Politicians may have the opportunity to interfere with the allocation of public services to help to achieve their electoral objectives. This column argues that politicians share rents with central players to build and sustain coalitions. Using detailed data from the Philippines, it examines social networks and the allocation of municipal services. Households with greater potential to broker political coalitions do indeed appear to receive more services from their municipal government.
Public development banks play a significant role in the allocation of credit to businesses that may be unable to attain credit under normal circumstances, despite generating positive externalities. But there is concern that lending by these institutions may end up being allocated inefficiently. This column considers the costly screening that banks must do to allocate funds. It finds that the inefficient allocation of credit may arise when banks are unable to fully internalise the benefits of possible projects. Direct lending and the implementation of subsidies for intermediated lending are two possible ways to counter expensive screening.
The IMF’s latest Global Financial Stability Report devotes for the first time a chapter to the systemic risks potentially associated with the insurance sector and how regulatory bodies should respond. This column examines the key points and proposes a way forward for the global regulatory framework for insurance. In particular, it argues for the importance of not treating the sector in the same way as the banking sector as the two operate very different business models. Similarly, for an activity-based approach, a regulatory focus on just nine ‘systemically important’ insurers rather than the sector as a whole is flawed.
The volume of credit to Swedish households has grown twice as fast as incomes since the mid-1990s. This has resulted in both rising house prices and rising household debt. This column argues that these trends expose Sweden to important economic vulnerabilities. Curbing these vulnerabilities will require prompt action by the authorities.
Theory and empirical data contest the direction of causality in the relationship between economic performance and income inequality – a relationship that is of great political importance. This column uses evidence from OECD countries to show that the relationship is not linear. While some countries can improve economic performance only at the cost of increasing economic inequality, other countries can improve both economic performance and equality without such a trade-off.
Modern discussions about a country’s ‘decline in manufacturing’ are seldom meaningful. Such talk of industrialisation and deindustrialisation across the entire sector tends to ignore important variation across individual industries. This column draws lessons from the revealed comparative advantage of late-Victorian Britain – the ‘workshop of the world’. Advantage lay mainly in industries that were relatively capital-intensive and that didn’t rely on large pools of unskilled labour. Despite its resource wealth, even Britain in the first era of globalisation was at a measurable comparative disadvantage in a number of industries.
Behavioural economics has made many gains in recent years, but much uncertainty persists about the effectiveness of different behavioural interventions. This column uses data from a large-scale experiment to find the relative effectiveness of multiple treatments within one setting, and to gauge the accuracy of academic experts’ forecasts of responses. It finds monetary incentives are strong motivators, non-monetary psychological inducements are moderately effective, and results using behavioural factors are generally consistent with models of social and time preferences. Further, the interviewed experts correctly anticipate several results, including the effectiveness of psychological inducements, but fail to predict other important features.
In light of the Eurozone Crisis, some countries have implemented reforms to collective wage bargaining institutions, which can be responsible for wage rigidities that are problematic in the face of rising unemployment. This column describes collective wage bargaining in France and how national minimum wage increases are transmitted to wage floors set by industry-level agreements. An increase in the national minimum wage leads to an increase in negotiated industry-level wage floors, which firms then use as references for their wage policy. This might partly explain why French base wages have continued to increase despite recent rising unemployment.
The Global Crisis emphasised the fragility of international financial networks. Despite this, there has been little historical research into how networks propagate financial shocks. This column explores how interbank networks transmitted liquidity shocks through the US banking system during the Great Depression. During banking panics, the pyramided-structure of reserves forced troubled banks to reduce lending, thus amplifying the decline in investment spending.
The large wave of refugees arriving from the Middle East and Northern Africa is one of the major challenges facing the EU today. In this column, the authors of the 2nd Monitoring the Eurozone report outline their proposal for one measure to help deal with the refugee crisis – EU refugee bonds. EU-wide bonds are an appropriate way to finance the response to the crisis due to the immediate costs for some countries and the future benefits for others of integrating refugees.
