Showing papers in "Economic Policy in 2010"

Cross‐Country Experiences and Policy Implications from the Global Financial Crisis

Abstract: The financial crisis of 2007--2008 is rooted in a number of factors, some common to previous financial crises, others new. Analysis of post-crisis macroeconomic and financial sector performance for 58 advanced countries and emerging markets shows a differential impact of old and new factors. Factors common to other crises, like asset price bubbles and current account deficits, help to explain cross-country differences in the severity of real economic impacts. New factors, such as increased financial integration and dependence on wholesale funding, help to account for the amplification and global spread of the financial crisis. Our findings point to vulnerabilities to be monitored and areas of needed national and international reforms to reduce risk of future crises and cross-border spillovers. They also reinforce a (sad) state of knowledge: much of how crises start and spread remains unknown. — Stijn Claessens, Giovanni Dell’Ariccia, Deniz Igan and Luc Laeven

From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons

Abstract: The Great Depression of the 1930s and the Great Credit Crisis of the 2000s had similar causes but elicited strikingly different policy responses. While it remains too early to assess the effectiveness of current policy, it is possible to analyse monetary and fiscal responses in the 1930s as a natural experiment or counterfactual capable of shedding light on the impact of current policies. We employ vector autoregressions, instrumental variables, and qualitative evidence for 27 countries in the period 1925–39. The results suggest that monetary and fiscal stimulus was effective -- that where it did not make a difference it was not tried. They shed light on the debate over fiscal multipliers in episodes of financial crisis. They are consistent with multipliers at the higher end of those estimated in the recent literature, and with the argument that the impact of fiscal stimulus will be greater when banking systems are dysfunctional and monetary policy is constrained by the zero bound. — Miguel Almunia, Agustin Benetrix, Barry Eichengreen, Kevin H. O’Rourke and Gisela Rua

The governance and performance of universities: evidence from Europe and the US

Abstract: We test the hypothesis that universities are more productive when they are both more autonomous and face more competition. Using survey data, we construct indices of university autonomy and competition for both Europe and the United States. We show that there are strong positive correlations between these indices and multiple measures of university output. To obtain causal evidence, we investigate exogenous shocks to US universities’ expenditures over three decades. These shocks arise through the political appointment process, which we use to generate instrumental variables. We find that an exogenous increase in a university’s expenditure generates more output, measured by either patents or publications, if the university is more autonomous and faces more competition. Exploiting variation over time in the ‘stakes’ of competitions for US federal research grants, we also find that universities generate more output for a given expenditure when research competitions are high stakes. We draw lessons, arguing that European universities could benefit from a combination of greater autonomy and greater accountability. Greater accountability might come through increased reliance on competitive grants, enhanced competition for students and faculty (promoted by reforms that increase mobility), and yardstick competitions (which often take the form of assessment exercises). — Philippe Aghion, Mathias Dewatripont, Caroline Hoxby, Andreu Mas-Colell and Andre Sapir

Monetary policy in exceptional times

Abstract: This paper describes the way in which the European Central Bank (ECB), the Federal Reserve and the Bank of England conducted monetary policy since the beginning of the financial crisis in August 2007. We argue that both quantitative easing – and the other non-standard measures introduced by central banks that changed the composition of the asset side of their balance sheets (so-called ‘qualitative easing’) – acted mainly through their effects on interest rates and, in particular, on money market spreads, rather than solely through ‘quantity effects’ in terms of the money supply. We perform a quantitative exercise on the euro area which estimates the effect of the reduction of these spreads to the broader economy. — Michele Lenza, Huw Pill and Lucrezia Reichlin

On Demographic and Economic Transitions in Macro-Social Systems

Abstract: Consider one of the key indicators of socio-economic development of the macro systems, which is the economic transition. They are identifying two types of economic transition, their connection with the demographic transition and two basic characteristics of economic transition as multipliers and speed.

