On the Hook for Impaired Bank Lending: Do Sovereign-Bank Interlinkages Affect the Net Cost of a Fiscal Stimulus?

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September 2nd, 2014

The new issue of the International Journal of Central Banking includes this article by Robert Kelly and Kieran McQuinn – here.

Deflation Once Again

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September 1st, 2014

The media faithfully reported Eurostat’s flash estimate of yoy inflation in the Eurozone at 0.3% for August on Friday last. The yoy rate says merely that prices were 0.3% higher in August than they had been twelve months previously. Just two pieces of information are employed – today’s number and the number twelve months earlier. The intervening eleven pieces of info are ignored.

What do these eleven observations have to say? Well it is not pretty. The index was unchanged over eight months, and actually fell over four months. The country-by-country numbers are only available for July. Here is what happened over the four months from March.

HICP July % Change over March

Belgium         -1.5                  Germany       +0.2

Greece           -0.8                  Estonia          +0.5

Spain             -1.0                  Ireland           +0.1

Italy               -1.6                 Cyprus           +2.2

Luxembourg    -0.5                  Latvia            +0.8

Austria           -0.5                  Netherlands   +0.1

Portugal         -0.1                  Slovenia        +0.2

Finland          -0.3                  Malta             +4.1

France            -0.4                  Slovakia        +0.2

Half of the 18 countries experienced price falls, half saw increases. The weighted average Eurozone inflation rate over these four most recent months was -0.5%. No large country saw a significant increase but two, Spain and Italy, saw prices fall 1% and 1.6%, hence the weighted average decline.

Using twelve-month rates is well-established but it is hardly best practice. Since the Spring it is clear that the Eurozone has been experiencing a widespread and in some cases rapid fall in prices. With nominal interest rates as low as they can go, and zero real growth, the feared deflation has already commenced. It could even be too late to do too little.

 

 

 

More on Germany

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September 1st, 2014

The economic challenges facing Germany are reported in this FT Analysis article.

Ireland

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August 28th, 2014

Micheál Collins of the Nevin Institute is out with a new paper looking at the burden of taxation by income decile by tax-type, and the results are very interesting. From the piece:

Using data from the most recent Household Budget Survey, this paper estimates both the direct and indirect taxation contributions of households. The paper examines, individually and collectively, the direct and indirect tax paid by households across the income deciles, alongside the overall average household contributions. The data is presented at the households and equivalised adult level.

This chart summarises the findings nicely.

Update: Micheál has responded to many of the main points raised in the thread here.

Germany

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August 28th, 2014

Marcel Fratzscher writes in the FT here.

France

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August 28th, 2014

Paul Krugman asks whether anyone thinks that Hollande has the faintest idea about how austerity is going to fix the French economy, in a context where France is clearly facing a huge demand-side problem.

I guess this is the latest statement of what the French are thinking. They recognise that there is a demand side problem in Europe, and hope that someone else (the ECB, and European institutions who might promote European investment) will address this. And they hope that if they do things that the Europeans like, then this will lead not only to saner European macroeconomic policy, but to investment by French companies as well:

“Je souhaite… que chacun prenne ses responsabilités”, poursuit Michel Sapin. “Le gouvernement a pris les siennes, je souhaite que l’Europe le fasse aussi. Mais il faut que les entreprises prennent les leurs.”

I sort of understand what is going on politically. One thing that strikes you about France is how partisan the politics there are. There are some — typically on the left — who think that demand is all that ever matters, and others — by no means all on the right, since VSP’s are to be found right across the spectrum — who think that supply is all that matters. So the government is trying to say that both demand and supply matter, and is describing this in terms of a bargain: if we are tough on spending and all the rest, then the French private sector and “Europe” should do their part, and invest.

But what if, as appears to be the case, the big reason that French companies are not investing is a lack of demand? And what if the Germans simply refuse to budge on macroeconomic policy, as seems likely? Is French policy simply going to consist of saying “pretty please”, or do they have a credible threat to move things along?

Threatening to leave the euro if things keep going the way they are might just do it (what would be the political point of the euro without France?), but does anyone see Hollande credibly threatening that? Does anyone see him credibly threatening anything? And what is his Plan B if Eurozone macroeconomic policy remains essentially unchanged? Does he even have one?

