September 2016

Nguyen, Hagendorff, Eshraghi, 30 September 2016, 7699 reads

Banks are regularly under scrutiny for their professional and ethical behaviour. This column assesses the role of boards in monitoring and advising conduct, and offers new insights for how to structure bank boards to prevent misconduct. Conventional board measures such as board independence and financial expertise have no measurable impact on misconduct being committed or detected. Instead, governance metrics revolving around CEO connections warrant more attention from regulators, investors, and governance activists.

Ruiz Pozuelo, Slipowitz, Vuletin, 30 September 2016, 17811 reads

The debate over whether democracy causes economic prosperity and growth dates back millennia. Recent empirical results suggest that democratisation has a sizable positive effect on economic growth, but endogeneity and reverse causality may be driving these results. This column uses new data from surveys of democracy experts to solve the endogeneity puzzle. The positive association between democracy and economic growth is a reflection of economic turmoil causing the emergence of democratic rule, rather than democracy causing more economic growth.

Hufbauer, Jung, 29 September 2016, 14717 reads

Donald Trump has consistently made headlines with unusual and potentially dangerous economic policy proposals, including threatening to pull out of the WTO, renegotiating trade agreements, and imposing tariffs on imports from Mexico and China. This column explores the legal and economic dimensions of these proposals. Old and modern legal statutes could allow a US president to implement such policies, and the repercussions for the US economy could be severely negative.

Tucker, 28 September 2016, 23225 reads

The objective of financial stability policy is unclear. Is it the resilience of the financial system, avoiding the costs of systemic collapse, or managing the credit cycle, containing the costs of resource misallocation and over-indebtedness? This column argues that the answers have serious implications for what can decently be delegated to independent ‘macroprudential authorities’, but have barely been debated in those terms.

Avdjiev, McCauley, Shin, 28 September 2016, 14521 reads

Working with the wrong accounting classifications can lead to wrong conclusions in any area of economics. But it is especially treacherous in international finance, due to the importance of key currencies and the operations of multinational firms, especially global banks. Much of the analysis in international finance is still conducted under the assumption that the GDP area, decision-making unit and the currency area coincide – the so-called ‘triple coincidence’. This column illustrates the common analytical missteps that can arise by reviewing three examples from the recent past, and argues that a proper analysis of capital flows necessitates paying greater attention to basic accounting building blocks.

Borio, McCauley, McGuire, Sushko, 28 September 2016, 11448 reads

Covered interest parity is close to a physical law in international finance, yet it has been consistently violated since the Global Crisis. Violations since 2014, once banks had strengthened their balance sheets and regained easy access to funding, are especially puzzling. This column argues that the violation reflects a combination of foreign exchange hedging demand and tighter limits to arbitrage. Hedging demand has been boosted, in particular, by divergent monetary policies in an ultra-low interest rate environment, while tighter limits to arbitrage result from a stricter management of banks’ balance sheets.

Campanella, Vernazza, 27 September 2016, 27551 reads

China’s debt – in particular its corporate debt – is large by historical and international standards. This column argues that of greater concern is the sharp increase in recent years, and that the vulnerability is heightened by the concentration of this debt in old industries that suffer from overcapacity and weak competitiveness. The authorities appear to be only now taking steps to halt the rise in corporate debt, but as prior episodes of banking crises show, this is unlikely to be enough to avert either a prolonged period of slowing growth or a financial crisis in the medium term.

Gal, Hijzen, 27 September 2016, 5567 reads

Product market reforms are seen as a way to boost output in advanced economies, but we know little about their short-term impact. This column presents data from 18 advanced economies that reveal large differences in the potential upside of reform depending on the sector in which a firm operates, its size, and its financial health.

Tol, 27 September 2016, 5524 reads

The UK may opt to leave the EU Emissions Trading System. This column argues that as the UK is a large importer of emission permits, this would make meeting its climate policy targets much harder and dearer, and would remove the legal standing of many permits circulating in the rest of the EU. Some non-EU countries do take part in the Emissions Trading System, and this appears to be the best option for the UK post-Brexit. If not, the UK Government will be forced into a major overhaul of its climate policy.