Credit ratings failures and policy options

Abstract: This paper examines the role of credit rating agencies in the subprime crisis that triggered the 2007–2008 financial turmoil. We focus on two aspects of ratings that contributed to the boom and bust of the market for structured debt: rating inflation and coarse information disclosure. The paper discusses how regulation can be designed to mitigate these problems in the future. Our preferred policy is to require rating agencies to be paid by investors rather than by issuers and to grant open and free access to data about the loans or securities underlying structured debt products. A more modest (but less effective) approach would be to retain the ‘issuer pays’ model but require issuers to pay an upfront fee irrespective of the rating, ban ‘credit shopping’, and prescribe a more complete format for the information that rating agencies must disseminate. — Marco Pagano and Paolo Volpin

The Effects of Employment Protection Legislation and Financial Market Imperfections on Investment : Evidence from a Firm-Level Panel of EU Countries

Abstract: Exploiting information from a panel of European firms we study the joint effect of EPL and financial market imperfections on investment, capital-labour substitution, labour productivity and job reallocation. We find that EPL reduces investment per worker, capital per worker and value added per worker in high reallocation sectors relative to low reallocation sectors, while increasing the average frequency at which firms adjust their capital stock. The reduction in capital per worker and value added per worker is less pronounced in financially sound firms. Also, the propensity to invest appears to increase only in firms that are likely to be financially unconstrained. Overall, poor access to credit markets seems to exacerbate the negative effects of EPL on capital deepening and productivity. —Federico Cingano, Marco Leonardi, Julian Messina and Giovanni Pica

Inflation risk and the inflation risk premium

Abstract: This article starts by discussing the concept of ‘inflation hedging’ and provides estimates of ‘inflation betas’ for standard bond and well-diversified equity indices for over 45 countries. We show that such standard securities are poor inflation hedges. Expanding the menu of assets to Treasury bills, foreign bonds, real estate and gold improves matters but inflation risk remains difficult to hedge. We then describe how state-of-the-art term structure research has tried to uncover estimates of the inflation risk premium, the compensation for bearing inflation risk. Most studies, including very recent ones that actually use inflation-linked bonds and information in surveys to gauge inflation expectations, find the inflation risk premium to be sizeable and to substantially vary through time. This implies that governments should normally lower their financing costs through the issuance of index-linked bonds, at least in an ex ante sense. Our findings thus indicate a potentially important role for inflation index linked bonds. We briefly discuss the pros and cons of such bonds, focusing the discussion mostly on the situation in the United States, which started to issue Treasury Inflation Protected Securities (TIPS) in 1997. We argue that it is hard to negate the benefits of such securities for all relevant parties, unless the market in which they trade is highly deficient, which was actually the case in its early years in the United States. —Geert Bekaert and Xiaozheng Wang

Currency mismatch, systemic risk and growth in emerging Europe

Abstract: Currency mismatch is a vehicle that exposes the economy to systemic risk, but it is also an engine of growth. We analyse this dual role at the macro and the micro levels. At the aggregate level, we construct a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers – that is, those with no foreign currency income. Using our measure, we find that across emerging European economies, increases in currency mismatch are associated with higher growth in tranquil times, but also with more severe crises. On net, after taking into account the crisis period, we find a positive link between currency mismatch and growth. These results are also confirmed for a broader sample of emerging economies. In our firm-level analysis, we find that in emerging Europe, currency mismatch relaxes borrowing constraints, reduces interest rates and enhances growth across sets of firms that arguably are the most credit constrained – that is, small firms in non-tradables sectors – but not across large firms. An advantage of our approach is that it considers both listed and non-listed firms, and so we are able to effectively capture the effects of currency mismatch across the entire economy, not just the financially privileged stock market listed firms. — Romain Ranciere, Aaron Tornell and Athanasios Vamvakidis

Mitigating the pro-cyclicality of Basel II

Abstract: Policy discussions on the recent financial crisis feature widespread calls to address the pro-cyclical effects of regulation. The main concern is that the new risk-sensitive bank capital regulation (Basel II) may amplify business cycle fluctuations. This paper compares the leading alternative procedures that have been proposed to mitigate this problem. We estimate a model of the probabilities of default (PDs) of Spanish firms during the period 1987–2008, and use the estimated PDs to compute the corresponding series of Basel II capital requirements per unit of loans. These requirements move significantly along the business cycle, ranging from 7.6% (in 2006) to 11.9% (in 1993). The comparison of the different procedures is based on the criterion of minimizing the root mean square deviations of each adjusted series with respect to the Hodrick–Prescott trend of the original series. The results show that the best procedures are either to smooth the input of the Basel II formula by using through-the-cycle PDs or to smooth the output with a multiplier based on GDP growth. Our discussion concludes that the latter is better in terms of simplicity, transparency, and consistency with banks’ risk pricing and risk management systems. For the portfolio of Spanish commercial and industrial loans and a 45% loss given default (LGD), the multiplier would amount to a 6.5% surcharge for each standard deviation in GDP growth. The surcharge would be significantly higher with cyclically varying LGDs. — Rafael Repullo, Jesus Saurina and Carlos Trucharte

