Many analysts believe that German economists hold a very different view of macroeconomics. This column presents a personal view why this belief is wrong. The fact that Europe still consists of sovereign nations and that most Europeans still want to keep it that way informs much of what happens inside German economists' heads.
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Conventional theory suggests that hierarchy and state institutions emerged due to increased productivity following the Neolithic transition to farming. This column argues that these social developments were a result of an increase in the ability of both robbers and the emergent elite to appropriate crops. Hierarchy and state institutions developed, therefore, only in regions where appropriable cereal crops had sufficient productivity advantage over non-appropriable roots and tubers.
The focus of the financial inclusion debate has been mainly on credit and savings services. This column provides evidence that more effective payment systems can help ease small businesses’ access to external finance, ultimately resulting in faster economic growth. The success story of M-PESA in Kenya shows that mobile money technology not only increases financial inclusion of households, but also alleviates small firms’ financing constraints.
The EZ Crisis is a long way from finished. The latest VoxEU eBook presents a consensus view of what caused the Crisis and why. It argues that this was a classic ‘sudden stop’ crisis – not a public-debt crisis. Excessive, cross-border lending and borrowing among EZ members in the pre-Crisis years – much of which ended up in non-traded sectors – was why Greece’s deficit deceit in 2009 could trigger such a massive crisis. The ultimate causes were policy failures that allowed the imbalances to get so large, a lack of institutions to absorb shocks at the EZ level, and poor crisis management.
Productivity growth is slowing around the world. The question is what lies behind this trend and whether it can be arrested. This column takes a historical perspective on total factor productivity growth slowdowns. International factors that heighten the risk of TFP slumps include global interest rate shocks, global oil price shocks and rising global risk aversion. Country-specific factors working in the same direction include low educational attainment, weak political systems, and overly high levels of investment. Investing in education, political development and rebalancing can mitigate the risk of TFP slumps but are unlikely to eliminate them entirely.
The Federal Reserve is on the verge of triggering the process of monetary policy tightening. This column argues that the rationale for that policy judgement rests on faulty analytical assumptions about the labour market, inflation dynamics, the stance of monetary policy, and the balance of risks to the economic outlook. What’s more, the current opacity of the FOMC’s near-term strategy is likely to exacerbate uncertainty and hinder the effectiveness of monetary policy in fostering the goals of maximum employment and price stability.
Counting citations is the mainstream approach to judging a paper’s academic impact. This column summarises research into the citation lifecycle of economic papers and how it differs for papers classed as applied, applied theory, theory, or econometric methods. There is a clear-cut lifecycle for economics articles. More importantly for professional evaluation, the cycle differs markedly across fields.
There is an urgent need for policymakers to fully acknowledge the extent to which conventional indicators related to gross trade are severely flawed as policy benchmarks because they fail to take into account the existence of global value chains and their increasing role in shaping the global economy. This column, which introduces a new Vox eBook, urges academics to start proposing workable indicators that are systematically produced and readily available.
Research consistently finds that men are more risk tolerant, or even risk loving, than women. This column argues that social identity, next to biology, helps explain the stark difference in risk attitudes and beliefs across genders. Men to whom identity is salient become more risk tolerant and invest more often and with more money. Identity makes men overconfident but its effects decrease with age. This is consistent with the notion that gender stereotypes have become less stark over the last decades.
Understanding foreign exchange markets is key to understanding the global financial system. Yet, a clear understanding of why and how foreign exchange illiquidity materialises is still missing. This column suggests that foreign exchange liquidity can be impaired in times of flight to quality and higher global risk, and that commonality increases in distressed markets.
The 2014 decline in oil prices lowered short-run inflation. Before the Global Crisis, the medium-term correlation between oil prices and inflation was weak, but it has become much stronger since the onset of the Crisis. This column suggests that following the onset of the Crisis, inflation expectations reacted quite strongly to global demand conditions and oil supply shocks. The public’s belief in the ability of monetary authorities to stabilise inflation at the medium-term horizon has deteriorated.
