Mr. Ashok Vir Bhatia, Ms. Srobona Mitra, Anke Weber, Mr. Shekhar Aiyar, Luiza Antoun de Almeida, Cristina Cuervo, Mr. Andre O Santos, and Tryggvi Gudmundsson
This note weighs the merits of a capital market union (CMU) for Europe, identifies major obstacles in its path, and recommends a set of carefully targeted policy actions.
European capital markets are relatively small, resulting in strong bank-dependence, and are split sharply along national lines. Results include an uneven playing field in terms of corporate funding costs, the rationing out of collateral-constrained firms, and limited shock absorption. The benefits of integration center on expanding financial choice, ultimately to support capital formation and resilience. Capital market development and integration would support a healthy diversity in European finance. Proceeding methodically, the note identifies three key barriers to greater capital market integration in Europe: transparency, regulatory quality, and insolvency practices. Based on these findings, the note urges three policy priorities, focused on the three barriers. There is no roadblock—such steps should prove feasible without a new grand bargain.
This paper develops a simple procedure for incorporating market-based information into the construction of fan charts. Using the International Monetary Fund (IMF)'s global growth forecast as a working example, the paper goes through the theoretical and practical considerations of this new approach. The resulting spreadsheet, which implements the approach, is available upon request from the authors.
Mr. Francisco d Nadal De Simone and Mr. Luc Everaert
Data on the weekly operating time of capital improve the measurement of effective capital input in production. The production function of the French business sector is found to be consistent with a Cobb-Douglas technology under constant returns to scale. Total factor productivity growth, estimated as an unobservable variable, has declined steadily since the late 1970s, but more slowly since 1994. During the 1990s, a secular increase in shift work raised the operating time of capital and began to contribute positively to growth, albeit only slightly.
This paper explores whether changes in the age distribution have significant effects on financial markets that are rational and forward-looking. It presents an overlapping generations model in which agents make a portfolio decision over stocks and bonds when saving for retirement- Using the model to simulate a baby boom-baby bust demonstrates that returns to baby boomers will be substantially below returns to earlier generations, even when markets are rational and forward-looking. This result is important because the current debate over how to reform pay-as-you-go pension systems often takes historical returns on financial assets—and on the equity premium—as given.