In recent decades, new forms of dictatorship based on manipulating information rather than on mass violence, have emerged. This column explores the trade-offs and techniques of the modern dictator. Such dictators can survive using little violence in the face of moderate economic underperformance. Economic downturns often prompt an increase in censorship and propaganda. Though new information-based dictatorships are better adapted to a modernised society, modernisation and access to information, as well as economic contractions could undermine them.
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Robots may be dangerous not only to the action heroes of cinema, but also to the average manufacturing worker. This column analyses the effect robots have had in 14 industries across 17 developed countries from 1993 to 2007. Industrial robots increase labour productivity, total factor productivity, and wages. While they don’t significantly change total hours worked, they may be a threat to low- and middle-skilled workers.
The large dip in oil prices reverberated across asset markets, contributing to the depreciation of the Russian rouble. This column argues that the recent fall of the rouble may be more an exception than the norm. Oil shocks have only a limited impact on global exchange rate configurations, since oil exporters tend to lean against exchange rate pressures by running down or accumulating foreign exchange reserves.
Piketty's justification for his proposed wealth tax relies on the notion that the rate of return on capital exceeds economic growth. This column challenges this basis, arguing that it fails to account for risk. The authors also examine the relative merits of a consumption tax, which may be more valid.
As the Eurozone crisis lingers on, euro exit is now being debated in ‘core’ as well as ‘periphery’ countries. This column examines the potential costs of euro exit, using France as an example. The authors estimate that 30% of private marketable debt would be redenominated, but since only 36% of revenues would be redenominated, the aggregate currency mismatch is relatively modest. However, the immediate financial cost of exiting the euro would nevertheless be substantial if public authorities were to bail out systemic and highly exposed companies.
Manufacturing is often seen as the key to sustainable export and productivity growth in developing countries. This column argues that, while manufacturing played a key role in some countries’ development, high growth can be sustained without relying primarily on manufacturing. A process of learning, productivity improvement, and investment that touches all sectors characterises the most successful economies. Policies that artificially favour manufacturing should instead give way to maximising learning from the frontier in all sectors of the economy.
The Global Crisis has forced a revaluation of the standard macroeconomic models in use worldwide. This column discusses an enrichment that include a formal concept of ‘confidence’ about the short-medium term economic outlook – one that relates to market psychology rather than expectations about technology and policy. This extension helps the model predictions better match reality. It also offers a formalisation of the popular view that depressed spending, arising from a drop in confidence, is a major cause of recessions and that recoveries often hinge on ‘restoring confidence in the economy’.
The ECB has finally begun releasing the minutes of its policymaking meetings, something the world's major central banks have been doing since the 1990s. This column asks whether the publication of these minutes increases ECB transparency. While providing useful information on analysis at the ECB, the minutes lack the details on the actual discussions and the voting behaviour of committee members that the minutes of the Fed, the Bank of England and the Bank of Japan provide. They thus constitute just the first step, albeit a very welcome one, towards ECB transparency.
The Eurozone Crisis has been characterised by a sharp rise in sovereign interest rates in peripheral countries. The re-emergence of spreads between peripheral and core Eurozone countries at the start of the Greek crisis came after a decade of homogeneous interest rates in the monetary union. This column investigates the behaviour of spreads through the lens of a theory of implicit bailout guarantees.
There were 24 sovereign defaults and debt restructurings between 1997 and 2013. Using data on 180 debt restructurings – for both sovereign bonds and sovereign syndicated bank loans – this column argues that the roughly 75% ‘haircut’ Argentina imposed on its creditors in 2005 was an outlier. Greece’s ‘haircut’ of roughly 64% in 2012, by contrast, was in line with previous experience.
Understanding our increasingly interconnected world requires tools from the rapidly growing field of network science. This column discusses guiding principles that are emerging from that science and helping to understand human behaviour – ranging from disease propagation and financial contagion to criminal behaviour.
