The fragmentation of financial systems along national borders was one of the main handicaps of the Eurozone both prior to and in the initial phase of the crisis, hindering the shock absorption capacity of individual member states. The EU has taken important steps towards the deeper integration of Eurozone financial markets, but this remains incomplete. This column argues that a fully-fledged financial union can be an efficient economic shock absorber. Compared to the US, there is significant potential in terms of private cross-border risk sharing through the financial channel, more so than through fiscal (i.e. public) means.
Marco Buti, José Leandro, Plamen Nikolov, 25 August 2016
Laurence Ball, 24 August 2016
Much of the damage from the Great Recession is attributed to the Federal Reserve’s failure to rescue Lehman Brothers when it hit troubled waters in September 2008. It has been argued that the Fed’s decision was based on legal constraints. This column questions that view, arguing that the Fed did have the legal authority to save Lehman, but it did not do so due to political considerations.
Raju Huidrom, M Ayhan Kose, Franziska Ohnsorge, 13 August 2016
Fiscal multipliers tend to be larger when the fiscal position of governments is stronger. This column argues that the link between fiscal multipliers and fiscal positions is independent of the business cycle. Although multipliers are generally larger in recessions, they are smaller during times of high debt, even during recessions, relative to what they would be if government debt were lower.
Yuichi Ikeda, Hideaki Aoyama, Hiroshi Iyetomi, Takayuki Mizuno, Takaaki Ohnishi, Sakamoto Yohei , Tsutomu Watanabe, 22 July 2016
Econophysics is an emerging field applying theories and methods from physics to economic problems and data. This column explores the collective motions of trade and the effects of trade liberalisation, using global data from the past two decades. Econophysics methods reveal how business cycles synchronise, and how economic risk propagates throughout the global economic network. The results also highlight inherent problems of structural controllability that are induced during economic crises.
Saleem Bahaj, Iren Levina, Jumana Saleheen, 28 June 2016
Finance plays a key role in growth by connecting savers and investors, but it can also be a source of crises. This column discusses whether there has been enough finance to enable productive investments. UK non-financial companies appear to have enough internal funds to cover all their investment taken as a whole, but the evidence suggests that small firms face shortfalls. The column also pleads for the development of new and better data sources to help measure the supply of finance that can be used to exploit productive investment opportunities.
Efraim Benmelech, Ralf R Meisenzahl, Rodney Ramcharan, 11 June 2016
The US government’s ‘bailout of bankers’ in 2008-09 remains a highly controversial moment in economic policy. Many critics suggest that intervention to relieve household debt may have been more effective in stimulating economic recovery. This column suggests that without federal intervention to stabilise financial markets and recapitalise some non-bank lenders, the magnitude of the economic collapse might have been much worse. While household debt was incredibly important in reducing demand, the financial sector dislocations and the lack of credit also played a critical role.
Thomas Gehrig, 25 May 2016
During normal operations, price discovery is an important feature of decentralised market trading. But the process can be distorted when markets are under great stress, such as during the run up to the collapse of Lehman Brothers in 2008. This column uses trading data from the days leading up to and following the collapse to show that price discovery at US stock exchanges remained remarkably efficient, even at the height of the turmoil.
Stijn Claessens, Nicholas Coleman, Michael Donnelly, 18 May 2016
Since the Global Crisis, interest rates in many advanced economies have been low and, in many cases, are expected to remain low for some time. Low interest rates help economies recover and can enhance banks’ balance sheets and performance, but persistently low rates may also erode the profitability of banks if they are associated with lower net interest margins. This column uses new cross-country evidence to confirm that decreases in interest rates do indeed contribute to weaker net interest margins, with a greater adverse effect when rates are already low.
Roel Beetsma, Xavier Debrun, 16 May 2016
The success of independent central banks is often used to argue in favour of independent fiscal councils with the aim of promoting sound fiscal policies. But unlike central banks, fiscal councils have no policy levers to pull – they can bark but never bite. This column explores the theoretical foundations and practical implications of fiscal councils. The evidence suggests that independent councils can mitigate the deficit bias. They do this by subjecting the ‘fiscal alchemy’ to systematic, rigorous, and highly publicised scrutiny.
Kebin Ma, 09 May 2016
Bank liquidity is a key component of the post Global Crisis environment. In this video, Kebin Ma discusses the interaction between market liquidity risk and funding liquidity risk. Capital requirements for preventing bank losses might not be as effective as we thought. The video was recorded in April 2016 at the First Annual Spring Symposium on Financial Economics organised by CEPR and the Brevan Howard Centre at Imperial College.