Wehby, Dave, Kaestner, 26 September 2016, 7938 reads

Despite ample research on the effects of minimum wage increases on employment, there has been little consensus on the effects of such increases on workers’ broader welfare, and in particular on their health and that of their families. This column analyses comprehensive data from the US on the effects of minimum wage increases on the health of children born to low-income workers. It finds that the increases have a significant positive impact on birth weights. This has important policy implications, with infant health acting as a reliable indicator of future health.

Arteta, Kose, Stocker, Taskin, 26 September 2016, 8855 reads

Against a background of persistently weak growth and low inflation expectations, a number of central banks have implemented negative interest rate policies over the past few years. This column argues that such policies could help provide additional monetary policy stimulus, as long as policy interest rates are only modestly negative and do not stay negative for too long to avoid adverse effects on the financial sector. While these policies do have a place in the policymaker’s toolkit, they need to be handled with care to secure their benefits while mitigating risks.

Fernández-Macías, Bisello, 25 September 2016, 6931 reads

A tasks approach to labour market analysis can contribute to a better understanding of structural change and employment trends. However, its narrow focus on a few specific types of task content and its neglect of the social aspects of production can limit the usefulness of this approach. This column presents a new framework for conceptualising and measuring tasks, and discusses an application to Europe.

Weinzierl, 24 September 2016, 5743 reads

Tax policy to correct inequality assumes that nobody is entitled to advantages due to luck alone. But the public largely rejects complete equalisation of 'brute luck' inequality. This column argues that there is near universal public support for an alternative, benefit-based theory of taxation. Treating optimal tax policy as an empirical matter may help us to close the gap between theory and reality.

Ahlfeldt, Holman, 24 September 2016, 8158 reads

Good architectural design is a public good, but economists and policymakers lack robust evidence on the impact of well designed architecture on location value when planning spaces. This column verifies the worth of preserving and designing good architectural spaces by analysing the changes in property prices across conservation and non-conservation areas in England. It finds that good design in buildings has a substantial positive impact on location value. 

Edmans, 23 September 2016, 8164 reads

During political campaigns, candidates often set their sights on CEO compensation as a target for potential regulation. This column considers the various arguments for regulating CEO pay and questions whether it is a legitimate target for political intervention. Some arguments for regulation are shown to be erroneous, and some previous interventions are shown to have failed. While regulation can address the symptoms, only independent boards and large shareholders can solve the underlying problems.

Pomfret, Sourdin, 23 September 2016, 4335 reads

Joining a customs union is supposed to reduce trade with third countries. But after 2004, the largest EU accession countries actually increased their trade with Australia, especially their exports. This column argues that new regional value chains made accession country industries more competitive, especially in the auto industry. Trade with Australia has also been facilitated by a drop in the costs of bilateral international trade.

Bessen, 22 September 2016, 34042 reads

A popular notion is that computer automation leads to major job losses. However, this ignores the dynamic economic responses that involve both changing demand and inter-occupation substitution. Using US data, this column explores the effect of automation on employment growth for detailed occupational categories. Computer-using occupations have had greater job growth to date, while those using few computers suffer greater computer-related losses. The real challenge posed by automation is developing a workforce with the skills to use new technologies.

De Haas, Poelhekke, 22 September 2016, 5399 reads

The extraordinary expansion in global mining activity over the last two decades, and its increasing concentration in emerging markets, has reignited the debate over the impact of mining on local economic activity. This column analyses how the presence of nearby mines influences firms in eight countries with large manufacturing and mining sectors. Mines are found to out-compete local manufacturing firms for inputs, labour, and infrastructure. However, mining activity is found to improve the business environment on a wider geographic scale.

Dordal i Carreras, Coibion, Gorodnichenko, Wieland, 21 September 2016, 6991 reads

Models that estimate optimal inflation rates struggle to accurately account for interest rates reaching the zero lower bound, due to the lack of historical data available. This column suggests periods of hitting the zero lower bound are longer than previously thought, and models the optimal inflation rate target on this. Given the uncertainty associated with measuring the historical frequency and duration of such episodes, the wide range of plausible optimal inflation rates implies that any inflation targets should be treated with caution.