Economic theory offers conflicting perspectives on the relationship between insider trading and innovation. To date, the empirical evidence is similarly inconclusive. This column exploits the staggered enforcement of inside trading laws across countries to explore the effect on patenting behaviour. The findings point to a robust positive effect of enforcement on various measures of patenting behaviour. Legal systems that protect outside investors from corporate insiders thus help to foster innovation.
Europe has failed to design institutions robust enough to weather difficult times, as the sovereign debt and refugee crises prove. This column introduces CEPR’s new Monitoring the Eurozone report, Reinforcing the Eurozone and Protecting an Open Society, which argues that coordinated actions are urgently needed. The institutional changes proposed by the authors are politically feasible and would help restore prosperity to the Eurozone.
Optimising the allocation of factors of production improves productivity. In India, where evidence suggests land is severely misallocated to inefficient manufacturing firms, access to financing is disproportionately tied to access to land. This column examines the link between the misallocation of land and access to capital through financial markets. A very strong positive correlation emerges between the two, consistent with the fact that land and buildings can provide strong collateral support for accessing finance from the credit market.
The limits of the European Single Market have often been highlighted. This column argues that although implicit barriers remain, the Single Market has delivered substantial benefits to member countries. New empirical evidence is presented of the trade and FDI gains that Central and Eastern European countries have enjoyed since joining the Single Market. On top of making regulations more competition-friendly, regulatory harmonisation can boost the economic links between countries.
Explicit economic incentives – for example, a subsidy to contribute to a public good – can sometimes ‘crowd out’ generous and ethical motives. But when properly designed, can incentives ‘crowd in’ these civic virtues? This column uses an example from ancient Athens to show how this might be done, providing a lesson for modern mechanism design and public policy.
During normal operations, price discovery is an important feature of decentralised market trading. But the process can be distorted when markets are under great stress, such as during the run up to the collapse of Lehman Brothers in 2008. This column uses trading data from the days leading up to and following the collapse to show that price discovery at US stock exchanges remained remarkably efficient, even at the height of the turmoil.
Trade has been growing more slowly since the Great Recession not only because global GDP growth is lower, but also because trade itself has become less responsive to GDP. The causes of the changing trade-income relationship have been studied, but its consequences have not. This column presents a simple framework to assess some of the demand-side and supply-side implications. The change hurts growth, although the quantifiable effects are not large.
Seven years on from the great financial crisis and despite central banks being seen by many as ‘the only game in town’, there has been a renewed push for monetary policy to experiment even further. One of the latest proposals is the revival of Milton Friedman’s ‘helicopter money’. But have all the implications of what many see as central banks’ ‘nuclear option’ been fully appreciated? This column argues that this is not the case. Realising the benefits that its proponents claim exist would require giving up on interest rate policy forever.
A large empirical literature has revealed the effects of preventative and punitive measures on crime. This column examines the effects of police deployment strategies, comparing geographically concentrated protection with evenly dispersed protection across a city. The results suggests that when considering changes in the geographic distribution of police forces, we should take into account the effects on house prices and on reallocation of the population, as well as the overall effect on crime in the entire city.
The Syrian exodus has created a crisis that has thrown the existing European asylum system into chaos and has led to an increasingly polarised debate over solutions. This column argues that in the long term, we need to shift away from the current system of ‘spontaneous’ asylum migration towards a comprehensive resettlement programme. However, a radical shift towards resettlement is unlikely while the Syrian crisis continues at its current intensity.
Spain enjoyed substantial growth in the decade prior to the Global Crisis, despite declining aggregate productivity. Recent research blames the poor productivity on different forms of a ‘financial resource curse’. This column argues that resource misallocation was particularly severe due to corruption and crony capitalism. This suggests future growth will require serious political reforms.
Industrialisation has been the key to modern economic growth and rapidly rising incomes, but some question whether it is always a blessing when taking a broader view of human wellbeing. While the recent rise of China and other Asian economies has transformed the lives of millions, the experience of Britain in the 19th century shows a more mixed picture of development. This column presents a unified framework for measuring British wellbeing over the period 1780-1850, which shows that better health and higher income levels alternated in improving overall wellbeing, until declining health in the 1840s led to stagnating wellbeing.
