November 2008
Improving efficiency in the 'market for innovation'
The EU is considering two major policy initiatives to improve patent enforcement – patent litigation insurance and establishment of a centralised patent court. This column studies the US experience in centralising patent decisions and concludes that a European Patent Court would likely bring clarity to patent rights, making the market for innovation more efficient.
Conflicts cause poverty, or is it vice-versa?
This column suggests that in Africa an income drop of 5%—a large but altogether common deterioration in economic conditions—increases the risk of civil conflict in the following year to nearly 30%. This suggests that aid agencies could help prevent war by targeting short-term emergency aid towards countries hard-hit by adverse commodity price movements or weather shocks.
India should hold a $1 trillion in foreign exchange reserves
It is undeniable that India's foreign exchange reserves have helped in limiting the impact of the crisis. This column suggests that, if the Indian government wants to cushion against all potential capital outflows of a future crisis, reserves of $1 trillion would not seem excessive.
Lift the ban on Spanish labour reform
Reviving the Spanish economy will require more that macroeconomic stimulus. This column says a sizeable reallocation of labour, brought about by increased labour market flexibility, is the only responsible course of action.
Financial markets and a lender of last resort: Lessons from the founding of the Federal Reserve
The current crisis raises serious questions about the role of a lender of last resort. This column provides historical insight into its importance. Such a lender is critical to containing crises, as demonstrated by the frequent autumn harvest financial crises in the US prior to the establishment of the Federal Reserve.
Political markets
Micael Castanheira of ECARES (Université Libre de Bruxelles) talks to Romesh Vaitilingam about the economic analysis of interactions between politicians, political parties and the voters. The interview was recorded at the annual congress of the European Economic Association in Milan in August 2008.
Does direct democracy reduce the size of government?
Patricia Funk of the Universitat Pompeu Fabra talks to Romesh Vaitilingam about her research on the impact of direct democracy on government spending, which draws on over a hundred years of data on the cantons of Switzerland. The interview was recorded at the annual congress of the European Economic Association in Milan in August 2008.
The financial meltdown is an academic crisis too
Recent events have not been kind to the modern financial market structure. This column blames the prevailing consensus amongst finance academics for underestimating the irrationality and instability involved. Has the discipline failed to understand global financial markets?
Iceland’s historical moment
Iceland’s meltdown was caused by the rapid emergence of an oversized banking sector and accompanying domestic credit creation, asset bubbles and excessive indebtedness that all this encouraged. This column draws lessons from this crisis and suggests Iceland should join the EU if it wants to stand a chance at keeping its well-educated young people from emigrating.
Unorthodox monetary policy: Central banks as “stabilising speculators”
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.
Germany needs high wage settlements and a serious fiscal stimulus
Germany is in better shape than many to weather the financial crisis. But, this column argues, it needs to raise private consumption with a substantial fiscal stimulus and higher real wages, lest it run the risk of slipping into combined stagnation and deflation.
Industrial agglomeration and entrepreneurship
Many academics, policy makers, and business leaders stress the importance of local conditions for explaining spatial differences in entrepreneurship and economic development. This column assesses the importance of various forces for agglomeration. The empirical evidence suggests that market effects, such as proximity to input suppliers and labour market pooling, play a big role, while there is less support for factors like entrepreneurial culture and industrial diversity.
Carbon, trade policy, and carbon free trade areas
Trade and environmental regimes may need to be more closely linked in a post-Kyoto world. This column discusses trade policy initiatives’ potential contribution to global carbon emissions reduction and the potential impacts of proposals for carbon-reduction-motivated geographical trade arrangements. It suggests that the need to link environmental and trade policy may render the WTO obsolete.
Quo vadis Islamic finance?
This column discusses current trends in Islamic finance, which accounts for more than $800 billion worth of assets worldwide. The industry faces a number of challenges, including economic and legal bottlenecks, banking concerns, and unharmonised financial regulations, but most of them arise from the industry’s infancy. Islamic finance’s long-term prospects seem promising.
