Enhancing the global financial safety net through central-bank cooperation
Edwin M. Truman, 10 September 2013
Should we expect more global financial crises? This column argues that we should. Global financial crises are far from being a thing of the past because they are often caused by buildups of excessive domestic and foreign debt. To successfully address them and to limit negative spillovers, we need coordinated actions that prevent a contraction in global liquidity. Unless we establish this more robust, coordinated global financial safety net centred on central banks (which is where the money is), we may end up being incapable of addressing inevitable future crises.
The prospect that the Federal Reserve will soon ease off on its purchases of long-term assets has increased financial-market uncertainty and contributed to a retrenchment in global capital flows. This turbulence has revived discussion of the need to enhance the global financial safety net –i.e.
Topics: Global crisis, International finance
Tags: banking, Central Banks, debt, liquidity
External liabilities and crisis risk
Luis AV Catão, Gian Maria Milesi-Ferretti, 4 September 2013
Debt seems to be a lightning rod for crises. This column presents new research showing that the ratio of net foreign liabilities to GDP, and in particular its net external debt component, is indeed a significant crisis predictor for both advanced economies and emerging markets. Large current-account deficits and real exchange rate appreciation – the standard predictors – still matter, but we should be thinking more about net external debt.
Much has been written about the causes of the global financial crisis of 2008 – the role of the US subprime crisis as a triggering event, the generalised period of easy credit and financial excesses fuelling growing economic and financial vulnerabilities, the failures to properly regulate large systemic financial institutions.
Topics: Global crisis
Tags: debt, Eurozone crisis, liabilities, net external debt
Eurobonds: The design is crucial
Roel Beetsma, Konstantinos Mavromatis, 21 December 2012
Are Eurobonds a desirable solution to Eurozone members’ debt crises? Unhappily, it’s difficult to say. This column argues it very much depends on how the system is designed. However, looking at the most prominent proposals, it seems a cleverly designed Eurobonds system may well provide governments with the right incentives to encourage both issuing less debt and pursuing meaningful structural reform.
The debt crisis in Eurozone southern states has given rise to a number of measures to strengthen fiscal governance in Europe. It has also sped up plans for further integration of policymaking in the Eurozone.
Topics: EU institutions
Tags: debt, debt restructuring, eurobonds, Eurozone crisis
Solving the macroeconomic policy challenge in Europe
Richard Wood, 19 December 2012
Five years after the subprime bubble burst, the self-correcting nature of business cycles is being questioned and, subsequently, orthodox macroeconomic policy is starting to be challenged. This column introduces a radical rethink of options open to macroeconomic policymakers, suggesting that in order to simultaneously achieve economic stimulus without increasing debt, new money creation should be used to directly finance on-going budget deficits.
Countries in Europe are either slipping into recession or experiencing worsening depression. Economies are headed in the wrong direction, and the malaise is spreading. The current orthodoxies are failing.
Topics: Macroeconomic policy
Tags: debt, macroeconomic policy, quantitative easing, Subprime
Cut deficits by cutting spending
Alberto Alesina, 30 November 2012
Should debt-ridden and economically struggling Western governments be doing everything possible to reduce their deficits? Should we cut spending or hike taxes to reduce our debt-to-GDP ratios? This column argues that the answer is obvious: the cheapest, most effective and confidence-inspiring route is to cut spending. Coupled with other pro-growth policies, the evidence suggests that it is only really spending cuts that will spur private investment and economic recovery in Europe.
Should debt-ridden and economically struggling Western governments be doing everything possible to reduce their deficits? The debate over that question has become increasingly confusing – not only in Europe, where the matter is particularly urgent – but in the US, too.
Topics: Europe's nations and regions, Global crisis
Tags: debt, Eurozone crisis, fiscal policy, global crisis
Effects of commodity price windfalls on external debt: The role of political institutions
Rabah Arezki, Markus Brückner, 15 June 2012
Booming commodity prices generate large foreign currency inflows for exporting nations. This column argues that in countries with executive constraints and political competition windfalls from commodity booms lead to a significant reduction in external debt. In autocratic regimes, on the other hand, the windfalls are used to increase consumption expenditures.
Booming commodity prices have generated large foreign currency inflows for commodity exporting nations. Such inflows, however, are not always associated with positive outcomes for the commodity exporters. Phenomena such as corruption (Bhattacharyya and Hodler 2009) and the ‘natural resource curse’ (Brunnschweiler and Bulte 2012) often plague nations rich in natural resources.
Topics: Development, Macroeconomic policy
Tags: debt, political regimes, resource curse
Financial repression: Then and now
Carmen M Reinhart, Jacob Funk Kirkegaard, 26 March 2012
Rich nations worldwide have a problem with debt. In the past, such problems have been dealt with by several tactics, including 'financial repression'. This column explains how the tactic works and documents its resurgence in the wake of the global and Eurozone crises.
In light of the record or near-record levels of public and private debt, debt-reduction strategies are likely to remain at the forefront of policy discussions in most of the advanced economies for the foreseeable future (Reinhart and Sbrancia 2011).
Throughout history, debt-to-GDP ratios have been reduced by:
Topics: International finance, Macroeconomic policy
Tags: debt, financial repression, inflation
Fiscal consolidations for debt-to-GDP ratio containment? Maybe … but with much care
Gianluca Cafiso, Roberto Cellini, 20 March 2012
As fiscal-consolidation policies are being implemented across the EU, a debate has been developing concerning the effects of such policies on the dynamics of the debt-to-GDP ratio. This column examines past episodes and finds that following fiscal adjustment may have favourable effects in the short term but that the two-year cumulated changes have been mainly adverse.
In recent time a wide debate has been developing concerning the effects of restrictive fiscal policies on the dynamics of the debt-to-GDP ratio (eg Corsetti and Müller 2012). The debate is nourished by the current experience of EU countries, where fiscal-consolidation policies are implemented.
Topics: Macroeconomic policy
Tags: austerity, debt, eurozone
A series of unfortunate events: Common sequencing patterns in financial crises
Carmen M Reinhart, 9 January 2012
Financial crises often unfold according to common patterns, but the post-2007 contraction is in fact different from other post-WWII crises in its unusual severity, says Carmen Reinhart in CEPR DP8742. But the patterns of past crises may still provide clues on the future of housing, labour, and international financial markets. This paper outlines what that future might look like.
Vox readers can download CEPR Discussion Paper 8742 for free here.
Journalists are entitled to free DP downloads on request; please contact firstname.lastname@example.org. To learn more about subscribing to CEPR's Discussion Paper Series, please visit the CEPR website.
Topics: Financial markets, Global crisis, International finance
Tags: debt, default, financial crises, financial repression
Sovereign debt, government myopia, and the financial sector
Raghuram Rajan, Viral Acharya, 24 November 2011
Why do governments repay external borrowing? This column argues that myopic governments seeking popularity do not default when they are poor because they would lose access to debt markets and be forced to reduce spending. And they do not default when rich because of the adverse consequences to the domestic financial sector. This explains why governments continue servicing debt when default is beneficial for the country.
Why do governments repay external sovereign borrowing?
Tags: debt, Government default