In the years preceding the Great Recession there was a dramatic rise in household debt in the US, and an increase in import competition triggered by the expansion of China and other low-wage countries. This column uses consumer credit data to argue that these phenomena are intimately linked. Household debt levels increased significantly in counties where US manufacturing jobs shifted overseas, and regional exposure to import competition explains 30% of the cross-regional variation in the growth in household debt.
Jean-Noël Barrot, Erik Loualiche, Matthew Plosser, Julien Sauvagnat, 21 October 2016
Carlos Garriga, Finn Kydland, Roman Šustek, 16 October 2016
Central banks responded to the financial crisis by cutting policy rates to prevent deflation and curb the decline in economic activity, but these responses have been anything but temporary. This column explores whether the sticky price channel is still relevant in an environment of persistently low rates. Although the effectiveness of the sticky price channel is limited, monetary policy instead transmits through mortgage debt. The recent period of low rates and low inflation has redistributed income and consumption from savers to mortgage borrowers.
Ricardo Reis, 14 October 2016
Conventional economic theory predicts that, outside of a financial crisis, quantitative easing should have no effect on real outcomes or inflation. This column proposes two theoretical channels through which quantitative easing might also work in a fiscal crisis. In this case, quantitative easing can be a valuable tool because it can control the path of inflation over time and reduce the distortions to the credit flow in the economy.
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.
Friederike Niepmann, Tim Schmidt-Eisenlohr, 11 June 2016
To mitigate the risks of international trade for firms, banks offer trade finance products – specifically, letters of credit and documentary collections. This column exploits new data from the SWIFT Institute to establish key facts on the use of these instruments in world trade. Letters of credit (documentary collections) cover 12.5% (1.7%) of world trade, or $2.3 trillion ($310 billion).
Fredrik Andersson, Lars Jonung, 30 May 2016
The volume of credit to Swedish households has grown twice as fast as incomes since the mid-1990s. This has resulted in both rising house prices and rising household debt. This column argues that these trends expose Sweden to important economic vulnerabilities. Curbing these vulnerabilities will require prompt action by the authorities.
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.
Matthias Morys, 10 May 2016
The first century of modern Greek monetary history has striking parallels to the country’s current crisis, from repeated cycles of entry and exit from the dominant fixed exchange rate system, to government debt built-up and default, to financial supervision by West European countries. This column compares these two episodes in Greece’s monetary history and concludes that lasting monetary union membership can only be achieved if both monetary and fiscal policies are effectively delegated abroad. Understandable public resentment against ‘foreign intrusion’ might need to be weighed against their potential to secure the long-term political and economic objective of exchange rate stabilisation.
Thomas Gehrig, 06 May 2016
Information asymmetry is a key factor during financial crises. In this Vox Views video, Thomas Gehrig compares the 1907 and 2007 crises and finds common patterns. Information is a driver of crises and of market liquidity. In periods of stress, finding liquidity is difficult and illiquidity increases mostly because of information. 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.
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.
Biagio Bossone, Marco Cattaneo, 04 January 2016
‘Helicopter tax credits’ have been proposed as a means of injecting new purchasing power into the economies of Eurozone Crisis countries. This column outlines one such system for Italy. The Tax Credit Certificate system is projected to accelerate Italy’s recovery over the next four years, and will likely be sustainable. It also provides a tool to avoid the breakup of the Eurosystem and its potentially disruptive consequences.
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.
Avinash Persaud, 20 November 2015
As the recent Financial Stability Board decision on loss-absorbing capital shows, repairing the financial system is still a work in progress. This column reviews the author’s new book on the matter, Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risks. It argues that financial institutions should be required to put up capital against the mismatch between each type of risk they hold and their natural capacity to hold that type of risk.
Mouhamadou Sy, 09 November 2015
From the introduction of the euro in 1999 to the Greek crisis in 2010, the Eurozone witnessed external imbalances between countries at its core and those at its periphery. These imbalances have been attributed either to differences in competitiveness or to the effect of financial integration. This column argues that in order to understand the imbalances within the Eurozone, it is necessary to consider credit costs and capital flows. The lower real cost of credit for high-inflation countries must be taken into account, as well as the inflow of capital to the non-tradable sector that this implies. Monetary policy cannot be conducted in a ‘one size fits all’ manner.
Jakob de Haan, Wijnand Nuijts, Mirea Raaijmakers, 06 November 2015
The Global Crisis revealed serious deficiencies in the supervision of financial institutions. In particular, regulators neglected organisational culture at the institutional level. This column reviews efforts since 2011 by De Nederlandsche Bank to oversee executive behaviour and cultures at financial institutions. These measures aimed at identifying risky behaviour and decision-making processes at a sufficiently early stage for appropriate countermeasures to be implemented. The findings show that regulators can play a larger part in securing the stability of the financial system by taking an active role in shaping institutional cultural processes.
Alex Pienkowski, Pablo Anaya, 06 August 2015
During the Global Crisis, sovereign debt-to-GDP ratios grew substantially in the face of shocks to growth, increased fiscal deficits, bank recapitalisation costs, and rising borrowing costs. This column looks at how these various shocks interact with each other to exacerbate or mitigate the eventual impact on debt. Choice of monetary policy regime is an important determinant of how public debt reacts to these shocks.
Esa Jokivuolle, Jussi Keppo, Xuchuan Yuan, 23 July 2015
Bankers’ compensation has been indicted as a contributing factor to the Global Crisis. The EU and the US have responded in different ways – the former legislated bonus caps, while the latter implemented bonus deferrals. This column examines the effectiveness of these measures, using US data from just before the Crisis. Caps are found to be more effective in reducing the risk-taking by bank CEOs.
Stefan Gerlach, Reamonn Lydon, Rebecca Stuart, 21 July 2015
Despite being a mainstay of macroeconomic theory for the past half century, the Phillips curve often receives the death knell from various commentators. These critiques often rely on results from data samples spanning relatively short periods. Using the case of Ireland, this column argues that short-term idiosyncrasies can explain the failure of the model in these contexts. Taking a longer historical view, the Phillips curve remains a useful macroeconomic model, at least in the Irish context.