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Current Research

The Causes and Consequences of International Dollar Positions

by Agustín Bénétrix

By the end of 2014, banks and bond investors extended 8 trillion of US dollar credit to non-bank borrowers outside the United States. However, the offshore credit denominated in other main international currencies such as the euro and yen reached $2.5 and $0.6 trillion, respectively (BIS 2015). The central role of US dollar as currency of denomination for international credit motivates this research. Building on previous work on international currency exposures, our goal is to study the cross-country distribution of short and long dollar positions, its determinants and implications.

Public Debt and Relative Prices in a Cross-Section of Countries

by Vahagn Galstyan (with Adnan Velic)

This project examines the effects of debt and distortionary labour taxation on the long-run behavior of the relative price of nontraded goods. At the theoretical level, in a two-sector open economy model it demonstrates that higher public debt, associated with higher taxation, contracts labour supply in both traded and nontraded goods sectors. Relative prices move inversely with respect to the shifts of relative supply, which, in turn, depend on relative factor intensities. At the empirical level, for a panel of advanced economies, it finds statistically significant effects of public debt and taxes on the relative price of nontraded goods, with higher debt and taxes associated with higher relative prices.

Banks Credit and Productivity Growth

by Fadi Hassan (with Filippo di Mauro and Gianmarco Ottaviano)

Financial institutions are key to allocate capital to its most productive uses. This project examines the relationship between productivity and bank credit in the context of different financial market set-ups, by introducing a model of overlapping generations of entrepreneurs under complete and incomplete credit markets. Then, it exploits firm-level data for France, Germany and Italy to explore the relation between bank credit to estimate an extended set of elasticities of bank credit with respect to a series of productivity measures of firms. The estimates show a Eurozone core-periphery divide. The elasticities between credit and productivity in France and Germany are consistent with complete markets, whereas in Italy they are consistent with incomplete markets. The implication is that in Italy firms turn to be constrained in their long-term investments and bank credit is allocated less efficiently than in France and Germany. Hence capital misallocation by banks can be a key driver of the long-standing slow productivity growth that characterises Italy and other periphery countries.

An Aging Dynamo:
Demographic Change and the Decline of Entrepreneurship in the United States

by Joseph Kopecky

The rate of new business startups has fallen dramatically over the last thirty-five years, a trend that accelerated after the year 2000. The timing of this decline coincides with the start of a steady increase in both the life expectancy and average age of the workforce. I document that an individual's propensity to select into entrepreneurship follows a hump "shape" as they age. To account for both individual behavior and aggregate trends, I construct a life cycle model of entrepreneurial choice. I find that demographic channels can account for a large portion of the recent decline in startup activity, predicting further decline as the population continues to age. This presents a new challenge that policy makers around the world may face, as they see steadily increasing shares of their workforce near retirement, and relatively few individuals well positioned to take on entrepreneurial risk.

The Political Economy of Reforms in Central Bank Design:
Evidence from a New Dataset

by Davide Romelli

What accounts for the worldwide changes in central bank design over the past four decades? Using a new and comprehensive dataset on central bank institutional design, this paper employs a political economy perspective to explain the timing, pace and magnitude of reforms in a sample of 154 countries over the period 1972-2017. I build a dynamic index of central bank independence that extends previous ones by (i) capturing the entire set of legislative reforms over time, and (ii) including a larger set of institutional characteristics that influence the degree of central bank independence. I show that past reforms that increased the level of independence, as well as a regional convergence, represent important drivers of reforms in central bank design. An external pressure to reform, such as obtaining an IMF loan or joining a monetary union, also increases the likelihood of reforms, while political factors or crises episodes have little impact. These results are robust to controlling for the size and magnitude of reforms, alternative indices of central bank independence and various estimation strategies.

New Goods and International Risk Sharing

by Paul Scanlon

Because consumption growth rates are weakly correlated across countries, standard one-good models indicate that the degree of international risk sharing is low. This project develops a model which identifies another form of risk sharing: the exchange of new goods. In the model, consumers have a love of variety, and the composition of consumption also determines welfare. As a result, the exchange of new goods now constitutes a form of risk sharing; to determine the degree of international risk sharing, comparing consumption growths is not enough.

Economic Development with Integrated Labour Markets

by Michael Wycherley

The integration of the Irish and UK labour markets meant that Irish wages were determined largely by UK wages rather than economic conditions within Ireland. This meant that Ireland found it difficult to follow the standard development strategy of progressing up the value chain from low wage and low skill activities. This project investigates Ireland's alternative strategy of importing productivity via FDI, the implications of relying on outside sources for productivity growth, and the degree to which this strategy is necessary or possible for other European countries.

