more mortgages lower growth in newly collected data on 46 economies over 1990 2011 we show that financial development since 1990 was mostly due to growth in credit to real estate and other asset markets which has a negative growth coefficient we also distinguish between growth effects of stocks and flows of credit we find positive growth effects for credit flows to nonfinancial business but not for mortgage and other asset market credit flows by accounting for the composition of credit stocks and for the effect of credit flows we explain the insignificant or negative growth effects of financial development in recent times what was true in the 1960s 1970s and 1980s when the field of empirical credit growth studies blossomed is no longer true in the 1990s and 2000s new bank lending is not primarily to nonfinancial business and financial development may no longer be good for growth these trends predate the 2008 crisis they prompt a rethink of the role of banks in the process of economic growth jel e44 o16 o40 c33

the economics of the covid 19 pandemic an assessment the covid 19 pandemic has created both a medical crisis and an economic crisis as others have noted we face challenges just as big as those in the spanish flu pandemic and the great depression all at once the tasks facing policy makers are extraordinary many new kinds of intervention are urgently required this issue of the oxford review of economic policy has two objectives the first is to explore these new interventions evaluating their use suggesting how they might be improved and proposing alternatives the second is to show that the challenges facing us are global and will require international cooperation if they are to be dealt with effectively this short introductory essay positions the papers in the issue within an overall conceptual framework with the aim of telling an overarching story about the pandemic

heterogeneous effects of competitiveness shocks on macroeconomic performance across euro area countries this paper considers how competitiveness impacts macroeconomic performance in 11 euro area countries var models are estimated for the individual countries using quarterly data from 1995q4 to 2013q4 besides unit labour costs as a competitiveness measure the models include gdp the current account balance and domestic credit the empirical analyses show that changes in unit labour costs help explain gdp dynamics in the short and medium term in most countries whereas they have little explanatory power for the current account balance or domestic credit for most countries overall the effects of the unit labour costs vary substantially across the countries in the euro area the heterogeneity suggests that policy measures aiming to improve economic growth correct current account imbalances and ensure financial stability need to take country specific features into account

slow recoveries any role for corporate leverage abstract this paper examines whether financial conditions of the non financial corporate sector can explain why the recovery from recessions in the united states is slower since the mid 1980s leverage by the corporate sector has increased significantly since the financial deregulation of the mid 1980s empirical evidence shows that slow recoveries are associated with a significant drop in the growth rates of investment and bank loans and with a surge in the growth rates of corporate bonds in an estimated dynamic stochastic general equilibrium model with a financial accelerator counterfactual experiments based on estimates of two samples 1965 1983 and 1984 2007 show that the non financial corporate indebtedness affects only marginally the speed of the recovery in the two samples

leaning against windy bank lending using a dynamic stochastic general equilibrium model with banking this paper first provides evidence that during the great moderation monetary policy leaned against the wind blowing from the loan market in the us it then shows that the extent to which this occurred delivers a small welfare loss relative to the optimised simple interest rate rule that features only a response to inflation the source of business cycle fluctuations is crucial for the optimality of a leaning against the wind policy in fact the pro cyclical nature of lending creates a trade o between inflation and financial stabilisation when supply shocks are prevalent

debt deleveraging and the liquidity trap a fisher minsky koo approach in this paper we present a simple new keynesian style model of debt driven slumps that is situations in which an overhang of debt on the part of some agents who are forced into rapid deleveraging is depressing aggregate demand making some agents debt constrained is a surprisingly powerful assumption fisherian debt deflation the possibility of a liquidity trap the paradox of thrift a keynesiantype multiplier and a rationale for expansionary fiscal policy all emerge naturally from the model we argue that this approach sheds considerable light both on current economic difficulties and on historical episodes including japan s lost decade now in its 18th year and the great depression itself

necessity as the mother of invention monetary policy after the crisis we examine recent changes in monetary policy due to the financial crisis and ask whether they are likely to be temporary or permanent we present evidence from two original surveys one of central bank governors the other of academic specialists we find that central banks in crisis countries are more likely to have resorted to new policies to have had discussions about changing mandates and to have communicated more extensively but thinking has changed more broadly for instance many central banks in non crisis countries also report implementing macro prudential measures looking forward we expect central banks to have broader mandates use macro prudential tools more widely and communicate more actively than before the crisis while there is no consensus yet about the usefulness of unconventional monetary policies we expect most of them will remain in central banks toolkits as governors who gain experience with a particular tool are more likely to assess that tool positively finally the relationship between central banks and their governments might well have changed with central banks crossing the line into the political realm more often than in the past

the global credit boom challenges for macroeconomics and policy the recent financial crisis has put the spotlight on the rapid rise in credit which preceded it in this paper we provide an empirical and theoretical analysis of the credit boom and the macroeconomic context in which it developed we find that the boom was unusually long and associated with neither particularly strong growth nor rising inflation in the economies in which it took place we show that this type of credit and financial cycle is hard to reconcile with existing economic theory and argue that while the global savings glut may account for the cycle s initial phase other factors such as the conduct of monetary policy and perceptions of declining macroeconomic risk were more important from the mid 2000s onwards we conclude by identifying some of the challenges now facing macroeconomics and policy

a note on debt and economic activity this note explores how debt flows may have an effect on economic activity crucially banks are not viewed as mere financial intermediaries but as agents who create and lend money to borrowers without reducing anyone s holdings of money in the process

