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  • What the Black Death Can Teach Us About Economic Development Today

    To understand the future of economic development, we must better understand economic history. So contends Peter Temin ,Gray Emeritus Professor of Economics at MIT. In a column at Vox , Temin takes us back to the 14th century, when the Black Death prompted an historic shift. The rise in wages as a result of the Black Death was sustained by a shift in marriage patterns that increased the age of women’s marriage, and reduced the rate of population increase. The adaptation to the initial shock led to a durable rise in people’s income. This, in turn, led to a demand for more meat in their diet, which, of course, was accommodated by more husbandry. The whole pattern fit together with the Black Death as a shock that shifted households and the economy from one demographic equilibrium to another. This research dovetails with Allen’s argument that the initial innovations of the Industrial Revolution emerged from tinkering by producers to reduce the costs of expensive labour and reap the benefits of cheap power. In response to the awareness that wages were generally high in western Europe, Allen (2009) went to some lengths to show that the small gains from these initial innovations were not profitable in either France or the Netherlands. Allen (2013) also argued that wages and energy prices in North America were close enough to the British pattern for policy initiatives – tariffs, education, and infrastructure investments – to create conditions hospitable to industrialisation. This was definitely true for countries in western Europe that followed the British pattern once industrial productivity advanced from its initial level. Although these countries did not have the factor prices to make the initial innovations of the Industrial Revolution profitable, the further development of these innovations rendered them profitable at factor prices close to those in Britain. And, as Allen noted, policy changes helped industrialisation along as it spread. But this was all within the high-wage area described by Voigtländer and Voth. They noted that the European marriage pattern extended only from the Atlantic to a line from St. Petersburg to Trieste. Other countries in Asia or Africa were low-wage economies, subject to Malthusian pressure on wages, and their factor prices were not close to the English ones. Small changes in economic policies were not sufficient to make industrialisation profitable in India or Egypt. The story that links the Black Death to the Industrial Revolution, therefore, is also a story telling why Europe industrialised in the past two centuries. Read The Black Death and industrialisation: Lessons for today’s South here .
  • Benefits of EU Membership for Poorer Nations

    Yesterday, European economists Nauro Campos , Fabrizio Coricelli , and Luigi Moretti posted some of their findings on the benefits of EU membership to rich nations. Today, they share some of their findings--again at Vox --on the benefits to poorer nations. They focus on two periods of enlargement: the 1980s and 2004. And they find that there are clear benefits to every nation except one. This column presents new estimates of the economic (monetary) benefits from EU membership. The main finding is that of substantial and positive pay-offs, with approximately 12% gain in per capita GDP. Despite substantial differences across countries, there are clear indications that the benefits of EU membership have significantly outweighed the costs (except for Greece). An important question is to identify factors that allow countries to better exploit EU entry. Campos et al. (2014) began investigating this issue and their preliminary findings highlight the role of financial development (i.e., more financially developed countries growing significantly faster after EU membership) and, somewhat less surprisingly, trade openness. Read How much do countries benefit from membership in the European Union? here .
  • Benefits of EU Membership for Rich Nations