Marin , Fache Rousová, Verdier, 21 September 2016, 5171 reads

We know little detail about how much multinational firms transplant their organisational culture to affiliates. Data from Austrian and German multinational firms shows that, contrary to what we might expect, almost 70% of foreign investments do not adopt the parent firm's mode of organisation. This column argues that the size of the home and host markets, and the level of competition in each market, all influence the decision to transplant culture. Globalisation also creates 'reverse transplanting', in which the parent firm's organisation becomes more like the optimal organisation of the subsidiary. 

Brunnermeier, Langfield, Pagano, Reis, Van Nieuwerburgh, Vayanos, 20 September 2016, 7114 reads

The Eurozone lacks a safe asset that is provided by the region as a whole. This column highlights why and how European Safe Bonds, a union-wide safe asset without joint liability, would resolve this problem, and outlines steps to put them into practice. For given sovereign default probabilities, these bonds would be as safe as German bunds and would approximately double the supply of euro safe assets. Moreover, owing to general equilibrium effects, they would weaken the diabolic loop between sovereign risk and bank risk.

Niño-Zarazúa, Roope, Tarp, 20 September 2016, 21546 reads

Since the turn of the century, income inequality has risen to be among the most prominent policy issues of our time. This column looks at inequality trends in recent decades. While relative global inequality has fallen, insufficient economic convergence, together with substantial growth in per capita incomes, has resulted in increased absolute inequality since the mid-1970s. The inclusivity aspect of growth is now more imperative than ever.

Calomiris, Flandreau, Laeven, 19 September 2016, 9572 reads

The Global Crisis has raised concerns over how far ‘lender of last resort’ policies by central banks should go. This column examines the history of the development of these policies throughout the world. Last resort lending is a locus of political power, and as such, its creation should be viewed as the outcome of a political bargain. It is therefore not surprising that countries differed in their propensity to create such policies, and in the powers with which they chose to endow them.

Sittl, Warnke, 18 September 2016, 5829 reads

In sports economics, competitive balance refers to how well opponents are matched in terms of their ability to win. A lack of competitive balance implies that match outcomes will be more predictable and less interesting for fans. This column uses two decades of Bundesliga data to investigate whether competitive balance is decreasing in German football. Good players are increasingly playing for better teams, denoting a reduction in competitive balance. Although this reduction doesn’t seem to have affected fans’ interest, the results emphasise how revenue and regulations can affect competitive dynamics.

De Giorgi, Frederiksen, Pistaferri, 17 September 2016, 6275 reads

Household consumption can be influenced by the consumption behaviour of peers. This column examines why this is the case, and considers some policy implications. The tendency for individuals to under-save (or over-borrow) in an attempt to ‘keep up with the Joneses’ appears to be driven by the average consumption of their peers, rather than by the consumption of conspicuous items. If tax policy fails to consider these peer effects, it risks wrongly estimating the effects of tax reforms that target certain groups.

Fouquin, Hugot, 17 September 2016, 12461 reads

Historians and economists generally identify two periods of trade globalisation, the first beginning around 1870 and the second during the 1970s. The column argues that new data from 1827 onwards shows globalisation beginning as trade barriers were lowered around 1840, and that both periods of globalisation were surprisingly fuelled by a regionalisation of world trade. If globalisation continues to grow in future, regionalisation may decline.

Bown, Tovar, 17 September 2016, 10054 reads

Argentina and Brazil began to open their markets to the world significantly – but only partially – in the 1990s. Yet these countries’ efforts to liberalise beyond their Latin American trading partners have stalled since 1995. This column re-examines the 1990s MERCOSUR experience and raises questions over just how much trade policy cooperation these two countries have undertaken. This lack of coordination also has implications for the ‘building blocks’ versus ‘stumbling blocks’ debate in trade policy.

Ho, Lee, 16 September 2016, 6318 reads

The US health insurance market is becoming less competitive due to mergers and withdrawal of services from certain states. This column examines how this affects consumers through insurance premiums and hospital reimbursement rates. Using employer-sponsored insurance data from California, it finds that the relationship between insurer competition and health care spending depends on institutional and market structure.  If premiums can be constrained through effective regulation or negotiation, then reduced competition might lead to lower costs. Absent such constraints, consumers will likely be harmed.