when credit bites back using data on 14 advanced countries between 1870 and 2008 we document two key facts of the modern business cycle relative to typical recessions financial crisis recessions are costlier and more credit intensive expansions tend to be followed by deeper recessions in financial crises or otherwise and slower recoveries we use local projection methods to condition on a broad set of macro economic controls to study how past credit accumulation impacts key macro economic variables such as output investment lending interest rates and inflation the facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle

zero interest rate policy and unintended consequences in emerging markets since 2009 central banks in the major advanced economies have held interest rates at very low levels to stabilise financial markets and support the recovery of their economies this paper outlines the unintended consequences of the prolonged period of very low world funding interest rates in emerging markets the paper is informed by a mises hayek bis view on credit booms and mises law of unintended consequences consistent with the presented credit boom view i provide evidence that the very low world funding interest rates are associated with a rise in volatile capital flows and asset market bubbles in fast growing emerging markets in line with mises law i further show that these unintended consequences give rise to a new wave of interventionism as policymakers in emerging markets increasingly reintroduce financially repressive measures to isolate the economies from foreign capital inflows

covid 19 and the financial system a tale of two crises this paper compares and contrasts the resilience of the financial system in particular banks during the global financial crisis and covid 19 we show that banks are now part of the solution rather than part of the problem thanks to regulatory and institutional reforms over the past decade heeding the lessons from the global financial crisis has paid dividends we outline some early lessons from the covid 19 crisis for the financial system going forward the author s 2020 published by oxford university press for permissions please e mail journals permissions oup com

the great mortgaging housing finance crises and business cycles this paper unveils a new resource for macroeconomic research a long run dataset covering disaggregated bank credit for 17 advanced economies since 1870 the new data show that the share of mortgages on banks balance sheets doubled in the course of the twentieth century driven by a sharp rise of mortgage lending to households household debt to asset ratios have risen substantially in many countries financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries housing finance has come to play a central role in the modern macroeconomy

how does credit supply expansion affect the real economy the productive capacity and household demand channels credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand in this study we develop a test to determine if the household demand channel is present and we implement the test using both a natural experiment in the united states in the 1980s and an international panel of 56 countries over the last several decades consistent with the importance of the household demand channel we find that credit supply expansion boosts nontradable sector employment and the price of nontradable goods with limited effects on tradable sector employment such credit expansions amplify the business cycle and lead to more severe recessions

srisk a conditional capital shortfall measure of systemic risk we introduce srisk to measure the systemic risk contribution of a financial firm srisk measures the capital shortfall of a firm conditional on a severe market decline and is a function of its size leverage and risk we use the measure to study top financial institutions in the recent financial crisis srisk delivers useful rankings of systemic institutions at various stages of the crisis and identifies fannie mae freddie mac morgan stanley bear stearns and lehman brothers as top contributors as early as 2005 q1 moreover aggregate srisk provides early warning signals of distress in indicators of real activity received june 7 2011 accepted april 18 2016 by editor geert bekaert

one size fits all monetary policy and asymmetric household debt cycles in u s states i investigate the nonlinear effects of monetary policy through differences in household debt across u s states after constructing a novel indicator of inflation for the states i compute state specific monetary policy stances as deviations from an aggregate taylor rule i find that the effectiveness of monetary policy is curtailed during periods of large household debt imbalances moreover a common u s monetary policy does not fit all it may have asymmetric effects on the economic performance across states particularly at times of high dispersion in the household debt imbalances as it may have been the case around the great recession

capital regulation and credit fluctuations we provide a rationale for imposing counter cyclical capital ratios on banks in our simple model bankers cannot pledge the entire future revenues to investors which limits borrowing in good and bad times complete markets do not sufficiently stabilize credit fluctuations as banks allocate too much borrowing capacity to good states and too little to bad states as a consequence bank credit output capital prices or wages are excessively volatile imposing a stricter capital ratio in good states corrects the misallocation of the borrowing capacity increases expected output and can be beneficial to all agents in the economy although in our economy all agents are risk neutral counter cyclical capital ratios are an effective stabilization tool to ensure this effectiveness capital ratios have to be based on ex ante equity capital as classical capital ratios can be bypassed

cost benefit analysis of leaning against the wind abstract an obvious cost of leaning against the wind is a weaker economy if no financial crisis occurs possible benefits are lower probabilities and smaller magnitudes of crises a second cost less obvious previously overlooked but higher is a weaker economy if a crisis occurs for representative estimates costs exceed benefits by substantial margins overturning the result requires policy rate effects on the probability and magnitude of crises more than 5 40 standard errors larger than representative estimates higher probabilities larger magnitudes or longer durations of crises typical consequences of ineffective macroprudential policy increase the margin of costs over benefits

post crisis business investment in the euro area and the role of monetary policy business investment in the euro area strongly declined during the global financial crisis and the sovereign debt crisis it has not yet rebounded to its pre crisis trend despite the very expansiona

private debt overhang and the government spending multiplier evidence for the united states using state dependent local projections and historical us data we find that government spending multipliers are considerably larger in periods of private debt overhang in particular while multipliers are below or close to one in low private debt states we find significant crowding in of private spending in periods of debt overhang resulting in multipliers that are much larger than one in high private debt episodes more government purchases even reduce the ratio of government debt to gross domestic product these results are robust for the type of shocks and when we control for the business cycle financial crises deleveraging episodes government debt overhang and the zero lower bound