    With the relatively healthy EU member states on the hook for helping lift the economies of less healthy member states, many Finns and Germans, for example, are asking, "what's in EU membership for us?" European economists Nauro Campos , Fabrizio Coricelli , and Luigi Moretti have been looking at the benefits of EU membership, and they find that joining the club came with many economic benefits. But interestingly, those benefits varied based on when a nation joined. From Vox : Figures 1 and 2 show SCM results for the 1973 and 1995 EU enlargements.2 The dark line is for actual per capita GDP (or labour productivity), and the red line for the estimated synthetic counterfactual. A measure of the magnitude of the economic benefits from EU membership is given by the difference between the actual per capita GDP for each country (or labour productivity) and that of its SCM artificial control group. We find substantial benefits for the 1973, and modest benefits for the 1995 enlargement. For the first ten years post-accession, per capita incomes for the former would be approximately 12% lower, while that for the latter would be about 4% lower (without EU membership). Alternatively, if we consider all years since accession, the respective figures would be about 34% for the former, and 5% for the latter. We find that per capita incomes in the UK and Denmark would have been 25% lower (if they had not joined the EU in 1973), but that the benefits for Ireland are even larger. Our estimates suggest that per capita income in Ireland would have been about 50% lower if it had not joined the EU in 1973. This column presents new estimates of the economic benefits from EU membership focusing on the 1973 and 1995 enlargements. The main conclusion is that of substantial and positive pay-offs with benefits from EU membership clearly above direct costs, and with larger gains for the 1973 than for the 1995 enlargement.6 Moreover, the difference between the estimated benefits for 1973 and 1995 enlargements is considerable and, thus, should not be attributed solely to differences in per capita incomes at the time of joining. We conjecture that institutions may provide a more promising explanation of these differences if one believes that Austrian, Finnish, and Swedish institutions were better developed or aligned with the EU when these countries joined the European Union. Read The eye, the needle and the camel: Rich countries can benefit from EU membership here .
  • Angus Deaton on Global Quality of Life, Health, and Wealth

    In his latest book, Princeton economist Angus Deaton argues that the world is a much wealthier and healthier place today than it was a half century ago, but that progress has not come without some setbacks, and a danger of "vast inequalities." Deaton has an introduction to the book, titled The Great Escape: health, wealth, and the origins of inequality , at Vox , where he shares this graph: The figure plots life expectancy at birth (for both sexes together) against per capita GDP in price-adjusted international dollars. Each point is a country, shown as a circle whose area is proportional to population; the lighter circles are for 1960, and the darker circles for 2010. The arrow points in the direction of progress, where both per capita incomes and life expectancy increase over time. The 2010 line is above the 1960 line so that, for a typical country, life expectancy has increased by more than would have been expected given a movement along the 1960 line. Preston suggested that movement along the curve was the effect of income on health, while the upward movement of the line could perhaps be attributed to technical progress. Death 'ages' as we move along each curve; this is the epidemiological transition. In the poorest countries, parents still live with the agony of watching their children die from long-conquered maladies like pneumonia, diarrhea, or vaccine preventable diseases like measles. In the rich countries, where disease has moved out of the bowels of children and into the arteries of the elderly, death comes from chronic diseases – heart disease and cancer – and comes to the old, not to the young. The aging of death recapitulates what happened in history, though poor countries today have achieved comparable health at much lower levels of per capita income than was the case in the rich countries in the past. When I was born in Edinburgh in 1945, life expectancy in Scotland was lower than it is in India today; when my father was born in the Yorkshire coalfield in 1918, child mortality in England was higher than it is in sub-Saharan Africa today. Progress has been repeatedly interrupted by horrors, not all of which are safely locked up in a historical museum. The Figure shows the huge increase in life expectancy in China between 1960 and 2010, most of which happened, not slowly over time, but immediately after 1960. In fact, this is not a story of progress, but of the unwinding of the disaster of the great Chinese famine. Mao’s demented attempt to catch up with rich countries in a few years, to assume leadership in the Communist world, and to preserve his own political position at home, led him to ignore the mounting evidence that millions were dying. Eventually, perhaps 30 million people died, Yang (2013). This is far from the first time in history that toxic politics has brought human catastrophe. It is sometimes hard to see the benefits that good policies bring, but the Great Leap Forward is a spectacular example of what bad policies and bad politics can do. Read the full post here .
  • The Case for Measuring Gross National Disposable Income

