The ECB has been struggling to implement a programme of quantitative easing (QE) that would successfully target deflation. The main difficulty is political, stemming from opposition from German institutions. Their argument against is that a government bond buying programme by the ECB would mix fiscal and monetary policy. This column argues the opposite – such a programme can be structured so that it does not mix fiscal and monetary policy. It, therefore, would not impose a risk on German taxpayers.
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Plunging oil prices affect everyone, albeit no two countries will experience it in the same way. In this column, the IMF’s Chief Economist Olivier Blanchard and Senior Economist Rabah Arezki examine the causes as well as the consequences for various groups of countries and for financial stability more broadly. The analysis has important implications for how policymakers should address the impact on their economies.
The ECB may soon launch QE. Two of Europe’s leading macroeconomists argue that QE is the ECB’s last anti-deflation tool – it must not be sacrificed to political expediency. The risk-sharing debate is secondary to the programme’s size and duration – one example would be €60 billion per month for one year, or until inflation expectations rose to near 2%. The ECB should also explain that no matter how well the monetary part of the programme is designed, an accompanying fiscal expansion is critical to QE’s effectiveness.
The Swiss central bank last week abandoned its euro exchange rate ceiling. This column argues that the fallout from the decision demonstrates the inherent weaknesses of the regulator-approved standard risk models used in financial institutions. These models under-forecast risk before the announcement and over-forecast risk after the announcement, getting it wrong in all states of the world.
The merit of a minimum wage is a classic issue of contention in economics and is of particular interest during a contraction. This column uses worker-level microdata to investigate the effect of a federal policy change in the US that affected some states more than others. The authors evaluate not only the proximate effects on employment, but also follow workers for up to three years afterward to track career trajectory following a minimum wage hike.
Some theories suggest that the threat of revolution plays a pivotal role in democratisation. This column provides new evidence in support of this hypothesis. The authors use democratic transitions from Europe in the 19th century, Africa at the turn at the 20th century, and the Great Reform Act of 1832 in Great Britain. They find that credible threats of revolution have systematically triggered pre-emptive democratic reforms throughout history.
Not only is world trade lower than its pre-Crisis level, but it is also growing slower than GDP. This column examines the relationship between trade and GDP in the last four decades. The findings indicate that roughly half of the slowdown is driven by structural rather than cyclical factors. Trade itself has become less responsive to GDP in recent years. In particular, supply chains are maturing after years of rapid expansion.
Ending the Swiss franc-euro peg created market turmoil and much vitriol among pundits. This column argues the that SNB could and should have waited – riding along with the euro’s depreciation until Swiss deflation disappeared, but the decision to end the one-sided peg was not a mistake. The peg was always meant as a temporary measure that had to be lifted one day.
Central banks in advanced economies implemented quantitative easing (QE) as a response to the Global Crisis. A key transmission mechanism of QE, emphasised by policymakers, has been the ‘portfolio balance’ channel. This column describes behaviour of insurance companies and pension funds using sectoral and micro-level data from the UK. The results show that investors shifted their portfolios away from government bonds towards corporate bonds. But portfolio rebalancing has been limited to corporate bonds and did not extend to equities.
The recent expansion of US shale oil production has captured the imagination of policymakers and industry analysts. It has fuelled visions of the US becoming independent of oil imports, of cheap US gasoline, of a rebirth of US manufacturing, and of net oil exports improving the US current account. This column asks how plausible these visions are, and examines the evidence to date.
While Brazil has become one of the largest economies in the world, it remains among the most closed economies as measured by the share of exports and imports in GDP. This column argues that this cannot be explained simply by the size of Brazil’s economy. Rather it is due to a reliance on domestic value chain integration as opposed to participation in global production networks. Greater trade openness could produce efficiency gains and help Brazil address its productivity and competitiveness challenges.
Allegations of tax-avoiding transfer pricing by multinational firms are common, but economic evidence is scarce. This column discusses detailed price data for intra-firm and arm’s length transactions that reveals tax-driven transfer pricing, and suggests that it may be reduced by focusing on a small number of large firms in a small number of tax havens.
The Bank of England has been a beacon for openness and transparency. This column argues that proposed changes to its procedures will worsen transparency. The changes would make the policymaking process less efficient in the name of transparency. But transparency is not an end in itself. Rather, it is a tool for enhancing accountability and, just as importantly, advancing the ultimate goal of making monetary policy more efficient and effective.
