The ECB’s 2016 Sintra Forum on Central Banking focused on the international monetary and financial system. In this column, the organisers of the forum highlight some of the main points from the discussions, including concerns that the world economy may be suffering from a shortage of safe assets and proposals for which areas international regulatory reforms should be further developed.
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Over the past three years, 18 states plus the District of Columbia have implemented minimum wage increases, joining ten other states that have raised their minimum wages at least once since the last Federal increase in 2009. This column examines the impact of the more recent state increases on wages, weekly earnings, and employment among workers in the low-wage leisure and hospitality Industry. A comparison with states with no minimum wage increase since 2009 suggests that the recent legislation contributed to substantial wage increases with no discernible impact on employment levels or hours worked.
Italians will vote next month on constitutional reform that aims to abolish perfect bicameralism. The reform would reduce the size of the Senate, and make the Chamber of Deputies the primary legislative body. This column discusses the effects of perfect bicameralism on legislative efficiency and the relationship between executive and legislative power. The reform would see a reduction in decree laws and legislative decrees, and lead to less frequent use of the confidence question. Additionally, it would see important improvements in bureaucratic efficiency.
Trade agreements involving the US could be the first economic casualty of the 2016 election. The existing US trade agreements rose from the ashes of WWII and the Great Depression. This column argues that understanding how they protect the US economy, American workers, and consumers is critical to avoiding a repeat of the policy mistakes of earlier eras.
Why did so many of those who feel left behind vote for a member of the global elite in the US election? This column argues that rather than an increase in income and wealth inequality, it may be a rise in equality for wealthy African-Americans, for women, and for the gay community that is feeding a greater sense of unfairness. If we advocate greater horizontal equality, we must also ensure that it is embraced, or at least tolerated, by all.
Recent political events have highlighted a growing anti-globalisation sentiment, evident in scepticism towards free trade and resistance to immigration. However, existing analyses focus on short-term, local effects. Using global data, this column takes account of the complex relations between trade, migration, innovation, and growth. Liberal trade and immigration stances are found to have positive effects on global output. The results suggest that globalisation remains a tremendously powerful engine of growth.
The Global Crisis has led to a new wave of regulation. This column argues that improved capital requirements, liquidity requirements, bank resolution and cross-border regulatory cooperation are welcome, but that unresolved problems remain. Specifically, regulation may become too complex, focus too little on macroprudential risks, be inadequate to deal with crises in global financial institutions, or fail to cope with financial innovation.
The ‘gig economy’ refers to the independent workforce, including those drawing income from new digital platforms such as Uber and Airbnb. This column uses a survey of 8,000 respondents in the US, the UK, Germany, Sweden, France, and Spain to explode some myths about this relatively new and controversial side of the economy. Among the findings are that existing statistics severely underestimate the size of the gig economy, and that 30% of those working independently do not do so out of choice.
The vote for Brexit was a watershed moment in European politics. This column investigates the causal drivers of differences in support for the Leave campaign across UK regions. Globalisation in the form of the ‘Chinese import shock’ is found to be a key driver of regional support for Brexit. The results suggest that policies are needed that help to redistribute the benefits of globalisation across society.
Despite lifting millions out of poverty, globalisation is facing growing political opposition. This column surveys the successes and failures of globalisation, and some of the critical policy implications. Globalisation has reached a stage where its benefits have been captured but its costs have been largely ignored. Going forward, governments need to address inequality and social inclusion, boost global investment, and restore confidence.
The reasons why a country would comply with international standards of transparency in the face of sizeable returns in the tax haven business are unclear. This column highlights fundamental coordination problems in the fight against offshore secrecy regimes and their implications for optimal policies, and explores whether the fight will be successful or not.
It is now seven years since the Greek crisis began. As well as reflecting the chronic deficiencies of its own institutions, the failings in Greece also reflect substantial shortcomings in international institutions. This column argues that it is time for all sides to move on, and proposes a simple debt operation for Greece that can deliver debt sustainability with minimal adjustments to the ESM operating procedures.
It is questionable whether the lessons from the relatively new field of household finance have been reflected to any great extent in the way that the banking and financial services industry works. This column introduces the Think Forward Initiative, which seeks to build a bridge between research and action. A better understanding of how and why people spend, save, invest and hold assets can act as a springboard for action to help consumers.