    GDP gets all the attention of the media, but there are limits to relying on it as the measure of economic progress. GNI, or Gross National Income, is another measure, and one that is popular with a lot of economists. But for some countries, it doesn't include all of the funds coming in to a nation's people. Clara Capelli and Gianni Vaggi , of the University of Pavia, argue that we should pay more attention to GNDI, or Gross National Disposable Income. From Vox : Traditionally, the Gross Domestic Product is the most widely accepted indicator of an economy’s size and performance, although in the last decades many contributions have suggested to adopt alternative tools to measure people’s wellbeing (see Stiglitz, Sen, and Fitoussi 2008). The Gross National Income (GNI) is largely considered a better indicator to account for the income available to the dwellers of a country because it captures the incomes related to the mobility of factors of production (wages earned by cross-border workers, repatriated profits and dividends, etc.), the so-called Net Primary Incomes (NPI), in the Systems of National Accounts (see UN 2008 and IMF 2009). However, GNI does not include unilateral transfers such as foreign aid and, most importantly, remittances: the so called Net Secondary Incomes (NSI). GNI accounts for the income of cross-border workers – the so called compensation of employees – but not for the money sent home by those who live and work abroad for more than one year, which are by far the largest share of remittances. Remittances have increased by approximately seven times between 1990 and 2010 (see the World Bank database); they now represent one of the largest types of monetary inflows for many developing countries and in some developing countries they can be as high as 20% of GDP. Unilateral transfers are recorded by a third indicator, the Gross National Disposable Income (GNDI), which includes both primary and secondary distribution of income. GNDI provides a much better indicator than the GNI of the living standard of the people of a country and in many cases it should substitute for the latter measure. However the GNDI is not easily available in major international reports and databases. The OECD calculates GNDI for its members and for some non-member countries such as China and Indonesia. Furthermore, GNDI is sometimes confused with GNI in common practice (see for instance Todaro and Smith 2011, page 54). Read A better indicator for standard of living: The Gross National Disposable Income here .
  • Bank of America Chief Economist on Deflation Concerns

    With annual rates of inflation hovering near just 1% in the U.S., Europe, and Japan, the concern about deflation and its effect on the global market is up. Bank of America Chief Economist Mickey Levy sees the three cases as somewhat different, and warns us not to treat them as part of a clear global trend. More importantly, he argues that we should be careful to distinguish between "bad deflation" and "healthy price declines." Here is an excerpt from his op-ed at Vox : Deflation stemming from insufficient demand and growth-constraining economic policies can drain confidence and become negatively reinforcing, as Japan has shown. In such situations, aggressive macroeconomic policy stimulus designed to jar expectations and boost demand is appropriate. Europe’s downward price and wage pressures are necessary adjustments to its earlier excesses, and relying excessively on aggressive monetary policy to stimulate demand is not a lasting economic remedy. Europe is not destined to fall into a Japanese-style prolonged malaise, but it must continue to pursue reforms that lift productive capacity and confidence. The US situation is very different. The economic expansion is gaining momentum (temporarily sidetracked by unseasonal winter storms), unemployment is falling steadily, personal income is growing faster than inflation, and household net worth is at an all-time high. Expectations of deflation are not apparent in either household or business behaviour. Concerns about lingering labour-market underperformance are warranted; angst about deflation is not. Prices of some goods and services in the US have been falling, benefitting from technological innovation, improved product design, or heightened competition and distribution efficiencies through the internet. Examples abound: flat-screen TVs, computers, automobiles, reduced fees on financial transactions, online consumer and business purchases, etc. These lower prices and quality improvements explain the vast majority of the recent deceleration in inflation – the PCE deflator for goods continues to decline and is flat for nondurables, while it has been rising at a fairly steady pace of 2% for services. These innovation-based price reductions improve standards of living and free up disposable income to spend on other goods and services. They boost aggregate demand and enhance economic performance. And they contribute positively to longer-run potential growth. It is unclear why US policymakers and commentators fear disinflation that stems from innovation-based price reductions amid accelerating aggregate demand. European policymakers face tougher choices. Read Clarifying the debate about deflation concerns here .
  • Russia's Market Volatility and Economic Diversity Problem