In the wake of the Great Recession, a contentious debate has erupted over whether austerity is helpful or harmful for economic growth. This column compares the experiences of the East Asian countries – whose leaders responded to the East Asian financial crisis with expansionary fiscal policy – with those of the European periphery countries during the Great Recession. The authors argue that it was a mistake for the European periphery countries to pivot from fiscal expansion to consolidation before their economies had recovered.
Recent debt crises have brought the fragility of the Eurozone into focus. It has been argued that members are vulnerable to sudden changes in market sentiment. This column examines how debt markets reacted to an ECB announcement that it would serve as a lender of last resort, finding that recent debt crises have strong self-fulfilling dynamics.
Racial disparities in socioeconomic conditions remain a major policy issue throughout the world. This column applies a new neighbour-based measure of residential segregation to US census data from 1880 and 1940. The authors find that existing measures understate the extent of segregation, and that segregation increased in rural as well as urban areas. The dramatic decline in opposite-race neighbours during the 20th century may help to explain the persistence of racial inequality in the US.
The Great Recession sparked the interest in the link between financial conditions and employment. This column describes results from a new model of labour and finance, incorporating financial imperfections and borrowing constraints. The results uncover a complementarity between firms holding cash and labour market imperfections. Firms embedded into better functioning financial sectors are, on average, less inclined to hold cash. In addition, a more financially integrated system would dismiss more labour, explaining the higher increase of unemployment in the US compared to Europe.
There has been an extensive debate over whether central banks should raise interest rates to ‘lean against’ the build-up of leverage in the financial system. This column reports on empirical evidence showing that, in contrast to the conventional view, surprise monetary contractions have tended to increase shadow bank asset growth, rather than reduce it in the US. Monetary policy had the opposite effect on commercial bank asset growth. These findings cast some doubt on the idea that monetary policy could be used to “get in all the cracks” of the financial system in a uniform way.
Evidence of the impact of monetary policy on economic activity supports conventional models with nominal rigidities. This column highlights the importance of the ‘credit channel’ of monetary policy. Unanticipated tightening produces a significant drop in real activity. However, monetary policy responses produce large movements in credit costs, which are due to the reaction of term premia and credit spreads. Therefore, to account for credit costs, it might be necessary to amend macroeconomic models to control for term premia and credit spreads.
Recessions can lead to an increase in youth unemployment, which could later negatively affect labour market outcomes. This column explores the effect of recessions on criminal activity. The findings indicate a substantial effect on initiating and forming youth careers. There is initially strong and eventually long-lasting detrimental effect of entering the labour market during a recession for individuals at the threshold of criminal activity. These effects are economically substantial and potentially more disturbing than short-run effects.
Rising wage inequality has received attention from academics and policymakers alike. This column describes new evidence for determinants of the ‘skill premium’, i.e., the wage difference between high and low-skilled workers. The findings indicate that skill premia are larger at larger firms. At the same time, larger firms have grown substantially. Therefore, the growth of larger firms in the economy could partially explain the growing wage inequality.
Although most of the tax compliance literature focuses on tax evasion, a significant portion of the tax gap includes tax delinquencies. This column discusses new research about the enforcement of tax debts, including evidence from a field experiment in the US with nearly 35,000 tax delinquents who collectively owe half a billion dollars in taxes. In addition to financial penalties, this research studies the effectiveness of a common ‘shaming’ penalty in which the names, addresses, and other identifying information of individuals and businesses with delinquent taxes are published online.
The shallow growth response to Eurozone rebalancing policies could point towards structural impediments. To uncover such impediments and design effective structural reforms, it is necessary to focus on the path from micro behaviour to macro outcomes. This column argues that firm-level data from the CompNet database can shed light on the impacts of structural reforms.
College-educated workers are less likely to experience unemployment, but their lifetime earnings are also much more uncertain. This column estimates the risk-adjusted value of college education to be between $225,000 and almost $600,000, corresponding to risk-adjusted increases in total present-value lifetime wealth of 35% to 48%. Increased earnings volatility actually decreased the risk-adjusted value of college between 1968–1980 and 1991–2011 by almost $50,000, even though expected lifetime income increased by about $150,000. Nevertheless, even the most conservative estimates of the value of college education are still positive.