In the mean time, austerity in France will continue to hurt the French economy. How high in the polls does the FN have to rise before Hollande realises that what he is doing is neither prudent nor responsible, but incredibly dangerous?

And how long before the French political system is willing to acknowledge, publicly, that Montebourg’s warnings do not reflect a particularly “left wing” view of economics, but would be regarded as plain common sense by most macroeconomists?

 

 

The economic consequences of WW1 in Britain

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August 28th, 2014

Nick Crafts provides the latest instalment in the VoxEU series on the economics of World War 1, here.

The Future of Global Economics

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August 27th, 2014

The new issue of F&D is here : it features an array of articles to mark the 50th anniversary of F&D (and 70th anniversary of the Bretton Woods institutions).

Irish Performance since Independence and the Scottish Debate

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August 27th, 2014

This paper of mine just came out in a special issue of Oxford Review of Economic Policy on the question of Scottish independence.  I had been asked to reflect on Irish economic performance since independence, on the exercise of fiscal and monetary sovereignty, and on migration policy, without saying anything about Scotland.

From an earlier draft I attach a comparison of population growth in Ireland and Scotland and their respective peripheries.

The euro is a scapegoat for the blunders of politicians

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August 24th, 2014

Martin Sandbu writes on the tension between “greater integration” and “less integration” among member countries here.

Money and Tough Love: On Tour with the IMF

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August 23rd, 2014

This book by Liaquat Ahamed (with photos by Eli Reed) provides a “behind the scenes” narrative of how the IMF operates, including a substantial section on its role in the Irish crisis.  It is an unusual book, with lots of photos (it is not possible to buy an e-book version) and is collaboration between Writers in Residence,  Visual Editions and Magnum Photos.

One interesting passage on page 111 (as part of the book’s coverage of the role of Ashoka Mody):

“During the annual review in 2009, and again in early 2010, Mody urged Lenihan to take advantage of the IMF’s credit facilities and borrow pre-emptively. Mody saw this both as a way of shoring up Ireland’s finances and using the IMF imprimatur to bolster foreign confidence in Ireland. But both times, either Lenihan was not himself persuaded, or he was unable to convince his cabinet colleagues.”

 

 

Insidious Ireland

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August 22nd, 2014

IMF Economists Bas B. Bakker and Leslie Lipschitz propose a taxonomy of balance-sheet crises in a new IMF working paper (.pdf). The basic distinction is between ‘Conventional’ and ‘Insidious’ balance sheet crises.

A conventional balance sheet crisis happens because of external imbalances, typically large gross flows into or out of the country, causing balance sheet vulnerabilities, typically in non financial corporate sectors, which then blow up the economy. The insidious balance sheet crises have the conventional crisis features plus way off-balance expectations and really off portfolio effects.

The authors find Ireland and Japan insidious. Fair play to them.

From the paper:

Conventional and Insidious Macroeconomic Balance-Sheet Crises; by Bas B. Bakker and Leslie Lipschitz; IMF Working Paper No. 14/160; August 1, 2014

This sort of crisis would usually be preceded by a long period of excellent economic results—rapid growth led by exports, sound policies, and strong external accounts—that gives rise to an enduring positive perception of the economic prospects. The difficulties arise when a normal, equilibrating shift in relative prices—an increase in the prices of nontraded goods and assets relative to those of traded goods—gets built into investor expectations and elicits a rapid, and eventually excessive, reallocation of credit and domestic real resources.

The paper is excellent and worth reading as a narrative of a series of crises, but it’s not clear what Bertie et al would have done in 2004 in Ireland, had we had this paper to guide them, because the conventional vs. insidious distinction isn’t clean-cut. The discussion on pages 29-31 of the paper on China are fascinating. A deeper dig into financial history might help get more salient case studies to iron out the distinctions.

Guest Post on Higher Education Participation

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August 22nd, 2014

GUEST POST: Darragh Flannery (UL)

In the context of the media coverage related to spatial differences in higher education participation (as outlined in this HEA report) some in this forum may be interested in on-going research conducted by myself, in conjunction with colleagues in NUIG and the ESRI. Our findings to date have been published in the Economic & Social Review (paper available here) and Applied Economics (paper available here). A brief summary of some of our findings and my thoughts on the issue are below. It is worth mentioning that the data used in our research comes from the School Leaver’s Survey (SLS) in 2007 (the SLS was unfortunately discontinued after this year). While our data is obviously dated, I would be confident that the conclusions of both papers are still relevant and possibly even more pronounced today.