Between 1870 and 1914, 68 countries – both sovereign and British colonies – used the London Stock Exchange to issue bonds. This column argues that bond prices and spreads in this period show that the colonies’ semi-sovereignty lowered credit risk at the price of higher illiquidity risk, and further worsened liquidity by attracting investors that rarely traded. Parallels between Eurozone and colonial bonds suggest that the pricing of liquidity and credit in government bond markets is an institutional phenomenon.
Almost half of all unemployed people in Europe have been looking for a job for over a year, causing considerable mental and material stress on those affected and pushing many of them to the margins of the labour market. This column introduces a new VoxEU eBook that examines patterns of long-term unemployment across key European countries and asks what measures have proven effective in helping people back into work and what more can be done.
Free trade is under fire, with evidence documenting the distributional impacts and labour adjustment costs of trade liberalisation mounting. This column instead presents new evidence on the benefits of freer trade in terms of growth and innovation. It points to gains that could be lost if support for globalisation is not maintained.
A key driver of productivity is ease of resource allocation. This column uses firm-level data for France to show that misallocation has a spatial dimension: resource allocation and the associated effect on productivity are related not only to firms’ characteristics, but also to the environment in which they operate. Denser commuting zones seem to offer a better match between employers and employees, leading to more productive firms.
The recent deceleration of world trade has been widely discussed, and many argue the relationship between trade and GDP growth is undergoing a fundamental shift. This column presents a novel framework to account for changes in the import intensity of global demand. Import intensity rose between 2000 and 2008 due to high demand for durables and to international production fragmentation. After 2011, fragmentation stopped and demand shifted to services, in particular in China. Low trade ratios are likely to persist in the near future.
The European Commission is currently evaluating compliance with the Stability and Growth Pact across the Eurozone. However, differences in the econometric methods used by member states and by the Commission can lead to estimates that are at odds. This column argues that the Commission’s method of estimating the non-accelerating wage rate of unemployment for Eurozone members, which relies on an accelerationist Phillips curve, is inferior to specifications with a traditional Phillips curve. The findings highlight how technical aspects of an estimation procedure can have serious effects on policy outcomes.
The objectives of maximising growth and reducing external imbalances may not be fully compatible in a financially integrated and asymmetric world. This column argues that countries have two choices: they can contain global imbalances and gross financial flows through permanent capital controls, or they can pursue financial integration, managing growing imbalances and external exposures by creating more global safe assets. This implies debt contracts would be either state-contingent, with easy restructuring, or built to be ‘safe’, with a high level of commitment by the issuer.
As with previous systemic crises, the 2007-2009 crisis has created regulatory reform, but is it adequate? This column argues that prudential regulation should consider interactions between conduct – capital, liquidity, disclosure requirements, macroprudential ratios – and structural instruments, and also coordinate with competition policy. Though recent reforms are a welcome response to the latest crisis, we do not know how effective they will be in future.
The euro as a common currency has recently been the subject of harsh criticism by economists from both sides of the Atlantic, including claims that citizens in some Eurozone countries are turning against it. This column argues that, in fact, the euro currently enjoys comfortable popular support in each of the 12 original member states of the Eurozone and that potential upcoming referenda in any of these countries do not appear to pose a threat to the currency. In contrast, popular support for the euro has declined sharply in non-Eurozone EU member states since the recent crisis, with the UK standing out as the country with the most negative view.
Behavioural economics has been playing an increasingly important role in public policy the world over, and Canada is no exception. This column outlines the steps Canada is taking towards incorporating insights from the literature into its policies. It also highlights the emphasis that many agencies in Canada are placing on testing their prospective behavioural interventions through randomised control trials.
Bid preferences and set-asides are popular discriminatory practices in US public procurement, but are prohibited in the EU. This column argues that discrimination can be cost-reducing provided it is targeted to favour those firms whose participation is more responsive to the auction procedure. Situations when set-asides may be cost-reducing are also discussed.
The spread of financial shocks globally has caused some to argue that capital accounts should be more closed, thereby shrinking the opportunities available to global savers and borrowers alike. That would put further downward pressure on interest rates in surplus economies, and upward pressure on borrowing costs in economies where the greatest opportunities lie. This column argues that by acting in their local interest, domestic macroprudential policymakers can safeguard against the risk of financial instability spilling across borders, while continuing to allow capital to flow to where it is of most use.
A recent Vox eBook examined the the potential issues facing various EU members when it comes to negotiating with the UK over Brexit. This column, taken from the eBook, examines Spain's negotiating position, including the possible stumbling block of Gibraltar.
