Most Read: This Month
The debate about fiscal consolidation reduces too often to shouting matches about the value of fiscal multipliers, or about the existence of a critical debt-to-GDP ratio. This does not do justice to what is a complex choice, depending on many factors. Our purpose in this article is to review the relevant factors at play and allow for a richer discussion.
The very public Rogoff-Reinhart kerfuffle has focused on what is not true. This column reviews the evidence on what is true. It suggests that the debt-growth link is more complex than commonly thought. While there is evidence that public debt is negatively correlated with economic growth, there is no study that makes a strong case for a causal relationship going from debt to growth.
The UK escaped a liquidity trap in the 1930s and enjoyed a strong economic recovery. This column argues that what drove this recovery was ‘unconventional’ monetary policy implemented not by the Bank of England but by the Treasury. Thus, Neville Chamberlain was an early proponent of ‘Abenomics’. This raises the question: is inflation targeting by an independent central bank appropriate at a time of very low nominal-interest rates?
The world has seen a hundred financial crises in the past three decades. In this column, Nobelist Joe Stiglitz argues that we could have done much more to prevent this crisis and to mitigate its effects. Looking ahead, we can do much more to prevent the next one. This is a chance to revolutionise flawed economic models, and perhaps exit from an interminable cycle of crises.
Standard microeconomics ignores personalities, but business studies stress the importance of entrepreneurs. This column presents evidence that shows that personalities are important. Looking into the death of a firm’s founder during the first ten years of a company’s existence, the data suggest that entrepreneurs matter – they are the ‘glue’ that holds a business together.
Macroeconomics was challenged by the Global Crisis. In this column, one of the world’s leading macroeconomists provides his take on the highlights of the IMF’s recent conference. He concludes by noting that the conference set a clear research agenda for the future.
Economists did very badly in predicting the crisis. But in this column, Nobelist George Akerlof argues that the economic policies post-crisis have been close to what a sensible ‘economist-doctor’ would have ordered. The lesson for the future is that good economics and common sense have worked well. We have had trial and success. We must keep this in mind with policy going forward.
By the end of the 1990s, under the incentive of Eurozone entry, most peripheral European countries were busy undertaking structural reforms and putting their fiscal houses in order. This column argues that the arrival of the euro, and the subsequent interest-rate convergence, loosened a tide of cheap money that reversed the incentives for further reforms. As a result, by the end of the euro’s first decade, the institutions and governance in the Eurozone periphery were in worse shape than they were at the start of the decade.
Europe’s austerity-first approach has triggered research-based efforts to evaluate the effectiveness of debt-reduction strategies. This column, based on a US empirical study, suggests that an ‘austerity shock’ in a weak economy may be self-defeating. Public-debt reduction historically occurs gradually amid improved growth. If policymakers, firms and households respond as in the past, we should expect lower deficits amid higher growth and, eventually, decreasing debt ratios.
Recent data show that the current-account deficits of Greece, Italy, Spain, and Portugal have improved at a rapid pace and are actually close to being balanced. This column reviews recent research that shows this adjustment has been remarkably fast. Compared to mid-2008, these four nations have switched expenditures at a rate that is much higher than the typical rate observed during large rebalancing episodes. A key requirement for a return to a post-crisis Eurozone is thus on its way to being met.
Current-account deficits have caused problems in several Eurozone countries, but surpluses are also an issue. This column argues that surpluses are detrimental to the welfare of the population to the extent they are driven by structural weaknesses affecting demand. Addressing these issues through structural reforms, while letting wages and prices respond flexibly to market signals, would be welfare-enhancing for the surplus countries.
Medieval monetary practices reveal an alternative approach to currency stabilisation. This column examines the role of Mint prices as a device for stabilising the medieval bullion market. This might seem to be of limited relevance to managing modern currencies, yet a longer historical view helps to highlight different approaches to currency stabilisation. This raises a question for modern policymakers: should the price of some of the asset counterparts of today’s money be anchored, as bullion prices once were under the Mint system?
