Help Economics alum Steffi Huber ’10 by participating this survey!
I’d like to invite Barcelona GSE students and alumni to participate in a survey I’m conducting with Isabelle Salle (Bank of Canada, research fellow at the University of Amsterdam) to help understanding households’ consumption and investment responses to the prolonged “dance” phase of the COVID-19 crisis.
As yet, policymakers and academics do not have good estimates for how people might behave in this crucial period. You can help to fill this gap, and in the process help to build a collective understanding of the economic consequences of the pre-vaccine crisis.
We’ve received around 1,000 responses to the survey so far, and we are using it as a trial survey which will be adjusted for a large grant application to run a representative survey in all major European countries.
Please read below to know more about what is involved.
Purpose of the research
This research survey aims to shed light on household responses to the COVID-crisis in two ways. First, we want to investigate how the crisis has already changed investment and consumption demands. Second, we want to understand the expected consumption and investment behavior of households when lockdown restrictions are progressively lifted but prior to an effective treatment or vaccine being available.
What taking part involves
There will be a series of questions about your current and planned consumption and investments. The survey requires no special knowledge for you to complete it. Your participation is voluntary, you do not have to answer all the questions if you do not want to, and you may withdraw from the study at any point.
The information provided by you in the survey will be held anonymously, so it will be impossible to trace this information back to you individually. The anonymous data itself will be held indefinitely and may be used to produce reports, presentations, and academic publications. If you have any questions or concerns about this research please feel free to contact any of the researchers involved in the project, using the contact details below.
In my all-time favourite book ‘Antifragile’, Nassim Taleb divides the world into 3 categories- fragile, robust and antifragile. He refers to fragility as the state of being that involves avoiding disorder and disruption for fear of the mess that threatens to disrupt your life: you think you are keeping safe, but really you are making yourself vulnerable to the shock that will tear everything apart. Robustness is the ability to stand up to shocks without flinching, without changing who you are. But you are antifragile if shocks make you better able to adapt to each new challenge you face. You are antifragile if you can opportune from disruptions, to be stronger and more creative. Taleb thinks we should all try to be antifragile!
On March 11, 2020, declared a world pandemic, the COVID-19, is an epitome of the chaotic disruption Taleb was referring to. The onset of this crisis got me pondering whether populations, institutions, financial bodies, governments and policy-makers -i.e. the world as a whole will be able to be resilient in the face of the aftermath of this crisis? Do we have the acceptance, courage and strength besides the technical, innovative and problem-solving skills to start afresh and turn this disequilibrium around into the most memorable salvation story we have ever seen? Or will we succumb to this dooming, seemingly apocalyptic spiral, and lose everything we take for granted in our day-to-day lives? When the noise of this unprecedented shock dies, will we be left at the inception of a brand new system that will push us to rethink policies, and rewrite mandates that shape, govern and structure the world?
The outbreak of this global health crisis saw a strong backlash against globalization in the form of acceleration of trends underway. Before COVID-19 slammed the global economy earlier this year, China had adopted selective international exchange rates for political incentives. This had consequently led to US-China trade wars involving up to 25% tariff imposition on Chinese imports.
In March, COVID-19 contributed to this backdrop by declining the number of cargo ships setting off for the United States by 10%. The cost of shipping goods by air nearly doubled, restricting trade further. In order to contain the outbreak of the rapidly spreading virus, countries were forced to close their borders to foreign visitors which severely restricted the movement of people worldwide.
With no signs of the situation returning to normalcy, countries are desperately trying to be “self-sufficient” by ordering factories at home to produce ventilators, banning exports of face masks, and localizing pharmaceutical supply chains even at the cost of added expenses. The declaration of a potential suspension of immigration into the U.S by the President seemed like a final nail in the coffin for the era of globalization.
The world’s response to COVID comes across as ratifying Trump’s argument for protectionism and supply chain controls. This alludes to a pressing question in such uncertain times: Will the world remain flat after the curve flattens after all? Let’s first look at what does it mean for the “world to be flat”? In the book, ‘The world is flat’ by Thomas L. Friedman, the author endorses his view of the world as a level-playing field, wherein all players have equal opportunity and the world is a global market where historical and geographic boundaries are becoming increasingly irrelevant.
Globalization has persisted in different forms for decades. In my opinion, just like the dotcom bubble, 9/11 debacle, 2008 financial crisis, the COVID-19 pandemic too, is a temporary shock, which will perhaps change the face of globalization but not sink it. In the near future, we will likely either have a vaccine or much of the world will be infected by the virus. Either way, the current restrictions will neither be needed nor sustainable in the long run.
For instance, by the time the curve peaks, most countries will perhaps already have bought or produced enough inventory. In that case, will it really make sense to use tax-payers money on incurring exorbitant production costs to set up ventilator factories at home when their supply is already bolstered by sufficient purchase? Evidently, medical supply chains will change less than politicians currently promise!