    The Winter Olympics are beginning their second week in Russia, and most people want to talk about the figure skating, the hockey, the medal count, maybe even the pageantry. But some economists have other thoughts on their minds. At Vox , World Bank economists Alvaro González , Leonardo Iacovone , and Hari Subhash are focusing on a major Russian weakness, and it isn't a lack of strong two-way forwards on the ice hockey team. No, they are concerned about Russia's "limited economic diversification." The nation's policy leaders have struggled to help limit market volatility, the authors note. Russia is susceptible to economic bad times that are really bad and last longer than for other large economies, and that makes it hard for new sectors to grow: Volatility in Russia is a nearly all-encompassing event. When things are booming, the boom is shared by nearly all manufacturing sectors. When things go bust, practically all sectors go bust. The relatively high level of concentration of output across firms and sectors exacerbates the problem. Further, when analysing slumps and surges across time and comparing these to other economies, we find that although surges in Russia have similar looking peaks and last about as long as those in comparator countries, the slumps are deeper (Figure 2) and longer (Figure 3). For slumps of less than 6 years (the horizontal axis), the probability (the vertical axis) of a slump persisting for another period is higher in Russia (the step-like line is above that of the other economies). The survival of new, relatively efficient firms (particularly during longer and deeper slumps) is a central weakness and likely key issue limiting economic diversification in Russia. Our analysis shows that during slumps, more productive firms tend to have lower odds of surviving relative to less productive ones than during surges. During long and deep slumps, older firms and firms facing less intense competition are more likely to survive. Unfortunately these firms are often not the champions of change and innovation that form the basis of diversification. In Russia the slumps do in fact wipe away some of the hard fought gains made by new, emerging entrants. So much for the new blood needed for the economy to diversify. Read Russian volatility: Obstacle to firm survival and diversification here .
  • Economic Impact of Electrification on Rural US Communities in the 1930s

    One potential path to increasing economic activity in developing economies is infrastructure investment. Getting rural communities "on the grid" in poorer nations, for example, connects them with the global economy in direct and indirect ways. University of Mississippi economist Carl Kitchens looked in his own backyard to see the impact of bringing electricity to rural communities--he notes that 1.3 billion people worldwide do not have access to electricity today--on economic advancement. From Vox : While large-scale projects have demonstrated benefits, often at a large expense, the literature has neglected smaller, more targeted, less expensive projects. In new research (Kitchens and Fishback 2013), we focus on electrification projects that directly connect rural consumers to the electric grid. In 1935, the Rural Electrification Administration (REA) was created in the US. In a five-year period, the REA provided $3.6 billion in subsidised loans to newly established cooperatively owned utilities. With these funds, rural utilities doubled the number of farms receiving electric service, and constructed more rural distribution line than private companies had constructed in the previous 50 years. Using a sample of approximately 1,400 rural counties in the US from 1930 to 1940, we estimate the relationship between changes in access to electricity via the REA and agricultural outcomes such as crop values, livestock values, farm size, and land values. We are interested in how counties that received access to electricity from the REA changed relative to similar counties that did not receive REA electricity. Our empirical findings suggest that access to electricity improved outcomes in agricultural counties. While agriculture was in decline everywhere at the peak of the Great Depression, counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity relative to counties that did not obtain electricity from the REA. Read US Electrification in the 1930s here .
  • Vox: Examining New Evidence on GDP and Life Satisfaction

