An efficient allocation of inputs across firms is a necessary condition to boost TFP growth. This column presents evidence that in large Eurozone economies, capital misallocation trended upwards in the period 2002-2012 while labour misallocation dynamics were flatter. Uncertainty and credit market frictions were strongly associated with the observed developments in capital misallocation, whereas the overall deregulation in the product and labour markets contributed to dampening input misallocation dynamics.
Elisa Gamberoni, Claire Giordano, Paloma Lopez-Garcia, 13 December 2016
Stephen Cecchetti, Kim Schoenholtz, 07 December 2016
The Bank of Japan has recently implemented one of the largest central bank policy shifts in modern times, raising its inflation target explicitly to 2% and kicking off the most rapid balance sheet expansion among the leading central banks. This column assesses this policy decision and its potential pitfalls, and compares it to similar policies enacted in the past. Unless policy has a significantly larger impact on financial conditions going forward than it has to date, the revised framework will likely be insufficient to achieve the Bank’s inflation target any time soon.
Marco Buti, Helene Bohn-Jespersen, 25 November 2016
The actions taken in 2008-09 by the G20 avoided an outright depression during the financial crisis, but questions remain over its ability to evolve from a short-term crisis response forum to effectively addressing more long-term challenges. This column argues that to ‘win the peace', G20 members as well as G20 Presidencies have to redesign international economic policy coordination, and ensure that the focus is kept on a limited number of deliverables to which all G20 members can agree.
Maria Balgova, Alexander Plekhanov, 18 November 2016
The major increase in the volume of non-performing loans as a result of the recent financial crisis was predictable, but the persistence of this bad debt is a cause for concern. Using a sample of 100 countries, this column compares economic outcomes in three different scenarios following a rise in non-performing loans. Reducing these loans has an unambiguously positive medium-term effect, with countries that experience an influx of fresh credit growing the fastest. Allowing high levels of non-performing loans to persist, on the other hand, can cost more than two percentage points of economic growth annually.
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.
Joshua Aizenman, Yothin Jinjarak, Huanhuan Zheng, 24 October 2016
The booms and busts of real estate prices echo those of the real business cycle. This column looks at the relationship between house price valuations and economic growth in an international context. Taking account of heterogeneity in housing policies across countries, large house price depreciations are found to be positively associated with economic growth. This positive relationship is more pronounced in countries with civil law legal systems.
Julia Ruiz Pozuelo, Amy Slipowitz, Guillermo Vuletin, 30 September 2016
The debate over whether democracy causes economic prosperity and growth dates back millennia. Recent empirical results suggest that democratisation has a sizable positive effect on economic growth, but endogeneity and reverse causality may be driving these results. This column uses new data from surveys of democracy experts to solve the endogeneity puzzle. The positive association between democracy and economic growth is a reflection of economic turmoil causing the emergence of democratic rule, rather than democracy causing more economic growth.
Guglielmo Barone, Francesco David, Guido de Blasio, 10 September 2016
EU regional policies aim to lead regions onto a path of self-sustaining growth. Fully successful interventions should imply a higher growth rate, not only during the treatment (when the region benefits from the transfers), but also after the expiry of the programme (when the financing terminates). This column uses evidence from the Abruzzi region in Southern Italy to document that when the party is over and the funding ends, growth may slow down significantly.
Philippe Aghion, Ufuk Akcigit, Julia Cagé, William Kerr, 29 August 2016
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.
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.