Le Pont de Londres: Interactions between monetary and prudential policies in cross‐border lending

Using two unique confidential datasets summarizing the cross‐border lending of banks in France and the UK, we examine whether recipient‐country prudential policies can help to reduce the spillover effects of euro‐area (EA) monetary policy. We address this question from a novel angle, focused on the role of international financial centres, by considering differences in bank size and location (lending from French headquarters vs. from French affiliates located in the UK). For small French banks that lack a presence in international financial centres, the response of direct cross‐border lending from France to EA monetary policy is partially offset by recipient‐country prudential policy. For larger banks, however, the offsetting effect applies only to lending that passes through foreign affiliates located in London. This suggests the existence of a “London Bridge”: banks adapt their flows to the UK conditional on EA monetary policy and global prudential policies; and from their UK affiliates to third‐party countries in a manner that depends on local prudential settings.     

A Framework for Assessing Global Imbalances1

Since the mid‐1990s and prior to the financial crisis external balances of systemically important economies widened significantly. This paper takes a long‐run perspective and reviews the main determinants of widening global imbalances. To this aim, we first provide a set of newly derived statistical measures: while large external imbalances are not new in economic history, their persistence, their concentration on one economy (the United States) and the specific role of emerging market economies make the present episode rather unique. Second, we argue that the observed pattern of imbalances can be mostly understood as a result of various structural changes in the global economy, which have allowed a widening trend of external positions. Three main features set the most recent period apart from past episodes of growing external imbalances: (i) the emergence of new players, in particular emerging market economies such as China and India, which are quickly catching up with the advanced economies; (ii) an unprecedented wave of financial globalisation, with more integrated global financial markets and increasing opportunities for international portfolio diversification, also characterised by considerable asymmetries in the level of market completeness across countries; and (iii) the favourable global macroeconomic and financial environment, with record high global growth rates in recent years, low financial market volatility and easy global financing conditions over a long period of time, running until the outburst of the financial crisis during the summer of 2007. These structural changes that have been supplemented by cyclical or policy‐induced factors ultimately facilitated the sudden, disorderly unwinding of global imbalances that is reflected in the current financial crisis.     

A critical review of the “ladder of investment” approach

The “ladder of investment” is a regulatory approach proposed by Cave (2006), which has been widely embraced by national regulatory authorities in the European telecommunications sector. The approach entails providing entrants, successively, with different levels of access—the “rungs” of the investment ladder, while inducing them to climb the ladder by setting an access charge that increases over time or by withdrawing access obligations after some pre-determined date (i.e., by setting sunset clauses). Proponents of the ladder of investment approach claim that such regulatory measures would make service-based entry and facility-based entry complements—albeit they have been traditionally viewed as substitutes—in promoting competition. The regulators, thus, have shown a strong interest in this approach. The paper provides a critical review of the ladder of investment approach by setting out its two underlying assumptions and discussing their validity with references to the related industrial organization literature.     

Enlargement and the EU Periphery: The Impact of Changing Market Potential

We study the impact of changing relative market access in an enlarged EU on the economies of incumbent Objective 1 regions. First, we track the impact of external opening on internal spatial configurations in a three‐region economic geography model. External opening gives rise to potentially offsetting economic forces, but for most parameter configurations it is found to raise the locational attractiveness of the region that is close to the external market. Then, we explore the relation between market access and economic activity empirically. We simulate the impact of enlargement on EU Objective 1 regions. Predicted market‐access‐induced gains in regional GDP and manufacturing employment are up to seven times larger in regions proximate to the new accession countries than in ‘interior’ EU regions. We also find that a future Balkans enlargement could be particularly effective in reducing economic inequalities among the EU periphery, due to the positive impact on relative market access of Greek regions.     

Firm-level comparative advantage

We study the consequences of heterogeneity in factor intensity on firm performance. We present a standard Heckscher–Ohlin model augmented with factor intensity differences across firms within a country–industry pair. We show that for any two firms, each of whose capital intensity is, for instance, one percent above (below) its respective country–industry average, the relative marginal cost of the firm in the capital-intensive industry of the capital-abundant country is lower (higher) than that of the other firm. Our empirical analysis, conducted using data for a large panel of European firms, supports this prediction. These results provide a novel approach to the verification of the Heckscher–Ohlin theory and new evidence on its validity.     

The impact of the judiciary on entrepreneurship: Evaluation of Pakistan's “Access to Justice Programme”

In 2002, the Pakistani government implemented a judicial reform that cost $350 million or 0.1% of Pakistan's 2002 GDP. This reform did not involve increased incentives for judges to improve efficiency but merely provided them with more training. Nonetheless, the reform had dramatic effects on judicial efficiency and consequently on entrepreneurship: judges disposed of a quarter more cases and entry rate of new firms increased by half due to the reform. Using data from the World Bank Group Entrepreneurship Database, our estimates suggest that this translates into an increase of Pakistan's GDP by 0.5%.     

EU Enlargement and Trade Integration: Lessons from a Gravity Model

The authors estimate gravity models using a large panel of bilateral trade flows across 61 countries between 1980 and 2003, which are applied as a benchmark for the integration of Central and South Eastern European countries with the euro area. They show that a careful examination of the fixed effects of the model is crucial for the proper interpretation of the results. The results suggest that trade integration between most new EU member states and the euro area is already relatively advanced, while the remaining Central and Eastern European countries have significant scope to strengthen trade links with the euro area.     

Currency depreciations, financial transfers, and firm heterogeneity

The present paper investigates five episodes of currency collapse from the perspective of non-financial firms operating in Argentina, Brazil and Mexico. We focus on two aspects: wealth and income transfers from borrowing firms to lenders and firm heterogeneity. At the firm level, we find that the currency collapses are preceded and associated with sharply rising financial transfers from firms to lenders. The debt and income structure is central in explaining the asymmetric firm dynamics. Most affected are firms with high levels of unhedged foreign-currency debt. At the country level, Argentina, Brazil, and Mexico display three contrasting examples. Argentina has a large currency mismatch, Brazil balances the currency denomination of debt and income (natural hedge), and Mexico occupies an intermediate position.