    At Vox , economists Eugenio Proto and Aldo Rustichini take a crack at better defining the relationship between GDP and life satisfaction. To put it another way, the relationship between money and happiness. Pointing to their own research and that of others, the relationship is strong in poorer nations, where, increases in GDP do indeed bring more life satisfaction. The relationship is not so clear in developed nations. Take a look: •People in countries with a GDP per capita of below $6,700 were 12% less likely to report the highest level of life satisfaction than those in countries with a GDP per capita of around $20,000. Countries with GDP per capita over $20,000 see a much less obvious link between GDP and happiness. Between this level and the very highest GDP per capita level ($54,000), the probability of reporting the highest level of life satisfaction changes by no more than 2%, and seems to be hump-shaped, with a bliss point at around $33,000. This corresponds broadly to the well-known Easterlin Paradox – that the link between life satisfaction and GDP is more or less flat in richer countries. To further assess the importance of taking into account the unobserved heterogeneity, we perform a second analysis of the relationship between aggregate income and life satisfaction on more homogeneous territorial units. We restrict the sample to all countries within the EU before the first enlargement to eliminate potentially confounding factors at the country level; Figure 2 show the main findings of this second analysis. This confirms the findings of the country-based analysis outlined above. •Data show a clearly positive relation between aggregate income and life satisfaction in the poorer regions, but this relation flattens and appears to turn negative for richer regions, with a bliss point between $30,000 and $33,000. Read the full post here.
  • 'Bali Package' or 'Bali Ribbon'?

    A week ago, the WTO passed a series of trade initiatives known as The Bali Package . This was the first global trade agreement in 12 years, so there is something to be said for policy leaders coming up with something. But Richard Baldwin argues that the initiatives, while welcome, are incomplete and not enough. From VOX : The WTO’s choice is really rather simple. Given that the Doha Agenda is manifestly not ‘self-balancing’, the agenda has to be expanded to be concluded. The problem is that the WTO is now at the back of the queue when it comes to natural expansion items – those being negotiated in deep regional trade agreements. Key WTO members cannot negotiate them in the WTO until the mega-regional deals are done or dead. On the mega-regionals’ current trajectory, that means at least two idle years for the WTO. More likely, nothing will move until after the current Director-General’s term is up in 2017. The obvious way forward is to use the WTO’s power of convening and its uniquely legitimate structure to prepare the ground on 21st century issues. This is really the only substantive thing the WTO can accomplish in the medium run. My proposal is to start a discussion about mega-regionals – akin to the Asia-Pacific Economic Cooperation forum – inside the WTO in 2014. The World Bank and UNCTAD are undertaking some studies along these lines, but both have institutional perspectives. They would be better placed in the WTO – a member-driven organisation that is truly global. WTO-led discussions and analysis (not negotiations) should address: •How will the disciplines of mega-regionals like the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership affect excluded nations? •Which of these mega-regional disciplines should be brought into the WTO, and how? •Which would require special and differential treatment? •Which would require technical assistance to the least developed nations? Using its convening power, the WTO could help nations develop fully informed views on these questions. This would help identify the key issues that arise from moving the WTO into the governance of 21st century trade disciplines (see, for example, Jara 2013). Read WTO agreement: The Bali Ribbon here .
  • 'What's Wrong With Europe?'

    At Vox , Isabella Rota Baldini and Paolo Manasse compare GDP in Europe and the U.S. and ask, "What's wrong with Europe?" In asking the question they point to the considerable disparity between EU member nations, and raise concern that the global economic crisis dealt a major blow to the very necessary "process of convergence." It is useful to compare the trend of per capita real GDP in the US (blue line) and in the Eurozone (yellow line), as shown in Figure 1. The graph shows a decline in real average incomes since 2007-2008 in both areas. The impact of the crisis on the US is larger, the decrease in per capita income is of - $2,459 at constant prices (-6 %), compared a fall of -€1200 euro (-4.7 %) in the Eurozone. However, in 2012 the average US income has recovered to pre-crisis levels, whilst Europe’s is still 2.5 points below. In order to understand why, it is useful to look at the state-level data. Figure 1 shows two bands – blue and yellow – for the US and the Eurozone respectively, whose upper and lower limits describe the per capita income in the richest and poorest state: the District of Columbia and Mississippi in the US; Luxembourg and Estonia in the Eurozone. From the graph it is clear that internal differences are much greater in the Eurozone than in the US. Between 2000 and 2012, real per capita income of the richest US state is five times that of the poorest state. In the Eurozone this ratio is 8.6 to 1. The data on unemployment confirms this pattern – both countries experience a sharp rise during the crisis years; however, aggregate unemployment rate in the US has been declining since 2010, whilst it is still increasing in Europe. In 2012 the gap between the lowest (4.3% in Austria) and the highest (25% in Spain) rate skyrocketed. According to the standard model of economic growth, poor countries should grow faster than rich ones. This is because in such countries capital, compared to labour, is relatively scarce, and thus more productive. Consequently, one would expect poorer countries to save and invest more, as return on capital is higher. This process of convergence has occurred in Europe between 2000 and 2007; however, the speed of convergence has halved in recent years. Read the full article here .
  • The Relationship Between Finance and Growth In Highly Advanced Economies