Pre-2008 macroeconomic thinking largely ignored the financial sector as a source of shocks. This column argues that such shocks are not rare, so we need a fundamental rethink of the financial system and macroeconomic policy frameworks. We must think about strong measures that would minimise the chances of anything similar happening again. The reforms considered to date are too small and too meek.
Reducing gender inequity will require a wide range of policies. This column describes a framework for quantifying the growth effects of gender policies in developing economies and, by applying an overlapping generations model to Brazil, shows that gender policy is likely to produce tangible economic results, but only in the long term.
France has recorded one of the lowest real per capita income growth levels in the OECD over the last 20 years or so. One of the many structural weaknesses causing this weak performance is the French tax system. This column argues that complexity, instability and non-neutrality coupled with very high effective tax rates in many areas of the French tax system put a heavy burden on the economy.
Is there too much financial development, or too little? Can economists even measure it well? This column argues that commonly used measures of financial development are poor proxies of what the financial system actually does, presenting a new worldwide database that aims to fill some of the gaps. There needs to be a stronger link between the theory and measurement of financial development.
Who should we trust when it comes to fiscal forecasts: governments or independent agencies? This column argues that this question is, in fact, a red herring: empirical evidence suggests that in the past, international agencies’ fiscal forecasts were partially affected by the same problems that the literature widely acknowledges for governmental forecasts. An attractive solution is independent national forecasters.
The economic consequences of financial crises have been systematically explored. Their political consequences haven’t. This column argues that without paying attention to politics, crises will remain poorly understood. After all, politics shapes policy choices, market sentiment and, ultimately, economic outcomes. Evidence from the effects of banking crises over the past century show that crises have a dramatic impact on the survival prospects of governments.
Do patents encourage innovation? This column presents a new analysis, suggesting that patent rights block cumulative innovation only in very specific environments. To encourage innovation, remedial government policies should be targeted; a ‘broad based’ scaling back of patent rights is unlikely to be appropriate. Policies and institutions should facilitate more efficient licensing, promoting cumulative innovation without diluting the innovation incentives that patents provide.
Before the global financial crisis, European banks had rapidly expanded their foreign-lending activities. However, this column argues that financial stress in Europe has put this process into reverse and negatively affected credit conditions in developed and emerging markets alike. As European banks repair their balance sheets and rethink their business models in a context of stricter regulatory requirements, financial fragmentation, and a deteriorating European economy, they continue to retrench to home markets.
Youth unemployment in Europe seems to be sticking around. This column assesses youth unemployment policy in France using data from a controlled experiment. ‘Job counselling’ – a key French policy that prepares some job seekers for the recruitment process, and connects them with potential employers – seems to only marginally improve graduate’s chances of employment. Moreover, the evidence suggests that what’s good for one graduate may be bad for another: the beneficiaries of intensive job counselling are more likely to find employment simply at the expense of other job seekers.
Time and again, research correctly finds that people in developed countries don’t exercise enough. But what information are policy efforts to promote physical exercise based on? This column presents new – and more sophisticated – research that disentangles recreational exercise and cumulative exercise – such as physical activity in (or on the way to) the workplace. An individual’s total physical activity, and not just their recreational exercise, is the salient input into health production because exercise is typically a very small portion of an individual’s total daily physical activity. The sole focus on recreational exercise may well be misleading.
The growth of China and India’s financial sectors is hard to ignore. This column presents a new dataset on domestic and international capital raising activity and performance of the publicly listed firms in China and India. The data suggest that expanding capital markets might tend to directly benefit the largest firms – those able to reach some minimum threshold size for issuance. More widespread direct and indirect effects are more difficult to elucidate.
State-owned enterprises have become global players and the subject of much policymaking concern. There is a widespread perception that they may be acting differently when competing with private firms in the global market place. This column introduces a new database on state-owned firms that shows that more than one in ten of the world’s largest firms are state-owned. These new data should help governments formulate informed and balanced policy responses.