The international climate negotiations have moved away from targets such as keeping warming below 2°C in favour of more realistic goals. This column presents new evidence on the economic impacts of climate change. The initial impacts of climate change on welfare might be positive, but in the long run the negative effects dominate, and will be substantially higher in poor countries. Poverty reduction therefore complements greenhouse gas emissions reduction as a means to reduce the impacts of climate change.
There are more democracies in the world than non-democracies, but few of the democracies go beyond electoral competition. This column highlights the contrast between electoral democracies and liberal ones, that is, those that protect civil rights in addition to political and property rights. Liberal democracies are rare because the failure to protect minority rights is a common consequence of the emergence of democracy. They are especially uncommon in the developing world, where decolonisation and identity cleavages sparked social mobilisation.
Suboptimal behaviour has been discussed but has not been studied extensively empirically. This column argues that the February 2014 London Underground strike enabled a sizeable fraction of commuters to find better routes. Due to the strike, many commuters were forced to experiment and around 5% stuck with these new routes after the strike was over. The strike produced an overall net benefit. Commuters seem to ‘satisfice’ and under-experiment during normal times.
Some argue that the increasing wealth-to-income ratios observed in many advanced economies are determined by housing and capital gains. This column considers the growing wealth-to-income ratio in an economy where capital and labour are used in two sectors: construction and manufacturing. If productivity in manufacturing grows faster than in construction – a ‘housing cost disease’ – it has adverse effects on social welfare. Concretely, the higher the appreciation of the value of housing, the lower the welfare benefit of a rising labour efficiency in manufacturing.
Greece needs debt restructuring. Yet, to get debt reduction, the Greek government is required to implement structural reforms. This column proposes a way to square the circle by introducing a Structural Reform Index in Greek loan contracts. The central feature of the proposal is the linkage of debt relief to progress in structural reforms. The features and conditions of the proposal should make it desirable both for Greece and the German government and other creditors.
With records of subjective wellbeing going back less than half a century, this column asks if we can know the impact of key past events on the happiness of our ancestors. It presents a new historical index that draws on millions of digitised books in the Google Books corpus of words using sentiment analysis. The index – which goes back to the 1776 US Declaration of Independence, 200 years earlier than any other index of happiness – makes it possible to analyse the historical drivers of happiness in France, Germany, Italy, Spain, the UK and the US.
After 2018, Greece should have market access. This column argues that without further debt relief, this is unlikely to happen. Under reasonable assumptions, its debt ratio will likely not decline, and the financing burden will increase again. Private investors will take these risks into account and will ask for a risk premium that Greece cannot afford in the long run.
The public narrative on austerity is shaped by simple scatter plots purporting to portray the large negative impact of fiscal ‘austerity’ on economic growth. This column argues that, while recognising concerns about causality, economists should systematically explore correlations and multiple regressions, and test their robustness. The results reveal a mixed picture, lending partial support to the notion that fiscal choices and output growth are empirically associated.
Evidence suggests that people are more likely to behave in a pro-social way if they are aware of others who behave in such a manner. This column finds evidence for this phenomenon among blood donors. For every unit increase in a donor’s motivation, there is a 44% spillover in motivation to their fellow tenant. There is an overall increase in donation rates due to such a social multiplier of 17.9 percentage points, instead of the 10 percentage points obtained by calling an isolated donor.
The Global Crisis and its high costs have revived interest in early warning indicators of economic risks. This column presents a new set of indicators to detect vulnerabilities and assess country-specific risks of suffering a crisis. The empirical evidence confirms the usefulness of the vulnerability indicators in warning of severe recessions and crises in OECD countries. But indicators are no silver bullet and should be complemented with other monitoring tools, including expert judgement.
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.
In response to the Crisis, the ECB provided liquidity to banks on a massive scale and intervened in sovereign debt markets. This column argues that bank bailout policies and non-standard monetary policies by the ECB had a significant impact on default risks of sovereigns and banks in the Eurozone. The results, however, show that neither of the two policies was an unqualified success. Policies which are intended to reduce default risk can therefore have opposite effects if they are not properly designed.
