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.
Thomas Gehrig, 25 May 2016
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 C. P. 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 K 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 C. 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.
Edward Glaeser, 11 August 2014
The wonders of the internet age cast doubt on the idea that technological progress is stagnating. Worryingly, however, some fraction of US job losses has become permanent after almost every recession since 1970. This chapter argues that persistent joblessness is unlikely to be a purely macroeconomic phenomenon. Although the US welfare system remains less generous than many European ones, it has become substantially more generous over time. Alongside targeted investments in education and training, radical structural reforms to America’s safety net are needed to ensure it does less to discourage employment.
M Ayhan Kose, Franziska Ohnsorge, Lei (Sandy) Ye, 07 January 2016
Emerging markets face their fifth consecutive year of slowing growth. This column examines the nature of the slowdown and appropriate policy responses. Repeated downgrades in long-term growth expectations suggest that the slowdown might not be simply a pause, but the beginning of an era of weak growth for emerging markets. The countries concerned urgently need to put in place policies to address their cyclical and structural challenges and promote growth.
Joshua Aizenman, 03 January 2016
The Global Crisis renewed debate on the benefits and limitations of coordinating international macro policies. This column highlights the rare conditions that lead to international cooperation, along with the potential benefits for the global economy. In normal times, deeper macro cooperation among countries is associated with welfare gains of a second-order magnitude, making the odds of cooperation low. When bad tail events induce imminent and correlated threats of destabilised financial markets, the perceived losses have a first-order magnitude. The apprehension of these losses in times of peril may elicit rare and beneficial macro cooperation.
Alessandra Bonfiglioli, Gino Gancia, 19 December 2015
The Great Recession highlighted the prominent role that economic uncertainty plays in hindering investment and growth. This column provides new evidence that economic uncertainty can actually play a positive role by promoting the implementation of structural reforms with long-run benefits. The effect appears to be strongest for countries with poorly informed voters. These findings suggest that times of uncertainty may present an opportunity to implement reforms that would otherwise not be passed.
Koji Nomura, 18 December 2015
Though Asian economies have maintained stable growth since 2010, their overall economic performance has slowed down compared to the peak in the 2000s. This column discusses the recent productivity trends in the Asian region and argues that the reason for the slowdown has been the end of China’s economic boom. Asian countries must undertake initiatives for achieving sustainable improvement of TFP across the region.
Nikolaos I. Papanikolaou, Christian C. P. Wolff, 06 December 2015
In the years running up to the global crisis, the banking sector was marked by a high degree of leverage. Using US data, this column shows how, before the onset of the crisis, banks accumulated leverage both on and, especially, off their balance sheets. The latter activities saw an increase in maturity mismatch, raised the probability of bank runs, and increased both individual bank risk and systemic risk. These findings support the imposition of an explicit off-balance sheet leverage ratio in future regulatory frameworks.