financial crises output losses and the role of structural reforms financial crises take a heavy toll on output growth we assess the role of structural reforms in reducing the output losses resulting from financial crises across advanced economies emerging and developing economies and low income developing economies we also revisit the role of macroeconomic policies in this context the impact of crises on output growth differs between types of crises and economies thus warranting sample splits along these lines some but not all reforms and policies help to reduce the output losses of crises in the medium term highlighting the need not to overgeneralize the effectiveness of reforms and policies further research is warranted to further explore the heterogeneity in the impact of financial crises on output growth and to better understand when and how specific structural reforms and macroeconomic policies can mitigate the output costs of financial crises jel e32 e44 e63 g28 o47

international evidence on the historical properties of business cycles we contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century although the magnitude of output fluctuations has varied across countries and periods relations among real quantities have been remarkably uniform properties of price levels however exhibit striking differences between periods inflation rates are more persistent after world war ii than before and price level fluctuations are typically procyclical before world war ii and countercyclical afterward fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods jel e32 e31

explaining foreign support for china s global economic leadership we analyze the factors that increase the likelihood that other nations will follow china s global economic leadership while our theoretical framework incorporates the conventional argument that china pulls in followers with economic benefits we focus on grievances with the current global order that have the effect of pushing countries toward the rising new leader we find that grievances about global financial instability are particularly important push factors our results show that countries that have experienced more financial crises more variable capital account policies more volatile portfolio capital outflows and more social unrest during imf programs are more likely to support china s global leadership than leaders of nations that have been less exposed to these problems we find no evidence that grievances about global governance or grievances about discriminatory us trade policies are related to foreign support for china s global economic leadership overall our evidence is consistent with the interpretation that leaders want to reform and preserve the wto and the imf which have worked reasonably well for them under us leadership at the same time they have incentives to follow china s economic leadership on global capital flows emphasizing long term infrastructure and development finance over short term flows which under the current order have imposed large costs on many economies

what explains the speed of recovery from banking crises abstract while a large body of research has explored the causes and effects of banking crises less is known about what determines recovery from banking crises despite large variations in post crisis performances across countries in order to identify local and global factors that determine the length of recovery i e the time it takes until countries reach their pre crisis level of per capita gdp this exploratory paper employs event history analysis on 138 incidents of banking crises between 1970 and 2012 regarding domestic factors the simultaneous occurrence of currency crises large financial sectors overvalued currencies and large primary deficits are associated with later recovery whereas higher debt to gdp ratios or inflation levels do not exhibit a negative effect on post crisis performances regarding external factors a low growth of world trade as well as indicators of uncertainty in financial markets are correlated with later recovery global interest rate shocks are particularly harmful for the speed of recovery among middle income countries with a strong reliance on external capital the results are similar when using the length of recessions as an alternative indicator of post crisis performances

the circular relationship between inequality leverage and financial crises in this paper we put into perspective the recent literature which points to inequality as a possible cause of credit bubbles by reintegrating it into a more general analysis on the two way relationship between inequality and finance we focus more specifically on situations where high inequalities and widespread access to credit coexist and argue that even when institutions maintain more or less equal access to finance there may be a dynamic positive circular relationship between inequality and financial development however even if there is some evidence in the literature of a positive causal impact of inequality on credit this does not preclude other important cofounding factors the conclusions concerning the distributional impact of finance are more ambiguous a survey of the empirical literature highlights several issues that must be tackled first endogeneity reverse causality and coincidental factors are major concerns second the choice of consistent measurements for the key variables both credit and inequality has strong empirical implications and must be grounded on relevant theoretical channels third those circular dynamics have substantial policy implications for emerging economies since an increasing number face a joint increase in inequality and credit

financial and fiscal interaction in the euro area crisis this time was different abstract this paper highlights the anomalous characteristics of the euro area twin crises by contrasting the aggregate macroecosnomic dynamics in the period 2009 2013 with the business cycle fluctuations of the previous decades we report three novel stylised facts first the contraction in output was marked by an anomalous downfall in private investment and an increase in households savings while consumption and unemployment followed their historical relation with gdp second households and financial corporations debts and house prices deviated from their pre crisis trends while non financial corporations debt followed historical regularities third the jumps in the public deficit gdp and debt gdp ratios in 2008 2009 were unprecedented and so was the fiscal consolidation that followed our analysis points to the financial nature of the crisis as a likely explanation for these facts importantly the anomalous increase in public debt is in large part explained by extraordinary measures in support of the financial sector which show up in the stock flow adjustments and reveal a keyinteraction between the fiscal and the financial sectors

institutions household credit composition and the business cycle we show that the negative effect of household credit growth on subsequent economic growth documented in the recent literature is not the same across countries the effect is stronger in countries with weak institutions where the fraction of consumer credit in total household credit is greater that is an important nuance as consumer credit is a sizable part of household credit in many emerging markets and its rapid buildup should be observed with the same caution as a rapid buildup in housing credit jel g21 e32 e44