€-coin indicator and the looming recession
We are in the most serious financial crisis since WWII, and many did not see it coming until it was too late. This column contrasts the performance of €-coin, a real-time monthly indicator for the euro area, with that of professional forecasters. €-coin seems to provide a more accurate assessment of current economic trends. Unfortunately, it is at its lowest level since 1993.
Better targeted regulation: Let banks be banks, let investors be investors
Simplicity and transparency, two major causalities of recent financial market changes, are essential to restoring trust in financial markets. This column suggests that distinguishing two types of financial intermediaries – client servicers and capital managers – would be a big step in the right direction. Today’s lack of distinction means one set of regulations is applied to the two very different functions.
Uncertainty, climate change, and the global economy
What will the climate be like in a hundred years’ time? The answer depends on both how human activity affects climate change and how a warming climate alters the economy’s productive capacity and human welfare. There is uncertainty about those links, but this column shows that, absent policy action, global warming will be a major problem even under very optimistic circumstances.
Food prices and food security: Don’t blame liberalisation
Rising food prices are hurting many poor people across the globe. This column defends agricultural liberalisation, showing that agricultural protection actually increased over the last quarter-century in most poor countries and arguing that self-sufficiency would worsen food security. Policymakers should give direct aid to the very poor rather than resorting to export restrictions.
Assessing the impact of the financial crisis on the US labour market
What is causing the mass US layoffs, decreased demand or more expensive financing? This column presents new research showing that two-thirds of the variation in employment across companies is due to their varying dependence on credit. In short, cheap capital is important for employment.
Understanding happiness: the distinction between living – and thinking about it
Nobel laureate Daniel Kahneman of Princeton University talks to Romesh Vaitilingam about wellbeing as an indicator of social progress, arguing that we need at least two measures of happiness – one that comes when you ask people how they feel right now (‘experience happiness’) and one that comes when you ask people how they think about their life (‘life evaluation’). The interview was recorded at a workshop on happiness research at the Centre for Economic Performance in London in October 2008.
The emergence of women’s rights and gender equality
Matthias Doepke of Northwestern University talks to Romesh Vaitilingam about his research on the emergence of women’s rights and gender equality in England and the United States in the nineteenth and twentieth century. The interview was recorded at the annual congress of the European Economic Association in Milan in August 2008.
Europe doesn’t need sovereign wealth funds
French President Nicholas Sarkozy has proposed that European nations create sovereign wealth funds to protect national companies from foreign “predators.” This column says that idea is protectionist and without merit. Emerging economies establish sovereign wealth funds to invest foreign reserves or commodity revenue – not to bail out domestic firms and stifle global competition.
Finance, market, globalisation: a plot against mankind?
Finance, the market and globalisation are at risk of being jointly demonised by the crisis. This column argues that the these three elements are neither good nor bad; they are just opportunities for individuals, for societies and for economies that must be understood and regulated.
Fear of appreciation: Asian exchange rate asymmetry
Why are emerging Asian economies accumulating massive foreign exchange reserve stocks? Much research has focused on precautionary or export-promoting motives. This column argues that emerging economies are pursuing exchange rate management with a strong bias towards preventing appreciation.
GM solution: Chapter 11 with government restructuring finance
A GM bailout would delay restructuring and ultimately destroy jobs. Restructuring under Chapter 11 is the best solution, but credit market conditions require the US government to provide transitional, “Debtor in Possession” financing. To avoid political interference, the actual lending decisions should be made by a commercial bank with a stake in the outcome
Globalisation and risks: Trends and crises
Globally integrated countries have suffered heavily from highly volatile stock markets during the current crisis. This column argues that globalised countries enjoy lower stock market risk in good times, but they suffer just as much in crises. Moreover, the transition to openness breeds financial instability. Policymakers need ways to manage these risk concerns.