People tend to build their careers through job-hopping. This column adds to our growing understanding of how these job-to-job flows translate into enhanced productivity and earnings gains. Using new data, an analysis of the nature and extent of these flows by firm size and firm wages over the cycle shows that, during labour market downturns, workers tend to stay for longer on lower-paying, less productive rungs of the job ladder.
Diesel vehicles have never been popular in the US, but have dominated sales in Europe. This column presents new evidence explaining why this is the case. A change in preferences and the numerous competing suppliers benefited the diffusion of diesel cars. But more important was a European environmental policy that favoured CO2 reductions. As diesel vehicles are only produced by European manufacturers, this policy provided a competitive advantage for domestic producers equivalent to a 20% import duty.
While there is substantial evidence that multinationals are more productive than domestic firms, the evidence on productivity spillovers remains mixed. This column estimates the effects of foreign presence on the innovation of local firms. It suggests that spillovers from foreign firms to domestic firms are limited to domestic firms immediately connected to foreign firms. Requirements for foreign firms to have significant local content may therefore be justified.
Recent economic and financial events, such as the ‘taper tantrum’, have highlighted again the relevance of global factors in driving capital flows to emerging markets. This column suggests that capital flows to emerging markets move in part due to global push factors. However, sensitivity to these push factors differs greatly across types of flows and emerging markets. How much push factors affect individual emerging markets depends on their local liquidity and the composition of their foreign investor bases. Countries relying more on international funds and global banks are significantly more affected by changes in push factors.
Designing a tournament to keep each game or round as exciting as possible for spectators is, as you might imagine, complex and nuanced. Yet, most sporting tournaments use a basic ‘knock-out’ model, and have done for years. This column argues that tournament organisers ought to be more creative, and illustrates a model and examples suggesting that tournament organisers should not confine themselves to tradition. Choosing the proper scheme is a hard but feasible goal for tournament designers.
Whether incumbent firms deter new entrants in a more concentrated market has been of major concern to antitrust authorities. This column introduces empirical evidence on the relationship between market concentration and entry in the intermediate goods market, using unique data from the Japanese auto market. The findings show a U-shaped relationship, whereby entry decreases and then increases as the market concentrates.
Better management practices are associated with better firm performance, and the quality of management practices is also associated with per capita income. This column explores the effect of business practices on small firms in developing countries. The findings indicate that better business practices are correlated with higher productivity, higher firm profits, and higher rates of survival. Poor business practices are holding back small firms in developing countries.
In the last century, real estate funding by banks grew steadily. This column argues that the unprecedented expansion of banking in mortgage lending resulted in a high degree of maturity mismatch. The solution to this problem should focus on greater maturity matching, and not using insured deposits. One avenue to do so is by securitising mortgages with little maturity transformation. Another is to create intermediaries providing mortgage loans where the lender shares in the appreciation, while assuming some risk against the occasional bust.
The relationship between finance and growth has recently returned to the top of the policy research agenda, with several papers questioning earlier results indicating a positive link. This column suggests a different interpretation of the early findings. While there can be too much finance, as many countries have found out in recent crises, this does not imply that there is too much financial development.
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’.
Joining the Eurozone was once a near unquestionably good idea. Now, the costs of joining the monetary union are under close scrutiny. This column takes a slightly different tack, presenting an alternative perspective on how joining the euro has impacted productivity in southern Europe. It turns out that capital wasn’t allocated efficiently across firms after cheap borrowing at low interest rates, impacting total factor productivity.
In the aftermath of the Global Crisis, there have been many regulatory initiatives targeting financial institutions, especially investment funds. This column sheds light on the costs and benefits of increased financial regulation. The findings show that the indirect cost of regulation of alternative funds such as UCITS is around 2% per annum in terms of risk-adjusted returns. Policymakers should therefore carefully consider the effect of higher liquidity requirements on the returns that alternative investment funds can generate.
Regulatory arbitrage is an essential feature of modern banking. This column presents new evidence on avoiding macroprudential policies by borrowing from abroad. Domestic non-banks borrow more from abroad after an increase in capital requirements, but not after an increase in lending standards. This is most likely because of differences in the way the two regulations apply, and suggests that we should have strong frameworks for reciprocating capital regulation.