    We have come to accept that there is a direct relationship between the strength of a financial system and economic growth. The "literature" mostly supports that thinking, according to Thorsten Beck . But, Beck notes, recent studies point to a curious deviation: there may be diminishing returns, or worse. The relationship between financial system and growth may even "[turn] negative at very high levels of financial development." From Vox : What are the reasons for this insignificant or even negative relationship between finance and growth across high-income countries? Recent papers have put forward several explanations. While these are not necessarily incompatible with each other, they have different policy implications. •First, the measures of financial depth and intermediation the literature has been using might be simply too crude to capture quality improvements at high levels of financial development. Some authors have argued that it is not so much the quantity of financial intermediation, but the quality that matters (Hasan, Koetter and Wedow 2009). The question is, however, whether there are limits to these efficiency gains, as there are to the volume of intermediation. In addition, the financial sector has gradually extended its scope beyond the traditional activity of intermediation towards so-called 'non-intermediation' financial activities (Demirgüc-Kunt and Huizinga 2010). As a result, the usual measures of intermediation services have become less and less congruent with the reality of modern financial systems. The literature has not developed yet good gauges of these non-intermediation services to properly assess their relationship with economic growth. •A second explanation focuses on the beneficiaries of the credit. While the theoretical and most of the empirical finance and growth literature has focused on enterprise credit, financial systems in high-income countries provide a large share of their services, including credit, to households rather than enterprises. In several countries, including Canada, Denmark, and the Netherlands, household credit constitutes more than 80% of overall bank credit – mostly mortgage credit. Theory makes ambiguous predictions about the effects on the relationship between household credit and growth, and initial empirical evidence shows an insignificant relationship between the two (Beck et al. 2012). The relationship between financial deepening and economic growth goes through enterprise credit, and the fact that much of the financial deepening in high-income countries over the past 20 years has been in household credit can partly explain the insignificant relationship between finance and growth in these countries. •A third explanation posits the financial system might actually grow too large relative to the real economy if it extracts excessively high informational rents, and in this way attracts too much young talent towards the financial industry (Bolton et al. 2011, Philippon 2010). Kneer (2013a,b) provides empirical evidence for this hypothesis, showing that industries relying more on human capital suffer more in their productivity as the financial system expands. This hypothesis thus clearly points to a trade-off between the intermediation function a financial sector provides to the real economy and a drain on talent needed by the same real economy. Read Finance and growth: Too much of a good thing? here .
  • Impact of Unconventional Monetary Policies

    At Vox , Biagio Bossone has compiled a two-part review of what he calls "uncoventional monetary policies." These are policies used by central banks in response to the Great Recession. All your favorites are here: forward guidance, negative interest rates, quantitative easing, debt monetizing, overt money financing, and neo-chartalist forms. In part two, he pulls them all together: Table 1 offers a snapshot of what I consider to be the main features of each policy type. In the table, policies are reported from left to right in ascending order of the directness of their impact on spending – from those that rely on changes in prices and expectations to those that affect spending by adding money balances to the economy. The policies that have greater direct impact on spending (overt monetary financing, neo-chartalism) are those that combine expansionary fiscal impulses with permanent monetary financing (‘helicopter money’). This combination requires a degree of cooperation between the government and the central bank, with implications for central-bank independence (see below). Government (and political) involvement, as well as the necessary coordination with the central bank, entail longer policy gestation periods than for policies involving the central bank exclusively (forward guidance, negative interest rates, and QE). On the other hand, the transmission from the fiscal-plus-monetary policy impulse to the spending response – which is inherent in helicopter money options – is more direct, quicker and stronger. Read Unconventional monetary policies part 1 here , and part 2 here .
  • A Call for Greater Central Bank Cooperation and a Global Financial Safety Net

