Sorting It Out: International Trade and Protection With Heterogeneous Workers

The two models of international trade with developed factor markets -- Heckscher-Ohlin and Specific Factors -- both suffer significant defects. For example, their predictions about the patterns of domestic production and international trade are for the most part either indeterminate or uselessly complex. The problem with these models is that the supply of factors to an industry is either perfectly elastic or perfectly inelastic. Using a model in which heterogeneous workers sort across industries we eliminate this problem. The result is a multi-good model with sharp predictions about (1) the domestic pattern of production, (2) North-North and North-South trade, (3) the demand for protection, (4) the determinants of domestic income distribution, and (5) the effect of trade on economic development.

Euroisation in Serbia

Euroisation in Serbia is rooted in a long history of macroeconomic instability. Extreme inflation volatility has undermined trust in the dinar and discouraged dinar savings. At the same time, an abundant supply of foreign capital inflows has provided easy access to foreign currency lending at low interest rates in an environment of perceived exchange rate stability – a perception reinforced by the choice of exchange rate regime. As a result, both the asset and the liability side of banks’ balance sheets, and even those of the non-bank sector, is heavily foreign currency-denominated. This paper documents the forces that promote euroisation in Serbia. The paper argues that, in the wake of the global crisis, a window of opportunity has emerged that could foster a process of de-euroisation. The lack of foreign funding and recent exchange rate volatility has tilted borrower incentives towards local currency borrowing. If disinflationary macroeconomic policies gain credibility, with the possible support of regulatory options, euroisation could drop sharply.

The great plunge in oil prices: Causes, consequences, and policy responses

Following four years of relative stability at around $105 per barrel, oil prices have declined sharply since June 2014. This paper presents a comprehensive analysis of the sources of the recent decline in prices, and examines its macroeconomic, financial and policy implications. The recent drop in prices is a significant, but not an unprecedented event as it has some significant parallels with the price collapse in 1985-86. The recent decline has been driven by a number of factors: several years of upward surprises in the production of unconventional oil; weakening global demand; a significant shift in OPEC policy; unwinding of some geopolitical risks; and an appreciation of the U.S. dollar. Although the relative importance of each factor is difficult to pin down, OPEC's renouncement of price support and rapid expansion of oil supply from unconventional sources appear to have played a crucial role since mid-2014. The oil price drop will lead to substantial income shifts from oil exporters to oil importers resulting in a net positive effect for global activity over the medium term. Although several factors could counteract its impact on global growth and inflation, the drop in oil prices will pose significant challenges for monetary, fiscal, and structural policies

The Great Depression – Retro Part 1

The study was written because the economic crisis of 2008 had been compared by many, including renowned economic experts, with the one in 1929– 1933. Dealing with the latest literature on the sub ject, I drew the following surprising lessons for myself. Firstly, the literature available for the Hungarian professional public is rather poor com pared to what can be found out from leading for eign research on the subject that combine econom ic theory and history. Secondly, the thesis that the lesson has been drawn from the historical experi ence of the Great Depression is only partly true. Only one of the reasons for this incompleteness is that ‘retrograde’ institutional changes took place. The other reason is that there are really serious question marks, which can be considered epistemo logical, concerning the way the Great Depression evolved and ended. In other words, it is sensible to treat our knowledge of the events of that time with proper humility, considering its limits; it does not hurt to be aware of the puzzles that still exist. One should be restrained when harping on the question ‘Can it happen again?’. I believe that one can bet ter understand this lesson, if I do not tell the new, linear story that can be reconstructed according to the new framework of attitude, but I present the difference between the earlier and newer approach es in connection with individual problems

Weakness in Investment Growth: Causes, Implications and Policy Responses

Investment growth in emerging market and developing economies has slowed sharply since 2010. This paper presents a comprehensive analysis of the causes and implications of this slowdown and presents a menu of policy responses to improve investment growth. It reports four main results. First, the slowdown has been broad-based and most pronounced in the largest emerging markets and in commodity exporters. Second, it reflects a range of obstacles: weak activity, negative terms-of-trade shocks, declining foreign direct investment inflows, elevated private debt burdens, heightened political risk, and adverse spillovers from major economies. Third, by slowing capital accumulation and technological progress embedded in investment, weak post-crisis investment growth has contributed to sluggish growth of potential output in recent years. Finally, although specific policy priorities depend on country circumstances, policymakers can boost investment both directly, through public investment, and indirectly, by encouraging private investment, including foreign direct investment, and by undertaking measures to improve overall growth prospects and the business climate

The Great Depression – Retro Part 2 : On the Great Depression in Light of New Research

The direct reason for writing this study was to draw conclusions of the Great Depression for the present crisis that start-ed in 2008 and which continues to the present day. My goal is to present international, primarily Anglo-saxon monographs and studies on the topic that apply methodologies and approaches hardly discussed – in this particular topic in my view – in Hungarian language literature. My conclusion, emphasised in reference to this specific historical event, is that even though financial-econom-ic studies – accompanied by their very own sophisticated methodologies – are essential to understanding global crises, such as the crisis of 1919-1933, they are at the same time insufficient to do so. It is unavoidable to involve broader historical-political con-text in these studies as well as highly complex social psychological processes that are at the same time of crucial importance and orient the expectations of masses. this is closely related to recognising the limits of knowledge that shape and influence current economic policies

Slowdown in emerging markets: Rough patch or prolonged weakness?

Emerging markets (EM) face their fifth consecutive year of slowing growth and a possibly longer period of sluggish performance than previously thought. This paper presents a comprehensive analysis of the nature of and the appropriate policy responses to the growth slowdown in EM. It reports three main results. First, the slowdown is synchronous and protracted, affecting a sizable number of EM, especially large ones. Second, it has been driven by both external factors, including weak world trade, low commodity prices, and tightening financial conditions; and domestic factors, including slowdown in productivity growth, bouts of policy uncertainty, and an erosion of policy buffers. Both structural and cyclical factors have contributed to the slowdown. Third, the room for accommodative cyclical fiscal and monetary policies is limited in many EM, lending urgency to putting in place structural reforms to upgrade governance structures, improve business environments, raise human and physical capital, and manage demographic pressures

The coming US interest rate tightening cycle: Smooth sailing or stormy waters?

The U.S. Federal Reserve (Fed) is expected to start raising policy interest rates in the near term and thus commence a tightening cycle for the first time in nearly a decade. The taper tantrum episode of May-June 2013 is a reminder that even a long anticipated change in Fed policies can trigger substantial financial market volatility in Emerging and Frontier Market Economies (EFEs). This paper provides a comprehensive analysis of the potential implications of the Fed tightening cycle for EFEs. We report three major findings: First, since the tightening cycle will take place in the context of a robust U.S. economy, it could be associated with positive real spillovers to EFEs. Second, while the tightening cycle is expected to proceed smoothly, there are risks of a disorderly adjustment of market expectations. The sudden realization of these risks could lead to a significant decline in EFE capital flows. For example, a 100 basis point jump in U.S. long-term yields could temporarily reduce aggregate capital flows to EFEs by up to 2.2 percentage point of their combined GDP. Third, in anticipation of the risks surrounding the tightening cycle, EFEs should prioritize monetary and fiscal policies that reduce vulnerabilities and implement structural policy measures that improve growth prospects