2009 will be the nightmare on Main Street
Every economist is predicting a macabre 2009, but no one knows for sure how bad things will get or who will survive. This column, by comparing the current crisis to uncertainty shocks of the last 40 years, predicts GDP growth could be reduced by as much as 4.5%. But, if politicians protect free markets, growth should be back in 2010.
Understanding liquidity risk and its role in the crisis
What is liquidity? Why is it at the heart of the crisis? How can we fix it? This column explains it all in terms any trained economist can understand.
South African objectives at the G20 leaders summit
This column suggests that South Africa should focus on four broad issues at the coming G20 Summit: supporting global growth, supporting regulatory reform and reconfiguring the IMF, supporting reform of Asian currency management practices, and underlining support for the Doha Round of WTO negotiations.
India and Bretton Woods II
The financial crisis affords India an opportunity to punch above its current economic weight. This column urges India to support globally coordinated actions to help limit the economic downturn. Most importantly, India should call for a strong political commitment by all countries to keep markets open and refrain from taking protectionist action.
Economic gangsters
Ray Fisman of Columbia University talks to Romesh Vaitilingam about his new book, Economic Gangsters: Corruption, Violence, and the Poverty of Nations, written with Ted Miguel. They discuss witch-killing in Tanzania, parking violations by United Nations diplomats, and the value of political connections in both the developing and developed world. The interview was recorded at the Centre for Economic Performance in London in November 2008.
Blood donations: the impact of material incentives
Alois Stutzer of the University of Basel talks to Romesh Vaitilingam about his research on the impact of material incentives on people’s willingness to give blood – a field experiment offering free lottery tickets or free cholesterol tests to different groups of current and potential donors. The interview was recorded at the annual congress of the European Economic Association in Milan in August 2008.
Reform institutions; do not write new rules
What should a “new Bretton Woods” involve? This column argues that the major task at hand is reorganising international economic institutions rather than tackling regulatory details. The G7, International Monetary Fund, and Financial Stability Forum are falling behind because they are not structured for the roles we need them to play.
Capitalise on the crisis: How to move forward
The financial crisis offers opportunities for reform. This column argues the IMF and Financial Stability Forum should be refocused and beefed up, the G7 scrapped, the G20 reshuffled, and group memberships suited to the issues. On November 15, leaders should agree on principles, rather than getting bogged down in details, and explain their reforms to the public.
How bad could the crisis get? Lessons from Iceland
Iceland’s banking system is ruined. GDP is down 65% in euro terms. Many companies face bankruptcy; others think of moving abroad. A third of the population is considering emigration. The British and Dutch governments demand compensation, amounting to over 100% of Icelandic GDP, for their citizens who held high-interest deposits in local branches of Icelandic banks. Europe’s leaders urgently need to take step to prevent similar things from happening to small nations with big banking sectors.
The effectiveness of fiscal policy depends on the financing and monetary policy mix
Governments are crafting fiscal stimulus packages to counter the crisis. This column highlights factors that are crucial in determining the effectiveness of such measures: the financing mix (taxes vs future spending cuts), and accompanying monetary policy. To illustrate the importance of these considerations, simulation results are presented for several stimulus packages.
Should the crisis be the trigger for a reshaping of euro-area entry rules?
Some new EU member states that have not yet adopted the euro have come under much greater pressure during the financial crisis than nations in the euro area. This column says that that does not mean the Maastricht criteria for euro entry ought to be relaxed. New member states suffering in the crisis are paying the price for their policy mistakes.
Tackling India’s credit crunch
The Indian variant of the credit crunch is different. This column outlines potential means of expanding India’s credit supply. Simply cutting interest rates will not suffice.
What the G20 should do on November 15th to fix the financial system
This column introduces a collection of essays by leading economists from around the world on what the G20 leaders should do this weekend. Four priorities are identified: nations should act quickly to strengthen and coordinate their firefighting responses; they should immediately reinforce the IMF’s ability to fire-fight the crisis as it spreads to emerging markets and vulnerable developing nations; they should 'above all, do no harm'. Finally, they should start 'thinking outside the box' when it comes to long-run fixes.