gains from anchoring inflation expectations evidence from the taper tantrum shock abstract have improvements in monetary policy frameworks increased emerging market resilience to external shocks this paper exploits the may 2013 taper tantrum episode in the united states to study the reaction of 18 large emerging markets to an external shock conditioning on their degree of inflation expectations anchoring we find that while the tapering announcement negatively affected growth prospects regardless of the level of anchoring countries with weakly anchored inflation expectations experienced larger exchange rate pass through to consumer prices and higher inflation these findings suggest that gains in inflation expectations anchoring can improve central bank s policy trade offs when facing external shocks

corporate debt structure and economic recoveries abstract this paper analyzes the business cycle behavior of the corporate debt structure and its interaction with economic recovery the debt structure is measured as the share of bonds in the total credit to non financial corporations for a quarterly panel of countries over the period 1989 2013 we first show that the substitution of loans for bonds in recoveries is a regular property of business cycles secondly we provide evidence that economies with high bond share and important bond loan substitution recover from the recessions faster this identified link between corporate debt structure and business cycles is robust to the inclusion of traditional factors which shape recessions and recovery such as the size and the quality of financial markets the occurrence of bank crisis the dynamics of credit and the distribution of firm size

how does financial liberalisation affect the influence of monetary policy on the current account abstract does the current account improve or deteriorate following a monetary policy expansion we examine this issue theoretically and empirically we show that a standard open economy dsge model predicts that the current account response to a monetary policy shock depends on the degree of financial regulation in particular financial liberalisation makes it more likely that the current account deteriorates following a monetary expansion we test this theoretical prediction with a varying coefficient bayesian panel var model where the coefficients are allowed to vary as a function of the degree of financial product and labour market regulation on data from 1976q1 2006q4 for 19 oecd countries our empirical results support the theory we therefore conclude that following a monetary policy expansion the current account is more likely to go into deficit in countries with more liberalised financial markets

international business cycles world region and country specific factors the paper investigates the common dynamic properties of business cycle fluctuations across countries regions and the world we employ a bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates output consumption and investment in a 60 country sample covering seven regions of the world the results indicate that a common world factor is an important source of volatility for aggregates in most countries providing evidence for a world business cycle we find that region specific factors play only a minor role in explaining fluctuations in economic activity we also document similarities and differences across regions countries and aggregates jel f41 e32 c11 c32

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

debt deflation theory and evidence abstract in the early 1990s the most severe recessions occurred in those countries which had experienced the largest increases in private debt burdens was this an accident of history or did it reflect deeper forces affecting market economies the paper comprises three parts first it presents three stylised facts about debt and its impact on consumption growth in the 1930s and the 1990s second it discusses the reception of irving fisher s work on debt deflation by his contemporaries and argues that it is helpful to think of debt deflation as a real business cycle phenomenon third there is a theoretical discussion of the reaction of debt and consumption to shocks in the context of a model of precautionary saving central to the model is the role of distributional shocks which implies that aggregate demand may be a nonmonotonic function of the price of assets in terms of the consumption good multiple equilibria may exist leading to the possibility of financial instability the analysis of debt deflation requires the construction of real business cycle models without a representative consumer

dissecting the cycle a methodological investigation following burns and mitchell we define the cycle as a pattern in the level of aggregate economic activity an algorithm to locate turning points is developed as is a new measure of pro cyclicality a link between turning points and the moments of the series is established thereby providing the statistical foundation that burns and mitchell s work lacked using these tools we are able to dissect cycles in terms of the contributions made by trend growth volatility serial correlation and non linear effects we dissect several models and find little evidence that certain non linear effects are important to the nature of business cycles

a general constitutional possibility theorem arrow s impossibility theorem shows that there exist no transitive social preferences in nonoligarchic societies for all possible profiles of individual preference orderings similarly a generalization of sen s theorem of the impossibility of a paretian liberal implies under the same conditions that non pareto optimal outcomes may be present in the resulting cyclical preference relations this essay changes the customary perspective it demonstrates that for any profile of individual preferences we can always find a nonoligarchic assignment of rights to different subsets of society to decide between pairs of outcomes together with adequate decision rules which escapes these problems this assignment of rights can be a purely liberal one even for each profile but not one in which everybody participates in all decisions and which uses simple or qualified majority voting total direct democracy the adequate purely liberal constitution on the other hand may imply an oligarchy if too few outcomes are present

how does globalization affect the synchronization of business cycles this paper examines the impact of rising trade and financial integration on international business cycle comovement among a large group of industrial and developing countries the results provide at best limited support for the conventional wisdom that globalization has increased the degree of synchronization of business cycles the evidence that trade and financial integration enhance global spillovers of macroeconomic fluctuations is mostly limited to industrial countries one striking result is that on average cross country consumption correlations have not increased in the 1990s precisely when financial integration would have been expected to result in better risk sharing opportunities especially for developing countries this abstract was borrowed from another version of this item

credit induced boom and bust this paper exploits the federal preemption of national banks in 2004 from local laws against predatory lending to gauge the effect of the supply of credit on the real economy first the preemption regulation resulted in an 11 increase in annual lending in the 2004 2006 period which is associated with a 3 3 rise in annual house price growth rate and a 2 2 expansion of employment in nontradable sectors this was followed by a sharp decline in subsequent years furthermore we show that the increase in the supply of credit reduced delinquencies during boom years but increased them in bust years received june 7 2015 editorial decision december 22 2016 by editor robin greenwood