Corporate Tax Harmonization in the EU

Abstract: This paper explores the economic consequences of proposed EU reforms for a common consolidated corporate tax base. The reforms replace separate accounting with formula apportionment as a way to allocate corporate tax bases across countries. To assess the economic implications, we use a numerical computable general equilibrium (CGE) model for Europe. It encompasses several decision margins of firms such as marginal investment, FDI decisions, and multinational profit shifting. The simulations suggest that consolidation does not yield substantial welfare gains for Europe. The variation of effects across countries is large and depends on the choice of the apportionment formula. Consolidation with formula apportionment does not weaken incentives for tax competition. Tax competition instead offers a rationale for rate harmonization, in addition to base harmonization.

Drugs policy: what should we do about cannabis?

Abstract: Public policy has failed to prevent large-scale consumption of cannabis in most developed countries. So what, if anything, should we do to change the policy environment? Cannabis consumption is unambiguously harmful in several ways, but this does not automatically justify the prohibitionist policy dictated by the international drugs conventions. This paper sets out the arguments for policy intervention in the cannabis market and reviews the directions of policy change that have been called for. We argue that existing theoretical insights and empirical evidence give little compelling reason to prefer prohibition to the alternative of legalization of cannabis with harms controlled by regulation and taxation. Given this conclusion and the much wider prevalence of cannabis than of harder drugs, a reasonable way forward is to remove cannabis production and consumption (but not trade) from the current prohibitionist UN drug control treaties, to allow countries to adopt their own policies, thus generating new evidence on the potential impacts of a wider range of policy. — Stephen Pudney

Disability, Capacity for Work and the Business Cycle: An International Perspective

Abstract: Important policy issues arise from the high and growing number of people claiming disability benefits for reasons of incapacity for work in OECD countries. Economic conditions play an important part in explaining both the stock of disability benefit claimants and inflows to and outflows from that stock. Employing a variety of cross-country and country-specific household panel data sets, as well as administrative data, we find strong evidence that local variations in unemployment have an important explanatory role for disability benefit receipt, with higher total enrolments, lower outflows from rolls and, often, higher inflows into disability rolls in regions and periods of above-average unemployment. In understanding the nature of the cyclical fluctuations and trends in disability it is important to distinguish between work disability and health disability. The former is likely to be influenced by economic conditions and welfare programmes while the latter evolves in a slower fashion with medical technology and demographic changes. There is little evidence of health disability being related to the business cycle, so cyclical variations are driven by work disability. The rise in unemployment due to the current global economic crisis is expected to increase the number of disability insurance claimants.

Banking crisis management in the EU: an early assessment

Abstract: For well over a decade many observers had warned that the European Union was ill-prepared in case of a financial storm because its market integration far outpaced its policy integration. This situation was well known to policy-makers but it was hoped that financial crises would wait until policy integration occurred. The reality turned out differently, however. We assess the management of the 2007–2009 banking crisis within the EU against this backdrop. In a nutshell, we find that Europe has done better than could have been expected on the basis of existing arrangements. The two federal institutions acted swiftly, the European Central Bank by providing ample liquidity and the European Commission by enforcing competition discipline flexibly. However, there was no institutional innovation in the form of an EU-financed bail-out of transnational financial institutions or a genuine EU financial stress test. Supervisory responsibilities remained entirely with individual countries and coordination problems were managed through a combination of ad-hoc, discretionary cooperation and reliance on EU rules and procedures. It is not possible, however, to determine whether this relatively satisfactory situation is due to the fact that ad-hoc coordination was fundamentally sufficient or because no complex case of cross-border bank failure occurred. — Jean Pisani-Ferry and Andre Sapir

Multinational banking in Europe – financial stability and regulatory implications: lessons from the financial crisis

