Models that estimate optimal inflation rates struggle to accurately account for interest rates reaching the zero lower bound, due to the lack of historical data available. This column suggests periods of hitting the zero lower bound are longer than previously thought, and models the optimal inflation rate target on this. Given the uncertainty associated with measuring the historical frequency and duration of such episodes, the wide range of plausible optimal inflation rates implies that any inflation targets should be treated with caution.
Marc Dordal i Carreras, Olivier Coibion, Yuriy Gorodnichenko, Johannes Wieland, 21 September 2016
Enrique Sentana, 16 September 2016
Determining which risks are worth taking is one of the key problems facing financial market participants. Central to this is the time-varying nature of volatility. This column examines the Chicago Board Options Exchange volatility index, VIX, which has become the standard measure of volatility risk. Complementary approaches to pricing VIX derivatives are considered, and the tumultuous economy since the Great Recession is used to assess the empirical performance of the different models.
Sergei Guriev, Biagio Speciale, Michele Tuccio, 13 September 2016
A common explanation for the growth in unemployment in southern Europe after the Great Recession is lack of flexibility in over-regulated labour markets. This column examines wage adjustment in regulated and unregulated labour markets in Italy during the recent crisis. Using data on immigrant workers, it shows that before the crisis wages in the formal and informal sectors moved in parallel. During the crisis, however, formal wages did not adjust downwards, while informal labour wages did. Greater flexibility in wages in the formal market could slow the decline in employment.
Julian Kozlowski, Laura Veldkamp, Venky Venkateswaran, 11 September 2016
The Great Recession has had long-lasting effects on credit markets, employment, and output. This column combines a model with macroeconomic data to measure how the recession has changed beliefs about the possibility of future crises. According to the model, the estimated change in sentiment correlates with economic activity. A short-lived financial crisis can trigger long-lived shifts in expectations, which in turn can trigger secular stagnation.
Tito Boeri, Pietro Garibaldi, Espen Moen, 08 September 2016
The Eurozone's sustained rise in youth unemployment since 2008 threatens to create a 'lost generation'. This column presents evidence that this is, in part, an unintended consequence of pension reforms in southern Europe that locked in older workers. In future, reforms that create flexible retirement ages alongside variable pension levels could minimise the impact on youth unemployment without increasing the state's long-term pension liabilities.
Kurt Mitman, Dirk Krueger, Fabrizio Perri, 30 August 2016
Previous research found that income and wealth inequality had little impact on the aggregate dynamics of consumption, investment and output. This reinforced the idea that we can study downturns in the economy using representative agents. This column argues that household inequality affects both the depth of a recession and the welfare losses of those affected by it. Therefore we should explicitly measure and model household heterogeneity when we consider the impact of business cycle fluctuations and the welfare consequences of economic crises.
Laurence Ball, 24 August 2016
Much of the damage from the Great Recession is attributed to the Federal Reserve’s failure to rescue Lehman Brothers when it hit troubled waters in September 2008. It has been argued that the Fed’s decision was based on legal constraints. This column questions that view, arguing that the Fed did have the legal authority to save Lehman, but it did not do so due to political considerations.
Raju Huidrom, M Ayhan Kose, Franziska Ohnsorge, 13 August 2016
Fiscal multipliers tend to be larger when the fiscal position of governments is stronger. This column argues that the link between fiscal multipliers and fiscal positions is independent of the business cycle. Although multipliers are generally larger in recessions, they are smaller during times of high debt, even during recessions, relative to what they would be if government debt were lower.
Stefano Scarpetta, Mark Keese, Paul Swaim, 25 July 2016
The labour market recovery in OECD countries has been steady but slow since the Great Recession. More worrying is the fate of wage growth over the same period. This column assesses the implications of stagnation in the labour market for growth, wages, and inequality. It finds that structural weaknesses in labour market performance have become more visible as markets recover from the Great Recession. The policy response must include macroeconomic policies aimed at strengthening investment, and structural policies to support growth while nudging workers towards higher-skilled jobs.
Federico Cingano, Francesco Manaresi, Enrico Sette, 24 June 2016
Negative shocks to bank balance sheets are problematic not just for financial markets, but for employment and economic growth more widely. This column uses evidence on a bank liquidity shock in Italy in 2007-10 to show the impact on firms’ production, investment, and employment. Firms borrowing from banks with a high exposure to the shock experienced a more intense fall both in credit flows and in investment expenditure. While the credit cut has been homogeneous across borrowers, firms with easier access to external finance were able to contain the negative consequences of the drop in credit for investment.