Digital technologies have been widely used for political activism in recent years, including during the Arab Spring, the Occupy Wall Street movement, and the Indignados movement in Spain. This column reports research showing that the growing use of mobile phones in Africa leads to more political protests during recessions and periods of national crisis. The mobilising potential of digital technologies is more pronounced in autocratic countries and those where the raditional media are under state control, suggesting that this technology may play a key role in fostering political freedom.
The rise of automation and, more generally, IT-driven structural change in the labour market have made policymakers and researchers worry about ‘disappearing jobs’ and a dire future for employment. This column examines data from several countries to get a long-term view of labour supply. To the extent that productivity improvements continue, hours worked will indeed likely fall. But this will not necessarily be a bad thing and jobs will not necessarily disappear.
Increased globalisation since the mid-1990s has eroded some of the tax bases of many economies. At the same time, demand for public goods has risen and governments face the challenge of financing greater public expenditure with lower tax revenues. This column discusses tax policy responses to increasing globalisation, showing that since the mid-1990s governments in OECD countries have increasingly relied on revenues from employee-borne rather than firm-borne taxes. Due to the greater mobility of capital and high-skilled workers, who are able to escape higher taxes more easily, the middle classes have carried much of the additional tax burden.
Central banks may well possess private information about future economic conditions. This column asks whether such information should be communicated to the public. While it is crucial for the central banks to communicate their policy action plans to the private sector, guidance that helps the private sector form more accurate forecasts of future shocks can be undesirable and destabilising.
As Argentina’s protracted and litigious restructuring saga comes to an end, it is natural to ask what lessons the world can draw from this contentious process. This column takes a close look at Argentina’s ordeal, revealing just how idiosyncratic it has been. While it is therefore less influential than most people think, the long script yields important and unexpected lessons.
By creating liquidity, banks improve the allocation of capital and accelerate economic growth. This column uses evidence from US banks between 1984 and 2006 to evaluate the impact of competition amongst banks on their liquidity creation. It finds that an intensification of competition in the banking industry materially reduces liquidity creation. Furthermore, the evidence suggests that more profitable banks experience a smaller reduction in liquidity creation because of their ability to better absorb risk. Similarly, an intensification of competition reduces liquidity creation more among small banks, who are more engaged in relationship lending.
The idea that the global economy has entered a low-growth equilibrium appears to have gained acceptance. This column argues that this ‘New Normal’ never was, isn’t, and should be replaced by the ‘New Abnormal’. Far from being an equilibrium, the low growth recorded in the West since the nadir of the financial crisis in 2009 has only been achieved by progressively more aggressive and unprecedented monetary policy actions in response to a series of panic attacks in the financial markets. The aftershocks of the crisis are colliding with a series of structural changes which leave the global economy in a state of latent instability.
US cities became increasingly segregated by race over the 20th century. General consensus holds that most of this segregation was concentrated in the post-war period. This column uses neighbourhood-level data to find that racial segregation in cities began earlier; indeed, much of it had taken place by 1930. The column also examines the residential response of whites to black arrivals, suggesting that this contributed to segregation in addition to discrimination and institutional factors.
An ongoing issue for banking regulation is the extent to which regulators should move away from risk-sensitive capital requirements towards simpler requirements, such as the leverage ratio. This column looks at the evidence that has influenced the debate and shows that none of the analyses to date has tested the risk-based credit requirements of Basel II against leverage. It also sets out two new tests that do test Basel II and produce a different result from the earlier analyses, highlighting the importance of risk sensitivity.
Since the Global Crisis, interest rates in many advanced economies have been low and, in many cases, are expected to remain low for some time. Low interest rates help economies recover and can enhance banks’ balance sheets and performance, but persistently low rates may also erode the profitability of banks if they are associated with lower net interest margins. This column uses new cross-country evidence to confirm that decreases in interest rates do indeed contribute to weaker net interest margins, with a greater adverse effect when rates are already low.
