Economic history

Personal experience and risk aversion in times of crisis

Peter Koudijs, Hans-Joachim Voth, 12 April 2014

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.

Historical lessons for TARGET imbalances

Michael Bordo, 21 March 2014

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.

The illiquidity of water markets

José-Antonio Espín-Sánchez, Javier Donna, 2 February 2014

Fresh water is becoming increasingly scarce. Policymakers worldwide are advocating water markets as a solution to this scarcity problem, but there remains considerable controversy about the efficacy of water markets. This column studies a water market that was in place for over 700 years in southern Spain and was replaced by a system of fixed quotas in 1966. The market was terminated because a system of quotas outperformed the market due to the presence of liquidity constraints. The findings imply that we should be cautious when advocating water markets in developing countries where liquidity constraints are important.

US electrification in the 1930s

Carl Kitchens, 29 January 2014

Economists have found that large-scale infrastructure investments tend to increase economic growth and reduce poverty. However, there has been relatively little research on the effects of smaller, more targeted investment projects. This column discusses recent research on the effects of the US Rural Electrification Administration, which provided subsidised loans for connecting farms to the electric grid. Counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity than similar counties that did not.

The unpleasant legacy of the crisis: public debt and low trend growth in the Eurozone

Nicholas Crafts, 21 January 2014

Nicholas Crafts talks to Viv Davies about his recent work on the threatening issue of public debt in the Eurozone. Crafts maintains that the implicit fault line in the EZ is evident; several EZ economies face a long period of fiscal consolidation and low growth and that a different sort of central bank might be preferable. They also discuss the challenges and constraints of banking, fiscal and federal union. The interview was recorded in London on 17 January 2014.

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