But even after the shock evanesces, COVID-19 will heavily influence the decision-making process with regards to investment and relocation. Many argue that the crisis was an exemplary demonstration of increased risks associated with globalised supply-chains. A flip-side to the dispute is that in the quest to maximize profits and reduce the risk of localized disruption from the crisis, if anything, firms might only expand production lines across the world, creating employment more evenly, and promoting eventual global recovery. In fact, the renowned economist, Obstfeld, who served as IMF’s chief from late 2015 through 2018, said that “While global supply chains will undoubtedly change in a post-crisis economy, much of that change will be in the form of diversification, not on-shoring.”
While layoffs and increasing unemployment in a post-crisis recessive economy are inevitable, they will not mark the end of outsourcing. Turning to autarky-like economies will be too costly to be sustainable for countries world-over. There will be plenty of opportunities to employ people in jobs that demand highly skilled labour to meet the needs of the recovering economies. This will pave the way for Globalisation 3.0, described in Friedman’s book as individuals focusing on finding their foothold in the present global competition and making significant global collaborations. In fact, skill up-gradation of this form, to ensure relevance as demanded by the need of the hour, will push humans towards becoming antifragile, as recommended by Taleb.
However, “Outsourcing is just one dimension of a much more fundamental thing happening today in the world”, Friedman claims. Experts often view globalization from a one-dimensional perspective- physical goods and services crossing borders. But in fact, many intangibles- data, value, ideas, innovation frequently cross borders. In his book, Friedman emphasizes that “You don’t need to emigrate to innovate”. “Globalization in recent times has created a platform where intellectual work, intellectual capital, can be delivered from anywhere. It could be disaggregated, delivered, distributed, produced and put back together again — and this gave a whole new degree of freedom to the way work is done, especially work of an intellectual nature.” In light of this view of global integration, I believe that the world is going to get flatter. With workforces across nations getting training on Zoom video conferencing, to extensive sharing of knowledge in research on medical advances, the spillover of ideas and innovation is going to witness only an onward spur. The quantity and value of data transmitting between countries are increasing and with the high-value data processing replacing supply chains as the predominant channel of global economic exchange, I see this only increasing further.
So is the world after coronavirus tending to globalization or deglobalization? I think it depends on where you look. COVID can make it harder to ship Chelsea fan-club merchandise around the world, but no quarantine can contain cryptos from crossing borders!
Fintech has increasingly become part of the global economy with the evolution of technology, increasing investments in fintech firms, and greater integration between traditional incumbent financial firms and fintech. Since the 2007–2009 financial crisis, research has also paid more attention to systemic risk and the impact of financial institutions on systemic risk. As fintech grows, so too should the concern about its possible impact on systemic risk. This paper analyzes two indices of public fintech firms (one for the United States and another for Europe) by computing the ∆CoVaR of the fintech firms against the financial system to measure their impact on systemic risk. Our results show that at this time fintech firms do not contribute greatly to systemic risk.
Conclusions and key results
Our results show that, for the US, the payment and remittances and the market and trading support categories contribute the most to the VaR of the fintech industry. Instead, in Europe, fintech firms that provide software solutions and information technologies seem to be contributing the most to the risk of the sector. The estimation that includes fintech firms and the representative sample of the financial sectors show that fintech firms are not systemically important. Within the US financial system, the fintech companies that do contribute to systemic risk increase it by around 0.03%, while, in Europe, fintech firms contribute very little to the systemic impact (close to 0%). The Spearman’s rank correlation between a fintech firm’s ∆CoVaR and its respective size and between a fintech firm’s ∆CoVaR and its beta strengthens the importance of our estimations for a better assessment of systemic risk rather than just relying on the size and the beta of the firms to determine their likely contribution to systemic risk.
Some limitations of our study include the scope of our analysis method (∆CoVaR), the representation of the fintech sector, and the analysis of only two markets. However, micro-level data analysis focusing on each individual fintech category and changing the focus on emerging markets could reveal the specific risks, highlighting key research lines.
The financial cycle plays a key role in the functioning of the economy, as we have seen in the previous articles of this Dossier. But what are the specific consequences of the relationship between the financial and business cycle? Below we analyse its implications for one of the key macrofinancial relationships: the one that exists between the financial cycle and equilibrium interest rates.
The ECB and the Fed have initiated a process to review their strategy, the results of which will be published during the course of 2020. This review has been driven by certain structural changes in advanced economies, such as the decline in the equilibrium interest rate and the flattening of the Phillips curve.
While we do not anticipate disruptive changes, it is likely that the Fed will reinforce the symmetry of its inflation target and that the ECB will adopt a similar model in order to shore up inflation expectations.
El envejecimiento poblacional será uno de los factores clave que, junto con la revolución tecnológica y el cambio climático, redefinirán nuestras sociedades en las próximas décadas. Una población más envejecida cambiará forzosamente no solo la configuración de nuestras sociedades sino también la de nuestras economías, pues el envejecimiento poblacional tiene un impacto significativo sobre el crecimiento económico. Esta es la cuestión que abordaremos en este y en los siguientes artículos del Dossier, poniendo el foco en las economías española y portuguesa.
