Derivatives and the Eurozone crisis

Anne-Laure Delatte, Julien Fouquau, Richard Portes, 17 April 2014

In retrospect, it is striking that the sovereign bond spreads of peripheral Eurozone countries surged while the economic conditions were gradually deteriorating. This column provides a new explanation for this phenomenon. It suggests that the markets in credit default swap indices have exacerbated shocks to economic fundamentals. The same change in fundamentals had a higher impact on the spread during the crisis period than it had previously.

Learning about global value chains by looking beyond official trade data: Part 2

Zhi Wang, Shang-Jin Wei, Kunfu Zhu, 16 April 2014

One common measure of trade linked international production networks is the so-called VAX ratio, i.e. the ratio of value-added exports to gross exports. This column argues that this measure is not well-behaved at the sector, bilateral, or bilateral sector level, and does not capture important features of international production sharing. A new gross trade accounting framework is proposed that can better track countries’ movements up and down global value chains.

Taxing, spending, and inequality

Benedict Clements, David Coady, Ruud de Mooij, Sanjeev Gupta, 15 April 2014

The causes and consequences of rising inequality have stirred a lively debate on appropriate policy responses. This column reviews how governments have successfully used fiscal policy to address distributive concerns. It also examines the policy alternatives that countries can pursue in order to reduce income and wealth inequality at a minimum cost to efficiency. Such policies include exploitation of property taxes, reductions in tax deductions that favour upper-income groups, investing in increasing the human capital of low-income groups, and reforming social benefits.

UK growth: A new survey of macroeconomists

Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan, 14 April 2014

Fears that the financial crisis will have a significant negative impact on long-term UK economic growth are unfounded, according to a majority of the UK macroeconomics profession surveyed by the Centre for Macroeconomics (CFM). What’s more, the inaugural CFM survey, summarised in this column, indicates some optimism about the UK’s immediate capacity for higher growth: while roughly half of the respondents share the views of the Office of Budget Responsibility, the other half is substantially more optimistic about the capacity for the economy to recover.

Predicting economic turning points

Hites Ahir, Prakash Loungani, 14 April 2014

Forecasters have a poor reputation for predicting recessions. This column quantifies their ability to do so, and explores several reasons why both official and private forecasters may fail to call a recession before it happens.

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