Why fiscal sustainability matters
Willem, Buiter. Fiscal sustainability has become a hot topic as a result of the European sovereign debt crisis, but it matters in normal times, too. This column argues that financial sector reforms are essential to ensure fiscal sustainability in the future. Although emerging market reforms undertaken in the aftermath of the financial crises of the […]
International lending, sovereign debt and joint liability : an economic theory model for amending the treaty of Lisbon
Basu, Kaushik, Stiglitz, Joseph. As the Eurozone crisis drags on, it is evident that a part of the problem lies in the architecture of debt and its liabilities within the Eurozone and, more generally, the European Union. This paper argues that a large part of the problem can be mitigated by permitting appropriately-structured cross-country liability for […]
The impossible trinity, yet again
Grenville, Stephen. The views and theories on the impossible trinity are conflicting. This column discusses some of the theories and their potential drawbacks. It points out that the impossible trinity has policy relevance for advances economies because their currencies are often close substitutes, and exchange rates follow expectations. For emerging economies, however, the policies implied […]
QE and ultra-low interest rates: Distributional effects and risks
There is widespread consensus that the conventional and unconventional monetary policies that world’s major central banks implemented in response to the global financial crisis prevented a deeper recession and higher unemployment than there otherwise would have been. These measures, along with a lack of demand for credit as a result of the recession, contributed to […]
Inflation expectations and the missing disinflation
Olivier Coibion, Yuriy Gorodnichenko. During the Great Recession, advanced economies have not experienced the disinflation that has historically been associated with high unemployment. This column shows that using consumers’ (as opposed to forecasters’) inflation expectations restores the traditional Phillips curve relationship for recent years. Consumers’ inflation expectations are more responsive to oil prices than those […]
Are exchange rates predictable?
Rossi, Barbara. Predicting exchange rates is still an inexact science. Economic models perform poorly, and a plethora of alternative methods have been attempted. This column guides the reader through the state of the art, reviewing various predictors, models, and data specifications. Despite a large and divergent literature chasing this holy grail, the toughest benchmark remains […]
The comparative performance of fixed and flexible ER regimes
Cohen-Setton, Jérémie. Andrew Rose recently published a provoking paper, which shows that the choice of the exchange rate regime has had little influence on economic outcomes in the Great Recession. While the empirical analysis of the paper excludes EMU countries, this result has challenged the consensus that life outside the euro would have been easier for […]
Finance and growth: Too much of a good thing?
Beck, Thorsten. A well-functioning financial system is critical for economic growth. However, some studies find a negative relationship between the two at high levels of financial development. This column discusses why this is the case and suggests some policy implications. It argues that reforms that refocus the financial system on enterprise credit and on internalising the […]
Unemployment, labour-market flexibility and IMF advice: Moving beyond mantras
Blanchard, Olivier, Jaumotte, Florence & Loungani, Prakash. The state of labour markets in advanced economies remains dismal despite recent signs of growth. This column explains the IMF’s logic behind the advice it provided on labour markets during the Great Recession. It argues that flexibility is crucial both at the micro level, i.e. on worker reallocation, and […]
Sovereigns versus banks: Crises, causes and consequences
Jordà, Òscar, Schularick, Moritz & Taylor, Alan. In the aftermath of the global financial crisis, few would dispute the risks of excessive borrowing. But which debts should one worry about – public or private? This column presents new research on the interplay of public and private debts since 1870 in 17 advanced economies. History demonstrates that […]