The relationship between taxation and economic growth is complex, and relies in large part on the efficiency with which taxes are used. This column examines the impact of corruption on this relationship. The boost to welfare from reducing corruption is substantially larger than the marginal gains from optimising the tax rate for an existing level of government efficiency.
Philippe Aghion, Ufuk Akcigit, Julia Cagé, William Kerr, 29 August 2016
Holger Görg, Christiane Krieger-Boden, Peter Nunnenkamp, 23 August 2016
In theory, firms in developing countries benefit from viable, well-used, stable, and efficient local financial markets as a source of investment for local firms. Financial markets in the home countries of multinationals can also act as a source of FDI to the developing world when local financial markets are weak. This column discusses recent empirical data that support both arguments, and argues that advocates of tighter regulation for financial markets should consider the wider impact on developing country economies.
Claudio Raddatz, Sergio Schmukler, Tomás Williams, 12 August 2016
The categorisation of countries into relevant international benchmark indices affects the allocation of capital across borders. The reallocation of countries from one index to another affects not only capital flows into and out of that country, but also the countries it shares indices with. This column explains the channels through which international equity and bond market indices affect asset allocations, capital flows, and asset prices across countries. An understanding of these channels is important in preventing a widening share of capital flows being impacted by benchmark effects.
Paolo Mauro, 07 August 2016
Policymakers use a well established traditional accounting method to analyse past paths and predict future paths of debt ratios. But the traditional accounting exercises underemphasise the role of economic growth. This column proposes a simple, extended accounting framework to recognise the importance of growth more fully and explicitly. It quantifies the role of economic growth in debt-to-GDP measurement for Ireland and Italy, who were similarly placed in 2012 but whose paths diverged significantly in subsequent years.
Ernesto Dal Bó, Pablo Hernandez-Lagos, Sebastián Mazzuca, 26 July 2016
While cases of state failure have risen in the last decade, most notably in the Middle East and sub-Saharan Africa, they are not a new phenomenon. Historical evidence from the early modern period, and even the Bronze Age, shows that the majority of formed states have failed rather than thrived. This column introduces the ‘paradox of civilisation’ to characterise the obstacles settlements face in establishing civilisations. The paradox defines the success of a civilisation as a trade-off between the ability to produce economic surplus and to protect it. It is therefore important to correctly balance military and economic support when providing aid.
Rajiv Kumar, 22 July 2016
Despite Narendra Modi’s successful leadership as chief minister of Gujarat, some question his ability to achieve the same progress at the national level as India’s prime minister. This column analyses Modi’s political background and state- and national-level experience to assess his capacity to navigate India through a politically and economically important time towards its goal of becoming a prosperous economy. It finds that while Modi can lean on his Gujarati experience to some extent, in other aspects he will have to depart from his incremental approach to policymaking in favour of radical changes, particularly in the area of employment maximisation.
Norges Bank Investment Management, 18 July 2016
Growth in the number of publicly quoted companies is a key driver of economic development, so the apparent decline in the number of company listings, at least in developed markets, is naturally worrying for investors, exchanges, and regulators alike. This column provides a framework to address this decline, and proposes possible remedies that could be taken to encourage more listings. The listings ecosystem must establish a new equilibrium to address the evolving conflicts of interest between founders, early investors, underwriters, and future shareholders.
Graham Elliott, Allan Timmermann,
Policymakers use forecasting to attempt to assess the impact of major events, such as the recent Brexit vote, on the economy. While forecasting has improved dramatically in recent years, the models can still be greatly improved. This column discusses some of the limitations of forecasting models, and how policymakers can make their predictions more reliable. Key considerations are using more data to generate predictions, and using myriad models to eliminate individual misspecifications.
Masayuki Morikawa, 10 July 2016
The service sector accounts for much of the output of many advanced economies, and maximising the sector’s output while also minimising regional disparities is an important policy challenge. This column analyses productivity in service sectors in Japan, focusing on economies of urban density. The higher the employment density of the cities in which service firms are located, the higher their productivity, but firms relocating to such cities negatively impacts regional disparity. Further, considerable differences in productivity improvements among sectors indicate there certain industries should be promoted in large cities, and others in smaller cities with lower employment density.
