About us

The main aim of the World Economy and Finance Research Programme is to advance knowledge of the inter-relationships between financial markets and economic growth and stability.
Twenty six research groups in top universities throughout the United Kingdom are carrying out this work. The Programme is fully funded by the independent Economic and Social Research Council (ESRC) and runs until 2009.

World Economy and Finance Programme e-newsletter

WELCOME to the second e-newsletter from the Economic and Social Research Council's World Economy and Finance Programme.

The main aim of the Programme is to advance knowledge of the inter-relationships between financial markets and economic growth and stability. Twenty six research groups in universities throughout the United Kingdom are carrying out this work. The first phase of research began during 2005 and many results are now emerging.  Details of working papers and other publications can be found on the Programme's web site and the sites of individual projects to which it links.  This newsletter sketches some key developments. I hope you find it useful and informative. 

If you have received this newsletter in error or do not wish to receive further issues, then please reply to the email with the word 'unsubscribe' in the subject heading

More information can be found on our website.

Prof John Driffill, Programme Director

New research

With Phase Two in January 2006, ten new projects joined the sixteen already working as part of the WEF Programme.  The new projects further extend the programme`s breadth and depth, and address pressing issues posed by the changing landscape of the world economy.

The growth of China urges greater understanding of its economy and financial markets.  Scott Lash and Michael Keith of Goldsmiths, University of London, will investigate 'Risk Cultures in China', combining a sociological approach with economics (For details click here). Rhys Jenkins of the University of East Anglia will examine 'The Impact of China`s Global Economic Expansion on Latin America' (details). Amrita Dhillon's project at the University of Warwick on 'Legal and Economic Aspects of Sovereign Debt Default' (details) takes up a related aspect of Latin-American experience.  She and her colleagues examine Argentina's dealings with multiple and very diverse creditors, the IMF, the courts and collective action clauses.  Antonio Guarino and Steffen Huck at University College, London, take a different approach to financial markets.  They will undertake experiments with volunteers to explore 'Contagion in Financial Markets' (details).  

Three projects based at the London School of Economics will explore 'Monetary Policy in Developed and Developing Economies' (details), 'Home Ownership, Housing Collateral and Aggregate Fluctuations' (details), and 'The New International Division of Labour' (details).  Martin Weale and colleagues at the National Institute for Economic and Social Research investigate 'Demographic Uncertainty and Financial Risk' (details).  Patrick Minford of Cardiff University and Michael Wickens at York will build new macroeconomic models for the United Kingdom (details). Catherine Schenk at Glasgow University will research the effects of the collapse of the Sterling Area in the early 1970s on the developing economies who were its former members (details).

Global Imbalances

The questions surrounding the US current account deficit, and the corresponding surpluses, mainly in China and among oil-exporters, continue to raise concern.  Is it all going to end in tears, or are we seeing rational 'equilibrium' responses to changing incomes, investment opportunities, and risks?  These questions were discussed at a World Economy and Finance Programme meeting at Birkbeck on 22nd June 2006. 

Chris Meissner and Alan Taylor presented 'Losing our Marbles in the New Century?
The Great Rebalancing in Historical Perspective' (details), in which they compared the US’s hegemonic position today with Britain’s in the late 19th century.  Both enjoyed the benefits of low cost foreign borrowing and high returns on their overseas assets.  In both cases the amount of 'privilege' is declining. 

David Backus and Espen Henriksen presented 'Current Account Fact and Fiction' (details) which emphasised the smallness of the US current account and net deficit position relative to the size of the US economy and its total stock of wealth. They comment on the low rates of investment and growth in some of the richest countries, whose surpluses account for about half of the US deficit. Financial capital is flowing out of countries with low investment and growth and into the US and other fast-growing countries. Oil exporters account for much of the rest. 

Marcus Miller and Lei Zhang presented a paper on 'Capital Flows, Interest Rates and Policy Coordination: Two Views of Global Equilibrium' which looked at the issue rather more from the Chinese perspective.  They argued that the high surpluses and build-up of foreign exchange reserves were a rational response to the risks of the sudden stoppage of international capital flows (gross, not net) into China.

While there was a vigorous discussion of the dangers of the current situation, posed by a possible fall in US growth or a substantial weakening of the dollar, the predominant view was that many of the phenomena grouped under the heading of 'global imbalance' are not imbalances at all, and not candidates for policy interventions to re-balance them!   

Project Profile

Each newsletter will feature a different project. This edition looks at:

'Risk, Shocks, Growth and Poverty: Evidence from Long-Term Household Panel Data'

Stefan Dercon and his colleagues investigate the effects of imperfect credit and insurance markets on growth and poverty in developing countries. Do risk and shocks have persistent effects on poverty? Do they affect assets and investment?   Dercon and his group have highly detailed data on many households, over long periods of time, from rural South India, Ethiopia and Tanzania.  The results will inform policy on the importance of insurance and credit markets in alleviating poverty. If risk and shocks to incomes have a persistent impact, the return to investing in financial services for the poor will be much higher than often assumed.

In a recent paper, 'Consumption Risk, Technology Adoption and Poverty Traps: Evidence from Ethiopia', Stefan Dercon and Luc Christiaensen focus on the ability of households to use normally high-yielding but risky production technology for fear of the consequences of  poor harvests. They find that not just ex ante credit constraints, but also the possibly low consumption if harvests were to fail, discourage fertiliser use. They estimate that fertiliser application rates would increase by 8 percent if downside consumption risk were insured. Reducing downside risk may have a larger effect than the equivalent increase in livestock holdings. Complementing seasonal credit with insurance packages will be critical to encourage poor households to increase their use of modern inputs and help them escape the poverty trap.