the finance growth nexus in crisis while the literature on the finance growth nexus suggests a positive link between financial development and economic growth another strand of literature highlights the crucial role of credit growth for the occurrence and strength of financial and economic crises in this paper we link the two seemingly contradicting strands of the literature by a strong and robust empirical finding while financial development is indeed positively linked to gdp p c growth in normal non crisis times larger financial sectors lead to significantly worse economic outcomes in the case of a banking crisis

changing credit limits changing business cycles abstract in the last half century capital markets across the industrialized world have undergone massive deregulation involving large increases in the loan to value ltv ratios of households and firms we study the business cycle implications of this phenomenon in an estimated dynamic general equilibrium model with multiple credit constrained agents a progressive relaxation of credit constraints initially leads to both higher macroeconomic volatility and stronger comovement between debt and real activity this pattern reverses at ltv ratios not far from those currently observed in many advanced economies due to credit constraints becoming non binding more often the non monotonic relationship between credit market conditions and macroeconomic fluctuations carries important lessons for regulatory and macroprudential policymakers while reducing the average ltv ratio may unintentionally increase macroeconomic volatility a countercyclical ltv ratio proves to be successful in dampening business cycle fluctuations and most importantly avoiding dramatic output drops

bank asset quality monetary policy pass through the funding mix of european firms is weighted heavily towards bank credit which underscores the importance of efficient pass through of monetary policy actions to lending rates faced by firms euro area pass through has shifted from being relatively homogenous to being fragmented and incomplete since the financial crisis distressed loan books are a crisis hangover with direct implications for profitability hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate this paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass through using bank level data over the period 2008 2014 we empirically test the implications of the model we show that a one percentage point increase in the impairment ratio lowering short run pass through by 3 we find that banks with severely impaired balance sheets do not adjust their loan pricing in response to changes in the policy rate at all

bubbles and crises the role of house prices and credit this paper utilizes quarterly panel data for 20 oecd countries over the period 1975 q1 2014 q2 to explore the importance of house prices and credit in affecting the likelihood of a financial crisis

public choice theory some items for a research agenda to write about the expected development of public choice during the next twenty years is of course impossible for in order to predict the development of the field it would be necessary to know already today the results of future research but then the latter would be unnecessary thus i shall turn to a more modest and rather subjective endeavor namely to sketch some items which might prove fruitful for future research by filling gaps by integrating already existing insights and by extending the domain of public choice i will especially take up in the next section the relationship of public choice theory with constitutional economics law and economics institutional economics and social choice theory following this the relationship of public choice with the analysis of the international system will be discussed section 3 section 4 will take up public choice ideology and information and nondemocratic regimes finally section 5 offers some remarks on the evolution transformation and reform of political economic regimes

why so much stability an optimistic view of the possibility of rational legislative decisionmaking recent formal models of legislatures have proved that equilibrium outcomes are extremely unlikely without either 1 extreme restrictions upon preferences or 2 constraints upon the agenda the implication is that constant instability or dictatorial manipulation is the norm in politics

credit crises money and contractions an historical view abstract the relatively infrequent nature of major credit distress events makes an historical approach particularly useful using a combination of historical narrative and econometric techniques we identify major periods of credit distress from 1875 to 2007 examine the extent to which credit distress arises as part of the transmission of monetary policy and document the subsequent effect on output using turning points defined by the harding pagan algorithm we identify and compare the timing duration amplitude and co movement of cycles in money credit and output regressions show that financial distress events exacerbate business cycle downturns both in the 19th and 20th centuries and that a confluence of such events makes recessions even worse

reserve accumulation and financial crises from individual protection to systemic risk abstract this paper provides a new perspective on the relationship between countries international reserve holdings and financial crises while the local view holds that reserves may prevent domestic crises it overlooks that the accumulation of reserves relaxes the financing constraint of the reserve currency country and may cause a financial crisis in the centre which is transmitted globally according to this global view reserve accumulation might destabilize the international financial system since the crisis affects all countries alike the accumulation of reserves imposes a negative externality on non accumulating countries we integrate this idea in a theoretical model of the optimal amount of reserves and illustrate the gap between local and global optimality the consideration of systemic risk lowers the demand for reserves moreover if a supranational authority determines the optimal level of reserves it internalizes the negative externality and accumulates fewer reserves a macroprudential tax on reserve hoardings might implement the socially optimal solution our calibration analysis shows that these considerations are economically significant they lower the optimal amount of reserves in the benchmark case by 45

financial cycles characterisation and real time measurement abstract we demonstrate that financial cycles identified as the common fluctuation in credit and asset prices proxying balance sheet leverage differ across g 7 countries in terms of duration this contradicts a similar duration assumption inherent in the basel iii credit to gdp gap guiding countercyclical capital buffers against this backdrop we propose an empirical methodology for constructing country specific financial cycles that relaxes the similar duration assumption and is based on the common fluctuation of several variables using credit and asset prices as inputs to our methodology we show that constructed financial cycles significantly outperform the basel iii credit to gdp gap in predicting financial crises

