Internationalisation and innovation policies are frequently considered to be key drivers of growth. This column documents a strong positive association between internationalisation, innovation, and productivity at the firm-level across seven European countries. This association continues to hold after controlling for country, size, industrial sector, and firm specific characteristics, with some evidence of causality running from innovation to internationalisation. The analysis suggests that policymakers should coordinate, if not integrate, innovation and internationalisation policies in order to boost productivity and growth.
One concern with EU enlargement is that relatively poorer countries benefit more from becoming members. This column uses data from the 1973 and 1995 enlargements to show that richer countries also benefited a lot from joining the EU. Per capita incomes would have been considerably lower had these countries not joined the EU when they did. Yet, the difference between the estimated benefits for 1973 and 1995 enlargements is large, and thus, should not be attributed to differences in per capita incomes at the time of joining.
The Eurozone needs to further ease monetary policy because under the current low inflation and high unemployment periphery countries need to suffer painful deflation. However, the ECB faces challenges other central banks do not face. This column proposes a way to overcome some of these hurdles. It argues that the ECB should buy US treasury securities, lowering the foreign exchange value of the euro. That would be the best way to restore the export sector of the periphery countries.
Inequality – long ignored – is now centre stage in debate about economic policy around the globe. This column introduces the Chartbook of Economic Inequality, a summary of long-run changes in economic inequality for 25 countries over more than 100 years.
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.
John Maynard Keynes traded currencies using a discretionary and fundamentals-based strategy. This column shows that he underperformed rules-based carry, momentum and value strategies. The returns to these strategies in the 1920s and 1930s were time-varying and are in part explained by the contemporary limits to arbitrage. The excess returns might also represent compensation for exposure to the considerable macroeconomic volatility of the time.
The US unconventional energy boom has reversed the decline of domestic production, lowered oil and gas imports, reduced gas prices, and created political space for tougher regulations on coal-fired power plants. This column argues that it is not a panacea, however. Even if current estimates prove accurate, the long-run benefits to the US economy will be relatively small. Improving energy efficiency and promoting low-carbon technologies will be just as important as before – especially for the EU, given its more limited known reserves of unconventional oil and gas.
In the wake of the recent crisis, the debate about the economic benefits from EU membership has intensified. This column presents new results about the benefits countries derive from becoming EU members, using data from the 1980s and 2004 enlargements. There are substantial positive pay-offs, with a gain in per capita GDP of approximately 12%. Despite differences across countries, the evidence shows that the benefits of EU membership outweighed the costs for most countries – except for Greece. An important research question would be to identify factors that allow countries to better exploit EU entry.
The recent global crisis hit output, but the decline in international trade was twice as big. Standard models of trade fail to account for the severity of the event. This column proposes a new model that argues the great trade collapse was due to uncertainty. The uncertainty lead firms to postpone orders. As a result, trade declined substantially more than production. Data from the US for the past 50 years show quantitatively large effects of uncertainty shocks on the trade.
Measures of economic freedom provide useful cross-country comparisons, but lack the time dimension to track intertemporal progress. This column presents a new measure and extends it back in time to tell a history of economic freedom over the course of the twentieth century.
Excessive short-termism is always a problem for policy, but the Global Crisis has brought it sharply into focus. This column introduces a report that discusses how a shift to longer-term solutions is necessary and possible. A key message is that businesses as well as governments need to take a longer-term view. The report identifies ways to overcome the current impasse in key economic, climate, trade, security, and other negotiations.
The world has become healthier and wealthier since 1960, as measured by life expectancy and GDP per capita. In this column Angus Deaton introduces his new book and argues that the world is indeed a better place than it used to be, albeit with big setbacks, and that progress opens up vast inequalities.
The dollar remains dominant in the global monetary system. The clearest sign for its prevailing status is the dollar’s role as an exclusive currency used in the global oil market. This column suggests that there is room for more than one international currency even in a market as homogenous as the oil one. This is consistent with the view that network increasing returns are not as strong as sometimes supposed, first-mover advantage is not everything, and incumbency is no guarantee for continued dominance.