Sentana, 16 September 2016, 7726 reads

Determining which risks are worth taking is one of the key problems facing financial market participants. Central to this is the time-varying nature of volatility. This column examines the Chicago Board Options Exchange volatility index, VIX, which has become the standard measure of volatility risk. Complementary approaches to pricing VIX derivatives are considered, and the tumultuous economy since the Great Recession is used to assess the empirical performance of the different models.

Scharf, Smith, 16 September 2016, 5147 reads

The rise of peer to peer (P2P) fundraising – soliciting donations on behalf of a charity for undertaking an activity  – has paralleled the growth of online social networks, but the incentives driving online donation behaviour are still poorly understood. This column examines giving behaviour for a large sample of P2P fundraising projects that individuals promoted to their Facebook friends. A negative relationship is found between the number of friends and donation size. The findings suggest a ‘relational altruism’ motive, where donors give because they care about the person who is raising the money.

Edmans, Holderness, 15 September 2016, 5657 reads

The separation of ownership and control for public firms may lead to fully dispersed ownership where no shareholder has an incentive to engage in governance. This column argues that blockholders (owners of large stakes) play a critical role in long-term governance, partly through a credible threat to sell their stakes. This threat is undermined by well-intentioned policy moves to create holding-period incentives and requirements. If they succeed, these policies will make exit less likely and blockholders will lose a method to discipline managers.

Cheung, Chinn, Nong, 15 September 2016, 5244 reads

As long as countries strive to reallocate aggregate demand in their own favour, disputes will arise regarding the degree to which currency values are 'fair'. This column argues that the Penn effect – the observation that the price level is higher in countries with higher per capita income – may not be a reliable method to discern the fair value of a currency. Different specifications and different datasets lead to different estimates of the degree of misalignment, for example for the Chinese renminbi.

Moldovanu, Ockenfels, 14 September 2016, 13844 reads

Reinhard Selten, co-recipient of the 1994 Nobel Memorial Prize in Economic Sciences, passed away in August. This column outlines the intellectual life and career of a pioneering analyst of strategic interaction of both fully rational players (game theory) and real human beings with ‘bounded rationality’ (experimental economics). Selten called himself a ‘methodological dualist’, making a sharp distinction between normative game theory and descriptive theories of social and economic interaction. Nobody else has made such substantial and important contributions to both lines of research.

Bilbiie, Ghironi, Melitz, 13 September 2016, 7115 reads

Structural reform and deregulation are often promoted as ways to lower barriers to market entry. The Dixit-Stiglitz model provides an important benchmark – given specific preferences, there is a constrained-optimal amount of producer entry and product variety. This column reconsiders optimality of product creation, differentiating between consumer-producer and intertemporal inefficiencies and quantifying the welfare costs of inefficient entry. Monopoly profits should be preserved when product variety is endogenously determined by firm entry, as they play a crucial role in generating the welfare-maximising level of product variety in equilibrium.

D'Apice, 13 September 2016, 6074 reads

There has been renewed interest in economic analysis of the EU budget following the Global Crisis. This column presents new calculations of cross-border flows operated through the EU budget and compares them with those estimated for the US. For each euro paid by an average net (EU member state) contributor, approximately 75 cents return through the EU budget, and 25 cents cross a border. At the margin, the US federal budget is less redistributive in normal times, with around 90 cents per dollar returning to the contributing state, but net cross-border fiscal flows in the US increased steeply in the wake of the Global Crisis, financed by federal borrowing.

Guriev, Speciale, Tuccio, 13 September 2016, 8947 reads

A common explanation for the growth in unemployment in southern Europe after the Great Recession is lack of flexibility in over-regulated labour markets. This column examines wage adjustment in regulated and unregulated labour markets in Italy during the recent crisis. Using data on immigrant workers, it shows that before the crisis wages in the formal and informal sectors moved in parallel. During the crisis, however, formal wages did not adjust downwards, while informal labour wages did. Greater flexibility in wages in the formal market could slow the decline in employment.