Recent Publications

"Financial deglobalisation in banking?",Journal of International Money and Finance, forthcoming. (By Agustin Benetrix with Rober McCauley, Patrick McGuire and Goetz von Peter)

“Currency, Credit and Crisis: Central Banking in Ireland and Europe”,Studies in Macroeconomic History, Cambridge University Press, forthcoming.(by Patrick Honohan)

“Managing Macrofinancial Crises: The Role of the Central Bank”, in David Mayes, Pierre L. Siklos and Jan-Egbert Sturm, eds., The Oxford Handbook of the Economics of Central Banking, Oxford University Press, forthcoming. (By Patrick Honohan, with Domenico Lombardi and Samantha St. Amand)

“Peaks and Troughs: Economics and Political Economy of Central Bank Independence Cycles”, in David Mayes, Pierre L. Siklos and Jan-Egbert Sturm, eds.,The Oxford Handbook of the Economics of Central Banking, Oxford University Press, forthcoming. (By Davide Romelli, with Donato Masciandaro)

“New Goods and Asset Prices”, Journal of Financial Economics, forthcoming. (By Paul Scanlon)

"Financial Markets and the Allocation of Capital: the Role of Productivity", CEP Discussion Paper 1555, 2018. (By Fadi Hassan, with Filippo Di Mauro and Gianmarco I.P. Ottaviano)

“Could Performance-linked Lending Have Helped in the Euro Crisis? Could It Still?” in Robert Shiller, Jonathan D. Ostry and James Benford, eds., Sovereign GDP-linked Bonds: Rationale and Design, A ebook, CEPR Press, 2018 (By Patrick Honohan)

“The Management and Prevention of Banking Crises: Lessons from Recent Experience”, in Thorsten Beck and Ross Levine, eds., Handbook of Finance and Development (Edward Elgar). 2018, pp. 312-337. (By Patrick Honohan)

"Can appreciation be expansionary? Evidence from the euro area", Economic Policy, volume 33.94, 2018. (By Philip R. Lane, with Livio Stracca)

"The external wealth of nations revisited: international financial integration in the aftermath of the global financial crisis", IMF Economic Review, volume 66.1, 2018. (By Philip R. Lane, with Gian Maria Milesi-Ferretti)

"Central Bankers as Supervisors: Do Crises Matter?”, European Journal of Political Economy, volume 52, 2018. (By Davide Romelli, with Donato Masciandaro).

“Current account and real exchange rate changes: The impact of trade openness” European Economic Review, volume 105, 2018. (By Davide Romelli, with Cristina Terra and Enrico Vasconcelos)

<"The Productivity Puzzle and Misallocation: An Italian Perspective", CEP Discussion Paper 1520, 2017. (By Fadi Hassan, with Sara Calligaris, Massimo Del Gatto, Gianmarco I.P. Ottaviano and Fabiano Schivardi)

“International Investment Patterns: The Case of German Sectors”, Open Economies Review, volume 29, 2018. (By Vahagn Galstyan, with Adnan Velic)

“Public Debt and Relative Prices in a Cross-Section of Countries”, Review of World Economics, volume 154, 2018. (By Vahagn Galstyan, with Adnan Velic)

“LIML Estimation of Import Demand and Export Supply Elasticities”, Applied Economics, volume 50, 2018. (By Vahagn Galstyan)

>“Restoring an Effective Fiscal Stabilization Capacity for Euro Area Countries”, in Agnès Bénassy-Quéré and Francesco Giavazzi, eds., Europe’s Political Spring: Fixing the Eurozone and Beyond, A ebook, CEPR Press, 2017. (By Patrick Honohan)

“Restoring Trust in the Arrangements for Euro Area Intergovernmental Debt”, in Thorsten Beck and Geoffrey Underhill, eds., Quo Vadis? Identity, Policy and the Future of the European Union, A ebook, CEPR Press, 2017. (By Patrick Honohan)

“Management and Resolution of Banking Crises: Lessons from Recent European Experience”, PIIE Policy Brief 17-1, 2017. (By Patrick Honohan)

"Appointments to Central Bank Boards: Does Gender Matter?", Economics Letters, volume 155, 2017. (By Davide Romelli, with Patricia Charlety and Estefania Santacreu-Vasut)

“Taxation, Debt and Relative Prices in the Long Run: The Irish Experience”, The Economic and Social Review, volume 48, 2017. (By Vahagn Galstyan with Adnan Velic)

“Debt Thresholds and Real Exchange Rates: An Emerging Markets Perspective”, Journal of International Money and Finance, volume 70, 452-470, 2017. (By Vahagn Galstyan with Adnan Velic)

“The price of development: The Penn–Balassa–Samuelson effect revisited”, Journal of International Economics, volume 102, 2016. (By Fadi Hassan)

"Debt and austerity: Post-crisis lessons from Ireland, Journal of Financial Stability, volume 24, 2016. (By Patrick Honohan)

“Are Wider Central Bank Mandates Sustainable?”, in Doris Ritzberger-Grünwald, ed., Central Banking in Times of Change, Austrian National Bank, 2016. (By Patrick Honohan)

“What Else Can Central Banks Do?”, Geneva Reports on the World Economy, Geneva: International Center for Monetary and Banking Studies and London: Centre for Economic Policy Research, 2016. (By Patrick Honohan, with Laurence Ball, Joseph Gagnon and Signe Krogstrup)

"The Sovereign-Bank Diabolic Loop and ESBies", American Economic Review (P&P), volume 24, 2016. (By Philip R. Lane, with Markus K. Brunnermeier, Luis Garicano, Marco Pagano, Ricardo Reis, Tano Santos, David Thesmar, Stijn Van Nieuwerburgh, and Dimitri Vayanos)

“International Currency Exposures, Valuation Effects and the Global Financial Crisis”, Journal of International Economics, volume 96, 2015. (By Agustín Bénétrix and Philip R. Lane, with Jay C. Shambaugh)

“Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics”, Financial History Review, volume 22, 2015. (By Davide Romelli, with Donato Masciandaro)

“Country Size and Exchange Rates”, Economica, volume 82, 2015. (By Vahagn Galstyan)