Claims that ‘austerity has failed’ are popular, especially in the Anglo-Saxon world. This column argues that this narrative is factually wrong and ignores the reasons underlying the Greek crisis. The worst move for Greece would be to return to its old ways. Greece needs to realise that things could actually become much worse than they are now, particularly if membership in the Eurozone cannot be assured. Instead of looking back, Greece needs to continue building a functioning state and a functioning market economy.
Most Read: This Month
Nowhere in the developed world is secular stagnation more visible than in the Eurozone. This column explains this phenomenon with asymmetric external balances within the Eurozone. Southern countries had accumulated current-account deficits and became debtors when the Crisis hit, whereas the northern ones became creditors. The burden of the adjustments has been borne almost exclusively by the debtor countries creating a deflationary bias. Suggested fiscal policy prescriptions are government investment programmes, to be implemented by northern countries (and in particular, Germany).
The US economy has strengthened considerably in recent years, presenting an opportunity to address the 40-year stagnation in incomes for the middle class. This column provides historical and international context for the key factors affecting middle-class incomes: productivity growth, labour force participation, and income inequality. It also outlines President Obama’s approach to economic policies – what he terms “middle-class economics” – which is designed to improve all three.
With the potential to bring higher education to the masses, online learning has been hailed as revolutionary. The worry is that the quality of education will be diluted. This column presents evidence that online learning can bring substantial cost savings without much drop in quality – but employers do not value an online degree as highly, especially when coming from a private institution.
The anaemic recovery from the Global Crisis and the downward trend in real interest rates since 1980 have revived interest in the idea of secular stagnation. This column argues that if the US, UK, and Eurozone had not pursued contractionary fiscal policies from 2010 onwards, the recovery would not have been so slow and nominal interest rates would no longer be at the zero lower bound. Expanding the stock of government debt would have ameliorated, not worsened, the shortage of safe assets.
The Greek-Troika conflict is roiling markets, boardrooms and cabinet offices around the world. Crises are best solved by recognising losses, allocating them and moving on, so the biggest risk, this column argues, is that a compromise kicks the can further down the road. As the can rolls on, the scenery becomes politically and socially less attractive – fuelling the rise of political animosities, nationalism, and fringe parties. Greece is a special case but indicative of the core problem – deficient EZ governance structures that mean societies are stuck with increasing socioeconomic exclusion and political despair. The crisis will continue until the necessary further deepening of EZ institutional structures is completed.
Greece has a problem with debt that must be addressed on way or the other. This column proposes a way to estimate a ‘fair’ level of fiscal consolidation in Greece. The author’s central argument is that contagion risk made the Greek crisis worse by preventing early debt restructuring. If restructuring took place in 2010 instead of 2012, Greece’s debt to GDP ratio would have been 30 percentage points lower today. To bring Greece’s debt under 120% of GDP, it would be fair for Greece to run a 3% primary surplus over the next decade or two. This is less than the current target of 4.5% but still requires a significant effort.
Many observers blame austerity for much of the Eurozone’s current economic woes. This column presents new evidence on how financial markets assess austerity. Cutting government consumption raises the sovereign default premium in the short run. However, austerity pays off in the long run.
The conventional ‘trilemma’ view is that countries that allow free capital flows can still pursue independent monetary policies as long as they allow flexible exchange rates. This column examines the pass-through of Federal Reserve interest rates to policy rates in Chile, Colombia, and Mexico. The author concludes that, to the extent that central banks take into account other central banks’ policies, there will be ‘policy contagion’ and that, even under flexible rates, monetary policy will not be fully independent.
Housing played a major role in the Global Crisis, and some worry that the ultra-low interest rate environment is inflating new housing bubbles. Using 140 years of data from 14 advanced economies, this column provides a quantitative measure of the financial stability risks that stem from extended periods of ultra-low interest rates. The historical insights suggest that the potentially destabilising by-products of easy money must be taken seriously and weighed carefully against the stimulus benefits. Macroeconomic stabilisation policy has implications for financial stability, and vice versa. Resolving this dichotomy requires central banks greater use of macroprudential tools.
As developed economies have substituted away from manufacturing towards services, so too have developing countries – to an even greater extent. Such sectoral change may be premature for economies that never fully industrialised in the first place. This column presents evidence that countries with smaller manufacturing sectors substitute away from manufacturing to a larger extent, suggesting a trade channel through which falling international relative prices of manufacturing lead price-taking developing economies to substitute accordingly.
