Macroeconomic policy

Benny Hartwig, Christoph Meinerding, Yves S. Schüler, 19 January 2022

In the aftermath of the global financial crisis, a consensus rapidly emerged that systemic risk – a central concept in financial stability – needed to be contained going forward. However, to this day experts cannot agree on how to measure systemic risk in the first place, with researchers having proposed a plethora of indicators. This column proposes an analytical approach designed to lend structure to this universe of indicators for measuring systemic risk.

Leonardo D'Amico, Francesco Giavazzi, Veronica Guerrieri, Guido Lorenzoni, Charles-Henri Weymuller, 14 January 2022

Over the last few years, there has been a growing consensus that the current rules of the Stability and Growth Pact are outdated, too complicated, and not countercyclical enough. The authors of this column present a proposal to strengthen the European fiscal framework based on two elements: a revision of the fiscal rules, and a plan to create a European Debt Agency to absorb the debt accumulated during the pandemic. This first of two parts focuses on the fiscal rules and proposes setting a ceiling on the growth rate of primary spending, to be revised over three-year intervals, targeting debt reduction over a ten-year horizon.

Jon Danielsson, Marcela Valenzuela, Ilknur Zer, 13 January 2022

The relationship between financial risk and economic growth is complex. This column finds that perceptions of high risk unambiguously harm growth, while perceived low risk has an initial positive impact, which eventually turns negative. Global risk has a stronger effect on growth than local risk, via its impact on capital flows, investment, and debt-issuer quality, challenging monetary policy independence.

Tobias Broer, Jeppe Druedahl, Karl Harmenberg, Erik Öberg, 06 January 2022

Early signs of a recession can lead to a negative feedback loop, with workers' concerns about unemployment dampening demand and thus deepening the recession. This column uses a heterogeneous agent model to quantify the importance of the ‘unemployment-risk’ channel for business cycle fluctuations in the US economy. It shows that the channel accounts for around one-third of observed unemployment fluctuations. As the demand amplification through precautionary savings is inefficient, this finding provides an additional rationale for stabilisation policies by policymakers. 

Peter Andre, Ingar Haaland, Chris Roth, Johannes Wohlfart, 23 December 2021

Inflation has recently surged in both the US and the EU. This column uses responses from surveys of a representative sample of the US population as well as academic economists and US firm managers to show that households and managers are more likely than experts to think that the current surge in inflation will be persistent. Since the narratives individuals use to explain movements in inflation appear central to whether inflation expectations remain anchored, communication strategies by policymakers could put emphasis on specific narratives that highlight that inflationary pressures are unlikely to persist.

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