June 2009

Columba, Cornacchia, Salleo, 30 June 2009

The current crisis has made obvious the power of the financial sector to amplify business cycle dynamics. This column, the first half of a series, focuses on how leverage, capital regulation, and managers’ incentives contributed to the crisis.

Jiménez-Martín, Benítez-Silva, Eren, Heiland, 30 June 2009

How did we get a housing bubble? This column describes how well households predict the market values of their homes. Most homeowners overestimate the value of their properties by 5% to 10%, primarily due to the large expected capital gains implicit in the self-reported home values. Overly optimistic expectations about the evolution of house prices may have planted the seed of the current mortgage crisis in the US.

Calvo, Loo-Kung, 29 June 2009

The financial sector is prone to crises, which are typically associated with serious effects on output and employment. This column weighs the costs and benefits of financial deregulation that spurs temporarily high growth that then collapse and suggests that bubbles may be socially efficient.

Drechsler, Hallam, 29 June 2009

Foreign acquisitions of farmland in Africa and elsewhere have become a cause of concern. This column says that international investments are inevitable – the question is how to reconcile the objectives of land purchasers with the investment needs of developing countries.

Galizzi, Lisciandra, 27 June 2009

Want to encourage higher voter turnout in European Parliament elections? This column proposes allocating seats to member countries in proportion to their voter participation.

Lichtenberg, 27 June 2009

Many healthcare policymakers and analysts are focused on controlling rising medical costs. Is attacking high-cost, low-benefit medical innovation a solution? This column estimates that medical innovation – the use of advanced diagnostic imaging, newer drugs, and higher-ranked physicians – significantly increases life expectancy without raising medical expenditures per capita.

Metcalf, 27 June 2009

Nearly all economists agree that the most efficient way to address environmental problems is to raise the cost of the pollution-generating activity, but US policies subsidise clean-energy alternatives instead. This column criticizes that approach – subsidies lower the cost of energy, play favourites with technologies, are often inframarginal, and frequently interact in unexpected ways with other policies.

de Haan, Sturm, 27 June 2009

Should informed observers pay attention to the ECB President? This column says it is worthwhile for financial market participants to read the ECB President’s lips, as this adds information about upcoming interest rate decisions that is not provided by expected inflation and expected output growth.

Flandreau, Gaillard, 26 June 2009

How did the rating agencies come to have such a prominent role in the regulation of securities? This column traces their history back to the Great Depression. Ironically, the agencies became a regulatory instrument to address concerns about securities originators’ conflicts of interest, the very problem plaguing the agencies today. The lesson may be that no fixed regulatory solution is durable in the long run.

Saint-Paul, 26 June 2009

Gilles Saint-Paul of the Toulouse School of Economics talks to Romesh Vaitilingam about his work on the evolution of people’s beliefs about the market economy – how it affects occupational choice; how it is influenced by intellectuals who may be biased against the market economy; and how this all plays out in public debate about economic reform, particularly in France. The interview was recorded at the Royal Economic Society’s annual conference at the University of Surrey in April 2009.

Dutt, Traça, 25 June 2009

Would reducing corruption increase trade? While corrupt customs officials extorting bribes from exporters may impede trade, those who take bribes to circumvent formal trade barriers may help it. This column estimates that when tariffs exceed 25%, the pro-trade effects of corruption may dominate.

Persaud, 24 June 2009

Policymakers embraced the rhetoric of macro-prudential regulation in response to the crisis, but most of their proposals have just suggested more micro-prudential regulations of the sort that already failed. This column criticizes those proposals and outlines what real macro-prudential approaches would look like.

Edmans, Gabaix, 24 June 2009

Many blame executive compensation for encouraging shortsighted risk-taking. This column argues that compensation should be structured so as to provide incentives consistent with the firm’s position and long-term interest. It proposes “incentive accounts” that it says would be superior to existing compensation schemes.

Boeri, 23 June 2009

Public opinion is turning against migration during the recession, as generous European welfare states make migrants a potential fiscal burden. This column warns against the excessively exclusionary solutions to which voters are turning and suggests decoupling migration and the welfare state.

Gaulé, Maystre, 23 June 2009

Are freely availably scientific papers better disseminated? Many believe so, but this column presents new evidence suggesting that the higher number of citations received by open access papers is mostly due to a difference in quality. Nevertheless, there is a problem of access to the scientific literature in developing countries that needs to be addressed.