While many economists argue that demand stimulus is needed, this column argues that supply side measures are necessary to avoid secular stagnation. In the Eurozone, it is necessary to clean up and strengthen the balance sheets of banks, which can kick-start the flow of new lending. The comprehensive assessment by the ECB is an important step in this direction.
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.
The generation born in the UK after 1979 has suffered grave disadvantages. By the early 2000s, housing had become very expensive relative to income; since 2007, labour market conditions for new entrants have been poor. University fees have increased, and soaring public debt will in future have to be serviced by this self-same generation. Restorative justice is one of the aims of the six fiscal reforms proposed in this column.
US universities resemble high-end shopping malls. They use nice buildings and good reputations to attract good students and good faculty. To pay for this, external funding – once viewed as a luxury – is a necessary condition for tenure and promotion. This column argues that this model emerged at the initiative of universities not the federal government. Today’s stress is the harvest of what universities and faculty sowed in the 1950s and the 1960s.
Contagious bank runs are an important source of systemic risk. However, with observational data it is near-impossible to disentangle the contagion of bank runs from other potential causes of correlated deposit withdrawals across banks. This column discusses an experimental investigation of the mechanisms behind contagion. The authors find that panic-based deposit withdrawals can be strongly contagious across banks, but only if depositors know that the banks are economically related.
In an op-ed for the New York Times, Paul Krugman calls the Trans-Pacific Partnership (TPP) “No big deal”. This column looks at Krugman’s main arguments against the TPP. First, Krugman suggests spending political capital on domestic initiatives, and not on the TPP. Second, he argues that the pay-off from TPP will be trivial since tariffs are already low. The column points to a larger message in Krugman’s op-ed, namely that the era of globalization and policy-driven liberalisation is over.
Competition policy is central to the management of a modern economy. This column analyses some key distortions caused by competition policy and argues in favour of criminal sanctions in nations lacking resources for an appropriate fine-tuning of antitrust fines.
Although progress has been made on resolving the Eurozone crisis – vulnerable countries have reduced their current-account deficits and implemented some reforms – more still needs to be done. This column argues for a ‘consistent trinity’ of policies: structural reforms within countries, more symmetric macroeconomic adjustment across countries, and a banking union for the Eurozone.
Since 2007, there has been a buildup of TARGET imbalances within the Eurosystem – growing liabilities of national central banks in the periphery matched by growing claims of central banks in the core. This column argues that, rather than signalling the collapse of the monetary system – as was the case for Bretton Woods between 1968 and 1971 – these TARGET imbalances represent a successful institutional innovation that prevented a repeat of the US payments crisis of 1933.
In recent years credit growth in Latin America has been very strong, and countries have become more reliant on foreign bond issuances. This column argues that these phenomena are linked, and may have led to vulnerabilities which domestic and international supervisors are not well-equipped to assess. There is no systematic information on firms’ currency mismatches and hedging activities, and none that includes those of subsidiaries that may be located in other jurisdictions, preventing an accurate analysis of the true risks.
Despite obvious ties between political uncertainty and financial markets, the nature of this connection has not been studied in detail. This column describes a theoretical framework for evaluating the influence of political uncertainty on financial markets. Political uncertainty commands a risk premium, especially when the economy is weak. By raising firms’ cost of capital, it depresses investment and real activity. Furthermore, by raising risk premia, political uncertainty destroys market value.
Some view the improvements in current accounts for Greece, Italy, Portugal, and Spain as short-lived – the result of a temporary compression of import demand that is likely to be reversed as the recession eases. This column argues the contrary, based on the fact that their improving trade balances reflect better export performance. This development points toward a fundamental stabilisation of the competitiveness of these economies.
