Michalis Haliassos, 19 May 2017

The 2017 CEPR European Workshop on Household Finance took place on 28-29 April 2017 at the Copenhagen Business School. This column introduces the CEPR Network on Household Finance and its goals, and also describes the papers that were presented at the workshop.

Eilyn Yee Lin Chong, Ashoka Mody, Francisco Varela Sandoval, 17 January 2017

Recent research suggests a point beyond which the benefits of financial development diminish, and further development can even hurt growth. This column describes how a negative relationship between credit and growth emerged strongly after 1990 and was particularly pronounced in the Eurozone, consistent with the notion that an overgrown financial sector weakens economic growth potential. It also argues that slower growth leads to more rapid financial sector expansion. Policymakers need to be aware of the possibility that causality runs in both directions.

Lilia Mukhlynina, Kjell G. Nyborg, 23 October 2016

The valuation of firms, projects, and transactions directly affects investment decisions and the allocation of resources in the economy. But practitioners often dismiss 'academic' valuation techniques. This column uses a survey of valuation professionals to argue that the real-world choice of valuation methods is often arbitrary, and influenced more by professional subgroup than educational background. In which case, we should ask whether finance education beyond bachelor's degrees is merely a sideshow.

Nauro Campos, Fabrizio Coricelli, 11 December 2015

Whatever the result of Britain’s upcoming in-or-out referendum on EU membership, its relationship with the EU will change substantially. To assess these changes, it is important to understand how Britain has benefited from EU membership. This column argues that EU membership has brought benefits through three key mechanisms – trade, foreign investment, and finance. The current focus on UK exports to and imports from the EU may severely underestimate the true potential costs to Britain of Brexit.

Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan, 27 November 2015

Economists often disagree on China’s prospects. This column provides the results from a survey of top UK-based macroeconomists by the Centre for Macroeconomics (CFM). It turns out that three quarters of the experts believe that China’s annual growth rate will be less than 6% over the next ten years or so. But the panel is divided on whether the slowdown will have a significant impact on the UK economy.

Stephen Cecchetti, Enisse Kharroubi, 07 July 2015

A booming financial sector means economic growth. Or does it? This column presents new evidence showing that when the financial sector grows more quickly, productivity tends to grow disproportionately slower in industries with either lower asset tangibility or in industries with higher research and development intensity. It turns out that financial booms are not, in general, growth-enhancing.

Jakob de Haan, Dirk Schoenmaker, 06 July 2015

The financial crisis brought with it many challenges, both to prevailing disciplinary tenets, and for research and policy more generally. This column outlines the lessons that can be drawn from the financial crisis – issues like financial market failures, macro-prudential policy, structural changes of the financial system, and the European banking union. It argues for the inclusion of these topics in curricula for the next generation of finance students.

Francesco D'Acunto, Marcel Prokopczuk, Michael Weber, 26 February 2015

Discrimination can be costly for both victims and perpetrators. This column uses the variation of historical Jewish persecution across German counties to proxy for localised distrust in financial markets. Persecution reduces the average stock market participation rate of households by 7.5%–12%. This striking effect is stable over time, across cohorts, and across education levels. The effect survives when comparing only geographically close counties. It suggests that the persecution of minorities may negatively affect societal wealth even far into the future through the channel of intergenerationally transmitted investment norms.

Kirill Shakhnov, 17 January 2015

The rapid growth of the US financial sector has driven policy debate on whether it is socially desirable. This column examines the trade-off between finance and entrepreneurship, and links the growth of finance to rising wealth inequality. Although financial intermediation helps allocate capital efficiently, people choosing a career in finance do not internalise the negative effect on the pool of talented entrepreneurs. This mechanism can explain the simultaneous growth of wealth inequality and finance in the US, and why more unequal countries have larger financial sectors.

Joanne Lindley, Steven McIntosh, 21 September 2014

Individuals who work in the finance sector enjoy a significant wage advantage. This column considers three explanations: rent sharing, skill intensity, and task-biased technological change. The UK evidence suggests that rent sharing is the key. The rising premium could then be due to changes in regulation and the increasing complexity of financial products creating more asymmetric information.