Dennis Bams, Magdalena Pisa, Christian Wolff, 02 May 2016
In the absence of full information about small businesses’ risk of loan default, banks are unable to accurately calculate counterparty risk. This column suggests that banks can use industry and linked-industry data to better establish counterparty risk, because distress from one industry is transmitted to supplier and customer industries. A reliable and easily available signal for such distress is any failure reported by S&P.
Ester Faia, Beatrice Weder di Mauro, 30 April 2016
The default of key financial intermediaries like Lehmann Brothers, as well as the global banking panic following the 2007-2008 financial crises, set in motion the path for a fundamental restructuring of the global financial architecture. This column argues that the most pressing question has been how to design an efficient mechanism for resolution of significantly important banks. Bail-in, as opposed to bailout, has been the worldwide solution. But this presents issues for global banks, which must adhere to the rules in many different jurisdictions.
Stefano Scarpetta, Sandrine Cazes, Andrea Garnero, 20 April 2016
Job quality plays a significant role in individuals’ well-being as well as promoting labour force participation, productivity, and economic performance. But it can be an elusive concept if not grounded in hard data. This column presents a new OECD framework to measure and assess the quality of jobs based on three measurable dimensions – earnings quality, labour market security, and quality of the working environment. The data reveal a great deal of heterogeneity in job quality across OECD countries and also across socioeconomic groups. Furthermore, the relationship between the quantity and quality of jobs is more complex in the short term, especially in the aftermath of the Global Crisis.
Masayuki Morikawa, 11 April 2016
Forecasts of business conditions affect investment decisions. This column provides evidence that this is the case in Japan, using firm-level data collected between 2004 and 2014 covering several significant economic events. It also shows that the impacts of business condition forecasts on investment are similar across manufacturing and non-manufacturing industries.
Anya Kleymenova, Andrew Rose, Tomasz Wieladek, 05 April 2016
Post-crisis banking is in trouble, with cross-border bank lending significantly slower than before. Many economists think that this is down to complications from government ownership. This column argues that although government ownership is not the only possible friction or reason for cross-border bank lending, it is an inhibitor of cross-border bank activity in both the UK and the US. If the same mechanism applies to other countries around the world, then global banking intermediation may rebound once again, once banks are privatised.
Jason Furman, 17 March 2016
The US is becoming ever more unequal. This column assesses the 2016 Economic Report of the President, highlighting that middle-class incomes are shaped by productivity growth, labour force participation, and the equality of outcomes. As the US economy moves beyond recovery from the Global Crisis, its policy stance should focus on promoting each of those factors to foster inclusive growth.
Ricardo Caballero, Emmanuel Farhi, 11 August 2014
The secular decline in real interest rates over the last two decades indicates a growing shortage of safe assets – a shortage that became acute during the Global Crisis. Given the still-depressed levels of real rates and the sluggish investment recovery, this chapter conjectures that the shortage of safe assets will remain a structural drag on the economy, undermining financial stability and straining monetary policy during contractions. Under these conditions, an additional important aspect of public infrastructure investment is the government’s ability to issue safe debt against such projects.
Richard Koo, 11 August 2014
The Great Recession is often compared to Japan’s stagnation since 1990 and the Great Depression of the 1930s. This chapter argues that the key feature of these episodes is the bursting of a debt-financed asset bubble, and that such ‘balance sheet recessions’ take a long time to recover from. There is no need to suffer secular stagnation if the government offsets private sector deleveraging with fiscal stimulus. However, until the general public understands the fallacy of composition, democracies will struggle to implement such policies during balance sheet recessions.
Joel Mokyr, 11 August 2014
In the aftermath of the Great Recession, many economists are persuaded that slow growth is here to stay. This chapter argues that technological progress – particularly in areas such as computing, materials, and genetic engineering – will prove the pessimists wrong. The indirect effects of science on productivity through the tools it provides scientific research may dwarf the direct effects in the long run. Although technological advances may polarise labour markets, they also bring widespread benefits that are not accurately reflected in aggregate statistics.
Nicholas Crafts, 11 August 2014
After the Great Depression, secular stagnation turned out to be a figment of economists’ imaginations. This chapter argues that it is still too soon to tell if this will also be the case after the Great Recession. However, the risks of secular stagnation are much greater in depressed Eurozone economies than in the US, due to less favourable demographics, lower productivity growth, the burden of fiscal consolidation, and the ECB’s strict focus on low inflation.