There is a belief among the general public that employment volatility tends to be greater for firms with higher foreign exposure, but the relationship between the two is ambiguous in theory. This column uses firm-level data for Japan to compare the impact of foreign exposure on employment volatility for multinational, trading, and non-trading firms; for manufacturing and wholesale and retail trade; and for intra-firm and inter-firm trade. In manufacturing, the effect of exports on the volatility of employment varies, depending on the share of intrafirm exports to total sales. In wholesale retail, the effect of exports is generally insignificant.
The belief that educating future leaders of other countries helps spread the values of the country of study has inspired many foreign-education programmes. This column uses data on the education and UN voting patterns of 831 world leaders to show that foreign-educated leaders tend to be less friendly with former hosts, but more friendly with countries that share the host’s culture and politics. This appears to reflect a tension between ‘affinity’ with former hosts and ‘allegiance’ to domestic voters.
Between the first quarter of 2013 and the end of 2015, London property prices rose rapidly, the exchange rate appreciated, and the current account deficit widened. This column argues that the rise of the pound was in fact a financial bubble, riding on a property price-exchange rate carry trade.This unsustainable bubble was deflated by Brexit.
Not knowing when you are going to retire can make it hard to plan both savings and consumption in old age. This column examines how much uncertainty people face over their retirement and how costly this is as they attempt to make optimal saving plans. It argues that current structure of the Social Security retirement and disability programmes in the US does not provide much insurance against this uncertainty.
Agglomeration’s impact on product quality has received much less attention than its impact on productivity, despite the importance of quality as a precondition for economic development. This column employs plant-product-level data from Japanese manufacturing to assess the effects of urban agglomeration on product quality. The findings suggest that state and municipal tax breaks, and other public efforts to attract enterprises, enhance economic competitiveness by improving product quality along with productivity.
There is much dispute over whether immigration is beneficial or detrimental to the host country, and any conclusions are often event-driven rather than evidence-based. This column explores evidence on how immigration affected economic development between 1960 and 2013 through its effect on the cultural and ethnic composition of the destination country. Cultural heterogeneity appears to have had a positive impact on economic development, and the positive effect of diversity seems to have been stronger in developing countries.
Information sharing has come under increased scrutiny in the context of interbank lending, foreign exchange markets, and US Treasury auctions. This column explores the benefits and drawbacks of information sharing by dealers in US Treasury auctions. Information sharing is found to benefit first and foremost the issuer, i.e. the Treasury. The model provides insight on auction revenue, risk-sharing, and the decision to bid through a dealer, with information sharing having a sizeable effect on each.
In September 2016, the ECB held its first Annual Research Conference. This column surveys the contributions to the conference, which brought together policymakers and academics from around the world to promote discussion of topics at the forefront of monetary and financial economic research. Nobel laureate Eric Maskin gave the keynote lecture, addressing whether fiscal policy should be set by politicians, and the conference included eight further presentations and a panel discussion on monetary policy and financial stability.
Conventional logic suggests that lowering the policy interest rate will stimulate consumption and investment while discouraging people from saving, but low interest rates may also prompt people to increase their saving to compensate for the low rate of return. Using data on 135 countries from 1995 to 2014, this column shows that a low-interest rate environment can yield different effects on private saving across country groups under different economic environments. A well-developed financial market, an ageing population, and output volatility can all contribute towards turning the relationship between interest rates and saving negative.
There is an increasing consensus that global ‘excess saving’ has contributed to a reduction in equilibrium real interest rates. This implies a decline in yields of all assets including, but not restricted to, government bond yields. This column argues that since the turn of the century, the global economy has also been characterised by a rise in the yields on quoted equity, a feature for which the standard excess saving story cannot easily account. A separate explanation is that an increase in the global risk premium has increased the wedge between risk-free interest rates and the real required return on risky investments.
Political risk is a major cause of systemic financial risk. This column argues that both the integrity and the legitimacy of macroprudential policy, or ‘macropru’, depends on political risk being included with other risk factors. Yet it is usually excluded from macropru, and that could be a fatal flaw.
Recent studies on intergenerational income mobility have looked beyond the two-generational model to the role of grandparents, but multigenerational patterns in the wealth distribution have received less attention. This column uses a Swedish four-generational wealth dataset to study the role of family background for people’s wealth status and how much of this that is due to material inheritance. Most of the transmission in wealth status between generations comes from parents in the form of bequests and gifts, with only a marginal contribution from grandparents.
Unlike technical progress in transport or communication technologies, regional trade agreements are political decisions that can be reversed, as Brexit and the campaign promises of President-elect Donald Trump to raise tariffs on imports from Mexico demonstrate. This column analyses the consequences for the car industry of these two examples of the dismantling of an RTA. Car production would fall significantly in the UK under Brexit and in Mexico under ‘Trumpit’ due to a combination of tariff-induced sales losses and increased plant costs.