The first strand of our research (ESR paper) examined the impact of travel distance to nearest higher education institute on overall higher education participation, controlling for factors such as CAO points, gender etc..  Specifically, we wanted to see how the impact of travel distance may vary according to social class. The results showed that travel distance has a significantly negative impact on participation for those from lower social classes and that this impact grows stronger as distance increases. We also found that the distance effects are most pronounced for lower ability students from these social backgrounds and make some policy recommendations.

The second strand of our research (Applied Economics paper) took a slightly different angle and looked at the impact of travel distance and social class on the type of higher education a young person in Ireland may pursue. So instead of looking at the potential impact that spatial factors might have on whether a young person goes to higher education or not, we wanted to look at how these factors may influence whether students go to a university/non-university, pursue a level 8 degree or not, and the field of study they choose. We found some evidence that spatial factors played a role, but social class was found to be a more powerful determinant. For example, even with the same CAO points and similar geographical accessibility to a university, those from a ‘low’ social class had virtually zero chance of pursing a medical degree compared to someone from a ‘high’ social class. Again we discussed some potential policy options, such as a more flexible higher education grant system and consideration of more affirmative action policies such as social class quotas.

Given the fact that it did not feature at all in the previous National Plan for Equity of Access to Higher Education 2008-2013, it is good to see spatial accessibility and its relationship with social class being mentioned by the latest HEA report as a possible driver of variation in higher education participation. However, I do think it is important that the debate does not stop at the rather broad view of the impact this may have on going to higher education or not. Instead, I would think it is important that we delve deeper and investigate more specific outcomes such as the impact social class/spatial factors may have on more specific outcomes such as field of study and longer term labour market outcomes. This is especially relevant in the context of income inequality and social mobility issues.

Behavioural Science and Public Policy

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August 20th, 2014

I have posted here on a number of occasions about the relevance of the growing literature on behavioural economics and public policy for the Irish context. This post updates this with some new material and I hope people don’t mind if I draw on some from previous posts.

Increasingly, behavioural science is being used as a term to encapsulate the integration of psychological factors into understanding economic decision-making. This is basically an attempt to preserve the phrase “behavioural economics” to refer to explanations with explicit utility-theoretic foundations and also to avoid a lot of work from psychology simply being repackaged as “behavioural economics”. It is not a wholly satisfactory compromise as the phrase “behavioural science” means different things to different people  but it is certainly helping to form a shared set of ideas and methodologies and looks likely to continue as the main way of  describing this work.

There are a number of reasons for the explosion of interest in this area including the award of the Nobel prize to Daniel Kahneman in 2002 and the adoption of the book “Nudge” by the Obama and Cameron administrations. I think also the sense of purely neo-classical microeconomics being bound up with the regulatory failures surrounding the financial crisis is also fueling an appetite for more realistic accounts of decision-making. It is likely that a lot of what is now called economics will increasingly move towards a disciplinary more blurry field in particular in areas like financial regulation.

Some recent very useful overviews of this area include: Shafir’s Behavioural Foundations of Public Policy is excellent; Sunstein’s lengthy “Empirically-Informed Regulation” provides a strong overview; Nudge is obviously important; a recent paper by Brigitte Madrian outlines the behavioural approach to policy; this excellent short paper by Beshears et al makes the case for the limitation of revealed preferences and the need for other mechanisms; one of the researchers in our group has put together a data-base of studies employing what can loosely be called “Nudges” in various areas of policy; Publications of the Behavioural Insights Team in the Cabinet Office are available here;  I have also put together a fairly detailed reading list on behavioural economics and public policy, including legal and ethical issues; The Brookings Institute publication “Policy and Choice: Public Finance through the lense of behavioural economics” is one of the best available introductions to this area.

In terms of why Irish policy-makers should care about this area, below is not intended to be exhaustive but is an attempt to summarise the main areas.