Between June and December 2014, the Brent price of crude oil fell by 44%, resulting in one of the most dramatic declines in the price of oil in recent history. This column presents a new quantitative analysis of the market for crude oil. According to the model the authors use, around half of the decline ($27) was predictable using publicly available information. A part of this decline was due to a slowdown in global economic activity, but the major part came from supply and demand shocks in the oil market. Nevertheless, there are reasons to expect the decline in oil prices to end soon.
Much research about the Great Recession in the US has focused on the boom-bust in housing wealth and spending of the middle class. This column argues that a large role was actually played by the rich. The savings rate of the rich went through a similar cycle as that of the middle class with rising wealth first stimulating their consumption and falling wealth restraining it. Most importantly, the wealth of the rich has become so large and volatile that wealth effects on their consumption could impact the whole economy.
Greece and Europe as a whole are approaching a moment of truth on Greek debt. Posturing by both sides still gives the impression of a slow-moving train wreck that is only weeks away. This column proposes a ‘New Deal for Greece’ that might just avert the train wreck.
Notwithstanding the progress made in the field of exchange rate economics, we still know very little of what drives major currencies. This column argues that the best that one can do is to assume that currencies move to gradually restore (relative) purchasing power parity. Contrary to widely held beliefs, this is in general a much better strategy than to just assume that the exchange rate behaves like a random walk.
Creativity is assumed to be the mother of invention, but research testing whether this is the case is surprisingly rare. This column addresses this gap in the literature by assessing whether firms in creative industries in the UK are more innovative than firms outside creative industries. The authors also examine whether the location of creative-industry firms in creative cities – and the size of creative cities – matters for the innovative capacity of these firms.
Search frictions are important for understanding the housing market volatility. This column shows not only that the optimal order of buying and selling depends on housing market conditions but that it also affects these conditions. This feedback leads to multiple equilibria and to fluctuations in transaction volume, average time on market, and house prices.
Youth unemployment has been a problem in Europe for several decades, but some European countries have fared much better than others in recent years. This column summarises the policy lessons to be drawn from a new VoxEU.org eBook that compares the labour market experiences of different European countries and provides an early evaluation of the European Commission’s Youth Guarantee scheme.
Corruption and favouritism have motivated people to protest against the ruling regimes. In Egypt, in particular, the protests brought down Hosni Mubarak's government. To what extent this reduced the corruption and favouritism is less clear. This column sheds light on this problem. It present evidence that daily protest numbers were linked to variation in stocks prices of firms connected to the group in power. This suggests that popular mobilisation and protests have indeed a role in restricting the ability of connected firms to profit from favouritism and corruption.
Understanding the relationship between trade and growth is still at the core of the economics profession. This column seeks to identify the pathways by which globalisation affects economic growth looking at the case of Belgium in the decades preceding the First World War. It argues that the collapse in fixed export costs promoted the entry of uncompetitive firms into export markets and as the trade component of GDP rose, the share of high performing firms contracted, slowing growth.
To many observers, the long-lasting, underwhelming performance of growth, employment and investment suggests that something fundamental has changed with the way advanced economies’ macroeconomies are working. One leading explanation – the notion of ‘Secular Stagnation’ – has gained traction among some economists and policymakers while being rejected by others. This column opens a Vox Debate on Secular Stagnations which will involve frequent, invited ‘Lead Commentaries’ on all issues surrounding concept and its implications for policy, analysis and research.
Fiscal consolidation is back at the top of the policy agenda. This column provides historical context by examining 91 episodes of fiscal consolidation in advanced and developing economies between 1945 and 2012. By focusing on cases in which the adjustment was necessary and desired in order to stabilise the debt-to-GDP ratio, the authors find larger average fiscal adjustments than previous studies. Most consolidation episodes resulted in stabilisation of the debt-to-GDP ratio, but at a new, higher level.
Britain eschewed EU membership in the late 1950s but changed its mind in the early 1960s, only to be rebuffed by Charles de Gaulle. Membership came only in the early 1970s. This column argues that, among others, Britain joined the EU as a way to avoid its economic decline. The UK’s per capita GDP relative to the EU founding members’ declined steadily from 1945 to 1972. However, it was relatively stable between 1973 and 2010. This suggests substantial benefits from EU membership especially considering that, by sponsoring an overpowered integration model, Britain joined too late, at a bad moment in time, and at an avoidably larger cost.
The negative effects of recessions are not limited to consumption. Among others, they could also be harmful to preferences and values. This column uses recent evidence from Russia to argue that recessions can result in a sizeable decrease in interpersonal trust. This effect is transient in places where the fall in trust is small. In these regions, trust snaps back to pre-crisis levels as GDP recovers. In the places where fall in trust is large, the effect is persistent. Even after a recovery, trust remains 10 percentage points below the pre-crisis level.