Governments sometimes promote reforms that increase access to education for a large share of the population. These reforms may lower the returns to education by altering returns to skills, education quality, and peer effects. This column examines a 1961 Italian reform that increased enrolment in university STEM majors among students who had previously been denied access. The reform ultimately failed to raise their incomes.
There is growing interest in alternative measures of national wellbeing, such as happiness or life satisfaction. This column argues that a small number of survey questions are unlikely to capture all the aspects of wellbeing that matter to people. Using a stated-preference survey, the authors find several aspects of wellbeing to be important that are not commonly included in wellbeing surveys, such as those related to family, values, and security. This approach could be used to provide weights for wellbeing indices.
Married couples are healthier than singles. This column works to determine the direction of causality by exploiting panel data. In line with the evolutionary psychology literature, healthier individuals seem to be more desirable and are thus more likely to sort into marriage; but there also exists a ‘protective’ health value to marriage. It seems that couples encourage each other to take precautions.
An increasing share of purchases are made online where price changes are very cheap. This column presents new evidence on price dispersions and frictions using novel data from an online shopping platform from the US and the UK. Online prices are more flexible than prices in conventional stores but still sticky. Prices of goods sold online could be as imperfect as in regular markets.
The European Central Bank has just launched full-fledged quantitative easing. This column argues that the ECB’s watershed decision highlights both the strengths and the persistent vulnerabilities of the Eurozone. The limited-risk-sharing provision flags the need for greater fiscal union; and governments should use the respite that QE provides to launch much-needed structural reforms.
Tax incentives have become a common policy tool for encouraging firms to spend more on research and development – and the recession has further raised interest in the effectiveness of this policy. This column highlights a new review of the empirical evidence, which suggests that fiscal incentives for R&D only modestly stimulate R&D, while their impact on innovation and economic growth is uncertain.
Large and volatile capital flows into emerging economies since the Global Financial Crisis have re-invigorated efforts to unearth the determinants of these flows. This column investigates the interplay between global risk aversion (captured by the VIX) and countries’ characteristics. The authors also explore what policies countries should employ to protect themselves against the volatility of capital flows. The findings indicate that capital flows to emerging markets cannot be controlled without incurring substantial costs.
The Global Crisis has increased the importance of the renminbi as an international currency. This column describes how the status of the renminbi has changed relative to that of the dollar and the euro. It also discusses what their future as future currencies would be. The author suggests that within 10 years, the renminbi would be at least at par with the dollar as a regional trade settlement currency in East Asia. It is also likely to become a close second to the euro as a world reserve currency.
The manufacturing sector in OECD countries increasingly buys, produces, sells and exports services. This is now known as the servicification of manufacturing. This column, using firm-level data from Sweden, shows that as firms’ share of in-house services increases, so does their export intensity. The increasing complementarities between services and trade in goods thus imply that the different trade policies for goods and services are an antiquated divide.
Researchers have put forward two explanations for the failure of the US inflation rate to fall as far during the Great Recession as the Phillips curve would predict. Either expectations have been successfully anchored by the Fed’s inflation target, or the Phillips curve is focusing on the wrong thing – aggregate unemployment instead of short-term unemployment. This column shows that the two explanations are complementary; together, they explain the puzzle, but separately they cannot.
For over a century, economists have expressed concerns with short-termism. In particular, long-term growth and investment could be sacrificed for the sake of short-term profit targets. This column examines short-termism using US firm level data on R&D and earnings targets. The author develops a macroeconomic model of long-term growth with short-term manager incentives. Managers appear to manipulate R&D to meet profit targets. The theoretical analysis suggests that such short-termism leads to 1% lower firm value together with around 0.1% lower long-term growth for the economy each year.
The failure of markets to price carbon emissions appropriately leads to excessive fuel use and induces global warming. This column suggests a new, back-of-the-envelope rule for calculating the global carbon price. The authors find that fighting global warming requires a price of around $15 per ton of emitted CO2, or $0.13 per gallon of gasoline. The rule also highlights the importance of economic indicators, such as GDP, for climate policy.
Many lenders hire loan officers to screen soft information that may otherwise be ignored by credit scoring. However, in addition to their compensation costs, loan officers may have characteristics, such as being overly cautious, that could distort their decisions. This column documents the performance of loan officers using data from a Chinese lender. Despite the distortions, the loan officers contribute three times their pay in annual profits above what the lender could have earned by itself, even with the benefit of hindsight.