Societies characterised by a high transmission of socioeconomic status across generations are not only more likely to be perceived as ‘unfair’, they may also be less efficient as they waste the skills of those coming from disadvantaged backgrounds. Existing evidence suggests that the related earnings advantages disappear after several generations. This column challenges this view by comparing tax records for family dynasties (identified by surname) in Florence, Italy in 1427 and 2011. The top earners among the current taxpayers were found to have already been at the top of the socioeconomic ladder six centuries ago. This persistence is identified despite the huge political, demographic, and economic upheavals that occurred between the two dates.
Quantitative easing is called ‘unconventional monetary policy’, but monetary policy could get much more ‘unconventional’. Things like ‘helicopter money’, abolishing currency and negative nominal interest rates have entered the public policy debate. This column reports the views of leading experts on the future role of unconventional monetary policy, and what might be called ‘unconventional unconventional monetary policies’. Opinions are divided. There is a healthy dose of scepticism on the effectiveness of current and future policies, but also many respondents express urgency that central banks should have more policy tools to affect inflation and real activity when the need arises. Ultimately, the experts’ hesitations match those of central banks.
Migration is the most important issue for many likely voters in the upcoming UK referendum on EU membership, despite the fact that the economic impacts on the UK of recent EU migration appear to have been relatively benign. This column looks at these impacts, the implications of the UK’s “renegotiation” of its relationship with the EU, and post-Brexit policy options. A vote to Remain will unequivocally be a vote for the status quo in this area. A vote to Leave, however, will take us into new territory for UK immigration policy, with potentially significant consequences.
The success of independent central banks is often used to argue in favour of independent fiscal councils with the aim of promoting sound fiscal policies. But unlike central banks, fiscal councils have no policy levers to pull – they can bark but never bite. This column explores the theoretical foundations and practical implications of fiscal councils. The evidence suggests that independent councils can mitigate the deficit bias. They do this by subjecting the ‘fiscal alchemy’ to systematic, rigorous, and highly publicised scrutiny.
In the last decade, US states have created dozens of large-scale programmes that use public resources to subsidise attendance at private schools, but there is disagreement over who benefits from these subsidies. This column estimates the effects of the programmes on school revenue and enrolment. The programmes increase revenue, but the mechanism depends on the design. In programmes with restricted eligibility the subsidies reach families and increase enrolment, whereas in unrestricted programmes the subsidies flow to schools and increase revenue per student.
A large part of people’s wages rewards the knowledge embedded in them that they use in a production endeavour. Knowledgeable individuals specialise in hard, complicated tasks, while less knowledgeable ones specialise in simpler, more common tasks. This column uses a dynamic model of knowledge accumulation over time and career paths to find an underlying cause for wage inequality in the US over the last few decades. A good explanation for the wage inequality is the discrepancy between the rate of technological change and the rate at which the distribution of knowledge catches up.
For over half a century, one pillar of the world trading system has been the principle of ‘special and differential treatment’ (SDT) for developing countries. This column explores how SDT has impacted trade policy around the world. Although this strategy aims to help developing countries, in design and practice it seems to be biased against them. While there is no support for SDT as a growth-promoting strategy, there is a clear need for further research that explicitly tackles the empirical challenges that it presents.
Greece may be about to get some debt relief, although there is still resistance to the idea. This column argues that the ECB has been providing other Eurozone countries with debt relief since early 2015 through its programme of quantitative easing. The reason given for excluding Greece from the QE programme – the ‘quality’ of its government bonds – can easily be overcome if the political will exists to do so. It is time to start treating a country struggling under the burden of immense debt in the same way as the other Eurozone countries are treated.
The recent reversal of capital flows to emerging markets has pointed to the continuing relevance of the sudden stop problem. This column analyses the sudden stops in capital flows to emerging markets since 1991. It shows that the frequency and duration of sudden stops have remained largely unchanged, but that global factors have become more important in their incidence. Stronger macroeconomic and financial frameworks have allowed policymakers to respond more flexibly, but these more flexible responses have not guaranteed insulation or significantly mitigated the impact.
There is growing concern that funding agencies supporting scientific research are increasingly risk-averse, favouring safe projects at the expense of novel projects exploring untested approaches. This column uses the citation trajectories for over 1 million research papers to examine the impact profile of novel research. Novel papers tend to suffer from delayed impact, but are more likely to become big hits in the long run and to generate follow-up research. The short time windows of the bibliometric indicators that are increasingly used by funding agencies in their decision-making may bias funding decisions against novelty.