The problem of ‘managerial myopia’ – managers maximising short-term earnings at the expense of long-term investment – is well known. This column explores three elements that play a role in the problem: CEO compensation, shareholder structure, and information disclosure. Though all three practices are sometimes appropriate, they come with important costs that need to be considered by policymakers and practitioners.
Evidence of a decline in long-run growth is accumulating. However, many important questions remain unanswered. The analysis in column employs recent econometric techniques to provide an answer to some of the pertinent questions. The findings indicate that the weakness of the current recovery in the G7 is associated with a decline in the long-run growth rate of labour productivity.
The secular stagnation hypothesis has gained traction in the aftermath of the Global Crisis. This column argues that demography has played an important role in reducing the interest rates. The increase in life expectancy, which has not been offset by an increase in the retirement age, has led to an increase in the stocks of savings. The latter will go into price increases for assets in fixed supply – such as housing – rather than in adding new capital. Potential remedies for absorbing the extra savings are increasing the retirement age and an extension of the pay-as-you-go benefit systems.
Many nations and corporations strive to raise female membership in decision-making bodies. This column discusses new experimental evidence suggesting that there is more lying (and more extreme lying) in male groups and mixed-gender groups than in female groups. Moreover, group decision-making exacerbates men’s tendency to lie while the opposite is true for women. This suggests that the gender composition of decision-making bodies is important when the goal is to limit the scope of unethical behaviour.
Given the pressing need for labour market reforms in Europe, policymakers are looking to the Hartz I-IV reforms conducted in Germany in the mid-2000s for inspiration. To successfully apply their lessons one must understand why they worked. This column argues that the success of the Hartz reforms lay in improving matching efficiency between unemployed workers and vacancies – particularly effective in Germany where employment inflows are the main driver of labour market adjustment, in contrast to the US, where outflows play the primary role.
The interest rate derivatives market has grown tenfold over the past 15 years. These contracts are mostly held by commercial banks, raising financial stability concerns. This column discusses how hedging using derivatives affects bank lending and the occurrence of bank defaults.
Racial wage discrimination can proliferate in labour markets with large frictions because workers facing discrimination find it difficult to relocate. This column presents evidence of the interaction between frictions and discrimination in the English Premier League, the top tier of English football, using the 1995 Bosman ruling as an exogenous shifter. Before the ruling, wage discrimination resulted in teams with more black players outperforming competitors with equivalent payrolls. The decrease in frictions associated with the ruling allows players to escape discrimination by relocating.
Despite the consensus that growth alone does not need to lead to better social outcomes, a formal quantification of the quality of growth is still missing. This column seeks to bridge this gap by proposing a new quality of growth index that captures both the intrinsic nature and the social dimension of growth. This index could legitimately be part of the benchmarking tools for guiding policies toward more inclusive growth.
Illness shocks can decimate the economic opportunities of the poor. Women’s employment opportunities are particularly constrained by illness because their time is often diverted to the care of sick children. This column argues that the provision of publicly subsidised health insurance in Mexico has led to an increase in labour supply. This increase has occurred in part because insurance has enabled women to reallocate time away from caregiving tasks to work in the labour market. These findings suggest that health insurance does more than improve health: it also empowers women.
The proposed EU capital markets union aims to revitalise Europe’s economy by creating efficient funding channels between providers of loanable funds and firms best placed to use them. This column argues that a successful union would deliver investment, innovation, and growth, but it depends on overcoming difficult regulatory challenges. A successful union would also change the nature of systemic risk in Europe.
China and the US have recently agreed to reduce their greenhouse gas emissions. This column asks what quantifiable impact the new targets will have, whether they are any better than previous approaches, and if so, whether they are enough to avoid dangerous climate change. While insufficient for keeping temperature increase below the 2°C limit, the US and China’s bilateral commitments are a step in the right direction, and form the basis for a stronger international agreement in Paris later this year.
Dishonesty is a pervasive and costly phenomenon. This column reports the results of a lab experiment in which parents had an opportunity to behave dishonestly. Parents cheated the most when the prize was for their child and their child was not present. Parents cheated little when their child was present, but were more likely to cheat in front of sons than in front of daughters. The latter finding may help to explain why women attach greater importance to moral norms and are more honest.
Since the Global Crisis, debt sustainability has received increasing attention. This column argues that the maximum sustainable debt level depends negatively on the progressivity of the tax system. The authors estimate that the US is still relatively far from the peak of its Laffer curve and from its maximally sustainable debt level. However, adopting a flat tax would raise the maximum sustainable debt from 330% to more than 350% of benchmark GDP, whereas adopting Danish-style progressivity would lower it to less than 250%.