international house price cycles monetary policy and credit abstract we evaluate three alternative predictors of house price corrections anticipated tightenings of monetary policy deviations of house prices from fundamentals and rapid credit growth a new cross country measure of monetary policy expectations based on an international term structure model with time varying risk premiums is constructed house price overvaluation is estimated via an asset pricing model the variables are incorporated into a panel logit regression model that estimates the likelihood of a large house price correction in 18 oecd countries the results show that corrections are predicted by increases in the market s forecast of higher policy rates the estimated degree of house price overvaluation also contains significant information about subsequent price reversals in contrast to the financial crisis literature credit growth is less important all of these variables help forecast recessions

mind the gap a monetarist view of the open economy phillips curve abstract in many countries inflation has become less responsive to domestic factors and more responsive to global factors over the past decades we introduce money and credit into the workhorse open economy new keynesian model with this framework we show that i an efficient forecast of domestic inflation is based solely on domestic and foreign slack and ii global liquidity global money as well as global credit is tied to global slack in equilibrium then motivated by the theory we evaluate empirically the performance of open economy phillips curve based forecasts constructed using global liquidity measures such as g7 credit growth and g7 money supply growth instead of global slack as predictive regressors using 50 years of quarterly u s data we document that these global liquidity variables perform significantly better than their domestic counterparts and outperform in practice the poorly measured indicators of global slack that global liquidity proxies for

financial innovation the bright and the dark sides based on data from 32 countries over the period 1996 2010 this paper is the first to assess the relationship between financial innovation on the one hand and bank growth and fragility as well as economic growth on the other hand we find that different measures of financial innovation capturing both a broad concept and specific innovations are associated with faster bank growth but also higher bank fragility and worse bank performance during the recent crisis these effects are stronger in countries with larger securities markets and more restrictive regulatory frameworks in spite of these seemingly ambiguous findings our evidence points to a positive net effect of financial innovation on economic growth financial innovation is associated with higher growth in countries and industries with better growth opportunities

why so much stability one of duncan black s 1958 more important contributions was a classically simple proof that with complex issues and majority voting a stable outcome is unlikely this very simple proof that there would normally be no motion which can get a majority against all others and hence that any possible outcome is dominated by another has been elaborated and made more precise by later work without most improbable conditions endless cycling would be expected this is particularly true when logrolling is present as it normally is if we look at the real world however we observe not only is there no endless cycling but acts are passed with reasonable dispatch and then remain unchanged for very long periods of time thus theory and reality seem to be not only out of contact but actually in sharp conflict it is the purpose of this article to demonstrate that our existing theory when properly looked at does indeed imply a relatively stable outcome to voting in some cases however this stability will not be a true equilibrium because a random member of a large set will be chosen and then that random outcome will be left unchanged for long periods of time it does not dominate all other outcomes but is retained merely because of its particular history there are already several possible explanations for the observed stability in the literature we will take them up as they become relevant to the general line of reasoning i should however warn the reader that my own previous work including joint work with buchanan will play a major role here this may simply reflect egotism but i think that some of the early work which is now partially forgotten can provide solutions for more modern problems much recent public choice work has involved spatial models and these models frequently ignore logrolling the reason presumably is that it is very hard to put logrolling in a two dimensional diagram we shall begin considering such special models and assume that the issues are the sort that does not lead to logrolling and then turn to more complex logrolling problems with respect to the first situation in which logrolling does not occur there is already one possible explanation for the observed stability in the literature

have economic fluctuations been dampened a look at evidence outside the united states abstract until recently economists of all beliefs took it for granted that the severity of economic fluctuations had decreased sharply following world war ii recent work has challenged this view this study attempts to shed light on whether there was a true reduction in the severity of economic fluctuations by examining the experience of six european countries with one exception these countries did not experience a substantial reduction in the severity of the business cycle

the effects of systemic banking crises in the inter war period abstract this paper examines the time profile of the impact of systemic banking crises on gdp and industrial production using a panel of 24 countries over the inter war period and compares this to the post war experience of these countries we show that banking crises have effects that induce medium term adjustments on economies focussing on an eight year horizon it is clear that the negative effects of systemic banking crises last over the entirety of this time horizon the effect has been identified for gdp and industrial production the adverse effect on the industrial sector stands out as being substantially larger in magnitude relative to the macroeconomic effect comparing the results across long run historical periods for the same selection of countries and variables identifies some differences that stand out the short term macroeconomic impact effects are much larger in the post war period suggesting that the propagation channels of shocks operate at a faster pace in the more recent period moreover the time profile of effects differs suggesting that modern policies may be modulating the temporal shape of the response to banking crises shocks however the broad magnitude of the adverse effect of banking crises remains comparable across these time periods

macroprudential policy central banks and financial stability evidence from china abstract we study the chinese experience and provide evidence that central banks can play an active role in safeguarding financial stability the narrative approach is used to disentangle macropudential policy actions from monetary actions we show that reserve requirements window guidance supervisory pressure and housing market policies can be used for macroprudential purposes our var estimates suggest that well targeted macroprudential policy has immediate and persistent impact on credit but no statistically significant impact on output macroprudential policy can be used to retain financial stability without triggering an economic slowdown or as a complement to monetary policy to offset the buildup of financial vulnerabilities arising from monetary easing a well designed mix of these two policies helps to achieve both macroeconomic and financial stability objectives which however requires central banks to maintain a multi instrument framework