There is an ongoing debate among economists whether international trade contributes to business cycles synchronisation. So far, causal evidence has been limited. This column presents new research on the role of multinational firms in the transmission of shocks. The authors use a rich firm-level dataset from the US Census Bureau and the 2011 Japanese earthquake/tsunami as a natural experiment. They find that US firms with high dependence on Japanese inputs suffered large output losses following the earthquake. Global supply chains, therefore, play an important role in the cross-country transmission of shocks.
Recent experience with the zero lower bound on nominal interest rates, and the use of high-denomination notes by criminals and tax evaders, have led to revived proposals to phase out cash. This column argues that abolishing cash may be neither necessary nor sufficient to overcome the zero lower bound problem, and would severely undermine privacy. Allowing the public to hold reserves at central banks could reduce the need for deposit insurance, although the transition to the new regime and the effects on credit supply must be carefully considered.
Out-of-sample forecasting tests are increasingly used to establish the quality of macroeconomic models. This column discusses recent research that assesses what these tests can establish with confidence about macroeconomic models’ specification and forecasting ability. Using a Monte Carlo experiment on a widely used macroeconomic model, the authors find that out-of-sample forecasting tests have weak power against misspecification and forecasting performance. However, an in-sample indirect inference test can be used to establish reliably both the model’s specification quality and its forecasting capacity.
The adverse effects of energy subsidies have been widely documented. While recent decreases in international oil prices have provided a welcome respite, past experience has highlighted the need for caution. This column argues that to make this respite a permanent gain will require the removal of government discretion in determining domestic energy prices. Adoption of an automatic energy pricing mechanism, possibly with in-built short-term price smoothing, can help prevent the return of subsidies and prepare the way for eventual price deregulation.
Addressing the HIV/AIDS epidemic requires an understanding of how risky sexual behaviours change over time. This column observes that, whereas the accuracy of self-reported data depends on the likelihood of people telling the truth, the likelihood of risky behaviours being detected in tests for sexually transmitted infections is equal to the disease transmission rate. Self-reported data may therefore be a more reliable measure of risky behaviours than the prevalence of sexually transmitted infections when the probability of transmission is low.
Given the widely recognised importance of institutions to economic development, the question arises of how to promote development through institutional change. This column investigates how constitutional provision of the right to education affects educational attainment. Initial analysis indicates a negative correlation, but this relationship is not robust to controlling for legal origin. Factors such as judicial review likely affect implementation of constitutional provisions.
The effect of trade protection of infant industries in developing countries on their long-term growth has been widely debated. This column provides evidence on this topic using a novel dataset from the Napoleonic blockade against British trade. The author analyses the effect of this temporary trade protection on the cotton spinning as an infant industry, employing within-country variation in the trade protection. In the short run, better protected regions increased their production capacity in the infant industry. There is a persistence of this productivity in the long run as well.
From 1990 to 2009, more than 500 preferential trading agreements were formed by countries of all stripes. This column argues that the non-trade reform effects are central to understanding the causes and consequences of the recent trade agreement wave. Developing country leaders use deep, legally binding trade agreements with major economic powers, especially the US and the EU, to enact and implement politically controversial domestic reforms.
There is no consensus among economists about the size of the multiplier of government purchases. It is not clear either how multipliers vary with the state of the economy. This column presents new evidence on this issue using large historical data set from the US. The findings suggest that there is no evidence that fiscal multipliers differ by the amount of unemployment or the degree of monetary accommodation.
The Great Recession was marked by disruptions to the supply of credit to firms and households. But little is known about how much supply shocks to household credit actually contributed to employment losses. This column uses data on US counties to examine the causal relationship running from the supply of household credit to employment during the recession. The author concludes that contractions in household credit supply caused substantial employment losses.
Targeting key players in a network can have important effects due to multipliers arising from peer effects. This column argues that this is particularly true for crime –the success in reducing crime in Chicago was due to the targeting of 400 key players rather than spending resources on more general targets. Key-player policies in crime, education, R&D networks, financial networks, and diffusion of microfinance outperform other policies such as targeting the most active agents in a network.