Neil Kay, Gavin Murphy, Conor O'Toole, Iulia Siedschlag, Brian O'Connell, 29 June 2014

Small and medium-size enterprises (SMEs) often report difficulties in obtaining external finance. Based on new research, this column argues that these difficulties are not due to greater financial risks associated with SMEs. Instead, they are the result of imperfections in the market for external finance that negatively affect smaller and younger enterprises. The same research has shown that these types of firms are also the most reliant on external finance to support their investment and growth.

Nauro Campos, Stefan Dercon, 01 March 2014

Financial development and growth have long been linked. This column argues that there remain fundamental lacunae in our understanding of the finance-growth nexus. Three main areas for future research are identified: aid, institutions and technology.

Hans Degryse, Liping Lu, Steven Ongena, 21 August 2013

Non-bank financing originating in the shadow banking system has increasingly become an issue for policymakers. This column argues that informal financing has, in fact, been an essential element of corporate performance in China. Through reviewing the interaction between informal and formal financing, evidence suggests that informal financing simultaneously granted with formal financing (co-funding) is helpful for growth, especially for small firms.

Jeffrey Chwieroth, Andrew Walter, 10 May 2013

The economic consequences of financial crises have been systematically explored. Their political consequences haven’t. This column argues that without paying attention to politics, crises will remain poorly understood. After all, politics shapes policy choices, market sentiment and, ultimately, economic outcomes. Evidence from the effects of banking crises over the past century show that crises have a dramatic impact on the survival prospects of governments.

Edward Kane, 30 January 2013

Do financial institution managers only owe enforceable duties of loyalty, competence and care to their stockholders and explicit creditors, but not to taxpayers or government supervisors? This column argues that in the current information and ethical environments, regulating accounting leverage cannot adequately protect taxpayers from regulation-induced innovation. We ought to aim for establishing enforceable duties of loyalty and care to taxpayers for managers of financial firms. Authorities need to put aside their unreliable, capital proxy: they should measure, control, and price the ebb and flow of safety-net benefits directly.

Rolando Avendaño, Niels Boehm, Elisa Calza, 27 January 2013

Small and medium-sized enterprises provide the vast majority of employment in developing countries and are keystones in the productive structures of emerging economies. This column argues that the growth of such firms is being hindered by scarce financing. Looking at Latin America, it is clear that public financial institutions are increasingly important in meeting credit demands. If emerging economies want to see long-term growth, there needs to be a comprehensive approach to reducing the ‘traditional’ barriers to small and medium enterprise financing.

James Choi, Hongjun Yan, 25 January 2013

Security-market regulations often seek to ensure that all investors have equal access to information about each company. But what are the actual costs of an unequal information playing field? This column reviews evidence from China, Finland, and the US, suggesting that information asymmetry raises companies’ cost of capital. This inhibits investment and thereby long-run economic growth.

Roger Farmer, 22 January 2013

The efficient market hypothesis – in various forms – is at the heart of modern finance and macroeconomics. This column argues that market efficiency is extremely unlikely even without frictions or irrationality. Why? Because there are multiple equilibria, only one of which is Pareto efficient. For all other equilibria, the whims of market participants cause the welfare of the young to vary substantially in a way they would prefer to avoid, if given the choice. This invalidates the first welfare theorem and the idea of financial market efficiency. Central banks should thus dampen excessive market fluctuations.

Takeo Hoshi, 23 December 2012

Rejigging financial regulation is in vogue. But, in the world of international finance, how well do different regulatory systems join up? This column argues that the US Dodd Frank Act and Basel III are, in part, incompatible and that harmonising them may lead to unintended consequences. The US ought to tread carefully here but should also try hard to maintain the spirit of better financial regulation.

Robert Shiller, 14 October 2013

Robert Shiller of Yale University has just been awarded the Nobel Memorial Prize in Economic Sciences (with Eugene Fama and Lars Peter Hansen). In this interview recorded in May 2012, he talks to Romesh Vaitilingam about his book, ‘Finance and the Good Society’, which argues that even after the crisis, rather than condemning finance, we need to reclaim it for the common good. They discuss financial innovation, personal morality, the importance of education and the contribution that finance can make to our lives.