Macroeconomic policy

Andy Atkeson, Andrea Eisfeldt, Pierre-Olivier Weill, 17 September 2014

Entry and trading in over-the-counter (OTC) derivatives markets have received considerable attention. However, many critical questions remain unaddressed. This column describes a formal study of banks’ incentives to enter and trade in OTC derivatives markets. In equilibrium, only large banks enter to become dealers, and middle-sized banks only enter as customers. Care should be given not to reduce rents so much when dealer participation costs are high.

Jaime de Melo, Julie Regolo, 17 September 2014

The EU is about to extend economic partnership agreements signed in 2007 with countries of the Africa, Caribbean and Pacific region. Reflecting on the implementation difficulties associated with previous agreements and the minimal engagements in the upcoming ones, this column argues that these partnerships will fall short. No further integration of African economies will come out of them. Economic Partnership Agreements will have been a sideshow in the EU’s trade policy.

Janine Aron, John Muellbauer, 16 September 2014

Using aggregate data can bias estimates of exchange rate pass-through by ignoring heterogeneity in price adjustment across sectors. This column uses micro-level price data to estimate pass-through for South Africa, using actual CPI weights to reflect changes in consumption bundles. The result is a micro-based estimate of pass-through with aggregation consistent enough to interest monetary policymakers.

Alan Moreira, Alexi Savov, 16 September 2014

The prevailing view of shadow banking is that it is all about regulatory arbitrage – evading capital requirements and exploiting ‘too big to fail’. This column focuses instead on the tradeoff between economic growth and financial stability. Shadow banking transforms risky, illiquid assets into securities that are – in good times, at least – treated like money. This alleviates the shortage of safe assets, thereby stimulating growth. However, this process builds up fragility, and can exacerbate the depth of the bust when the liquidity of shadow banking securities evaporates.

James Boughton, 15 September 2014

The international financial system is not working fine and reforms of regional and global institutions are much needed. This column discusses some of the transformations that the IMF could implement in order to keep pace with the changes in the world economy. One problem for the credibility of the IMF is the G20 in its current design and organisation. Institutional reforms, however, should be combined with advances in economic policy in order to promote economic growth and financial stability.

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