Levy Yeyati, 22 June 2009

Latvia has been hard hit by the global crisis and faces an unsustainable currency peg. Should the country float its currency, adopt the euro, or try a contained devaluation? This column assesses the options and says that the latter is most realistic, in that it will address the concerns of the EU, IMF, and Latvia.

Buti, Székely, Keereman, 20 June 2009

This column says that the enlargement of the EU from 15 to 27 members made the EU more competitive and it is therefore better placed to face the current crisis. It says that both old and new member states enjoyed major benefits from eliminating trade barriers, gradually allowing higher cross-border labour mobility, promoting financial integration, strengthening institutions, and significantly reducing political risk.

Hoffmann, Nitschka, 20 June 2009

Mortgage-backed securities have played a major role in the financial crisis and aren’t very popular as a result. This column documents macroeconomic benefits of these instruments, showing that economies with more developed markets for securitised mortgage debt share more consumption risk with other economies.

Reisen, 20 June 2009

If history is any guide, the Chinese renminbi will soon be due to overtake the US dollar, just as the dollar replaced the pound sterling last century. But will the renminbi be ready for reserve currency status? This column discusses the issues at hand and explains why some experts would prefer the IMF’s Special Drawing Rights as the next global reserve currency.

Papaioannou, Kalemli-Ozcan, Peydró, 20 June 2009

What was the payoff to adopting the euro? This column says that financial integration, measured as bilateral bank holdings and transactions, increased by 40% more amongst eurozone members than countries that stayed out. It attributes that growth to the euro’s introduction eliminating exchange rate risk and coinciding with financial regulatory harmonisation.

Grout, 19 June 2009

Paul Grout of the Centre for Market and Public Organisation (University of Bristol) talks to Romesh Vaitilingam about his report, Private Delivery of Public Services, which surveys the theory and evidence on three models of private sector involvement in the delivery of public services: privatisation; public-private partnerships; and not-for-profit organisations. The interview was recorded in Bristol in June 2009

Liu, Duval, 19 June 2009

The current crisis has drawn attention to the important role of trade finance in supporting international trade. This column argues that emerging market economies in Asia need to significantly develop and strengthen national trade finance institutions.

Cline, Williamson, 18 June 2009

Large external imbalances persist and remain a significant concern. This column estimates a set of medium-run “fundamental equilibrium exchange rates” compatible with moderating external imbalances that might guide international policy efforts. It says that the US dollar is overvalued and the Chinese renminbi is undervalued.

Gersbach, 17 June 2009

How might we limit the accumulation of public debt by democratic governments? This column proposes “voting twice" – first for a deficit ceiling and second for a particular budget. Such a procedure might strike a balance between flexibility and the commitment to refrain from loading debt onto future generations.

Hamilton, 16 June 2009

Past oil price spikes associated with Middle East conflicts and OPEC embargos were each followed by a global economic recession. This column argues that the onset of the current economic downturn of is also partly attributable to a sharp increase in the price of oil. Moreover, the interaction of high oil prices and housing problems contributed to the severity of the downturn.

Escaith, Gonguet, 16 June 2009

How do firm linkages transmit shocks? This column discusses the real and financial transmission mechanisms in the supply chain and financial system that can create troublesome cascades. It applies its logic to the Asia Pacific production chain.

Baldwin, 15 June 2009

According to Alan Blinder, constant improvements in global communications will bring much more offshoring of “impersonal services’’, with an estimated 30 million to 40 million US jobs potentially offshorable. This column warns against taking these numbers at face value and recalls that the US is actually a net insourcer. With the advance of communication technologies, the US should see lots more service jobs “offshored” and lots more “onshored”.

Persaud, 13 June 2009

There is a strong consensus that banks had insufficient reserves set aside for a rainy day and that they should be required to hold more capital. This column says we should differentiate institutions less by what they are called and more by how they are funded. Encouraging individual risks to flow to those who can absorb them would make the system safer and introduce new players with risk capacities.

Zimmermann, Schäfer, 13 June 2009

Banking sectors worldwide are still suffering from the effects of the financial crisis. This column presents a plan of how governments can efficiently relieve ailing banks of toxic assets by transferring them into bad banks, an idea that is gaining popularity.

Ruhm, 12 June 2009

Christopher Ruhm of the University of North Carolina at Greensboro talks to Romesh Vaitilingam about his work with Charles Baum, which analyses data from the US National Longitudinal Survey of Youth to explore how body weight and obesity change with age and how that relates to socioeconomic status. The interview was recorded at the Centre for Market and Public Organisation in Bristol (UK) in May 2009.

