Global economy

Gideon Bornstein, Per Krusell, Sérgio Rebelo, 01 March 2021

Oil markets have long been central to discussions of the global economy, and fluctuations in oil prices frequently gain widespread attention. This column explores the impact of the rising use of fracking on how oil markets are best conceived within modern macroeconomic theory. The author's model predicts that as fracking accounts for an increasingly sizeable fraction of the world oil supply, it may herald a new era of lower, more stable oil prices.

Natalia Martín Fuentes, Isabella Moder, 05 February 2021

The COVID-19 pandemic is an unprecedented shock to the global economy and its potential scarring effects are thus difficult to predict. This column presents estimates of the long-term impact of past crises, suggesting that past epidemics and other exogenous shocks did not cause scarring effects, while the negative impact of financial crises on the long-term level of potential growth tends to be persistent. However, unlike previous exogenous shocks, the COVID-19 pandemic could affect the supply side of the economy through several channels and thus lead to a permanently lower level of potential output.

Elga Bartsch, Agnès Bénassy-Quéré, Giancarlo Corsetti, Xavier Debrun, 15 December 2020

When the COVID-19 crisis hit, neither monetary easing nor fiscal support alone was sufficient to buffer the shock. Monetary and fiscal authorities had to join forces to deliver the required macroeconomic backing, blurring the traditional boundaries between monetary and fiscal interventions. While some interpret these developments as the end of a decades-old consensus on the respective roles of central banks and treasuries, others see a stress test calling for the existing paradigm to adapt. Putting the notion of policy mix at the centre of the discussion, this column argues that policymakers have usefully exploited complementarities between monetary and fiscal instruments. However, such monetary-fiscal coordination can only work if the credibility of commitments to desirable long-term goals – healthy growth under price stability and public debt sustainability – is preserved and backed by a resilient institutional framework. Because effective monetary-fiscal coordination has its limits, rebuilding policy space is a priority. To do so, internationally coordinated efforts to raise equilibrium interest rates, correcting current imbalances between investment and saving, could set in a virtuous circle of stronger growth and reduced indebtedness. 

Elena Flores, Lucia Granelli, 14 December 2020

In April 2020, G20 Finance Ministers and Central Bank Governors endorsed the ‘G20 Action Plan Supporting the Global Economy Through the COVID-19 Pandemic’, setting out the key principles guiding the global response to the crisis and commitments to specific actions for driving forward international economic cooperation. The G20 agenda in 2021 – under the Italian Presidency – will be closely linked to the Action Plan. This column develops a few principles to support the G20’s work in 2021.

Julian di Giovanni, Andrei Levchenko, Isabelle Mejean, 14 December 2020

Superstar firms have recently been linked to phenomena such as top income inequality, comparative advantage in trade, and the fall in the labour share. Another important feature of superstar firms is their international trade linkages. This column studies how susceptible an economy with few large firms which account for the majority of imports and exports is to international business cycle shocks.  It finds that at the micro level, such larger firms respond more strongly to foreign shocks than smaller firms. At the macro level, this heterogeneity dampens the domestic GDP response to a foreign shock. 

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