In 2013, policymakers began discussing when and how to ‘taper’ the Federal Reserve’s quantitative easing policy. This column presents evidence on the effect of Fed officials’ public statements on emerging-market financial conditions. Statements by Chairman Bernanke had a large effect on asset prices, whereas the market largely ignored statements by Fed Presidents. Emerging markets with stronger fundamentals experienced larger stock-market declines, larger increases in credit default swap spreads, and larger currency depreciations than countries with weaker fundamentals.
The EZ debt overhang needs to be fixed. This column argues that making market discipline credible requires an orderly debt restructuring mechanism combined with a strictly regulated temporary mutualisation scheme or a well-designed debt conversion scheme. This combination could reduce the current debt overhang in an orderly fashion and cement strong incentives against over-borrowing in the future.
The European Resolution Fund is intended to reach €55 billion – much less than the amount of public assistance required by individual institutions during the recent financial crisis. This column argues that the Resolution Fund can nevertheless be large enough if it forms part of a broader architecture resting on four pillars: prudential regulation and supervision, ‘no forbearance’, adequate ‘reserve capital’, and provision of liquidity to the bank-in-resolution. By capping the Resolution Fund, policymakers have reinforced the need to ensure that investors, not taxpayers, bear the cost of bank failures.
When the law of one price is violated it can be difficult to determine a product’s contribution to the CPI. Does a low price competitor discount also on quality, or are market frictions at play? This column examines key product characteristics to separately identify these effects. Chinese firms discount both on price and quality, while Taiwanese firms use their productivity advantage to dynamically take advantage of market frictions.
The growth of international trade in intermediate inputs means that standard trade statistics can give a misleading picture of the real patterns of production behind world trade. This column introduces an accounting framework that decomposes traditional trade flows into components that better reflect the underlying location of the value addition linked to exports.
The ‘deadly embrace’ between banks and their government has strengthened with the EZ Crisis. This column argues that this has mostly been consequence rather than a cause of the Crisis. Moreover, adverse bank-sovereign negative feedback depends on the economy-wide effects of the sovereign risk, not just the banks’ direct exposure. Loosening the embrace requires sound public finances and well-capitalized, well-supervised banks – including the banking union project.
The recent crisis has highlighted some problems in the current structure of the Eurozone, such as the lack of political integration. This column introduces the Eiffel group – a group of French experts – and its call for a ‘political community of the euro’. The economic and political rationales behind the proposal are discussed in detail. This proposal (also shared by experts in other countries) calls for a debate about the architecture and institutions underpinning the European Monetary Union.
Recent growth in trade has decelerated significantly since its sharp recovery in 2010. This column discusses the role of global value chains in international trade and their contribution to the trade slowdown. Trade in complex products organised by global value chains, in particular motor vehicles, has been more sensitive to global downturn than has trade in simple products. Thus, either focusing on simpler products less dependent on global value chains, or diversifying the export folios, could be useful in reducing the risk of a slowdown in global merchandise.
The recent debate on the link between austerity and growth has focused on the short run. This column discusses recent research into the link between fiscal consolidation and medium-term growth under different financial conditions. If credit is not available to consumers and investors, private demand is less able to compensate for cutbacks in public demand, so large spending cuts can have a negative effect on growth. Difficult financial conditions probably explain why fiscal adjustments that worked in the 1990s have not produced similar beneficial effects on growth in recent years.
Since the onset of the sovereign debt crisis, the argument for a system of fiscal transfers to offset idiosyncratic shocks in the Eurozone has gained adherents. This column argues that what the Eurozone really needs is not a system which offsets all shocks by some small fraction, but a system which protects against shocks which are rare, but potentially catastrophic. A system of fiscal insurance with a fixed deductible would therefore be preferable to a fiscal shock absorber that offsets a certain percentage of all fiscal shocks.
In 2003, the UK adopted a ‘say on pay’ policy, whereby quoted companies’ executive compensation offers have to be put to a shareholder vote. This column presents evidence that this policy has had a relatively modest impact on executive pay. A 10% increase in compensation is associated with an increase in shareholder dissent against the proposal of just 0.2%. However, remuneration committees representing the more highly rewarded CEOs are quite sensitive to dissent, provided it exceeds a critical threshold of about 10%. Shareholders do not appear more anxious about pay since the crisis.