Thirty years ago, a distinguished group of economists advocated a ‘two-handed’ approach to unemployment that targeted supply as much as demand. This column examines recent work on the effectiveness of cyclical and structural policies – the two ‘hands’ – targeting unemployment in Europe. It further considers the pressures from greater integration of capital and labour markets on the success of these reforms. Cyclical measures, particularly the easing of monetary policy, have been successful, but further structural reforms are still needed in many countries where average unemployment remains too high.
With growth still weaker than is desirable and challenges originating from geopolitical developments further complicating the economic outlook, responsible growth-friendly fiscal policy needs to play a bigger role in supporting demand in the Eurozone today. This column presents a new European Commission Communication on Eurozone fiscal policy, which outlines what a “positive fiscal stance" for the Eurozone would look like.
The major increase in the volume of non-performing loans as a result of the recent financial crisis was predictable, but the persistence of this bad debt is a cause for concern. Using a sample of 100 countries, this column compares economic outcomes in three different scenarios following a rise in non-performing loans. Reducing these loans has an unambiguously positive medium-term effect, with countries that experience an influx of fresh credit growing the fastest. Allowing high levels of non-performing loans to persist, on the other hand, can cost more than two percentage points of economic growth annually.
In theory, financial globalisation has ambiguous effects on monetary policy. It may dampen effectiveness, but it may also amplify it through exchange rate valuation effects. This column shows evidence that the latter effect has dominated since the 1990s. Financial globalisation has increased the output effect of a tightening in monetary policy by as much as 25%. One implication is that monetary policy transmission mechanisms have changed, with the exchange rate channel gaining importance at the expense of the interest rate channel.
The European Commission has just called for a fiscal stance that is more supportive of the recovery and of monetary policy in the Eurozone. This column argues that the case is strong for spending now on investment and other targeted programmes supporting growth and employment. However, fiscal space is heterogeneously distributed across the Eurozone, with some countries able to exploit a clear margin, and others needing to pursue a more prudent approach of gradual debt unwinding. A common stabilisation capacity would help for managing shocks that cannot be absorbed by national stabilisers alone.
Studies have confirmed an increase in earnings inequality in Japan, but do not agree on how or when it increased, or which groups were most affected. This column decomposes changes in earnings data to show a recent decrease in the returns to general human capital of almost all Japanese workers, at the same time as an increase in the returns to firm-specific human capital among male workers with high wage rates. Gender-based wage inequality has persisted.
At first glance, the migration pressures on the EU and US appear similar, but recent history is not a reliable guide to future trends. This column uses demographic trends to predict that the US will experience a gradual decline in its newly arrived immigrant population, while the EU, ringed by nearby high-population-growth states, will see large increases in the stock of first-generation immigrants. As a result, US emphasis on strengthening borders and returning undocumented migrants may be misplaced.
The economic effects of the unprecedented levels of international migrations over the past few years are at the centre of political debates about immigration policy. This column evaluates the causal effect of migration on foreign direct investment using immigration patterns to the US going back to the 19th century. Foreign direct investment is found to follow the paths of historical migrants as much as it follows differences in productivity, tax rates, and education. The results suggest a mechanism of information flow facilitation, and that the effect of ancestry on foreign direct investment is very long-lasting.
In the wake of the Great Recession, the Federal Reserve took unprecedented measures to stem economic decline. This column uses the Fed’s open-market operations in 1932, another period of short-term rates near the zero lower bound, as a comparison for the QE1 operation of 2008-09. Although the 1932 policy boosted output and inflation, if the Fed had announced the operation in advance and carried it out for a full year, the Great Depression could have been attenuated considerably earlier.
The ‘dot plots’ that the Federal Open Market Committee has been publishing since 2012 have attracted a great deal of attention, but are difficult to interpret because changes in them reflect a combination of new information and changes in the projections horizon. This column addresses how the Committee members’ views of monetary policy have evolved in recent years, and have they have responded to changes in the macroeconomic environment.
Employment subsidies have been widely used in OECD countries to counteract the recent job crisis, but their effectiveness is difficult to assess. This column summarises the findings of a recent study analysing a 2012 Spanish employment subsidy given to firms with fewer than 50 employees that make use of a new type of permanent contract. Consistent with other country studies, it fails to find robust evidence for increased employment growth due to the subsidy scheme.