A number of countries have implemented various policies in an attempt to boost the performance of state-maintained schools. This column looks at the latest of these – the academies programme in England. Compared with reforms in other countries, the scale and pace of the academies programme is unprecedented. So far, academy attendance has led to gains in achievement, and the increase in autonomy has enabled schools to boost performance. It is too early, however, to tell whether the early success of sponsored academies will translate into success for the wider programme.
Climate monitoring organisations report that 2015 is set to break global temperature records. Meanwhile, this December ministers will convene at the UN meeting in Paris and the WTO meeting in Nairobi to continue climate negotiations. This column reports on progress to date, arguing that small steps forward are being taken, but they are not sufficient.
Discussions continue in some circles as to whether the ECB’s emergency liquidity assistance for Greek banks is legitimate. This column assesses the underlying economics of the emergency liquidity assistance programme and the complex interrelationship between the EU, the ECB and the Greek banks. Economists must focus on the political economy of a monetary union with incomplete fiscal union if they are to understand what’s going on with emergency liquidity.
Malaysia’s fortunes have taken a turn for the worse in recent years, both in manufacturing and across the economy in general. This column argues that the country is moving back to processing its agricultural and mineral resources, and that such ‘premature deindustrialisation’ is mostly policy driven. The biggest concern with such structural shifts is that they lead to low-productivity, low-wage manufacturing. Malaysia must address these issues and improve its business environment if it wants to realise its aspirations.
It is still not clear whether the effect of retirement on health is positive or negative. This column discusses new evidence from Japan showing that it is likely positive. In Japan, elderly people reduce their smoking and drinking after retirement. People tend to smoke and drink with their colleagues, so the result is mostly due to a peer effect.
Sovereign governments re-entering capital markets after debt renegotiations pay an interest rate premium for past defaults. This column presents new evidence that suggests earlier studies have underestimated this premium. This is partly due to the narrow credit history indicators used in previous studies as well as the narrow data coverage. Correcting for these problems, a sizeable and persistent default premium emerges, and one which rises on the duration of the default. The new findings are consistent with the view that financial markets help discipline governments and rationalise why governments try hard not to default.
There is a pressing need to understand the characteristics of financial systems that are vulnerable to crises, and the mechanisms through which crises are initiated and propagated. To address such a need, this column presents a new international database on financial fragility for 124 countries between 1998 and 2012. The novelties and main features of the databases are also highlighted.
An important channel for monetary policy transmission is through mortgage markets. This column illustrates how the effects of an interest rate lift-off, from the zero lower bound, on homeowners depend on three factors: the prevalent mortgage type in the economy (fixed or adjustable rate), the speed of the lift-off, and the inflation rate during the lift-off. This channel of transmission suggests that if the purpose of the lift-off is to normalise nominal interest rates without derailing the recovery, the Federal Reserve Bank and the Bank of England should wait until the economies show convincing signs of inflation taking off. Furthermore, the lift-off should be gradual and in line with inflation.
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.
Mortgage refinancing is one of the main ways households can benefit from a decline in the cost of credit. This column uses the US Government’s Home Affordable Refinancing Program (HARP) as a laboratory to examine the government’s ability to impact refinancing activity and spur household consumption. The results suggest that less creditworthy borrowers significantly increase their spending following refinancing. The authors provide comprehensive evidence that competitive frictions in intermediation sector prevented a large number of such eligible borrowers from benefiting from the programme. To the extent that such borrowers have the largest marginal propensity to consume, allowing them to refinance under the programme could increase overall consumption and alleviate uneven economic outcomes across the country.
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.
Economists infamously disagree about more or less everything. Luckily, this doesn't hold for CEPR Fellows. This chapter introduces the eBook – delving into the fundamentals that we agree on, and the nuances that we don’t.
The past five years have given European countries useful insights on what works in crisis resolution. The lessons should be viewed as forward-looking contributions to the institutional and policy reform agenda in Europe, especially in the Eurozone. The Eurozone is not doomed, it just needs better economic and financial policies.