    We all have Lehman Brothers on the brain this week. Naturally. And we're looking for thoughtful ideas about how to apply lessons from five years ago to today and the future. Edwin Truman , senior fellow at the Peterson Institute , believes the global financial system is as vulnerable as ever to global contagions. He argues that central banks need to work together to knit a global financial safety net. The net, he argues, requires setting up a global swap network. From Vox : It is possible to establish a global swap network that has the capacity to meet the demonstrated need and at the same time meet the concerns of central bankers. I have proposed (Truman 2010a and 2011) a global swap network with three keys to unlock it: The first key would be held by the IMF. Based on objective criteria, the IMF would declare a need for global liquidity to support the international financial system and recommend that central banks consider providing liquidity to private financial institutions in other countries via their central banks. The criteria employed by the IMF should be objective and linked to generalised global conditions, not country-specific circumstances associated with heightened stress events affecting individual countries. The second key would be held by the group of central banks that had previously established the global swap network. Participation in the global swap network would be pre-determined by the central banks based, for example, on the independence of the central banks and assessments of the stability of their financial systems. The central banks would meet and, using their own criteria, would agree or not with the IMF that there was a global need for liquidity that could and should be met by activating the network. The criteria used by the central bankers should be transparent, but they might differ from those used by the IMF. For example, they might give greater emphasis to financial conditions and the risk of global inflation.2 The third key would be held by each individual central bank (or pair of central banks) deciding to respond to the decisions of the IMF and the central banks as a group with a specific swap operation or sequence of operations. Importantly, no central bank would be required to activate the third key. Individual central banks would retain the capacity to enter into swap agreements outside of the three-key framework. Read Enhancing the global financial safety net through central-bank cooperation here .
  • A Potential Model for Putting the International back in International Banks

    The international bank, as we knew it before 2008, seems to have gone away. Instead, it has been replaced by banks that Dirk Schoenmaker refers to as multinational banks, "under which the national subsidiaries are supervised separately." Schoenmaker--Dean of the Duisenberg School of Finance and Professor of Finance, Banking and Insurance at the VU University Amsterdam, and author of Governance of International Banking --thinks this may be temporary, and he believes that international banking will again be international. Writing at Vox , he outlines the model he expects: The solution is a supranational approach for supervision and resolution. The bottom line is to arrange an appropriate fiscal backstop through burden sharing (see also, Goodhart and Schoenmaker 2009). The Banking Union in Europe is moving into that direction with proposals for a European Resolution Board, backed up by the European Stability Mechanism. The Banking Union will save the international banking model for the Eurozone. Figure 2 shows the improvement in resolution. The starting point is that a recapitalisation is efficient when the benefits (in the form of financial stability) exceed the costs. The solid diagonal in Figure 2 represents the line where benefits (B) and costs (C) are equal. The left dashed line measures the home country benefits.1 Basically, the home country only considers their local share of the benefits, ignoring the cross-border impact of averting bank failure. In the diagram area A – where there is no bank recapitalisation since the costs outweigh the benefit – there is an efficient outcome. Area B – where there is a recapitalisation – is, similarly, efficient. Area C, however, involves inefficiency. This is where the recapitalisation would be socially efficient considering spillovers but the costs for one nation exceed the one-nation benefit. Put simply, the home country will not do the recapitalisation. In the supranational approach (all benefits in the home country and the rest of Europe are incorporated by the supranational body), area C, which indicates the area of inefficiency, is smaller under the supranational line than under the home country line. Read Is there a future for international banks here .
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