Article by George Bangham ’17 (Economics of Public Policy)
In an article for the Resolution Foundation, George Bangham ’17 (Economics of Public Policy) looks at data on UK family finances in the period before the coronavirus pandemic and thinks about policy measures for those who may lose their primary source of income during the crisis.
Here is an excerpt:
We won’t know exactly how many people have lost their jobs due to coronavirus until at least the summer, when official statistics come out. But as well as monitoring the ongoing impact of the crisis, it’s equally important to consider the state of the country as the economic downturn hit home…
Amid the horror of the pandemic, and the legitimate fears of many families for their finances, it might seem frivolous to worry about statistics for the time being. But the lessons from the data are vital. They point us to new issues that the Government must fix. In a crisis, statistics can save livelihoods and save lives.
In this new publication for the Bank for International Settlements, Egemen Eren ’09 and co-authors Stefan Avdjiev and Patrick McGuire review recent events in FX swap markets in the context of the longer-term trends in the demand for dollars from institutional investors.
Since the start of the Covid-19 pandemic, indicators of dollar funding costs in foreign exchange markets have risen sharply, reflecting both demand and supply factors.
The demand for dollar funding has grown in recent years, reflecting the currency hedging needs of corporates and portfolio investors outside the United States.
Against this backdrop, the financial turbulence of recent weeks has crimped the supply of dollar funding from financial intermediaries, sharply lifting indicators of dollar funding costs.
These costs have narrowed after central banks deployed dollar swap lines, but broader policy challenges remain in ensuring that dollar funding markets remain resilient and that central bank liquidity is channelled beyond the banking system.
Opinion piece by Francesco Amodio ’10 (Economics) on Canada’s response to COVID-19 crisis
In a piece published on March 31 in the Montreal Gazette, Francesco Amodio ’10 (Economics) looks at measures taken by the Canadian government in response to the coronavirus pandemic.
Here’s an excerpt:
The measures taken by the Canadian government are in line with those taken in other countries, where governments are adopting either one or the combination of the following two approaches. In the first one, the government lets firms lay off workers, then pays out employment insurance benefits or other kind of income support transfers. The second approach focuses instead on “saving jobs,” with the government subsidizing wages in order to avoid layoffs.
Each approach has its pros and cons. In the short run, the size of wage subsidies and number of potential layoffs will determine which one is costlier. Perhaps more importantly, the two approaches differ in their medium- to long-run impacts.
A displaced worker might rationally prefer to wait through a long spell of unemployment instead of seeking employment at a lower wage in a job he is not trained for. I evaluate this trade-off using micro data on displaced workers. To achieve identification, I exploit the fact that the more a worker has invested in occupation-specific human capital, the more costly it is for him to switch occupations and therefore the higher is his incentive to wait. I find that between 9% and 17% of total unemployment in the United States can be attributed to wait unemployment
Publication in Journal of Banking and Finance by Alex Hodbod (ITFD ’12) and Steffi Huber (Economics ’10, GPEFM ’17)
We have a forthcoming article “Sectoral Risk Weights and Macroprudential Policy” in the Journal of Banking & Finance with our co-author Konstantin Vasilev (Essex).
This paper analyses bank capital requirements in a general equilibrium model by evaluating the implications of different designs of such requirements regarding their impact on the tendency of banks to amplify the business cycle.
We compare the Basel-established Internal Ratings-Based (IRB) approach to risk-weighting assets with an alternative macroprudential approach which sets risk-weights in response to sectoral measures of leverage. The different methods are compared in a crisis scenario, where the crisis originates from the housing market that affects the banking sector and is then transmitted to the wider economy.
We investigate both boom and bust phases of the crisis by simulating an unrealized news shock that leads to a gradual build-up and rapid crash in the economy. Our results suggest that the IRB approach creates procyclicality in regulatory capital requirements and thereby works to amplify both boom and bust phases of the financial cycle. On the other hand, our proposed macroprudential approach to setting risk-weights leads to counter-cyclicality in regulatory capital requirements and thereby attenuates the financial cycle.
Conclusions in brief
We show that IRB risk-weights can induce procyclicality of capital requirements and amplify both boom and bust phases of the business cycle. This is particularly concerning because procyclical risk weights could undermine other macroprudential tools, as these other tools are themselves based on risk-based measures of capital requirements e.g. Counter Cyclical Capital Buffers.
Our alternative approach of macroprudential
risk weights could induce countercyclicality of capital requirements, which may
offer benefits in terms of smoothening financial cycles. Targeting
macroprudential intervention on bank risk-weights is likely to be more
effective when it is sector-specific. This will alter banks’ incentives in a
sensitive way – thereby tending to attenuate sectoral asset booms.
The results complement the ongoing debate about the potential merits of a Sectoral Counter Cyclical Capital Buffer, which is ongoing internationally.
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