Abstract: This paper examines whether multinational banks have a stabilizing or a destabilizing role during times of financial distress With a focus on Europe, it looks at how these banks’ foreign affiliates have been faring during the recent financial crisis It finds that retail and corporate lending of these foreign affiliates has been stable and even increasing between 2007 and 2009 This pattern is related to the functioning of the internal capital market through which these banks funnel funds across their units The internal capital market has been an effective tool to support foreign affiliates in distress and to isolate their lending from the local availability of financial resources, notwithstanding the systemic nature of the recent crisis This effect has been particularly large within the EU integrated financial market and for the EMU countries, thus showing complementarity between economic integration and multinational banks’ internal capital markets In light of these findings, this paper supports the call for an integration of the European supervisory and regulatory framework overseeing multinational banks The analysis is based on an analytical framework which derives the main conditions under which the internal capital market can perform this support function under idiosyncratic and systemic stresses The empirical evidence uses both aggregate evidence on foreign claims worldwide, and firm-level evidence on the behaviour of banking groups’ affiliates, compared to stand-alone national banks — Giorgio Barba Navaretti, Giacomo Calzolari, Alberto Franco Pozzolo and Micol Levi

Monetary policy and financial imbalances: facts and fiction

Abstract: Following the financial crisis, many have argued that monetary policy should lean against asset price increases and that deviations of credit and asset prices from trend can be used to capture financial imbalances. We study quarterly data spanning 1986–2008 for a sample of 18 countries and argue that such measures contain little information useful for forecasting the future economic conditions. This casts doubts on the leaning-against-the-wind view. We also argue that tightening monetary policy in response to such imbalances are likely to depress real growth substantially. That finding, however, is sensitive to the Lucas critique. — Katrin Assenmacher-Wesche and Stefan Gerlach

Reforms and re-elections in OECD countries

Abstract: Economic reform is sometimes seen as damaging to a government’s re-election chances, but anecdotal evidence from OECD countries would not seem to strongly support this perception. This paper tests this hypothesis on a sample of 21 OECD countries over the period 1985–2003, controlling for other economic and political factors that may affect re-election. It is found that the chances of re-election for incumbent governments are not significantly affected by their record of pro-market reforms. However, the electoral impact of reform is found to differ strongly depending on which types of policies are considered. In particular, reform measures that are more likely to hurt large groups of ‘insiders’ seem electorally more damaging. A series of framework conditions appears to affect the impact of reforms on re-elections. Reformist governments in countries with rigid product and labour markets tend to be voted out of office, suggesting the existence of a ‘rigidity trap’. While fiscal stimulus is not an effective instrument to ‘sweeten the pill’ and raise the odds of re-election, the presence of liberal financial markets appears to soften electoral resistance to structural reform. The latter finding is of particular relevance in the current financial crisis: forward-looking governments should not rush to over-regulate financial markets in order not to compromise the feasibility of product and labour market reforms. —Marco Buti, Alessandro Turrini, Paul Van den Noord and Pietro Biroli

Post-crisis challenges to bank regulation

Abstract: The current crisis has swept aside not only the whole of the US investment banking industry but also the consensual perception of banking risks, contagion and their implication for banking regulation. As everyone agrees now, risks where mispriced, they accumulated in neuralgic points of the financial system, and where amplified by procyclical regulation as well as by the instability and fragility of financial institutions. The use of ratings as carved in stone and lack of adequate procedure to swiftly deal with systemic institutions bankruptcy (whether too-big-to-fail, too complex to fail or too-many to fail). The current paper will not deal with the description and analysis of the crisis, already covered in other contributions to this issue will address the critical choice regulatory authorities will face. In the future regulation has to change, but it is not clear that it will change in the right direction. This may occur if regulatory authorities, possibly influenced by public opinion and political pressure, adopt an incorrect view of financial crisis prevention and management. Indeed, there are two approaches to post-crisis regulation. One is the rare event approach, whereby financial crises will occur infrequently, but are inescapable.

Gaidar’s Reforms: Truth And Fiction

Abstract: Что мешает нашим современникам адекватно воспринимать историческую фигуру Егора Гайдара? Во многом это идеологические мифы, созданные в консервативных кругах нашей властвующей элиты с целью дискредитации либеральных преобразований, мифы, которые на протяжении почти двадцати лет актив‑ но внедряются в массовое сознание. В последние годы стало особенно модным ругать 1990‑е. Появился даже почти официальный термин — «проклятые девяностые».

Dictatorship, Democracy and Development

Abstract: Under anarchy, uncoordinated competitive theft by «roving bandits» destroys the incentive to invest in produce, leaving little either the population or the bandits. Both can better off if a bandit sets himself up as a dictator — «a stationary bandit» who monopolizes and rationalizes theft in the form of taxes.

