We need a strong and resilient global financial safety net to reduce the systemic implications of sovereign crises and allow nations to cope with shocks in order to reap the economic rewards of an integrated system of trade and finance. This column argues that the current arrangements are suboptimal – resembling more of a patchwork than a safety net. Drawing on the experience of central banks during the financial crisis, it offers preliminary policy proposals to enhance the effectiveness of the global financial safety net.
Emerging market firms have borrowed in foreign currency to take advantage of low interest rates. This column argues that when the Fed inevitably raises rates, such borrowing will be a threat to emerging economy financial systems. Yet so long as authorities use their existing prudential tools wisely, the risks appear manageable.
Market liquidity is all about smooth and rapid executions of large transactions. But why is it hard to keep big markets liquid? This column looks at liquidity in fixed-income markets, assesses new trends (as well as the EU’s new market instrument rules), and makes recommendations to policymakers to avoid illiquidity – a timely reminder that the social costs of illiquidity should not be underestimated.
Many models rely on the assumption of nominal price stickiness. But the different definitions of frictions can greatly alter their macroeconomic implications. In this column, price stickiness is modelled as the result of errors due to costly decision-making. Errors in the prices firms set help explain micro ‘puzzles’ relating to the sizes of price changes, the behaviour of adjustment hazards, and the variability of prices and costs. Errors in adjustment timing increase the real effects of monetary shocks, by reducing the ‘selection effect’.
Does low volatility in financial markets mean that another financial crisis is more likely? And should we be worried when everything is OK? This column presents the first empirical results that find a strong validation of Minsky's hypothesis – obtained from 200 years of historical cross-sectional data – that low volatility increases the likelihood of a future financial crisis by increasing risk-taking.
Other Recent Columns:
- A new international database on financial fragility
- Policy-driven premature deindustrialisation in Malaysia
- ‘Home Affordable Refinancing Program’: Impact on borrowers
- The costs of interest rate liftoff for homeowners: Why central bankers should focus on inflation
- The diffusion of European diesel automobiles
- Finance and growth – beware the measurement
- The political economy of liberal democracy
- Measuring the interest premium for past default
- The state of climate negotiations
- Low interest rates, capital flows, and declining productivity in South Europe
- Regulatory arbitrage in action: Evidence from cross-border lending
- Foreign entry and domestic innovation
- Emergency liquidity assistance and Greek banks’ bankruptcy
- Retirement and changing lifestyle habits
- Greek debt remains unsustainable
- Dispelling three myths on economics in Germany
- Academy schools and pupil performance
- Bad practices hold back small firms in developing countries
- The lifecycle of scholarly articles across fields of economic research
- Risk tolerance of men and women