative costs, leading to a net increase in tax revenues.
Much research has gone into trying to establish a connection in the US between having a distinctively black name and disadvantage over a lifetime. This column highlights a striking difference between the historical effects of having a black name and today’s effects. While modern black names show up in modern empirical studies as an albatross around the neck of those possessing them, either because those with such names come from worse socioeconomic conditions or face discrimination later in life, historical black names conveyed a large advantage accumulating over an individual’s lifetime.
Many commentators have noted that the US has ridden out its post-crisis malaise rather skilfully, not least when it comes to reducing unemployment. This column argues that the US unemployment rate - despite being impressive, all things considered - still has substantial room to fall because desire to work among the non-employed is close to a record low.
Intergenerational income mobility is currently not very high in the US compared to other developed countries. This column shows that US intergenerational income equality was high in the 19th century but plummeted between 1900 and 1920. The income-mobility ladder was thus pulled up during the so-called Great Gatsby era.
The value of world trade is falling. This column, which introduces the 18th Global Trade Alert report, shows that the manufactures that account for a large share of the fall are those where G20 nations have imposed the most trade restrictions since 2014. G20 leaders should request that the Chinese G20 Presidency support initiatives to revive global trade and avoid more trade distortions.
From 2011 to 2013, fiscal policy in the Eurozone turned progressively more restrictive. This column argues that output cost of fiscal consolidation strongly depends on presence and strength of credit constraints. With credit constraints both in the household and the firm sector, fiscal consolidation would be largely responsible for the weak growth performance during 2011-2013. Postponing the fiscal consolidation to a period of unconstrained monetary policy would have avoided most of these losses.
There is generally consensus among macroeconomists that monetary policy works best when it is systematic. Following the financial crisis, the US Federal Reserve shifted from long-term, systematic policy to short-term goals targeting unemployment. This column argues that, while these were appropriate in the aftermath of the downturn, such policy accommodations have been pursued for too long since. The need for a somewhat accommodative policy cannot be used to defend the current non-systematic policy and excessive emphasis on short-term employment gains.
This year, for the first time ever, nearly all of the world’s countries are making pledges to help limit future climate change. As of 1 October, 147 countries (representing about 85% of global emissions) have submitted their Intended Nationally Determined Contributions. These pledges, if carried out in full, are expected to lower emissions relative to the ‘business as usual’ forecast. However, they are not expected to prevent emissions from increasing above today’s level through 2030. To meet the global goal of limiting mean global temperature change to 2°C relative to the pre-industrial level, much more will need to be done after 2030. Eventually, emissions will have to fall to zero worldwide – either that, or countries will need to remove carbon dioxide directly from the atmosphere. This column introduces a new Vox eBook that looks into what needs to be done to build a climate regime that is both workable and effective.
In the wake of the Global Crisis, emerging Europe has experienced a sharp drop in investment levels. As a result, income convergence has virtually come to a halt. This column presents key findings of the EBRD’s latest Transition Report, urging countries in emerging Europe to rebalance their financial systems in order to reignite economic growth. Rebalancing is necessary in terms of the available debt–equity mix, the currency composition of credit, banks’ funding sources, and cross-border investment partners.
There seems to be a general consensus that the Trans-Pacific Partnership is not a pure trade agreement. This column presents evidence suggesting that for at least one major sector – the auto industry – the agreement will make a huge difference, bringing considerable disruption to the industry but offering sizeable gains for car buyers.
From the introduction of the euro in 1999 to the Greek crisis in 2010, the Eurozone witnessed external imbalances between countries at its core and those at its periphery. These imbalances have been attributed either to differences in competitiveness or to the effect of financial integration. This column argues that in order to understand the imbalances within the Eurozone, it is necessary to consider credit costs and capital flows. The lower real cost of credit for high-inflation countries must be taken into account, as well as the inflow of capital to the non-tradable sector that this implies. Monetary policy cannot be conducted in a ‘one size fits all’ manner.
Academics get ahead in part due to how often their papers are cited. This column argues that the pressure to publish research that garners a lot of citations stifles scientific progress by discouraging exploration. But in the absence of a plausible alternative for measuring the novelty of scientific publications, citation-based measures have persisted. This column presents a new way to rank scientific journals based on novelty as opposed to impact, which could encourage scientists to pursue more innovative work.