How China Won and Russia Lost

Abstract: The authors offer their own opinion of Chinese and Russian reforms. They assume that Chinese reforms were successful because they were initiated from below, the actions of Chinese peasants formed the fundament of reforms. On the contrary, Russian reforms did not have solid political basis, so they were not such successful as Chinese.

Methodological Approach to Evaluating Intergovernmental Relations in the Russian Federation

Abstract: In Russia the regional level of government obtains the vast authorities to regulate the interbudget relations on subnational level. The efficiency of municipal level of government largely depends on the regional governments’ decisions. So it’s very important to formulate quantitative and qualitative indicators to estimate the efficiency of interbudget relations on subnational level. We propose the methodological approaches to estimate the efficiency of interbudget relations on subnational level in the context of financial autonomy, fiscal equity and sufficiency of municipal financial resources to supply the needs of the local communities.

M&A Market: New Theoretical Approaches

Abstract: An intense discussion on the role of mergers and acquisitions in the economy has taken place over past 100 years. Recently, this issue has become actual for Russia and other emerging markets. The present paper attempts to provide an overview of modern theoretical approaches based on recent empiric research, to evaluate some perspectives for the development of M&A market in Russia.

New Normal for Russia

Abstract: The next decade (2010th) seems to be very different than the previous one from the economic perspectives. As in the US, one can speak about «new normal» for Russia. Demographic problems, global economic slowing down, investment climate deterioration will play their role. In the last years Russia tend to try to stimulate consumer-led growth. Nowadays limits of such growth model became visible.

The Impact of the Economic Crisis on Investment Expansion of the Russian Companies Abroad

Abstract: From the middle of the current decade a relatively new phenomenon — a large-scale direct investment outflow — is observed in Russian economy (its amount is comparable to FDI inflow to Russia) and those investments mainly go to M&A abroad. Modern crisis influenced controversially on this process development and revealed as problems as competitive advantages of Russian business activities abroad.

The Global Financial Crisis and the Conditions for the Formation of National Aggregate Demand

Abstract: The article examines the impact of the global financial crisis and prospects of its overcoming. The author notes that the structure of the global financial system during the crisis has changed as a result of the revaluation of risks and credibility of public and private financial instruments. Economic and financial crisis of 2007-2009 did not left the «islands of stability» neither in the developed world nor in the emerging markets. The crisis has reinforced the willingness of policymakers to strengthen the regulation of the financial markets and institutions.

E-Government of the Region

Abstract: Based on the experience of using information technologies in the government sector of Perm Krai, the author of the article proposes his own vision of the internal organization of a regional e-government (G2G). The author describes the creation of the electronic documentation flow system, the accounting and finance system, the information and analytical system. The article argues for the need to introduce a client relations management system (CRM) in the government.

BP in Russia: Settling the Joint Venture Dispute

Abstract: The conflict between TNK-BP’s British and Russian shareholders, which started in may 2008, led to Russians seeking to oust the company’s chief executive officer, Robert Dudley. They announced Dudley had put BP’s interests ahead of the JV’s interests. In this educational case students are asked to evaluate the options and draw up an action plan recognizing the pros and cons of maintaining the JV’s ownership structure or changing it, and also asked to identify the repercussions of this conflict for the future strategy of BP in Russia.

Institutions and Economic Development: Theory And Empirics (Overview of Contemporary Research)

Abstract: The paper provides an overview of contemporary research of the relationship of economic development and institutions. Studies conducted on the basis of cross-national data using econometric methods show that economic growth is produced by institutions protecting property rights and providing contracts enforcement. These achievements indicate that economic success is more likely to accompany the countries that have focused on institutional reforms.

Long-Term Challenges of Russia and the Scientific Heritag

Abstract: The article by V. Mau is devoted to long-term challenges in the development of Russia — in terms of E. Gaidar’s scientific heritage. It presents a methodological approach to the analysis of the country’s development, consider the economic policy and economic reforms of the 1990’s. In the article by A. Nechaev the myths and realities of the reforms, shock therapy are examined, the role of Gaidar, who saved the country from the bloody drama is traced. A. Aganbegyan pays special attention to the scientific heritage of E. Gaidar, considering him worthy of the title of academician. S. Dubinin distinguishes leadership abilities of Gaidar, allowed him to become the head of complex transformations which have no analogues in the world.