economic costs of alternative monetary policy responses to speculative currency attacks abstract the outcome of a speculative attack on the foreign exchange rate can be classified into three cases i immediate depreciation of the nominal exchange rate ii successful defense or iii failed defense this paper explores which of these outcomes yields the lowest cost in terms of output and unemployment in the short and medium run ex ante the outcome of a speculative attack is uncertain therefore the appropriate response of monetary authorities to a speculative attack depends on the cost of an immediate depreciation compared with that of the expected outcome of a currency defense our empirical analysis focuses on a sample of 73 emerging and developing countries over the 1960 2011 period our results indicate that an immediate depreciation is the policy response that is associated with a lower expected output loss and unemployment in the short run and it tends to be expansionary in the medium run a defense if successful entails insignificant costs in the short run but unlike an immediate depreciation a successful defense is not expansionary in the medium run if a defense fails large output losses and an increase in unemployment ensue at least in the short run

the risk of financial crises is there a role for income inequality abstract could macroeconomic factors such as income inequality be the real root cause of financial crises we explore a broad variety of financial and macroeconomic variables and employ a general to specific model selection process to find the most reliable predictors of financial crises in developed countries over a period of more than 100 years our in sample results indicate that income inequality has predictive power beyond loan growth and several other financial variables out of sample forecasts for individual predictors show that their predictive power tends to vary considerably over time but income inequality has predictive power in each forecasting period

agent based stock flow consistent macroeconomics towards a benchmark model abstract the paper moves from a discussion of the challenges posed by the crisis to standard macroeconomics and the solutions adopted within the dsge community although several recent improvements have enhanced the realism of standard models we argue that major drawbacks still undermine their reliability in particular dsge models still fail to recognize the complex adaptive nature of economic systems and the implications of money endogeneity the paper argues that a coherent and exhaustive representation of the inter linkages between the real and financial sides of the economy should be a pivotal feature of every macroeconomic model and proposes a macroeconomic framework based on the combination of the agent based and stock flow consistent approaches the papers aims at contributing to the nascent ab sfc literature under two fundamental respects first we develop a fully decentralized ab sfc model with several innovative features and we thoroughly validate it in order to check whether the model is a good candidate for policy analysis applications results suggest that the properties of the model match many empirical regularities ranking among the best performers in the related literature and that these properties are robust across different parameterizations second the paper has also a methodological purpose in that we try to provide a set or rules and tools to build calibrate validate and display ab sfc models

the time for austerity estimating the average treatment effect of fiscal policy after the global financial crisis a controversial rush to fiscal austerity followed in many countries yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled mired by the difficulty of identifying multipliers from observational data this article reconciles seemingly disparate estimates of multipliers within a unified and state contingent framework we achieve identification of causal effects with new propensity score based methods for time series data using this novel approach we show that austerity is always a drag on growth and especially so in depressed economies a 1 of gdp fiscal consolidation translates into a loss of 3 5 of real gdp over five years when implemented in a slump rather than just 1 8 in a boom

macrofinancial imbalances in historical perspective a global crisis index abstract global crisis episodes are rare events that can be properly studied by adopting the long run view of macroeconomic history in this study we explore the strength of the relationship between current account imbalances credit growth and equity returns at global level and document new evidence of a recurring sequencing pattern ahead of global crisis periods where credit booms are preceded by growing external imbalances and crisis episodes occur at the low end of the contraction phase of equity returns we use this information to construct a single aggregate measure with the aim of signaling periods of increasing risk of macroeconomic and financial instability at global level three major crisis episodes are identified with our global crisis index the 1929 crisis the breakdown of the bretton woods system and the recent financial crisis since past global crisis episodes at international level culminated with the collapse of existing international monetary systems the ongoing debate on the reforms needed to enhance the stability of international financial markets indicates the recent global financial crisis as a major turning point in the evolution of the international financial and monetary system

dynamic fuel price pass through evidence from a new global retail fuel price database abstract we estimate the dynamic effects of crude oil price shocks on retail fuel prices the pass through using the local projection approach of jorda 2005 using a novel monthly dataset of retail fuel prices in 162 countries over the period from 2000 1 to 2014 12 we find that i retail gasoline prices respond positively to crude oil price shocks but the responses vary across regions and income groups ii there is also some variation across country groups in the persistence of the effects of crude oil price shocks on retail gasoline prices and iii declines in crude oil prices lead to smaller effects on retail gasoline prices than increases in crude oil prices pointing to an asymmetry in the fuel price pass through

the real effects of the bank lending channel abstract this paper studies credit booms exploiting the spanish matched credit register over 2001 2009 we extend khwaja and mian 2008 s loan level estimator by incorporating firm level general equilibrium adjustments higher ex ante bank real estate exposure increases credit supply to non real estate firms but effects are neutralized by firm level adjustments for firms with existing banking relationships however higher bank real estate exposure increases risk taking by relaxing standards of existing borrowers cheaper longer term and less collateralized credit and by expanding credit on the extensive margin to first time borrowers that default substantially more results suggest that the mechanism at work is greater liquidity via securitization of real estate assets

the economic effects of a borrower bailout evidence from an emerging market this paper studies the credit market implications and real effects of one the largest borrower bailout programs in history enacted by the government of india against the backdrop of the 2008 2009 financial crisis the study finds that the stimulus program had no effect on productivity wages or consumption but led to significant changes in credit allocation and an increase in defaults post program loan performance declines faster in districts with greater exposure to the program an effect that is not driven by greater risk taking of banks loan defaults become significantly more sensitive to the electoral cycle after the program suggesting the anticipation of future credit market interventions as an important channel through which moral hazard in loan repayment is intensified