Housing forms a large share of household wealth in many nations. Using comparable data for the US and England, this column argues that the nature of housing as an asset – its utility value, illiquidity, and mix of risk and returns – is an important factor in explaining the trajectory of wealth in retirement.
The first century of modern Greek monetary history has striking parallels to the country’s current crisis, from repeated cycles of entry and exit from the dominant fixed exchange rate system, to government debt built-up and default, to financial supervision by West European countries. This column compares these two episodes in Greece’s monetary history and concludes that lasting monetary union membership can only be achieved if both monetary and fiscal policies are effectively delegated abroad. Understandable public resentment against ‘foreign intrusion’ might need to be weighed against their potential to secure the long-term political and economic objective of exchange rate stabilisation.
By providing liquidity to credit line borrowers and depositors, banks are potentially exposed to simultaneous runs on their assets and liabilities. This risk became a reality when the European interbank market froze in the summer of 2007. This column discusses the risk of double-bank runs, liquidity risk management by banks and the implications for the regulation of the financial sector, in particular Basel III. In 2007, banks with a larger exposure to the interbank market suffered a spike in drawdowns on their outstanding credit lines to firms, and were effectively exposed to a ‘double-run’. Importantly, this fragility was mitigated by active pre-crisis liquidity risk management by banks.
The ratio of wealth to income has increased substantially since WWII. Despite the key role of housing wealth in this process, an appropriate macroeconomic model that can explain recent history and assess the future is still lacking. This column presents a novel macroeconomic model designed to investigate the evolution of housing wealth in a growing economy with a fixed overall land supply. A key implication is that rising house and land prices are natural phenomena in a growing economy. Further, rising wealth-to-income ratios appear to be an important trigger for the long-term growth of the finance industry.
Language skills play an important role in labour market performance. This column uses evidence from the Netherlands to assess whether speaking a dialect affects a child’s educational performance. It finds that speaking Dutch dialects affects the academic performance of some young children. While it has a modestly negative effect on boys' language test scores, there is no effect on language tests for girls. Dialect-speaking does not affect scores in maths tests. The share of dialect-speaking peers in the classroom does not affect the test scores of either Dutch-speaking children or dialect-speaking children.
Since the onset of the Global Crisis in 2007-08, stress testing has emerged as a major component of the supervisory toolkit. This column introduces a new CEPR Press eBook that presents the perspectives of policymakers, stress test designers and academics on the remarkable development of a tool which ten years ago was little known.
Borders impede trade, and a major objective of research in international trade has been to identify by how much. This column argues that bilateral trade data can give a misleading picture. Larger countries have inherently smaller border effects because their data aggregate over more space and economic activity. Trade economists need to think harder about how slicing up the map at the level of countries drives estimates of important policy variables.
Employees care about more than just money. Understanding these non-monetary motivations can help organisations incentivise performance. This column presents evidence from a field experiment that explored the motivational effects of ‘meaningful’ work. Recognition and meaning are found to have substitutive motivational effects, while monetary incentives and meaning have additive effects.
Many countries are increasing the age at which people can start claiming state-funded pensions. One objection often raised is that such policies are unfair because some will be too unhealthy to remain in paid work. This column compares employment rates in England of older people today to those of earlier generations, and also to those of younger people today. These comparisons suggest that a significant minority of older people appear to be unable to work on the grounds of health alone.
Most economists view trade as benefiting countries overall but leading to winners and losers within nations. This column summarises a recent survey about winners and losers from globalisation prepared in the context of the FP7 COEURE project. It stresses that the policy debate should focus on identifying and compensating the losers from globalisation rather than on considering protectionist measures that are detrimental to growth.
Financial markets are increasingly concerned about the outcome of the upcoming Brexit referendum, and considerable attention is therefore focused on surveys of voting intentions. Using a Financial Times dataset covering 201 surveys conducted over the past five years, this column reveals that we can learn surprisingly little from these surveys. While in general they predict the vote will be in favour of remaining in the EU, the organisation that conducted each survey seems to be as important as respondents’ voting intentions in determining individual survey results. Moreover, there is a large number of undecided voters who are likely to decide the outcome of the referendum.