1. The use of “nudges” to encourage saving is the most developed behavioural policy literature. This has reached national policy significance in the roll-out of pension auto-enrolment in the UK. The Irish pension framework  was to see the entire private sector begin to be auto-enrolled in 2014 but subject to an economic recovery that has not yet materialised sufficiently. The psychology behind how people react to default settings in pensions is very interesting with a lot of opportunities and threats, among the latter the possibility that people will anchor too much to the default contribution and under-save as well as the possibility that naive consumers will simply be ripped off by providers who can charge higher fees with this less savvy group.

2. The role of behavioural science in financial regulation is a key question. The Financial Conduct Authority has been exploring this area actively. This excellent FCA occasional paper examines the potential implications of behavioural economics for financial regulation. In the US context, this very interesting report by Barr, Mullainathan and Shafir from 2008 outlines a new approach to consumer regulation based partly on the notion of “sticky defaults” whereby firms would be required to default people into the most desirable option based on their characteristics and only move them if they make choices following being provided with clear information. Such models are discussed in relation to two markets fraught with behavioural bias and consumer exploitation, namely credit cards and mortgages. The document also sets out proposals for changing the incentives of brokers.

As noted in another post, this literature is leading to a lot of very interesting questions for financial regulation that are hard to ask in a neo-classical setting. Below are some examples but obviously a small subset.

Should credit card variable and teaser rates be banned or at least taken out of the regular offers made to consumers?

Should mortgage providers be forced to disclose better deals available to their customers?

Should pay-day lenders be granted full access to the Irish market? If so, how do you regulate them?

Should auto-enrolment proceed in Ireland, what provisions should be put in place so that companies do not exploit naïve consumers by charging fees well in excess of regular rates?

Do behavioural biases prevent annuities markets from functioning optimally?

3. The implications of behavioural science for the design of welfare and taxation policies is another active area with applications across the Irish policy sphere in everything from structuring environmental taxes to design of incentive systems to encourage employment. Cass Sunstein, who is one of the main figures in this area, recently released a new book called “Simpler: The Future of Government“. It outlines an approach to government that emphasises making regulations, laws and taxes less confusing and more robust.

4. The search for alternative measures of welfare and social progress is a big concern of the emerging literature (see summary and readings from recent conference on this). The Stiglitz-Sen commission is becoming a standard reference on this topic and it is pretty comprehensive. Understanding how we go from the empirical literature in this area into meaningful indicators is an important direction for this literature. As well as interest in measuring well-being, there is growing interest in the bidirectionality of well-being and economic activity with a lot of recent work looking at impact of mental health in particular on economic functioning. (See Layard: Mental Health: The Frontier of Labour Economics). Related to this, an increasing literature has been examining the economic importance of ensuring good child mental health. This literature is helping us to understand better the interplay between poor child mental health and later economic outcomes. A recent PNAS paperby Goodman, Joyce and Smith gives a good indication of the type of research being conducted in this area. This is an extremely important area of research at the interface of psychology and economics.

5. A lot of recent research has begun to examine more closely the mechanics of what happens during job search from a more psychological perspective. Some of this research is explained in accessible form in this Brookings Institute publication. There is no question that traditional labour supply models are not a complete guide for understanding the behaviour of people who have been laid off and the literature on job activation needs badly more cross-disciplinary work to understand what is shaping behaviour and what environmental changes people might respond to.

6.  James Heckman and colleagues have been working on a large programme to integrate personality psychology and a theory of human development into economics. This is extremely important in terms of providing a theoretical and empirical basis for allocation of spending in health and education. Many of these papers are available on Heckman’s IDEAS webpage. Colleagues in Geary are involved in a collaboration looking at early childhood development. Some of these ideas are presented in accessible form on this website.

7. Prompted by Frank Barry in the comments, this paper by Peter Lunn at ESRI is a good overview of potential behavioural factors in the banking crisis. He has also published a number of other papers relevant to the above points (available here).

There are clearly several empirical, ethical and legal issues with the development of this agenda across all of these areas. The enthusiasm for randomised controlled trials in this area clearly has to be tempered with an awareness of their limitations (e.g. here). Furthermore, the extent to which interest-groups constrain the types of policies that emerge will be interesting to observe.

