Free exchange

THE purpose of all financial systems is to match savers who crave safety with investors who take risk. When savers discover the assets they thought were safe are in fact risky, crisis ensues. We all know what happened when the instruments meant to disperse American mortgage risk broke down. The most acute phase of Europe’s sovereign-debt crisis can be traced to the insistence of politicians at Germany’s behest that private-sector investors would henceforth have to take losses on the debt of any bailed-out country, not just Greece.

The flight from the assets formerly known as safe is only one side of the coin; the other side is what happens to those remaining assets still deemed safe.

Continue reading "Safe keeping" »

FOR a long time, economists tended toward the view that current accounts didn't, or at least shouldn't, matter. A mercantilist government might worry about its export position, and specie flow was hugely important under the gold standard. Yet in a world of floating exchange rates, imbalances should be fairly short-lived, self-adjusting, and benign—with the exception of those rooted in large sovereign borrowing. If the behaviour of individuals and firms amounts to net international borrowing in some periods and net international lending in others, that's not really something governments should fret about.

Alas, it is difficult to convince people of that, and understandably so. Imbalances are sources of angst for politicians worrying about domestic industry.

Continue reading "Gross mismanagement" »

THIS week's interesting economics research:

• The effect of TARP on bank risk-taking (Lamont Black and Lieu Hazelwood)

• Income inequality: what's wrong with it, and what's not (Filip Spagnoli)

• Does inequality lead to a financial crisis? (Michael Bordo and Christopher Meissner)

• The economics of network neutrality (Nicholas Economides and Benjamin Hermalin)

• Does the current account still matter? (Maurice Obstfeld)

• Financial globalization, inequality, and the raising of public debt (Marina Azzimonti, Eva de Francisco, and Vincenzo Quadrini)

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IT ISN'T too difficult to find praise for Mario Draghi these days, and, indeed, those economies whose primary exposure to Europe's troubles is via financial market jitters are quite happy that he seems (for the moment anyway) to have done a very nice job propping up European banks. Britain and central Europe may be still be sweating, but other big economies are doing much better than they were in December, thank you.

Which is a shame, in a way, because more dissatisfaction with Mr Draghi might return a focus to how miserably the European Central Bank is handling the European economy as a whole.

Continue reading "The growth problem" »

I THINK Matt Yglesias' intuition in this post—that Asia's relative economic importance is sure to grow, other things equal, given its huge share of global population—is on the mark. In the details, though, he gets a bit wobbly:

Obviously in the world-as-it-exists the low wages in China are an important issue. But if you imagine a long-term trajectory that's bending toward similar wages around the world with similar prevailing technology, then the key thing for Americans to consider is that Asia is the dominant choice for production even under a level playing field. That's because Asia is where the bulk of the people are. Ask yourself within the western world why the United States ahas an aviation industry and New Zealand doesn't.

Continue reading "Scale models" »

TODAY'S recommended economics writing:

• World's changed, man! (FT Alphaville)

• Economics in the crisis (Paul Krugman)

• The stagnant city (Forbes)

• The VMT puzzle (Modeled Behavior)

• French-German border shapes more than territory (New York Times)

• The usual suspect (Project Syndicate)

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THIS is a fascinating research result:

Estimates of the effects of higher gasoline taxes often rely on the estimated gasoline demand elasticity with respect to gasoline prices, with an implicit assumption that consumers respond to a change in gasoline taxes in the same way as they respond to a commensurate change in tax-exclusive gasoline prices.

This paper investigates this underlying assumption by separately estimating consumer responses to gasoline taxes and the tax-exclusive gasoline price. We examine the short-run impacts of changes in these two components on gasoline consumption, vehicle miles traveled, and vehicle choices using both state-level and household-level data.

Continue reading "OPEC and Uncle Sam" »