Thomas Gehrig, 25 May 2016
During normal operations, price discovery is an important feature of decentralised market trading. But the process can be distorted when markets are under great stress, such as during the run up to the collapse of Lehman Brothers in 2008. This column uses trading data from the days leading up to and following the collapse to show that price discovery at US stock exchanges remained remarkably efficient, even at the height of the turmoil.
Ioana Marinescu, 01 March 2016
During the last recession the US experienced some of the highest unemployment rates in its history, prompting the government to dramatically extend the duration of unemployment benefits. Economists have since debated whether this action helped or hindered the recovery of the labour market. This column finds evidence of a ‘silver lining’ effect – extended unemployment benefits led people to submit fewer job applications, but this reduction increased the chances of each application being successful. Hence the overall impact of extending benefits on aggregate unemployment was rather small.
Refet Gürkaynak, 12 February 2016
Since the beginning of the Global Crisis, the ECB has faced a sequence of problems. This column discusses some of these problems. It also highlights the successful first reaction of the ECB to the crisis and its adequate monetary policies. There are still unresolved structural problems in the Eurozone, however. Among them are the lack of a proper banking union and the need for a better fiscal policy coordination. And the job for such a change within the Eurozone cannot be delegated to the ECB.
Giovanni Federico, Antonio Tena-Junguito, 07 February 2016
Parallels are often drawn between the Great Recession of the past decade and the economic turmoil of the interwar period. In terms of global trade, these comparisons are based on obsolete and incomplete data. This column re-estimates world trade since the beginning of the 19th century using a new database. The effect of the Great Recession on trade growth is sizeable but fairly small compared with the joint effect of the two world wars and the Great Depression. However, the effects will become more and more comparable if the current trade stagnation continues.
Dae Woong Kang, Nick Ligthart, Ashoka Mody, 19 January 2016
Although the Great Recession was viewed as a US problem, the Eurozone was affected by it from the start. This column compares the monetary policy responses to the Crisis by the Fed and the ECB. It argues that the US approach has been much more aggressive and proactive. The ECB failed to provide stimulus when needed, and as a result the Eurozone might slip into a low-inflation trap.
Janet Currie, 15 January 2016
Studies of the effects of economic fluctuations on health have come to wildly different conclusions. This may be because the effects are different for different groups. Using US data, this column looks at the health consequences of the Great Recession on mothers, a sub-population that has thus far been largely neglected in the literature. Increases in unemployment are found to have large negative health effects and to increase incidences of smoking and substance abuse among mothers. These effects appear to be concentrated on disadvantaged groups such as minorities, and point to short- and long-term consequences for their children.
Alessandra Bonfiglioli, Gino Gancia, 19 December 2015
The Great Recession highlighted the prominent role that economic uncertainty plays in hindering investment and growth. This column provides new evidence that economic uncertainty can actually play a positive role by promoting the implementation of structural reforms with long-run benefits. The effect appears to be strongest for countries with poorly informed voters. These findings suggest that times of uncertainty may present an opportunity to implement reforms that would otherwise not be passed.
Kevin Daly, Tim Munday, 28 November 2015
The fallout from the Global Crisis and its aftermath has been deeply damaging for European output. This column uses a growth accounting framework to explore the pre-Crisis and post-Crisis growth dynamics of several European countries. The weakness of post-Crisis real GDP in the Eurozone manifested itself in a decline in employment and average hours worked. However, decomposing growth for the Eurozone as a whole conceals significant differences across European countries, in both real GDP growth and its factor inputs.
Refet Gürkaynak, Troy Davig, 25 November 2015
Central banks around the world have been shouldering ever-increasing policy burdens beyond their core mandate of stabilising prices. This column considers the social welfare implications when central banks take on additional mandates that are usually the domain of other policymakers. Additional mandates are shown to worsen trade-offs faced by the central bank, while distorting the incentives of other policymakers. Central bank ‘mandate creep’ may be detrimental to welfare.
Andrew Foote, Michel Grosz, Ann Stevens, 17 November 2015
In light of the Great Recession, we continue to learn new ways in which economic downturns directly affect the labour market. This column suggests that following an adverse demand shock, individuals exit local labour markets primarily through migration, but that has become less prominent in the Great Recession. Faced with declining economic prospects, workers are becoming more likely to stay put, without re-entering the labour market.