The role of corporate saving in global rebalancing
Philippe Bacchetta, Kenza Benhima24 August 2014
Among the various explanations behind global imbalances, the role of corporate saving has received relatively little attention. This column argues that corporate saving is quantitatively relevant, and proposes a theory that is consistent with the stylised facts and useful for understanding the current phase of global rebalancing. The theory implies that, while the economic contraction originating in developed countries has pushed interest rates towards the zero lower bound, the recent growth slowdown in emerging countries could push them out of it.
The increase in global imbalances in the last decade posed a theoretical challenge for international macroeconomics. Why did some less-developed countries with a higher need for capital, like China, lend to richer countries? The inconsistency of standard open-economy dynamic models with actual global capital flows had already been stressed before (e.g. by Lucas 1990), but the sensitivity to this issue became more acute with increasing global imbalances. This stimulated the development of several alternative theoretical frameworks.
Bruno Biais, Jean-Charles Rochet, Paul Woolley21 August 2014
The Global Crisis has intensified debates over the merits of financial innovation and the optimal size of the financial sector. This column presents a model in which the growth of finance is driven by the development of a financial innovation. The model can help explain the securitised mortgage debacle that triggered the latest crisis, the tech bubble in the late 1990s, and junk bonds in the 1980s. A striking implication of the model is that regulation should be toughest when finance seems most robust and when innovations are waxing strongly.
One of the curiosities of the modern economy is why the finance sector is so large. Economists have only recently sought to document and ponder this phenomenon. Empirically, Greenwood and Scharfstein (2013) find that, in the US, financial services, which accounted for 2.8% of GDP in 1950, made up 8.3% of GDP in 2006.
Identifying and quantifying monetary policy transmission through bank balance sheets
Kaoru Hosono, Daisuke Miyakawa09 August 2014
In the wake of the Global Crisis, several central banks have adopted unconventional monetary policies. This column presents new evidence from Japan on the transmission of monetary policy through banks’ balance sheets. Overall, the evidence suggests that bank net worth affects loan supply, that the effect depends on monetary policy and economic growth, and that this bank balance sheet channel has a significant impact on firms’ financing and investment. Exiting from unconventional monetary policies when bank balance sheets are weak could thus have a severe adverse impact on investment.
Masazumi Hattori, Andreas Schrimpf, Vladyslav Sushko
How does monetary policy affect firm activities? While there is long-standing literature on this issue, the transmission mechanism of monetary policy is currently attracting renewed attention. The reason is that many central banks – including the US Federal Reserve, the Bank of England, the ECB, and the Bank of Japan – have introduced unconventional monetary policies such as quantitative easing and credit easing in the wake of the Global Crisis, and sooner or later will have to exit from these policies.
Economic policies pursuant to the Global Crisis: A critique
Richard Wood13 July 2014
The Global Crisis triggered a series of medium-term policy changes. This column reviews the effectiveness of some of these monetary, fiscal policies, and internal devaluation policies. Policymakers anchored their strategic thinking in paradigms that became inapplicable to the new problems. An alternative set of macroeconomic policies is suggested.
The Global Crisis brought a halt to three decades of R&D internationalisation, in which foreign firms’ share of total R&D expenditure had increased in almost all countries where data is available. However, this column argues that the crisis did not lead to a new global distribution of overseas R&D expenditure, despite the erosion of the EU’s share. The persistence of R&D expenditure is attributed to the costs of relocating R&D and to the autonomy of foreign subsidiaries.
Foreign firms’ share of total business R&D expenditure increased during the last three decades in almost all countries where data is available, but this trend stopped with the Global Crisis of 2008–2009. In most countries, R&D of foreign firms was more severely affected by the crisis than R&D of domestic firms. However, the crisis did not lead to a new global distribution of overseas R&D expenditure.
Reform and be re-elected: Evidence from the post-crisis period
Marco Buti, Alessandro Turrini, Paul van den Noord04 July 2014
Structural reforms are presumed to deteriorate a government’s chance for re-election. This column, which is an update from earlier work, provides evidence of just the opposite – the odds of re-election are larger for reformist than for non-reformist governments. This holds if the financial system is not overly regulated and an adequate social safety net is present.
Marco Buti, Alessandro Turrini, Paul van den Noord
The former Eurogroup president allegedly said, “We all know what to do but we don’t know how to be re-elected once we have done it” (The Economist 2007). In an earlier VoxEU column (Buti et al. 2008), we argued that the presumed electoral risk for a reformist government – based on the statement by Mr Juncker – is largely unfounded, in particular if a number of conditions are met.
Low interest rates and secular stagnation: Is debt a missing link?
Claudio Borio, Piti Disyatat25 June 2014
Real interest rates have fallen to historic lows, and some economists are concerned that an era of secular stagnation has begun. This column highlights the role of policy frameworks and financial factors – particularly debt – in linking low real interest rates and sluggish economic growth. Policies that do not lean against booms but ease aggressively and persistently in busts induce a downward bias in interest rates over time and an upward bias in debt levels – something akin to a debt trap. Low real interest rates may thus be self-reinforcing and not always ‘natural’.
Today, the US government can borrow for ten years at a fixed rate of around 2.5%. Adjusted for expected inflation, this translates into a real borrowing cost of under 0.5%. A year ago, real rates were actually negative. With low interest rates dominating the developed world, many worry that an era of secular stagnation has begun (Summers 2013).
Wendy Carlin talks to Viv Davies about the 'Curriculum Open-access Resources in Economics' (CORE) project, which was established by the Institute for New Economic Thinking (INET) at Oxford and proposes a new approach to economics teaching for undergraduates. The aim is to update the existing economics curriculum so that it reflects recent developments in economics, the economy and in teaching methods. They discuss the 'three gaps' in economics teaching that the project seeks to close. The interview was recorded in April 2014 at the annual conference of the Royal Economic Society.
The mainstream economics curriculum needs an overhaul
Diane Coyle04 May 2014
The undergraduate economics curriculum is hugely influential, since today’s undergraduates are tomorrow’s policymakers. The massive policy failures before and after the Global Crisis have thus prompted a rethink. This column argues that there is a reasonable degree of consensus on the need for curriculum reform, but no agreement on whether this means rejecting the basic building blocks of the subject. Nevertheless, undergraduate courses in five or ten years will almost surely have changed considerably in character.
One of the delayed consequences of the financial crisis is a widespread and apparently growing desire to change how economics is taught. Students in a number of countries, including vocal groups in Chile and the UK, have recently intensified the demand for reform. One recent example is a report from the Post-Crash Economics Society at the University of Manchester (Post-Crash Economics Society 2014).
Stijn Claessens talks to Viv Davies about the recent IMF book titled 'Global Crises: Causes, Consequences and Policy Responses', co-edited with M Ayhan Kose, Luc Laeven, and Fabian Valencia. The book provides a comprehensive overview of current research into financial crises and the policy lessons learned. They discuss crisis prevention and management, and the crisis in the Eurozone. The interview was recorded in April 2014.