Development and political influence: Corruption happens, lobbying rules
This column presents evidence that lobbying is not only much more prevalent in developing countries than previously thought but also much more effective than corruption as a means of influencing public policy and supporting enterprise growth.
Lower pensions, more children: Evidence from Italy
Economic theory views children as investment or consumption goods. Using Italian pension reforms as a natural experiment, this column find evidence that supports the “children as investment” view.
Behavioural game theory: how real people think in strategic interactions
Vincent Crawford, then of the University of California, San Diego, talks to Romesh Vaitilingam about the research programme of behavioural game theory, which uses economic theory and lab experiments to make the analysis of strategic behaviour more like the way real people think and therefore potentially more applicable. The interview was recorded at the annual congress of the European Economic Association in Milan in August 2008.
Children: consumption goods or investment goods?
By analysing the effects of a pension reform in Italy, Vincenzo Galasso of Bocconi University has been able to explore why people might decide to have children – because they like them or to provide security in old age. In an interview recorded at the annual congress of the European Economic Association in Milan in August 2008, he talks to Romesh Vaitilingam about his surprising finding that people facing the prospect of reduced pension benefits when they retire have increased their fertility.
Iceland: The EU is the future
Iceland is undergoing a traumatic financial crisis. This column argues that the main anchor for its recovery strategy should be EU membership and entry into the euro area.
Why diversifying abroad doesn’t reduce investment risk
Investing in foreign markets may seem a good strategy for reducing risk. But this column shows that financial globalisation has resulted in increased correlation amongst international asset prices, thereby eliminating the diversification opportunities it was supposed to let investors harness.
Incentives for altruism? The case of blood donations
Episodes of blood supply shortage are the norm rather than the exception. “Pure” altruism is apparently not enough to guarantee a steady supply of blood, but economic incentives to donate might crowd-out intrinsic motivations. This column presents evidence that blood donors respond to material incentives and public recognition in the way predicted by standard economic theory. Rewarding them could increase blood supply.
Quantifying the Bradley effect: Will Obama win?
Will tomorrow’s US presidential election be closer than expected because Barack Obama is African-American? This column looks at the last decade of US electoral contests with black candidates and says that there is a Bradley effect, in which African-American candidates garner lower vote shares than predicted by opinion polls. If that holds true, it will be close tomorrow.
How India should address the financial contagion
Financially integrated India has been hit by the financial contagion. This column explains what Indian policymakers need to do in order to restore confidence in the financial system and avoid the risks of easing monetary policies. The time has come for the Reserve Bank of India to use its foreign exchange reserves to inject liquidity into the financial system.
Most Read
- Fiscal consolidation: At what speed?Blanchard, Leigh
- Public debt and economic growth, one more timePanizza, Presbitero
- Escaping liquidity traps: Lessons from the UK’s 1930s escapeCrafts
- The lessons of the North Atlantic crisis for economic theory and policyStiglitz
- Rethinking macroeconomic policyBlanchard
- A tale of two depressions: What do the new data tell us? February 2010 updateEichengreen, O’Rourke
- Educated in America: College graduates and high school dropoutsHeckman, LaFontaine
- Eurozone breakup would trigger the mother of all financial crisesEichengreen
- Debt, deleveraging, and the liquidity trap: A new modelKrugman
- Panic-driven austerity in the Eurozone and its implicationsDe Grauwe, Ji
Vox Talks
Vox eBooks
Don't Miss
Helicopter money as a policy option
Reichlin, Turner, Woodford
CEPR Policy Research
- The "Greatest" Carry Trade Ever? Understanding Eurozone Bank RisksAcharya, Steffen
- Political Credit Cycles: The Case of the Euro ZoneFernández-Villaverde, Garicano, Santos
- Winning by Losing: Incentive Incompatibility in Multiple QualifiersDagaev, Sonin
- Income and schoolingBrückner, Gradstein
- Monetary Policy and Rational Asset Price BubblesGalí