The 2007–08 crisis revealed regulatory failures that had allowed the shadow banking system and systemic risk to grow unchecked. This column evaluates recent proposals to reform the banking industry. Although appropriate pricing of risk should make activity restrictions redundant, there may nevertheless be complementarities between these two approaches. Ring-fencing may make banking groups more easily resolvable and therefore lower the cost of imposing market discipline.
Different characteristics of a politician could affect policy. Whereas existing studies analyse gender and education, this column discusses the effect of a politician’s age on governance and re-election. Younger mayors are more likely to strategically increase expenditures and attract more transfers from the higher levels of government right before the election. These fiscal cycles are positively correlated with re-election and, hence, potentially explain why younger mayors are more likely to be re-elected.
Rich countries pollute less partly because people in richer countries consume a less pollution-intensive bundle of goods. This column investigates whether this results from consumer preferences or economy-wide changes. Within a country, the environmental Engel curve is concave – meaning that richer households, while polluting more, consume a less pollution-intensive bundle. Over time, this accounts for half of the decrease in rich household pollution, with the remainder being due to price changes and environmental regulations.
Financial dollarisation, the widespread holding of assets and liabilities in a foreign currency, is often viewed as a threat to financial stability in emerging markets. However, there is not enough evidence that monetary policy is responsible for low dollarisation. This column uses cross-regional evidence from Russia to show that monetary stability is indeed a key determinant of dollarisation. Moreover, banking integration strongly influences how households and firms adjust the currency composition of their assets and liabilities to changes in monetary conditions.
This column introduces a new Vox eBook collecting some of the best Vox columns on financial regulations, starting with the fundamentals of financial regulations, moving on to bank capital and the Basel regulations, and finishing with the wider considerations of the regulatory agenda and the political dimension. Collecting columns from over the past six years, this eBook maps the evolution of leading thought on banking regulation.
Following the Warsh Review, the Bank of England plans to release its policy decisions, ‘enhanced’ meeting minutes and (once a quarter) the Inflation Report all at the same time. This column, which reports the views of the leading UK-based macroeconomists, reveals substantial support for the idea of simultaneously providing the different Monetary Policy Committee (MPC) documents. In order to make this possible, the Bank plans to change the structure of its MPC meetings. When the proposed change in the structure is taken into account, the panel is split on the desirability of the Bank's plans.
Transport costs fell precipitously during the last century leading many observers to posit that the world has ‘become flat’. If this were true, the costs of transporting goods should no longer have much bearing on firms’ location choices and the spatial structure of economic activity. This column, using manufacturing data for Canada from 1990 to 2008, argues that despite a decline in geographical concentration of industries, location patterns still change with fluctuations in transport costs.
Global value chains (GVCs) clearly promote trade and investment but their impact on domestic value-added is less clear. This column discusses new evidence showing that GVCs participation stimulates domestic value, but not for all nations. It is necessary for low- and middle-income countries to increase their absorptive capacities if they are to reap benefits from GVC participation.
It is difficult to evaluate the economic impact of natural disasters in the absence of an established metric for measuring the total damages. This column introduces a systematic index that measures the economic cost of catastrophes as well as the human cost – the latter integrating the World Health Organisation’s measure of disability-adjusted lifeyears. Low income countries face higher costs of disasters for a variety of reasons. Some recent disasters are evaluated as case studies.
Total US prescription drug spending rose 13% in 2014, the biggest increase in a decade. Driving this trend is spending on branded specialty drugs, which rose an unprecedented 31%. This column discusses recent research into the relationship between inflation-adjusted launch prices and survival benefits and approval year for 58 anticancer drugs approved in the US between 1995 and 2013. The authors find that launch prices are going up by $8,500 per year, approximately 12% year over year.
Electoral results and the geographical allocation of public investment in Greece have been intimately related. This column describes how incumbent Greek governments between 1975 and 2009 tended to reward those constituencies returning them to office. Increases in both the absolute and relative electoral returns for the party in government in a given Greek region were traditionally repaid with a greater level of per capita investment in that region. Single-member constituencies were the greatest beneficiaries of this type of pork-barrel politics.