Spatial inequalities in territorial-based greenhouse emissions matter in terms of regulation, both at the international and subnational levels. This column decomposes these inequalities worldwide for the two major greenhouse gases over the period 1970–2008. Within-country inequalities are larger, and rising, while between-country inequalities are smaller and falling. Moreover, social tensions arising from the discrepancy between the distribution of emissions and the distribution of damages appear to be larger within than between countries, and larger for carbon dioxide than for methane.
Safe haven inflows to Switzerland during global turmoil have been mentioned numerous times by the financial press and international organisations. However, recent research cannot find evidence for surges of capital inflows to Switzerland. In fact, this column argues that private capital inflows to and outflows from Switzerland have become exceptionally muted and less volatile since the Crisis. By contrast, net private capital flows have shown significantly higher volatility since the Crisis, frequently registering extreme movements. However, these extreme movements in net flows are not driven by surges of inflows.
There is no single replicable and comprehensive indicator of competitiveness that can be applied to various entities. In this column, the authors propose a novel decomposition of market share growth that captures non-price factors, such as quality or tastes. The findings imply that relying solely on price factors to determine a country’s competiveness might be misleading. For instance, central for boosting China’s presence in the global market were improvements in non-price factors. The role played by the exchange rate has been less important.
Banking activities have received increasing attention in the aftermath of the Crisis. This column focuses on the effects of bank portfolio choice on asset prices. The term spread is strongly influenced by banks’ expectations of their future profitability. Banks' funding activities, through the securitisation market, create conditions for higher leverage and may lead to a reduction in risk premia. Through its effects on asset prices, bank portfolio choice impacts the real economy, increasing its importance for policymaking.
The Global Crisis put to the fore the possibility that the relationship between financial development and output growth may be non-linear. This column presents new evidence on the issue using data on output growth of ten sectors from Latin America and East Asia. The authors find large differences between the two regions in terms of the impact of financial depth on sectoral growth, and validate the negative impact of financial deepening on output growth in several sectors. The results confirm that the impact of financial development on sectoral growth may indeed be non-linear – i.e. it may promote growth only up to a point.
In setting tax levels, governments around the world must predict how consumers will respond. This is a surprisingly difficult problem to solve – consumer preferences vary significantly across individuals and cannot be directly observed. This column suggests that these challenges for accurate demand prediction are best overcome using nonparametric methods, and outlines a flexible approach for recovering the distribution of consumer preferences that can be used to predict individual demand responses as required for policy analysis.
Despite vast improvements in information and communications technology, the tendency of firms in related industries to cluster together hardly changed between 1985 and 2005. This column examines the relationship between geographic clustering and innovation using establishment-level data from Japan. Research establishments – especially those in high-technology industries – are more localised than average. The degree of localisation is greater when establishments are weighted by their creativity, as measured by the number of patents created and the number of citations received.
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.
The corporate cash ratio – the share of liquid assets in total assets – comoves with employment in the US. This column argues that disentangling liquidity shocks and credit shocks is key to understanding this comovement, and that liquidity shocks appear to be crucial. These shocks make production less attractive or more difficult to finance, while they also generate a need for internal liquidity to pay wages, which can be satisfied by holding more cash.
Joining international supply chains has helped some developing nations to industrialise while leaving others by the wayside. This column discusses research that extract lessons from four case studies. It suggests the key to success is combining pro-active investment promotion with customised infrastructure improvements and public-private vocational training that allow investors to fit production from a novel site seamlessly into the company’s international supplier network.
In the wake of the Crisis, policymakers have introduced liquidity regulation to promote the resilience of banks and lower the social cost of crisis management. This column shows that a funding liquidity shock, manifested as lower access to wholesale sources of funding following a credit rating downgrade, translates into a significant decline in both domestic and foreign lending. Liquidity self-insurance by banks mitigates the impact of a credit rating downgrade on lending.
It has been debated whether taxpayers would have to foot the bill from different ECB government bonds purchase programmes. This column argues that for the participants of such programmes that involve the mutualisation of interest revenues, there is no free lunch.
Recent findings in development economics indicate that microloans are likely to perform best when accompanied by financial education, insurance, and savings products. This column presents evidence from a natural experiment in Sri Lanka, which involved door-to-door collection services among rural households. The evidence suggests that the programme increased both savings and income. In order to build up savings in the initial period, participants increased the hours worked. The treatment also triggered exit from self-employment. Financial service innovation can, therefore, have a major effect on the incentives to exit poverty.