Landersø, Heckman, 12 September 2016, 9614 reads

The Scandinavian model of social welfare is often contrasted favourably with the US model in terms of promoting social mobility across generations. This column investigates the accuracy of these claims, focusing on the case of Denmark. Denmark invests heavily in child development, but then undoes the beneficial effects by providing weak labour market incentives for its children to attend school compared to the US. This helps explain why the influence of family background on educational attainment is similar in the two countries.

Kozlowski, Veldkamp, Venkateswaran, 11 September 2016, 19108 reads

The Great Recession has had long-lasting effects on credit markets, employment, and output. This column combines a model with macroeconomic data to measure how the recession has changed beliefs about the possibility of future crises. According to the model, the estimated change in sentiment correlates with economic activity. A short-lived financial crisis can trigger long-lived shifts in expectations, which in turn can trigger secular stagnation.

Barone, David, de Blasio, 10 September 2016, 5535 reads

EU regional policies aim to lead regions onto a path of self-sustaining growth. Fully successful interventions should imply a higher growth rate, not only during the treatment (when the region benefits from the transfers), but also after the expiry of the programme (when the financing terminates). This column uses evidence from the Abruzzi region in Southern Italy to document that when the party is over and the funding ends, growth may slow down significantly. 

Cavagnaro, Sensoy, Wang, Weisbach, 10 September 2016, 6148 reads

Investment officers are often the highest-paid individuals in institutions such as pension funds and foundations, because of the size and importance of the decisions they make. This column argues that successful investment officers earn their pay, because they make returns that can't be explained by luck alone. Therefore, institutional investors might benefit from investing in high-quality investment officers.

Gay, Hicks, Santacreu-Vasut, 10 September 2016, 7910 reads

Evidence suggests that many forms of gender inequality are higher in countries where the language distinguishes gender. But these patterns could arise spuriously, as languages and other cultural institutions have co-evolved throughout history. This column uses an epidemiological approach to isolate language from other cultural forces and provide direct evidence on whether language matters. The findings suggest how gender roles have been shaped, how they are perpetuated, and, ultimately, how they can be changed.

in 't Veld, 09 September 2016, 9259 reads

The spillover effects of a fiscal stimulus in normal times are likely to be small, at best. This column argues, however, that when interest rates are stuck at the zero lower bound and monetary policy does not offset the expansion, public investment in surplus countries could have significant positive GDP spillovers to the rest of the Eurozone. Given current low borrowing costs, the increase in government debt for surplus countries would be modest, while debt ratios in the rest of the Eurozone could be improved.

Boeri, Garibaldi, Moen, 08 September 2016, 7639 reads

The Eurozone's sustained rise in youth unemployment since 2008 threatens to create a 'lost generation'. This column presents evidence that this is, in part, an unintended consequence of pension reforms in southern Europe that locked in older workers. In future, reforms that create flexible retirement ages alongside variable pension levels could minimise the impact on youth unemployment without increasing the state's long-term pension liabilities.

Campbell, Lusher, 08 September 2016, 19980 reads

Growing inequality has been one of the most pressing political issues since the Great Recession. However, there is a relative lack of consensus on the significant drivers of this trend. This column investigates the contribution of globalisation, via international trade, to US inequality. Although trade is found to have had important effects on certain parts of the US labour market in the early 2000s, the growth in US inequality since 1980 can be traced back to Reagan-era tax cuts.

Buti, Lacoue-Labarthe, 07 September 2016, 9500 reads

The Eurozone Crisis has taken a significant toll – both economic and political – on EU member states as well as the Union as a whole. This column identifies three elements that are key to a working solution for continued union: overcoming the intergovernmental method that has dominated EU decision‑making since the crisis, avoiding the seemingly easy route of blaming all evils on ‘Brussels’, and a more unified external representation in global economic governance.

Helliwell, 06 September 2016, 15368 reads

Discussions about inequality tend to focus on the distribution of income and wealth. This column argues for a shift in focus towards another source of inequality – subjective wellbeing. Wellbeing inequality has grown significantly for the world as a whole and in eight of the ten global regions. One way to address this inequality is to increase social trust.