Ines Stelk, Steven Bosworth, Dennis Snower, 05 July 2016
How the trend towards individualism in societies affects economic welfare is debatable, but it is generally agreed that the role of technological progress in spurring individualism is substantial. Exploring the impact of technological progress in a model of individual utility, this column finds that the direct positive effects of technological progress, in the form of innovation and economic growth, may be offset by the indirect negative effects resulting from greater positional competition at the expense of caring activities.
Benjamin Faber, Cecile Gaubert, 29 June 2016
Governments around the world continue to fund tourism promotion policies, even while current economic literature debates whether tourism in the long run benefits the economy as a whole. This column uses the empirical context of Mexico to analyse the economic implications of international and domestic tourism, and the underlying mechanisms. It finds that tourism provides long-run economic gains to households, both at the local level and in the aggregate.
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.
Federico Cingano, Francesco Manaresi, Enrico Sette, 24 June 2016
Negative shocks to bank balance sheets are problematic not just for financial markets, but for employment and economic growth more widely. This column uses evidence on a bank liquidity shock in Italy in 2007-10 to show the impact on firms’ production, investment, and employment. Firms borrowing from banks with a high exposure to the shock experienced a more intense fall both in credit flows and in investment expenditure. While the credit cut has been homogeneous across borrowers, firms with easier access to external finance were able to contain the negative consequences of the drop in credit for investment.
Masayuki Morikawa, 23 June 2016
The shifting balance between manufacturing and service industries in developed economies has significant implications for long-term growth and international trade. This column uses Japanese firm-level data to analyse the impact of ‘factoryless goods producers’ on overall productivity. As these producers specialise in tasks in which advanced economies have a comparative advantage, it is anticipated that when combined with falling production costs and trade liberalisation, they will contribute to economic growth.
Fabienne Ilzkovitz, Adriaan Dierx, 19 June 2016
Firms with greater market power can behave monopolistically, and recent research suggests that declining market competitiveness is driving income inequality. While competition authorities already measure the overall impact of their interventions by using customer savings, these measurements do not account for indirect effects of intervention. This column introduces a DSGE model to model competition policy interventions as a negative mark-up shock. Competition policy has a significant and positive impact on growth and jobs, and impacts richer and poorer households differently. Interventions have important redistributive effects that benefit the poorest in society.
Peter Lindert, Jeffrey Williamson, 16 June 2016
Americans have long debated when the country became the world’s economic leader, when it became so unequal, and how inequality and growth might be linked. Yet those debates have lacked the quantitative evidence needed to choose between competing views. This column introduces evidence on American incomes per capita and inequality for two centuries before World War I. American history suggests that inequality is not driven by some fundamental law of capitalist development, but rather by episodic shifts in five basic forces: demography, education policy, trade competition, financial regulation policy, and labour-saving technological change.
Francisco Buera, Ezra Oberfield, 12 June 2016
Free trade often comes hand in hand with economic growth. The opportunity for gain is relatively small, according to quantitative models that rely on standard static mechanisms. This column introduces a model to study the diffusion of ideas across countries as a means of increasing productivity, and a quantitative assessment of the role of trade in the transmission of knowledge. How much the transmission of knowledge will impact productivity depends on the openness of the trading countries, current stock of knowledge, and a diffusion parameter.
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.
Paul De Grauwe, Yuemei Ji, 07 June 2016
There is a high degree of correlation between the business cycles of different countries. This is particularly the case in the Eurozone, but also among industrialised countries outside of the Eurozone. Using a two-country behavioural macroeconomic model, this column shows that the main channel for the synchronisation of business cycles is the propagation of ‘animal spirits’ – waves of optimism and pessimism that become correlated internationally.
Torben Andersen, Jonas Maibom, 29 May 2016
Theory and empirical data contest the direction of causality in the relationship between economic performance and income inequality – a relationship that is of great political importance. This column uses evidence from OECD countries to show that the relationship is not linear. While some countries can improve economic performance only at the cost of increasing economic inequality, other countries can improve both economic performance and equality without such a trade-off.