The European Central Bank has often been criticised for inconsistencies in its policy communications. At the same time, several papers show how ECB communication has been effective. This column resolves this paradox by providing evidence showing that ECB introductory statements were, in fact, quite consistent over the first decade of its operations.
A relatively unforeseen implosion in housing markets figured prominently in the 2007 meltdown in capital markets and the subsequent downturn in the global economy. This column presents new research on the political geography of subprime lending. Congressional leaders – as well as other recipients of campaign contributions – may have benefited from gains to trade in the direction, pricing, and sizing of subprime mortgage loans.
Remedying a global crisis such as this requires concerted, consensual, coordinated effort. But we’re told economists are divided on what to do next. Is this true? Are we divided? This column praises efforts such as the Economic Experts Panel from the Chicago Booth School of Business. It’s from panels like this – which comprise top economists with differing political views – that we can get a sense of consensus or disagreement on major economic issues.
Energy-subsidy reform is notoriously difficult. This column argues that the environmental and social payoff from a concerted worldwide effort to replace these subsidies with better targeted measures would be substantial. Subsidy reform is an especially attractive option for countries under pressure to bring public debt to more prudent levels. The success of reform in several countries shows that the challenge is not insurmountable.
An unintended consequence of tighter banking regulation is that businesses are looking beyond banks for their loans. This column argues that this arbitrage opportunity may create systemic risks, including amongst major insurance companies. Using a new methodology, evidence tentatively suggests that insurers are indeed becoming systemic.
The UK is under fire for pulling up the drawbridge for bright foreign students by limiting visas and complicating the application process. This column argues that welcoming large numbers of foreign PhD students bodes well for countries and universities interested in scientific and engineering innovation. Science and engineering are, after all, critical for the growth and competitiveness of industrial economies. Policies that serve to limit or discourage the enrolment of international graduate students lead to reductions in the rate of scientific discovery.
With persistently weak economic conditions becoming the norm in Europe, economists are considering increasingly unconventional policy options. One tool that has yet to be taken out of storage is ‘helicopter money’, i.e. the overt monetary financing of government deficits. This column recounts a policy debate on helicopter money that was held at LBS in April 2013 among three of the world’s leading monetary economists.
Fixed-income investors that have targets based on imperfect risk measures are tempted to take on additional risk to raise their portfolio yields. This column argues that when yields are low such ‘reaching for yield’ may be especially attractive. New research that quantifies reaching-for-yield for corporate-bond investors shows that insurance companies, which are regulated based on broad ratings categories, assume additional risk by selectively overweighting risker bonds within categories. There is evidence that this distorts pricing and issuance.
Debate about who should be on central-bank committees has resurfaced in recent years. Is it better to appoint experienced central bankers, financiers, NGO workers or civil servants? This column argues that variations in voting patterns change with career background. Evidence suggests that if central banks want a wide range of policy preferences, then getting more academics on committees might be a reasonable strategy for better policy
Global climate cooperation has collapsed but the need for action has not disappeared. This column argues that only radical technological progress can reconcile climate-change goals with development. It argues that four changes in WTO trade rules could facilitate climate-change action and technological advances without unduly damaging trade.
Japan looks set to participate in the Trans-Pacific Partnership (TPP) negotiations. Reflecting the current debate in Japan, this column assesses what effect the Partnership will have on Japan’s growth. Evidence suggests that the economic effects may be far bigger than the current consensus suggests.
The world economy seems to be acting in unexpected ways. This column argues that austerity and quantitative easing do not seem to be working out as advertised. There is an urgent need to review the effectiveness of alternative macroeconomic policy approaches, and prepare an internationally agreed pro-growth plan to reflate distressed economies. The outlines of one such plan are presented.