Mankiw, Weinzierl, 12 June 2009

Should the income tax system include a tax credit for short taxpayers and a tax surcharge for tall ones? This column explains how the standard utilitarian framework for tax policy analysis says that individual attributes correlated with wages, such as height, should determine tax liabilities. Taller individuals should pay higher taxes. If this is objectionable, then something is wrong with the standard framework.

Gros, 11 June 2009

Why should the existence of current account “imbalances” provoke the biggest financial crisis in living history? This column says one has to take into account the way current account deficits are financed and how flow imbalances accumulated into large stock disequilibria. It explains the securitisation leading to the crisis as the product of a maturity mismatch between foreign savers seeking short-term assets and excess supply of long-term US mortgage debt.

Reade, Hendry, 11 June 2009

A vital challenge confronting economists is how to forecast, especially during a recession because livelihoods depend on those forecasts. This column discusses choosing amongst forecasts and outlines the concerns involved in averaging across models or using general-to-specific model searches.

Kahn, Cragg, 10 June 2009

What influences climate change policy? This column shows that a congressional district’s per capita carbon emissions and conservative ideology lower the probability that a representative votes in favour of a pro-environment bill, while county per capita income increases it.

Goldin, Katz, 09 June 2009

US educational attainment growth has substantially slowed since the 1970s. This column explains how the educational slowdown caused much of the recent rise in economic inequality and concludes that the futures of inequality and the US depend on increasing the supply of highly educated workers.

Fukao, Yuan, 08 June 2009

Though Japan has not suffered greatly from a housing collapse or toxic assets, its economy has been hit harder by the crisis than the US or EU. Japan’s contraction is almost entirely due to a steep fall in external demand. This column uses input-output analysis to show that the fall in US demand has had an amplified effect on Japan because it not only reduces Japanese net exports to the US but also net exports of intermediate goods to Asian countries, where they would have been assembled for final export to the US.

Galenianos, Persico, 08 June 2009

Drugs cause many social problems, but so does the drug war. This column suggests a novel solution that emphasises the risk of rip-offs in street sales – reducing the penalties applied to those who sell low-purity drugs. Leveraging moral hazard this way would effectively raise the wholesale price of drugs, undermining the drug market.

Jones, Olken , Dell, 06 June 2009

Hot countries tend to be poorer, but debate continues over whether the temperature-income relationship is simply a happenstance association. This column uses within-country estimates to show that higher temperatures have large, negative effects on economic growth – but only in poor countries. The findings are big news for future global inequality.

Daveri, 05 June 2009

The post-crisis data indicate that Italy is faring worse than the rest of Europe, except Germany. Moreover, the Italian economy entered a period of hardships and disappointing growth well before the mortgage crisis developed. This column argues that Italy cannot afford to postpone reforms if it wants to resume faster long-run growth.

Auboin, 05 June 2009

Trade finance, which supports the bulk of world trade, has deteriorated during the crisis and will continue to worsen in 2009. This column says that the response of public-backed institutions has been insufficient to cover the gap between supply and demand of trade finance worldwide. The G20 has adopted a wider package for injecting some $250 billion in order to further support trade finance.

Sacerdote, 05 June 2009

Bruce Sacerdote of Dartmouth College talks to Romesh Vaitilingam about his work with Scott Carrell, identifying children in New England high schools who have the qualifications to go to college and encouraging them to apply with information or cash incentives. They discuss the returns to college education, and the role of guidance counselling. The interview was recorded at the Centre for Market and Public Organisation in Bristol (UK) in February 2009.

Buiter, 04 June 2009

Some economists are arguing that central banks should set negative nominal interest rates. This column explains the basics by describing three ways of removing the zero lower bound on nominal interest rates: abolish currency, tax currency holding, or decouple the unit of account from the currency by introducing a new currency.

Debaere, Lee , Paik, 03 June 2009

Gains from agglomeration may explain why investors choose the same location when going abroad, but why do firms from the same country cluster together? This column examines evidence from South Korean firms investing in China and finds that investors of the same nationality benefit from stronger forward and backward linkages with each other.

Keating, 02 June 2009

The desire to regulate to avoid repeating this financial crisis is commendable, but this column says that the haste with which new regulations are being promulgated is unnecessary and dangerous. Precursory analysis that is incomplete, incorrect, or inadequate creates substantial potential for unintended consequences. We should take the time to appropriately analyse, design, and implement new regulation.

Easterly, 01 June 2009

The debate on aid to Africa continues. This column argues that it is bad governments and institutions that cause poverty, not bad geography. Making sure aid reaches the poor will often mean not giving it to poor governments.


CEPR Policy Research