The impact of tighter regulatory capital requirements during an economic upswing is a key question in macroprudential policy. This column discusses research suggesting that an increase of 15 basis points in aggregate capital ratios of banks operating in the UK is associated with a median reduction of around 1.4% in the level of lending after 16 quarters. The impact on quarterly GDP growth is statistically insignificant, a result that is consistent with firms substituting away from bank credit and towards that supplied via bond markets.
In a world of volatile capital flows, emerging markets are increasingly resorting to managing their exchange rates. But does this strategy increase their susceptibility to crisis? This column argues that while intermediate regimes as a class are the most susceptible to crises, ‘managed floats’ – a subclass within such regimes – behave much more like pure floats, with significantly lower risks and fewer crises. ‘Managed floating’, however, is a nebulous concept; a characterisation of more crisis prone regimes suggests that it is not the degree of exchange rate management alone, but the way the exchange rate is managed, that matters. Greater against-the-wind intervention by the central bank to prevent currency overvaluation reduces, while greater intervention to defend an overvalued currency raises, the crisis likelihood.
Discussions of global value chains (GVCs) have permeated international organisations’ research and policy agendas. This column presents a critical view on some of the recent policy recommendations that urge for as much liberalisation of trade in goods and services as possible. These proposals cannot be automatically applied to developing countries without some type of government intervention.
Multinationals take advantage of heterogeneity in tax deduction rules by reallocating debt to high-tax countries. This reduces tax revenue and distorts the trade-off between debt and equity financing. Some countries have enacted thin capitalisation rules that restrict deductibility when the debt-to-leverage ratio exceeds a certain threshold. This column provides evidence that such rules are only effective when restrictions are automatic, rather than allowing for government discretion.
Inadequate disclosure by banks increased funding costs and contributed to the recent crisis. This column presents quantitative indices to measure progress of disclosure between banks and over time. Internationally, disclosure has improved since 2000. However, more information alone is not sufficient to solve the problem. More needs to be done to ensure that the information provided is useful to investors, and that investors are incentivised to use this information. The ongoing reform agenda aims to address this.
Human behaviour in times of financial crises is difficult to understand, but critical to policymaking. This column discusses new evidence showing that personal experience in financial markets can dramatically change risk tolerance. A cleanly identified historical episode demonstrates that even without losses, negative shocks not only modify risk appetite, but can also create ‘leverage cycles’. These, in turn, have the potential to make markets extremely fragile. Remarkably, those who witnessed this episode but were not directly threatened by it, did not change their own behaviour. Thus, personal experience can be a powerful determinant of investors’ actions and can eventually affect aggregate instability.
The recent financial crisis was followed by discussions about that went wrong in the securitisation markets. This column describes some empirical work in the area of informational problems in the securitisation markets. In particular, it examines the tranche structure of deals in the private-label residential mortgage-backed securities (RMBS) markets. The role the equity tranche played in mitigating the information problems in the period up to the crisis is discussed. A larger equity tranche is related to superior ex-post default performance, as predicted by some models of contracting under asymmetric information.
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.
Do voters care about economic outcomes? Evidence on this question, especially in the context of developing countries, is rather scant. This column reports the findings from analysis of the 2009 parliamentary elections in India. Voters favoured parties that delivered high growth in their states and rejected those that did not. The authors also find that voters preferred candidates who had served in the parliament before, were wealthy, educated, and affiliated with a large party.
The Bali agreement last December has given new hope that the WTO is not dead. The recent announcement that negotiations on the reductions of tariffs on environmental goods are to resume gives hope that the triple-win outcome of the Doha round – for trade, for development and for the environment – might materialise, at least partly. Or does it? This column argues that unless the field of negotiations is widened, the initiative will not help much.
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.