Horioka, Terada-Hagiwara, 06 September 2016, 10881 reads

China’s one-child policy and a general preference for sons increased competition among grooms, whose families typically bear marriage expenses. This is believed to have increased household saving in the country. This column explores whether the same is observed in other countries with unbalanced sex ratios. Premarital sex ratios are found to have a significant impact on household saving rates in India and Korea, with the direction of the effect dependent on whether the bride’s (India) or groom’s (Korea) family is typically expected to bear the brunt of marriage-related expenses.

Bossone, 05 September 2016, 11183 reads

Some economists see helicopter money as a free lunch, because it can prompt growth without requiring higher debt financing. This column argues that if there are costs associated with the permanent injection of cash into the economy, they would diminish its effectiveness.

Crucini, Smith, 05 September 2016, 9574 reads

Commodity price convergence is often seen as the best way to measure the integration of markets that defines globalisation. This column reviews research on historical prices and also presents intranational evidence from Sweden from 1732 to 1914. Price convergence appears to date to the 18th century, well before the adoption of the telegraph or the railway. For emerging economies today, intranational price convergence arising from declining internal distance effects may be a precursor to globalisation.

Caldera, de Serres, Yashiro, 04 September 2016, 6585 reads

Structural reforms can have adverse effects in the short run if implemented under weak macroeconomic conditions. This column argues that prioritising reform measures that bring short-term benefits even in a bad conjuncture, and packaging them to benefit from reform complementarities across product and labour markets, remains the most promising growth strategy, especially in the post-Global Crisis context

Nigai, 04 September 2016, 6942 reads

Trade economists routinely evaluate changes in consumer welfare due to trade based on the assumption of a representative consumer. This column argues that this assumption often disguises much of the heterogeneity in gains across the income distribution, which leads to an overestimation of the gains for the poor and underestimation for the rich, especially for developing countries. This could help explain the lack of public consensus on the benefits of recent free trade agreements.

O'Brien, Palma, 03 September 2016, 10250 reads

Today's unconventional central bank policies have historical precedent. One example is the suspension of convertibility of banknotes into gold by the Bank of England between 1797 and 1821. This column argues that, although there were important differences between then and now, it demonstrates that bank reputation and interaction between bank and state are vital to the success of unconventional policies. Also, short-term unconventional policies may persist long after a crisis has passed.

Cherif, Hasanov, Zhu, 03 September 2016, 7258 reads

Amid a persistent fall in oil prices, many oil-exporting countries are realising that economic diversification should be a top priority. One important pathway is to create a dynamic export sector. This column argues the standard policy of structural reforms – which mostly tackle ‘government failures’ rather than ‘market failures’ – are not sufficient. The state needs to intervene to change the incentive structure of firms and workers, and impose a strict accountability framework.

Ball, Gagnon, Honohan, Krogstrup, 02 September 2016, 46027 reads

This column presents the latest Geneva Report on the World Economy, in which the authors argue that central banks can do more to stimulate economies and restore full employment when nominal interest rates are near zero. Quantitative easing and negative interest rates have had beneficial effects so far and can be used more aggressively, and the lower bound constraint can be mitigated by modestly raising inflation targets.    

Farmer, Platonov, 02 September 2016, 14272 reads

The concept of 'secular stagnation' asserts that unemployment remains high and output below potential because investors are pessimistic. This column presents a way to rethink the IS-LM model to include investor expectations. This 'IS-LM-NAC' model explains the slow recovery from the Great Recession, provides a theory-consistent explanation for secular stagnation, and suggests policy options to escape it.

Zoega, 01 September 2016, 31317 reads

Britain’s decision to leave the EU surprised many. This column examines the relationship between economic prosperity and voting behaviour in the referendum. The regions that have benefitted most from immigration and trade voted most strongly in favour of remaining, while the regions where people feel most threatened voted to leave. In other countries fearing a similar EU exit, economic policy should aim to ensure that the gains from trade and immigration are as widespread as possible.

Gibson, 01 September 2016, 6423 reads

Different survey methodologies are typically employed to produce estimates of global hunger. This column considers some of the methodological issues that arise. Short reference periods for each household lead to overstated variances and the confounding of chronic and transient welfare components. The column goes on to present a new approach to measuring chronic hunger which tackles this sampling problem by employing an intra-year panel.