Financial markets

Xavier Vives, 14 February 2017

Tobin taxes on financial markets, such as the EU Financial Transactions Tax, are regularly under consideration. This column argues that a rationale for a Tobin tax exists even in competitive and informationally efficient markets when traders have private information and they condition on prices. In this situation traders overreact to private information, and a transactions tax may offset this externality. 

Felix Hufeld, Ralph Koijen, Christian Thimann, 30 January 2017

Despite the importance of insurance, discussions about the macroeconomic role and the risks of insurance markets have been surprisingly limited. This column explores some of the key theoretical and conceptual questions still unanswered in this field, and suggests that a two-fold approach combining a focus on individual firms and an activity-based approach across the sector is needed to tackle systemic risk within the insurance industry.

Eilyn Yee Lin Chong, Ashoka Mody, Francisco Varela Sandoval, 17 January 2017

Recent research suggests a point beyond which the benefits of financial development diminish, and further development can even hurt growth. This column describes how a negative relationship between credit and growth emerged strongly after 1990 and was particularly pronounced in the Eurozone, consistent with the notion that an overgrown financial sector weakens economic growth potential. It also argues that slower growth leads to more rapid financial sector expansion. Policymakers need to be aware of the possibility that causality runs in both directions.

Kristopher S. Gerardi, Kyle Herkenhoff, Lee Ohanian, Paul S. Willen, 10 January 2017

Many studies have addressed the question of why people default on their mortgages, but lack of data has meant that much of this research has omitted the effect of the owner's ability to pay. This column uses panel data on defaults and changes in income to show that ability to pay is a much more important determinant of default than previously recognised. If the head of household loses a job, for example, this is equivalent to the effect of a 35% drop in home equity. Policies targeted at increasing ability to pay may be more effective at reducing default than those that try to remedy negative equity.

Nicholas Kozeniauskas, Laura Veldkamp, 03 January 2017

Uncertainty shocks are a major avenue of research in the quest to explain business cycles, as well as asset prices and financial crises. This column argues that three conceptually distinct types of uncertainty that are often modelled independently – ‘macro’ uncertainty about an aggregate variable such as GDP, ‘micro’ uncertainty about firms’ individual outcomes, and ‘higher-order’ uncertainty that people have about the beliefs of others – are in fact related because all three are tied to disaster risk.

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