The European Commission has clarified the flexibility in existing Eurozone fiscal rules. This column argues that the emphasis on structural rather than headline deficits is desirable but requires identification of potential growth rates. The way the Commission currently estimates potential output yields potential growth estimates that are very low. Thus, a year of modest expected growth like 2015 may be treated as a year of economic boom that requires faster than normal fiscal adjustments.
In a global financial system, macroprudential policies may create international spillovers. This column presents new evidence on how the organisational structure of a bank affects the magnitude of these spillovers. An increase in capital requirements at home causes foreign branches to reduce their lending growth to other banks operating in the UK more than foreign subsidiaries do. Seemingly, this is because branches are an integral part of the parent company.
R&D-intensive firms such as biopharmaceutical companies operate in a competitive and risky environment. This column presents new evidence on how competition affects the investment decision of R&D-intensive firms. An increase in competition will make the firm increase the R&D investment, and as a response the firm will carry more cash and reduce its debt. Also, more competition will increase the idiosyncratic risk of R&D-intensive firms.
The European Commission proposed the implementation of a Market Stability Reserve as a response to a surplus of allowances in the Emissions Trading System. This column discusses how the Reserve should be designed and whether it could improve the emissions trading. Insight from several models indicates that the Stability Reserve corrects for a number of market failures in the emissions trading.
Official awards are common in both monarchies and republics. Awards are bestowed not just by the state and the military, but also by cultural associations, academic institutions, and corporations. This column surveys the academic literature on the use of awards and their effect on motivation and performance. The authors argue that awards are a welcome means of honouring dedication and commitment. They delight their winners, motivate high performance, create role models – and come at low or even no cost.
The 7-8 November 2013 conference in Modena was the second in a series of events aimed at sharing different ideas and perspectives on a key policy issue – what can stimulate sustained growth in economies that cannot simply add more capital or import technologies developed abroad? This is an important question not only in the short run, as Europe struggles to emerge from recession, but also over the longer term as population ageing begins to affect these mature economies.
One important component of Obamacare – a dependent coverage provision for young people – took effect in 2010. It allowed dependents to remain on parents’ insurance coverage until age of 26. This column discusses the impact of this coverage on a number of outcomes. The results indicate that provision improved young adults’ health care access, did not influence preventive care utilisation, had mixed effects on health behaviours, and improved some but not all dimensions of self-assessed health.
Understanding large economic downturns is one of macroeconomics’ central goals. This column argues that imbalances in input-output linkages can interact with firm-level shocks to produce output fluctuations that are much larger than the underlying shocks. The result can be large cycles arising from small, firm-level shocks. It is thus important to study the determinants of large economic downturns separately. Macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.
Following the Warsh Review, the recording, number, and timing of the Bank of England’s Monetary Policy Committee meetings will change. This column argues that the recording may make the decision meeting more formal and could inhibit debate, although the eight-year gap before publishing transcripts ameliorates this concern. Having fewer MPC meetings is a good thing, and reduces ‘noise’ around monetary policy. The revised meeting schedule will not add to transparency and raises the risk of leaks and ‘news shocks’.
Colleges in the US charge high sticker prices but routinely offer discounts to individual students. This column presents research showing that colleges use a student’s federal aid form to learn about willingness-to-pay and to engage in substantial price discrimination in a way that amounts to a tax on income, with the primary effect of increasing tuition revenues. Nevertheless, the price discrimination also results in some redistribution to low-income students as well as a modest increase in student–college match quality.
The Little Ice Age is generally seen as a major event in European history. Analysing a variety of recent weather reconstructions, this column finds that European weather appears constant from the Middle Ages until 1900, and that events like the freezing of the Thames and the disappearance of English vineyards have simpler explanations than changing climate. It appears instead that the European Little Ice Age is a statistical artefact, where the standard climatological practice of smoothing what turn out to be white noise data prior to analysis gives the spurious appearance of irregular oscillation – a Slutsky Effect.