The media plays a significant role in politics, but households can choose not to consume political propaganda delivered through the media. This column uses evidence from Venezuela to show that households that support opposition parties are more inclined to switch away from, or tune out of, government propaganda delivered via the television. Higher-income households, which tend to have access to alternative channels via cable, are also less likely to consume propaganda. These findings have significant implications for politically polarised societies.
The Feldstein-Horioka puzzle concerns why levels of investment and saving are correlated across countries. This is puzzling because financial markets can rapidly move capital between countries, and there is no reason why the best investment opportunities should be in a saver’s home country. This column posits a disarmingly simple solution to this longstanding puzzle – global capital markets cannot by themselves achieve net capital transfers between countries. This solution may have implications for related issues such as the interaction of interest rates, exchange rates, and current account imbalances.
The current Brexit debate has highlighted questions about the benefits and costs of EU membership. This column considers the effect of membership on foreign direct investment (FDI). Using several measures, EU membership is found to increase FDI inflows by 14–38% between 1985 and 2013. These results support arguments for economic integration, and indicate that, like international trade, FDI is a key channel through which payoffs are delivered.
Most commentators agree that a European banking union would end the ‘deadly embrace’ between creditors and governments. This column argues that a banking union would be welcome, but that current proposals are dogged with problems. To resolve these, we should stop discussing debt restructuring and instead enhance the borrowing capacity of the European Stability Mechanism. A programme to buy capital in financial institutions unable to raise it directly on the market should also be set up.
Since the Eurozone Crisis a host of monetary and fiscal instruments have been used to try to reinvigorate growth and achieve financial stability, with mixed results. Basel III’s counter-cyclical capital buffer (CCB) is one such instrument which was met with scepticism. This column uses evidence from the Swiss economy to show that given the right circumstances and political will, the CCB can achieve financial stability.
The video revolution is coming to economics. This column introduces a new feature on VoxEU.org – Video Vox. These short videos (under five minutes) are something like a video version of Vox columns, namely, research-based policy analysis and commentary by leading economists. Many are produced in cooperation with organisations such as the European Economic Association, the Royal Economic Society, and the like.
Europe is in the midst of a major demographic crisis, with many countries facing ultra-low fertility rates. This column uses survey data from 19 European countries to show how low fertility can be traced to disagreement within couples about having babies. In low-fertility countries, it is usually the women who bear most of the burden of childbearing, and who veto having more babies. Fertility can be raised by policies that specifically lower cost to women of childcare, whereas general subsidies for childbearing are much less effective.
Okun’s law describes the positive empirical relationship between unemployment and the output gap. This column explores how this relationship differs depending on age and gender, taking into account different labour market institutions. Using data for 20 OECD countries over three decades, the authors find that the effect of Okun’s relationship decreases with age. Labour market institutions have similar effects on the unemployment rates of all groups, though magnitudes vary by age and gender.
Business cycles are generally viewed as having been less correlated during the Bretton Woods period, 1950-1971. This column discusses findings from a new database of quarterly industrial production for 21 countries from 1950 to 2014 based on IMF archival data. As it turns out, business cycle synchronisation was as strong before 1971 as it was after (up till the Global Crisis began in 2007). Moreover, deeper financial integration tends to de-synchronise national outputs from the world cycle, at least in non-crisis periods.
In the absence of full information about small businesses’ risk of loan default, banks are unable to accurately calculate counterparty risk. This column suggests that banks can use industry and linked-industry data to better establish counterparty risk, because distress from one industry is transmitted to supplier and customer industries. A reliable and easily available signal for such distress is any failure reported by S&P.
Research and development investment is a major driving force behind innovation and economic growth. Policy measures that aim to boost innovation activities attempt to improve incentives for these investments. This column reports on recent research showing that a firm’s financial strength is strongly correlated with the firm’s expected return to research and development, and therefore has a substantial impact on its research and development investment decision.