A key feature of globalisation over the last three decades has been the wave-like growth of foreign direct investment. This column shows that conglomerate cross-border acquisitions, which are closely associated with mispricing in financial markets, play a significant role in explaining these developments.
Nils Herger, Steve McCorriston, 31 January 2016
Joshua Aizenman, 03 January 2016
The Global Crisis renewed debate on the benefits and limitations of coordinating international macro policies. This column highlights the rare conditions that lead to international cooperation, along with the potential benefits for the global economy. In normal times, deeper macro cooperation among countries is associated with welfare gains of a second-order magnitude, making the odds of cooperation low. When bad tail events induce imminent and correlated threats of destabilised financial markets, the perceived losses have a first-order magnitude. The apprehension of these losses in times of peril may elicit rare and beneficial macro cooperation.
George Andrew Karolyi, David Ng, Eswar Prasad, 12 December 2015
Few economists understate the importance of emerging market economies in terms of world GDP and global growth prospects. This column asks where the future of emerging markets’ investments lie. Where investors have focused in the past and institutional path dependency are important determinants of emerging markets’ allocation of international investment portfolios. This has implications for the geographical distribution of emerging markets’ portfolio investments, a force to reckon with in international financial markets.
Jiangtao Fu, Daichi Shimamoto, Yasuyuki Todo, 01 December 2015
It has been widely argued that firms obtain loans with relaxed terms if they are politically connected. This column presents evidence from Indonesia that firms whose owners or directors have a personal relationship with a politician are more likely to have their loans approved by state-owned banks, and are more likely to receive the full amount applied for. However, the labour productivity of such firms is on average lower. This suggests that in some cases, politically connected lending may distort the efficiency of resource allocation and be detrimental to economic development.
Yves Zenou, 08 January 2015
Targeting key players in a network can have important effects due to multipliers arising from peer effects. This column argues that this is particularly true for crime –the success in reducing crime in Chicago was due to the targeting of 400 key players rather than spending resources on more general targets. Key-player policies in crime, education, R&D networks, financial networks, and diffusion of microfinance outperform other policies such as targeting the most active agents in a network.
Robert Townsend, Weerachart Kilenthong, 09 November 2014
In the aftermath of the Global Crisis, models with pecuniary externalities have gained popularity. This column presents a new framework that encompasses many of these externalities. The authors also show how to design financial contracts and markets in such a way that ex ante competition can achieve a constrained-efficient allocation.
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.
Bryan T. Kelly, Lubos Pastor, Pietro Veronesi, 31 March 2014
Despite obvious ties between political uncertainty and financial markets, the nature of this connection has not been studied in detail. This column describes a theoretical framework for evaluating the influence of political uncertainty on financial markets. Political uncertainty commands a risk premium, especially when the economy is weak. By raising firms’ cost of capital, it depresses investment and real activity. Furthermore, by raising risk premia, political uncertainty destroys market value.
Ian Dew-Becker, Stefano Giglio, 20 October 2013
Stabilisation policy should focus on the frequencies consumers care most about. This column presents evidence from stock-market returns suggesting that consumers are willing to pay the most to avoid – and are therefore most concerned about – fluctuations that last tens or hundreds of years. Modern macroeconomic theory tends to view the role of monetary policy as smoothing out inflation and unemployment over the business cycle. The authors’ findings suggest that resources would be better spent on policies that smooth out longer-run fluctuations.
Nicola Anderson, Joseph Noss, 03 September 2013
Financial prices display ‘fractal’ properties. This column conjectures that this is caused by interactions among agents with different horizons and interpretations of information. This structure appears to be associated with a special sort of stability that can be disrupted – leading to price crashes – if these interaction breaks down. While embryonic, this thinking may have important implications for the regulation of financial markets.
Alex Edmans, Vivian W Fang, Emanuel Zur, 16 February 2013
The stock market is a powerful tool for controlling corporations’ behaviour. But which is better, a highly liquid market or a number of large blockholders? This column argues in favour of liquidity. Evidence suggests that policymakers should not reduce stock liquidity through greater regulation. While the idea that liquidity encourages short-term trading – rather than long-term governance – sounds intuitive, deeper analysis shows that liquidity is beneficial because it encourages large shareholders to form in the first place, and allows shareholders to punish underperforming firms through selling their stake.
Lukas Menkhoff, Lucio Sarno, Maik Schmeling, Andreas Schrimpf, 31 March 2012
Momentum trading – buying past winners and selling past losers – is a popular trading strategy in many assets. In foreign exchange high returns to momentum trading have fuelled concerns that it is little more than destabilising speculation. This column argues that, for better or worse, such strategies are likely to continue.
Thomas Meyer, 19 August 2011
Against the backdrop of noise about the damage financial markets can cause, this column focuses on the positives. It presents an analysis of innovation at 1,200 firms worldwide and finds that financial markets usually award a premium to innovative firms, though this premium differs across countries. Economies with more active financial markets have higher innovation – which may be a driver of faster productivity growth.
Richard S. Grossman, Masami Imai, 07 September 2010
One of the striking features in the buildup to the global crisis was the extent of risk taken on by highly leveraged financial institutions. This column blames such behaviour on the limited liability status of these institutions. Using data on British banks from 1878 to 1912, it finds that the banks with greater liability for their debts took on less risk.
Thorsten Beck, 16 June 2010
Will the upcoming Financial Reform Bill in the US help prevent the next crisis or at least reduce its probability? This column argues that the answer is a firm “no”. It says this is not because the reform steps are damaging or wrong, but simply because they only provide the framework and do little to change incentives for banks and regulators.
Venkatachalam Shunmugam, 18 May 2010
Over-the-counter markets for derivatives have been a subject of blame for the global crisis. This column argues that the rising opacity and barriers to entry in these markets have been sorely overlooked leading to dark pools, flash trading, and front-running. These unfair practises can – at any time – cripple markets. They undermine the premise of free markets and should be stopped.
Richard Olsen, 06 March 2010
Why should high-frequency finance be of any interest to policymakers interested in long-term economic issues? This column argues that the discipline can revolutionise economics and finance by turning accepted assumptions on their head and offering novel solutions to today’s issues.
Eduardo Cavallo, 24 February 2010
Recent evidence suggests that Latin American counties have been shifting their public debt from foreign to domestically issued liabilities. This column argues that the change in debt composition does not guarantee less exposure to external shocks. Without a stable domestic investor base, Latin America will remain vulnerable to swings in global financial markets.
Giuseppe Bertola, Anna Lo Prete, 03 December 2008
Globalisation seemingly erodes governments’ ability to redistribute wealth. This column presents new evidence of the tradeoff between integration and redistribution, showing that financial development has filled in where government has receded. The current crisis may pose political challenges to both financial development and economic integration.
John Muellbauer, 27 November 2008
This column explains the logic behind a radically new form of monetary policy – a new central-bank tool for stabilising the credit cycle. By buying bank stocks and credit instruments at the bottom of the cycle and selling at the top, the new policy could moderate the boom-and-bust credit cycle independently of interest rate policy. The Fed action on 25 November is a good step in this direction.