Global crisis

Giancarlo Corsetti, Gernot Müller, Keith Kuester, 16 September 2017

The classic rationale for flexible exchange rates was that policymakers would be unconstrained by currency targets. The Great Recession, however, saw numerous central banks constrained instead by the zero lower bound. This column considers which exchange rate regime is best for small open economies in a global recession. The model suggests that if the source of the shock is abroad and foreign interest rates become constrained at their zero lower bound, then flexible exchange rates do provide a great deal of insulation to the domestic economy.

Tobias Adrian, Michael J. Fleming, Or Shachar, 14 September 2017

The potential adverse effects of regulation on market liquidity in the post-crisis period continue to receive significant attention. This column shows that dealer balance sheets have continued to stagnate and that various measures point to less abundant funding liquidity. Nonetheless, there is little evidence of a wide-spread deterioration in market liquidity. Liquidity remained resilient even during stress events like the 2013 ‘temper tantrum’.

Stéphane Bonhomme, Laura Hospido, 04 September 2017

The link between the rise in unemployment and the housing market in the US during the Great Recession is well documented. This column shows that in the case of Spain, the rise and fall in demand for construction workers following developments within the housing market had a big impact earnings inequality as well as employment. While there has been no apparent trend in the recent evolution of earnings inequality in Spain, countercyclical fluctuations have been substantial, with the construction sector playing a key role in this.

Stephen Cecchetti, Kim Schoenholtz, 29 August 2017

There is still a notable lack of consensus over when exactly the 2007-09 financial crisis started. This column argues that the crisis began on 9 August 2007, when BNP Paribas announced they were suspending redemptions. In 2007, the US and European financial systems lacked two key shock absorbers: adequate capital to meet falls in asset values, and adequate holdings of high-quality liquid assets to meet temporary liquidity shortfalls. Lacking these, the financial system was vulnerable to even relatively small disturbances, like the BNP Paribas announcement.

Peter Bofinger, Mathias Ries, 29 July 2017

There is a broad consensus that the global decline in real interest rates can be explained with a higher propensity to save, above all due to demographic reasons. This column argues that this view relies on a commodity theory of finance, which is inadequate for analysis of real world phenomena. In a monetary theory of finance, household saving does not release funds for investment, it simply redistributes existing funds. In addition, the column shows that at the global level, the gross household saving rate has declined since the 1980s, as well as net saving rates.

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