Macroeconomic policy

Massimiliano Marcellino, Angela Abbate, 04 February 2017

Exchange rates are important contributors to business cycle fluctuations in open economies. Forecasting exchange rates is not an easy task, however, perhaps due to the instability of their relationship with economic drivers. This column introduces a model that also allows for changing volatility when forecasting exchange rates. Modelling time variation in the cross-rate relationships, and in the volatilities of the shocks hitting the economic system, significantly improves forecasts.

Henrike Michaelis, Volker Wieland, 03 February 2017

In a recent speech, Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, compared the Fed’s strategy to simple reference rules, including the Taylor rule. This column argues that the comparisons enhance the Fed’s transparency and can help it to stand up to political pressure. However, Chair Yellen also suggests an important role for estimates of medium-run equilibrium real rates. Such estimates are extremely uncertain and sensitive to technical assumptions, and thus should not be used as key determinants of policy stance.

Ansgar Belke, Clemens Domnick, Daniel Gros, 19 January 2017

A high correlation of business cycles is usually seen as a key criterion for an optimum currency area. This column argues that the elasticity with which countries react to the common cycle is equally important. A country with a non-unitary growth elasticity relative to the common area will experience cyclical divergences at the peak and trough of the common cycle. Despite being characterised by highly-correlated business cycles, the Eurozone suffers from widely differing amplitudes. 

Paolo Pasimeni, Stéphanie Riso, 19 January 2017

EU budget reform is a key issue in policy debates, in particular the redistributive effects between member states. This column assesses redistribution within the EU budget over the period 2000 to 2014. It finds that the net redistributive impact of the EU budget is rather small and, contrary to common belief, that the revenue side is more progressive than the expenditure side.

Eilyn Yee Lin Chong, Ashoka Mody, Francisco Varela Sandoval, 17 January 2017

Recent research suggests a point beyond which the benefits of financial development diminish, and further development can even hurt growth. This column describes how a negative relationship between credit and growth emerged strongly after 1990 and was particularly pronounced in the Eurozone, consistent with the notion that an overgrown financial sector weakens economic growth potential. It also argues that slower growth leads to more rapid financial sector expansion. Policymakers need to be aware of the possibility that causality runs in both directions.

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