Along with colleagues, I have organised an annual workshop on economics/psychology in Ireland and it will take place again on October 31st in the Geary Institute (sign-up page here). Anyone interested in this area is welcome to attend.

Disturbing Equilibrium

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August 19th, 2014

A tangled though remarkable story behind the proof in the mid-1950s of the existence of a competitive general equilibrium (Arrow-Debreu, as it is known) is summarised in a recent posting on economicprincipals and revised (rather drastically, it must be said) here (scroll down to ‘A correction’).

There are strong echoes of the controversy over the proper academic credit for the discovery of the double helix structure of DNA. In the Economics case, the problem was compounded by a very slow refereeing process while rivals worked on a related research paper.

Economic Principals is itself an interesting website reporting on topical issues as well as presenting non-technical interpretative overviews of controversies in economics, often disentangling the intellectual, institutional and personal issues. One example, amongst many, relating to the 2011 Sargent-Sims Nobel Prize, is here. The full archive is online.

 

Irish Society of New Economists

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August 17th, 2014

The conference programme for the Irish Society of New Economists conference, taking place in Galway on 4th and 5th of September, is available here. Well done to the organisers Michelle Queally, Aine Roddy, Patricia Carney and Aoife Callan for putting together an extensive programme of 74 speakers.

Should Scotland be an independent country?

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August 17th, 2014

On 18th September, Scottish residents will vote on the question “Should Scotland be an independent country?“.

There has obviously been a vociferous debate in Scotland on the pros and cons of both options. As well as national identity arguments, the Yes campaign has pointed to such advantages as being able to set an independent defence policy, more competitive business taxation policies, fairer social welfare policies, retaining universality of policies such as personal care and student fees and many others (see details of the case for Independence here). The No campaign, in particular, has highlighted the benefits of being part of a larger union of countries and the risks involved in transition including potential for a lengthy readmission process to the EU and NATO, prolonged currency uncertainty, loss of shared institutions and so on (See the Better Together website).

Prof John Curtice has been keeping track of all opinion polls on the issue on this website

At present, the favoured outcome from pollsters and bookies is a No vote. I have co-authored a couple of reports on the potential for risk aversion to be playing one key role in the decision (here here and here).

I am opening this thread for people who want to comment on the referendum perhaps in particular the relevance of the last 100 years or so of Irish experience for Scotland.

Outward-oriented economic development and the Irish education system

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August 16th, 2014

 

Irish Educational Studies recently published a special issue to commemorate the landmark report Investment in Education (which was commissioned in 1962 and released in 1965).  The report’s finding that half of all children were leaving school by the age of 13 generated newspaper headlines and created the environment for Donogh O’Malley’s ‘free education’ initiative of 1966.  An appendix to the report provided information on the educational attainment of the population in 14 European countries (including seven in Eastern Europe) as well as in the US, Japan and Israel.  No equivalent statistics could be produced for Ireland.  Questions relating to educational attainment were included in the Irish Population Census from the following year.   This issue of Irish Educational Studies includes two witness accounts by key players, Áine Hyland, an RA to the report team, and Seán O’Connor, first head of the Development Branch of the Department of Education.  The issue, entitled Investment in Education and the Intractability of Inequality, also contains four academic papers.  Mine is available here.  The abstract reads as follows:

Most studies of the relationship between education and economic development focus on the line of causation running from the former to the latter.  The present paper studies how the pattern of Irish development has influenced the structure of the Irish education system.  The first section sets out the economic context of late industrialisation within which Investment in Education was commissioned and which determined the reception that the report received.  The report’s release would be followed shortly thereafter by a series of policy measures that would expand secondary-school enrolment and graduation rates and massively increase the demand for third-level places.  Later sections analyse the subsequent evolution of Ireland’s binary system of tertiary education and the recent attention devoted to science, technology and innovation policy and the ‘fourth level’ (postgraduate) sector.  Concluding comments focus on the continuing relevance of the perspective embodied in Investment in Education for the surprisingly high numbers who continue to leave the Irish education system without a Leaving Certificate qualification.

 

Global Imbalances and External Adjustment After the Crisis

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August 13th, 2014

The IMF WP version of my paper on this topic (joint with Gian Maria Milesi-Ferretti) is available here.