phillips lecture why some times are different macroeconomic policy and the aftermath of financial crises analysis based on a new measure of financial distress for 24 advanced economies in the postwar period shows substantial variation in the aftermath of financial crises this paper examines the role that macroeconomic policy plays in explaining this variation we find that the degree of monetary and fiscal policy space prior to financial distress that is whether the policy interest rate is above the zero lower bound and whether the debt to gdp ratio is relatively low greatly affects the aftermath of crises the decline in output following a crisis is less than 1 when a country possesses both types of policy space but almost 10 when it has neither the difference is highly statistically significant and robust to the measures of policy space and the sample we also consider the mechanisms by which policy space matters we find that monetary and fiscal policy are used more aggressively when policy space is ample financial distress itself is also less persistent when there is policy space the findings may have implications for policy during both normal times and periods of acute financial distress

the costs of macroprudential policy abstract central banks increasingly rely on macroprudential measures to manage the financial cycle however the effects of such measures on the core objectives of monetary policy to stabilise output and inflation are largely unknown in this paper we quantify the effects of changes in maximum loan to value ltv ratios on output and inflation we rely on a narrative identification approach based on detailed reading of policy makers objectives when implementing the measures we find that over a four year horizon a 10 percentage point decrease in the maximum ltv ratio leads to a 1 1 reduction in output as a rule of thumb the impact of a 10 percentage point ltv tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate however the effects are imprecisely estimated and the effect is only present in emerging market economies we also find that tightening ltv limits has larger economic effects than loosening them at the same time we show that changes in maximum ltv ratios have substantial effects on credit and house price growth using inverse propensity weights to rerandomise ltv actions we show that these effects are likely causal

risk sharing and industrial specialization regional and international evidence the authors provide empirical evidence that risk sharing enhances specialization in production to the best of their knowledge this well established and important theoretical proposition has not been tested before the empirical procedure is summarized as follows first the authors construct a measure of specialization in production and calculate an index of specialization for each of the european community ec and non ec oecd countries u s states canadian provinces japanese prefectures latin american countries and regions of italy spain and the united kingdom then they estimate the degree of capital market integration a measure of risk sharing within each of these groups of regions the ec countries the non ec oecd countries the united states canada japan italy spain and the united kingdom and rely on another author s estimate for latin america finally they perform a regression of the specialization index on the degree of risk sharing controlling for relevant economic variables they find a positive and significant relation between the degree of specialization of individual members of a group of countries provinces states or prefectures and the amount of risk that is shared within the group the authors perform regressions using variables such as shareholder rights and the size of the financial sector relative to gdp as instruments for the amount of inter regional risk sharing these regressions confirm that risk sharing facilitated by a favorable legal environment and a developed financial system is a direct causal determinant of industrial specialization this abstract was borrowed from another version of this item

private and public debt interlinkages in bad times abstract drawing on a large sample of recession episodes we document that those preceded by larger buildups in private debt tend to be followed by larger accumulations of public debt similarly to recessions preceded by a rapid run up in public debt these ex post public debt buildups are associated with a more muted growth in government expenditures and a sharper rise in fiscal stress the documented pattern becomes particularly intense in financial crises and emerges in both low and high public debt environments these empirical regularities suggest that private sector indebtedness should be considered a relevant factor in the assessment of the soundness of the fiscal position

are asset price guarantees useful for preventing sudden stops a quantitative investigation of the globalization hazard moral hazard tradeoff abstract an implication of the globalization hazard hypothesis is that sudden stops caused by global financial frictions could be prevented by offering foreign investors price guarantees on emerging markets assets these guarantees create a tradeoff however because they weaken globalization hazard while creating international moral hazard we study this tradeoff using a quantitative equilibrium asset pricing model without guarantees margin calls and trading costs cause sudden stops driven by a fisherian deflation price guarantees prevent this deflation by propping up foreign demand for assets the effectiveness of price guarantees their distortions on asset markets and their welfare implications depend critically on whether the guarantees are contingent on debt levels and on the price elasticity of foreign demand for domestic assets

what determines output losses after banking crises abstract we examine the output costs associated with 150 banking crises using cross country data for years after 1970 many banking crises do not lead to contractions and most banking crises do not lead to large contractions a result that holds for developed and developing economies we examine which variables help to predict output changes after a banking crisis using bayesian model averaging for developed economies we find that the output losses are positively related to prior economic conditions such as credit growth for low income economies we find that other factors such as having a stock market and deposit insurance are more important

level and dynamics of financial depth consequences for volatility of gdp abstractthe existing literature documents positive but potentially non linear relationship between financial depth measured as private credit to gdp ratio and volatility of gdp in this paper we e

cross of euros the eurozone currently confronts severe short run macroeconomic adjustment problems and a deficient institutional architecture that has to be reformed in the longer run europe s efforts at economic and monetary union are historically unprecedented however the gold standard provides lessons regarding what will and won t work macroeconomically and politically in the short run while us history provides long run lessons regarding appropriate institutional structures the latter also suggests that institutional reform only happens at times of great crisis and that it cannot be taken for granted the eurozone s leaders may therefore ultimately have to take heed of the lessons of history regarding currency union breakups