Increasing agricultural productivity and expanding the agribusiness industry in sub-Saharan Africa is critical for poverty reduction, food security and economic growth. Numerous recent national, regional and G20-level programmes have been initiated to that effect. This column discusses new research showing that political economy forces have a major bearing on the success or failure of agricultural reform programmes. To be successful, policymakers must bear in mind the extent to which existing elites are affected by the redistribution associated with increasing returns for rural producers.
Are free trade agreements good for ‘Factory Asia’? This column argues that rather than supporting ‘Factory Asia’, it is more likely that fragmentation trade has prospered despite the noodle bowl of overlapping FTAs in the region. Inter-regional FTAs, on the other hand, may have been able to indirectly support the growth of production networks among existing members, if they led to increased demand for the final goods that the networks produce.
Do economies’ social policies affect their innovative outcomes? This column uses the case of venture capital investors to argue that it may. Countries that protect workers rather than jobs – and thus avoid employment-protection laws – developed stronger venture-capital markets over 1999-2008, especially in highly volatile sectors like computers or energy.
Innovation is the beating heart of modern growth. This column argues that innovation-blocking institutions weaken when markets expand and competition intensifies. The rise and decline of medieval Italian crafts guilds offer valuable insights into this process. Policies that promote greater market integration and stronger competition are key steps in lowering the barriers to innovation.
Why do emerging markets liberalise capital-outflow controls? Fiscal versus net capital flow concerns
Recent years have seen a return to the capital controls policy debate. Presenting new data, this column argues that liberalisation of capital-outflow controls can allow emerging-market economies to reduce net capital inflow pressures, but may cost emerging economies the fiscal revenues that external financial repression generates.
The positive spillovers from multinationals to the productivity of their host-country suppliers are empirically well established. Usually, it is assumed that multinationals aid their suppliers by voluntarily sharing knowledge and cooperating with them. This column argues the spillovers might rather result from blunt pressure by the multinationals, forcing their suppliers to adopt new practices and to adapt to new standards.
What can we learn from China’s experience as a linchpin in the global value chain? This column presents new research showing that financial frictions influence the organisation of production across firm and country boundaries. If you’re credit-constrained, you might be stuck in the low value-added stage of the supply chain. Strengthening capital markets might thus be an important prerequisite for moving into higher value-added, more profitable activity. China’s experience tells us that liquidity-constrained manufacturers might therefore benefit more from import liberalisation and from the fragmentation of production across borders.
Can we learn from previous instances of fiscal prioritisation? This column surveys the US Treasury’s response to three wars – the Revolutionary War, The War of 1812 and the Civil War. Contemporary advocates of engaging in fiscal discrimination might ponder the actions of previous US Presidents Madison and Grant, who honoured all existing federal obligations despite challenging fiscal conditions.
The first order of business for the next Director-General of the WTO will be to help broker a deal at the Ministerial Meeting in Bali next December. Following the announcement of reductions in tariffs on environmental goods announced by APEC members last September, there is some hope that a deal might be in hand for a reduction in trade barriers on environmental goods and services. This column reviews the stalemate so far and argues that with little to put on the table, progress at the multilateral level is unlikely.
- Fiscal consolidation: At what speed?Blanchard, Leigh
- Public debt and economic growth, one more timePanizza, Presbitero
- Escaping liquidity traps: Lessons from the UK’s 1930s escapeCrafts
- The lessons of the North Atlantic crisis for economic theory and policyStiglitz
- Do entrepreneurs matter?Becker, Hvide
- A tale of two depressions: What do the new data tell us? February 2010 updateEichengreen, O’Rourke
- Educated in America: College graduates and high school dropoutsHeckman, LaFontaine
- Eurozone breakup would trigger the mother of all financial crisesEichengreen
- Debt, deleveraging, and the liquidity trap: A new modelKrugman
- Panic-driven austerity in the Eurozone and its implicationsDe Grauwe, Ji
Reichlin, Baldwin, 14 April 2013