Strengthening the banking sector through higher equity capital is one of the key elements of policies aiming to reduce the probability of crises. However, the ‘corporate debt bias’ – the tendency of corporate tax systems to favour debt over equity – is at odds with this objective. This column estimates the benefits for financial stability of eliminating the corporate debt bias. Fully removing the debt bias is estimated to reduce potential public finance losses by between 25 and 55% for the six large EU countries sampled.
Sven Langedijk, Gaëtan Nicodème, Andrea Pagano, Alessandro Rossi, Saturday, July 4, 2015
Carmen M Reinhart, Christoph Trebesch, Tuesday, October 21, 2014
To work towards resolving Europe’s ongoing debt crisis this column looks to the past. From the recent emerging market debt crisis (1980s-2000s) and the interwar episode of the 1920s-1930s we learn that debt write-downs and defaults are able to be postponed but not prevented. Punishment for default is temporary, sometimes followed by a renewed surge in borrowing that leads to another crisis.
David F. Hendry, Grayham E. Mizon, Wednesday, June 18, 2014
Many central banks rely on dynamic stochastic general equilibrium models – known as DSGEs to cognoscenti. This column – which is more technical than most Vox columns – argues that the models’ mathematical basis fails when crises shift the underlying distributions of shocks. Specifically, the linchpin ‘law of iterated expectations’ fails, so economic analyses involving conditional expectations and inter-temporal derivations also fail. Like a fire station that automatically burns down whenever a big fire starts, DSGEs become unreliable when they are most needed.
Udaibir S Das, Michael G. Papaioannou, Christoph Trebesch, Wednesday, November 28, 2012
There is an ongoing debate about debt restructurings, debt buybacks and other strategies to resolve sovereign debt crises. Unfortunately there is limited empirical knowledge about the process and outcome of past restructurings to guide the debate and help tackle future crises. This column is an attempt to fill this gap by surveying new data and lessons learned from debt crises of the past six decades.
Ashoka Mody, Damiano Sandri, Franziska Ohnsorge, Wednesday, February 22, 2012
Uncertainty rose sharply during the Great Recession, as did saving rates. This column shows that these two developments were related. Using a panel of OECD countries, it estimates that at least two-fifths of the increase in households’ saving rates between 2007 and 2009 was due to increased uncertainty about labour-income prospects. It adds that restoring higher levels of consumption and aggregate demand will require employment-friendly social insurance and reduced policy-induced uncertainty.
Francesco Trebbi, Atif Mian, Amir Sufi, Tuesday, February 21, 2012
Political environments appear systematically different in the aftermath of a financial crisis relative to before the crisis. This column argues that the ensuing gridlock and the delay in potentially beneficial policy reforms should come as no surprise.
Giuseppe Bertola, Tuesday, May 26, 2009
In Europe, unemployment is increasing more rapidly than in earlier comparable crises. This column attributes that to the severity of the recession and the flexibility-oriented reforms that only recently brought European unemployment down. But that does not mean that the answer is re-regulation of labour markets.