Summary: This paper has two objectives. First, it reviews the recent dynamics of global imbalances (both “flow” and “stock” imbalances), with a special focus on the shifting position of Latin America in the global distribution. Second, it examines the cross-country variation in external adjustment over 2008-2012. In particular, it shows how pre-crisis external imbalances have strong predictive power for post-crisis macroeconomic outcomes, allowing for variation across different exchange rate regimes. We emphasize that the bulk of external adjustment has taken the form of “expenditure reduction”, with “expenditure switching” only playing a limited role.

 

ECB Stress Test Manual

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August 11th, 2014

Manual here and press release here.

Vote Rotation at ECB Governing Council

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August 10th, 2014

The entry of Lithuania into the eurosystem in 2015 will trigger the long-planned vote rotation system at the governing council:  see ECB FAQ here,  the 2002 press release here that explains the change in the ECB voting system to cater for enlargement (as envisaged in the Treaty of Nice) and the revelation in today’s Sunday Independent here.

The Economic Recovery is Most Visible in the Labour Market

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August 9th, 2014

Today’s Irish Times has my two cents on Ireland’s economic recovery here

 

Patricia Clavin on the origins of international economic institutions

By

August 8th, 2014

The fifth in the VoxEU series of articles on the economics of World War I is available here.

Justin O’Brien Interviews Patrick Honohan

By

August 8th, 2014

here.

NYT: The Muddled Road to Overhauling Corporate Taxes

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August 7th, 2014

The political economy of reforming the US corporate tax code is reported here.

New research from Central Bank and ESRI

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August 7th, 2014

Central Bank Letter:

Mortgage Repayments after Permanent Modification – Anne McGuinness
Economic Letter – Vol 2014, No. 7

ESRI new releases:

07/08/2014
07/08/2014
06/08/2014
01/08/2014

 

International Financial Crisis: Seventh Anniversary

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August 7th, 2014

This Saturday marks the seventh anniversary of the international financial crisis (see, for example, the ECB’s crisis timeline here), at least in terms of the initiation of crisis management policy initiatives (the ECB liquidity injections of 9th August 2007).

 

Where are the pots and pans?

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August 5th, 2014

From Barry Cannon and Mary Murphy, this article examines an important question I’m sure many people have wondered about–given the scale of the macroeconomic downturn, especially in 2008 and 2009, why were there not more mass protests in the Irish case?

The article, published in Irish Political Studies is free for the moment. The abstract is below, and it seems the authors conclude we just didn’t have enough of a crisis to warrant mass demonstrations.

Update: Thanks to Michael Hennigan here is a slide deck of the paper (.pdf)

Since 2008, Ireland has experienced a profound multi-faceted crisis, stemming from the collapse of the financial and property sectors. Despite enduring six years of neoliberal austerity measures in response to this situation, popular protest has been muted. Using Silva’s [(2009) Challenging Neoliberalism in Latin America (Cambridge and New York: Cambridge University Press)] framework of analysis of popular responses in Latin America to that region’s debt crisis of the 1980s and 1990s, this article seeks to investigate why this has been the case. We assess how the crisis is being framed among popular and civil society groups, and whether increased associational and collective power is developing. In doing so, we look at processes of intra-group cooperation, cross-group cooperation and framing and brokerage mechanisms. We then ask, where such processes exist, if they can lead to a comprehensive challenge to the neoliberal policies currently being implemented, as happened in much of Latin America. We conclude that the crisis has not yet reached sufficient depth or longevity to foster a more robust popular response, but propose that analysis of similar processes in Latin America can help us understand better why this is the case, not just in Ireland, but in other countries of Europe experiencing similar situations.

Inequality in the Irish Context

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July 30th, 2014

John FitzGerald’s ESRI piece has added to the debate on income inequality in the Irish context, with some reaction from TASC’s Cormac Staunton, the Irish Times’ Chris Johns, and some other guy giving the flavour of the exchanges from right and left.

Edit: I think David’s forthcoming ESR piece (.pdf) is a real contribution to the debate and should be noted up here, too.

 

Inversion: UK versus Ireland

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July 29th, 2014

This WSJ article explains why UK can be more attractive than Ireland as an inversion location.