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.
Xavier Vives, 06 December 2016
Michael Bordo, Arunima Sinha, 20 November 2016
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.
Domenico Lombardi, Pierre Siklos, 07 November 2016
After the 2008 Global Crisis, there has been progress towards a system-wide regulatory architecture that includes a national macroprudential authority. This column describes a ‘capacity indicator’ that measures the state of macroprudential policies worldwide, including the features policymakers believe constitute a successful macroprudential policy regime. Eventually this index may be used to establish whether these macroprudential policy innovations have been successful.
Bruce Kasman, Joseph Lupton, 03 November 2016
Over the past two years, a significant disinflationary impulse has dampened nominal activity around the world. As this disinflationary impulse fades, however, both nominal and real growth should normalise. Indeed, as this column highlights, the latest signs show inflation and inflation expectations rising, profits stabilising, and capital expenditure inching up.
Peter Cziraki, Christian Laux, Gyöngyi Lóránth, 26 October 2016
Banks' payout decisions at the beginning of the financial crisis of 2007-2009 were particularly controversial as the crisis eroded the capital of many banks. Concerns were raised that banks may have engaged in wealth transfer to shareholders, or that they may have been reluctant to reduce dividends to avoid negative signalling. This column examines these arguments using a large dataset on US bank holding companies. Cross-sectional tests do not provide clear-cut evidence of active wealth transfer. Similarly, the evidence on signalling is mixed.
Antonio Fatás, Lawrence Summers, 12 October 2016
Conventional wisdom on supply and demand suggests that demand shocks are cyclical or transitory, and that only technology shocks are responsible for trend changes. This column argues that cyclical events can have permanent effects on demand, and therefore GDP. It is time for policymakers to start considering the possibility of hysteresis seriously.
Julian Kozlowski, Laura Veldkamp, Venky Venkateswaran, 11 September 2016
The Great Recession has had long-lasting effects on credit markets, employment, and output. This column combines a model with macroeconomic data to measure how the recession has changed beliefs about the possibility of future crises. According to the model, the estimated change in sentiment correlates with economic activity. A short-lived financial crisis can trigger long-lived shifts in expectations, which in turn can trigger secular stagnation.
Aida Caldera, Alain de Serres, Naomitsu Yashiro, 04 September 2016
Structural reforms can have adverse effects in the short run if implemented under weak macroeconomic conditions. This column argues that prioritising reform measures that bring short-term benefits even in a bad conjuncture, and packaging them to benefit from reform complementarities across product and labour markets, remains the most promising growth strategy, especially in the post-Global Crisis context
Marco Buti, José Leandro, Plamen Nikolov, 25 August 2016
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.
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.