Macroeconomic policy

Florin Bilbiie, Gauti Eggertsson, Giorgio Primiceri, 01 March 2021

How the US economy will emerge from the COVID-19 pandemic hinges in part on what will happen to the large amount of ‘excess savings’ that US households have accumulated since last March. This column argues that, in fact, these savings are not that excessive when considered against the backdrop of the unprecedented government interventions adopted over the past year in support of households, and that they are unlikely to generate a surge in demand post-pandemic.  

Manoj Pradhan, Charles Goodhart, 26 February 2021

Milton Friedman and Bill Phillips most likely assumed that their separate methods for predicting inflation would lead to much the same outcomes. Recently, however, monetary aggregates and the Phillips curve have provided extremely disparate signals. This column discusses recent economic developments leading to these disparate signals, concluding that inflation will most likely end up somewhere between the predictions of the two models – which is almost certainly higher than what central banks and the IMF are expecting.

Jean-Pierre Landau, 08 February 2021

The fiscal stimulus pushed by the new US administration – much larger that the remaining output gap – has recently triggered a new and fascinating debate on the risk of inflation. This column argues, however, that the focus on short-term imbalances may obscure the long-term risk of fiscal dominance. This points to the need for a new, revitalised approach to central bank independence which would aim less at solving the time-inconsistency problem (eliminating the incentive to cheat) and more on preserving central banks’ unconstrained ability to act and avoid fiscal dominance in the future.

Cristiana Belu Manescu, Elva Bova, 07 February 2021

Expenditure rules are recognised as one of the most effective tools to manage budgetary aggregates, and many EU members have recently chosen to add an expenditure rule to their national frameworks. In many cases, the 2012 introduction of the expenditure benchmark at the EU level was a major catalyst. Against this background, this column takes stock of the current design of national expenditure rules across EU member states and provides new evidence on their effectiveness in reducing the procyclicality bias of fiscal policy.

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.

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