While large Japanese firms have been present internationally for years, small firms have found it difficult to overcome the information obstacles associated with entering overseas markets. This column argues that lender banks can help as they not only provide financial support but also business consulting services using their extensive knowledge obtained through lending transactions. It shows that small and medium firms whose lender banks accumulate more overseas market information are more likely to start exporting.
The rapid growth of the US financial sector has driven policy debate on whether it is socially desirable. This column examines the trade-off between finance and entrepreneurship, and links the growth of finance to rising wealth inequality. Although financial intermediation helps allocate capital efficiently, people choosing a career in finance do not internalise the negative effect on the pool of talented entrepreneurs. This mechanism can explain the simultaneous growth of wealth inequality and finance in the US, and why more unequal countries have larger financial sectors.
The proportion of the population in the developing world that lives below the poverty line has been decreasing. This column argues, however, that such a counting approach is not the only way to assess whether the poorest have been reached. An alternative is to use the success in raising the consumption floor as an indicator of social progress. When applying such an approach, the author finds little progress for the poorest.
Shale gas exploitation in the US has changed the competitiveness landscape for energy intensive industries. Prices are only part of the picture. We propose an indicator – ‘Unit Energy Cost’ – reflecting productivity and the evolution of energy prices per unit consumed. The good performance of European industries can be explained by their relatively low energy intensity (high energy productivity). The US and China are catching up – this calls for renewed efforts to limit price growth, and further improvements in intensity performance.
A number of US studies have found a link between high pre-crisis debt and weak consumption after the recent financial crisis. This column investigates the relationship between household debt and consumption in the UK. Spending cuts associated with debt are estimated to have reduced the level of aggregate private consumption by around 2% after 2007, unwinding the faster growth in spending by highly indebted households, relative to other households, before the financial crisis.
The recent actions of the US Treasury to rein in corporate tax inversions leave their rationale largely intact. This column discusses new evidence suggesting that the potential tax benefits of inversions are still huge. The recent Treasury measures raised legal obstacles, but the heart of the problem remains unaddressed. At some point a new technique is likely to be found to circumvent the new measures – just as happened with earlier measures. This is a worldwide problem.
Allowing greater immigration may raise tax revenue and help pay for the welfare state, but it also affects the future composition of the voting population. This column discusses a political-economy model in which the largest group in a winning coalition chooses tax and immigration policies, and explains how the composition of the voting population changes over time.
For a decade the field of international trade has revolved around the notion that exporters are particularly productive. Many policy interventions implicitly assume that exporting causes firms to become more productive, but such causal inference may be dubious. This column presents an experiment designed to verify the existence of learning-by-exporting. Experimental results and detailed observation vindicate this causal channel.
The Global Financial Crisis has ignited the debate about a European banking union. Whereas most research focuses on the single supervision mechanism for European banks, this column analyses the advantages and disadvantages of having a single resolution mechanism. If banks hold opaque assets, local resolution authorities can still play an important role in the new regulatory framework.
Race is usually treated as a fixed, exogenous characteristic in academic studies and policy discussions, but a growing body of evidence calls this assumption into question. This column presents evidence from historical US census data that more than 19% of black males ‘passed’ as white, around 10% of whom later ‘reverse-passed’ to being black. Passing was associated with geographic relocation and with better political-economic and social opportunities for whites relative to blacks, providing prima facie evidence that passing was endogenous.
With the large Syriza victory in Greece, thoughts turn to forthcoming debt restructuring talks. This column argues that Greece is unlikely to get a large restructuring. Using a Rubinstein bargain approach to generate a back-of-the-envelope estimate, Greece would get some breathing room but not much. Rather than running a structural primary surplus of the order of 5% of potential output, as envisaged in the IMF projection, Greece could get away with a number close to 3.75%.
Capital controls are back in fashion. This column discusses new firm-level evidence from Brazil showing that capital controls segment international financial markets, reduce external financing, and lower firm-level investment. They disproportionately affect small, non-exporting firms, especially those more dependent on external finance. This suggests that macro-finance models focusing on aggregate variables are missing an important dimension by abstracting from firm-level heterogeneity.
Rural policies that affect migration to the cities may have significant impact on urban labour markets. However, there is little empirical evidence on the magnitude of these effects. This column argues that India’s rural employment guarantee – the world’s largest workfare programme – reduces short-term migration from rural areas. At the same time, it increases wages of urban unskilled workers.