NEW PARADIGM
The New Paradigm Papers of September/October
Once a month the Forum New Economy is showcasing a handful of selected research papers that lead the way towards a new economic paradigm.
BY
DAVID KLÄFFLINGPUBLISHED
15. OCTOBER 2025READING TIME
5 MIN
Failing Banks
Sergio A. Correia, Stephan Luck, Emil Verner
Why do banks fail? The authors analyze U.S. banks between 1863 and 2024 and show that bank failures are highly predictable. This suggests that liquidity shortages (à la Diamond-Dybvig) are less decisive than bank’s underlying financial health. Rising losses, declining solvency, and growing reliance on expensive noncore funding are early warning signs of collapse. Even bank runs before the introduction of deposit insurance were mostly the result of weak fundamentals. Low recovery rates on failed banks’ assets further indicate true insolvency—not mere market panic. The conclusion: banking crises are almost always and everywhere the result of real balance sheet deterioration.
Playing with Blocs: Quantifying Decoupling
Barthélémy Bonadio, Zhen Huo, Elliot Kang, Andrei A. Levchenko, Nitya Pandalai-Nayar, Hiroshi Toma, Petia Topalova
Contrary to the widespread belief that global fragmentation is harmful, a new study finds that many countries have actually benefited from decoupling. The reason for this counterintuitive result: while trade between geopolitical blocs has declined, trade within blocs has increased significantly, offsetting the negative effects. Between 2015 and 2023, roughly one quarter of countries shifted closer to the U.S., another quarter to China, and about half remained neutral. On average, real income rose by 0.4–0.6%. At the same time, some countries appear misaligned—many would actually be better off in the opposite bloc. Trade alliances, in short, do not always follow economic interests.
The Changing Nature of International Trade and its Implications for Development
Pinelopi K. Goldberg, Michele Ruta
Globalization is changing—and so are the opportunities for developing countries. While trade has historically fostered growth through knowledge transfer, reforms, and productivity gains, new forces such as automation, climate change, and geopolitical tensions now threaten that mechanism. The authors emphasize that traditional export-led growth models will be harder to replicate. Instead, services and green technologies may offer new development paths—provided that major economies make the right policy choices.
Who’s Afraid of Tariffs? The Geographic Distribution of Fear and Loss
Huijun Yan, Randall Morck
When the United States unexpectedly announced “Liberation Day” tariffs in April 2025, markets panicked: stock prices fell by over ten percent before Washington paused the measure a week later. Firms based in more Republican-leaning regions were hit hardest. The study documents how trade uncertainty translates directly into financial losses—and how economic policy shocks differ across sectors, regions, and political lines.
Laboratories of Autocracy: Landscape of Central–Local Dynamics in China’s Policy Universe
Kaicheng Luo, Shaoda Wang, David Y. Yang
China’s economy draws attention worldwide—but its policymaking landscape has also undergone a major transformation. Based on 3.7 million government documents, this study by David Yang and co-authors shows: until 2013, policymaking was highly decentralized, with local officials driving innovation. Since then, centralization has taken hold—independent initiatives are punished, while strict implementation of top-down policies is rewarded. This shift reduces policy effectiveness, as centrally designed measures often fail to match local conditions. According to the authors, the economic costs of centralization far outweigh its efficiency gains.
State Capacity and Infrastructure Costs
Zachary Liscow, Cailin Slattery, Will Nober
Why are infrastructure projects often so expensive? According to this study by U.S. economists and legal scholars, one major reason is low state capacity. Projects managed by experienced engineers cost 14% less on average—an effect several times larger than their salaries. When expertise is lost to retirement, costs rise sharply. The takeaway: effective public administration and continuity of personnel are crucial for efficient infrastructure investment.
