Modigliani and Miller at the IMF
In a paper on tax policy, leverage and macroeconomic stability published on 10 November, the IMF staff address the issue of excessive leverage or the so-called “debt bias” that poses risks for financial and macroeconomic stability. The “debt bias” has been largely created by more favorable tax treatment of debt relatively to equity. In most ... Read more
The Russian Economic Crisis: How Severe and How Long?
The economy of Russia contracted by almost 4% last year and is expected to decline further this year, according to the IMF (Economist 2016a). Russia being a resource driven economy and one of the top oil exporters globally, a large part of the downturn can certainly be explained by the collapse in oil price. Western ... Read more
The Power of Bankruptcies in the Energy Sector: Will We Ever See Oil Back Above 100 USD per Barrel?
The recent decline in the oil price has triggered speculations that as many as half of the U.S. shale oil producers might face bankruptcy soon (CNBC). Analysts have further argued that this would lead to a sharp decline in the U.S. oil production, which over last five years has roughly doubled from about 5 mb/d ... Read more
An Important Step for China and the World
On 30 November the Board of the IMF decided to include the Chinese RMB in the Special Drawing Rights (SDR) basket from 1 October 2016. SDR is the unit used in transactions between IMF member states and the Fund. RMB will thus become the fifth currency in this basket of global reserve currencies, joining the ... Read more
Germany is not Volkswagen, but the wake up call should not be ignored
Dalia Marin recently published a Project Syndicate column titled “Germany is not Volkswagen”, which basically tries to portray the fraud by Volkswagen that was recently uncovered by the US authorities as an isolated case and stress the strength of the German manufacturing culture. Germany is not Volkswagen, indeed. BMW, for example, passed the very same ... Read more
Fundamental Problems Facing Greece
The dust has yet to settle after the referendum in Greece and making any longer term predictions is next to impossible, other than stating the obvious that the next days and weeks will bring capital controls and issuing of IOUs to meet public sector payments, similar in form to the ones that the State of ... Read more
Is the Minimum Wage an Effective Way to Reduce Poverty or Inequality?
There is a growing interest in increasing the federal minimum wage in the U.S. and minimum wages at the state and city level (News and Observer). President Obama has already decreed a higher minimum for workers on Federal contracts, and he has proposed raising the Federal minimum from $7.25 to $10.10. Interest in the minimum ... Read more
Consequences of the World Oil Glut
Forecasting crude oil prices has been difficult. Forecast errors have been large, especially for the end of 2014, when typical forecasts were more than $40 per barrel too high. A panel of Wall Street Journal analysts forecast $94.65 per barrel, but the actual price was $53.27 per barrel. Forecasts implicit in oil futures contracts exhibited ... Read more
Trends and Cycles Across Industries in the U.S. Economy
In an earlier post, (2013) we discussed the long term decline in the share of manufacturing in the US economy. In this post, we will analyze the relationship between long-term structural changes and transitory shocks that have taken place in the US economy since World War II. Total GDP has increased by a factor of ... Read more
What Could Explain the Recent Collapse of the Ruble?
The popular story has it that the recent woes of the Russian ruble can be explained by a mix of decreasing oil prices and sanctions imposed by the West as a result of Russia’s aggression in Ukraine. This appeared to hold until November. Various sanctions have been in force for some months now and until ... Read more