Macroeconomic policy

Martin Ellison, Andrew Scott, 20 October 2017

A new dataset for the market value of British government debt makes a long-run analysis of fiscal sustainability and debt management possible. It shows that the 20th century saw a shift to financing debt by inflation and low bondholder returns, rather than through fiscal surpluses. This column uses a counterfactual analysis to show that long bonds have been an expensive way of financing debt, especially after a financial crisis. Had the government issued only three-year bonds since 1914, the level of debt in 2017 would have been lower by 28% of GDP.

Wouter den Haan, Martin Ellison, Ethan Ilzetzki, Michael McMahon, Ricardo Reis, 16 October 2017

The outgoing German finance minister, Wolfgang Schäuble, has recently expressed concerns about the risks posed to the world economy by high levels of debt. This column presents the latest Centre for Macroeconomics and CEPR survey of leading economists, in which a strong majority of respondents agree that an excess of public and private debt together with inflated asset prices mean that the world economy faces heightened risks. A similarly strong majority of the experts also agree that the loose monetary policy of major central banks is responsible for the recent increase in global leverage and asset values.

Thomas Drechsel, Silvana Tenreyro, 09 October 2017

Emerging economies, particularly those dependent on commodity exports, are prone to highly disruptive economic cycles. This column points to fluctuations in international commodity prices as a key driver of these cycles. Using a small open economy model, it quantitatively assesses their importance for Argentina’s economy, and finds that they explain 38%, 42%, and 61% of the variance of output, consumption and investment growth, respectively.

Nauro Campos, Jarko Fidrmuc, Iikka Korhonen, 26 September 2017

The debate about the future of the Economic and Monetary Union entails a careful examination of the costs and benefits of the European single currency. This column takes stock of the empirical evidence on the euro’s effects on business cycle synchronisation. We find that synchronisation across European countries increased by 50% after 1999 (the year the euro was introduced) and that this increase was more pronounced in euro area countries.

Klaus Adam, Henning Weber, 26 September 2017

The productivity of many firms evolves over time, which impacts the optimal inflation rate, that is, the rate of price increase with the least distortionary effect on relative goods prices. This column presents estimates for the US that suggest that, due to firm-level productivity changes, the optimal inflation rate has dropped from somewhat over 2% in the mid-1980s to a current level of roughly 1%.

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