The Eurozone crisis is still lingering. This column uses data from 100 years of sovereign defaults to portray a new take on the crisis. The findings indicate that crises in a financial centre have persistent adverse effects on the periphery. They lead to more economic losses than home-grown idiosyncratic crises. Successful restructuring of such crises would require substantially larger debt write downs than those following idiosyncratic crises.
Despite low levels of formal trade barriers and recent reductions in global communication and shipping costs, firms still command a disproportionately large market share in their home countries. This column examines home market advantage in the car industry. The results suggest that preference for own-country brands is an important feature of trade and multinational production that is underappreciated in the academic literature.
The Global Crisis revealed serious deficiencies in the supervision of financial institutions. In particular, regulators neglected organisational culture at the institutional level. This column reviews efforts since 2011 by De Nederlandsche Bank to oversee executive behaviour and cultures at financial institutions. These measures aimed at identifying risky behaviour and decision-making processes at a sufficiently early stage for appropriate countermeasures to be implemented. The findings show that regulators can play a larger part in securing the stability of the financial system by taking an active role in shaping institutional cultural processes.
Thomas Piketty and others have prompted renewed interest in understanding long-term patterns of inequality. This column presents evidence from pre-industrial Europe. Inequality rose even during the success stories of early modern Europe, but it can hardly have been the sole requisite for growth. In both economic history and today’s economic theory, the idea of a universal trade-off between growth and inequality needs to be replaced by stronger attention to social processes and institutional developments.
European banks are struggling with high levels of non-performing loans. This column explores the channels through which persistently high non-performing loans hold down credit growth and economic activity. A survey of EU authorities and banks reveals that the loans are not written-off for a variety of deep-seated reasons, including legal and tax code issues. An agenda is proposed comprising tightened bank supervision, structural bankruptcy reforms, and the development of markets for distressed assets.
Offshoring has risen in all advanced economies in recent years. This column analyses the impact of offshoring trends in the UK, where offshoring in services has followed the abundant offshoring in manufacturing, by uncovering their spatial implications. The impact of offshoring in places more exposed to such trends has been significantly negative on routine occupations. On the other hand, when investment abroad targeted developing economies, the effect on job creation in non-routine occupations was positive.
Interest rates are near zero – or moving towards it – in major economies worldwide. This column introduces a new theoretical framework that helps to organise thinking on how liquidity traps and slow growth spread across the world. It stresses the role of capital flows, exchange rates, and the shortage of safe assets. Once rates are at the ZLB, the imbalance between the supply and demand of safe assets is redressed by lower global output. Liquidity traps emerge naturally and countries drag each other into them.
The effects of copyright laws on artistic creativity are difficult to identify. This column looks back at 19th century Lombardy and Venetia where, following annexation by Napoleon, basic copyright protection was adopted. The copyright laws raised both the quantity and quality of Italian opera. The findings have important implications for modern debates about protecting intellectual property.
The global economy is not working properly. This column argues that to overcome suboptimal results, global aggregate demand must be expanded, the gap between excessively large pools of capital and huge unmet infrastructure needs must be bridged, and finally, the distributional downside of rapid technological advances and global integration must be addressed. Change will come only when a global vision is put forth, coupled with political will.
Outsourcing labour tasks to lower wage countries has been made much easier by the emergence of global online labour markets. This column argues that there are significant frictions in these markets, making it difficult for workers to get their first job and establish a reputation. However, new types of organisations have emerged that allow the sharing of reputations among groups of high-quality workers. These organisations seem to rely on offline social ties between workers to help reduce information-related trade barriers.
Small and medium-sized European businesses find it hard to raise capital, especially during their development phase. This column compares the situation in the US and Europe and suggests that many SMEs in Europe still face significant difficulties in identifying and accessing sources of funding. Promoting greater equity involvement and improving access to and information on all of the various funding options would do much to boost growth.
Since the Global Crisis, a broad discussion about the future of securitisation has emerged. This column presents new evidence on the relationship between securitisation and economic growth. The impact of securitisation depends on the underlying type of collateral. Securitisation of business loans may encourage investment and spur economic activity, but securitisation of consumer loans may at the aggregate divert resources away from productive purposes.
With a European transfer union on the cards, we can learn a lot from Germany’s reunification – a transfer union of sorts. This column takes us through various lessons, concluding that transfers would cement southern Europe’s lack of competitiveness and drive Europe into permanent stagnation.