Macroeconomic policy

Marco Buti, András Chabin, Björn Döhring, João Leal, 13 July 2018

Next week, after ten days of swift, flat riding, the Tour de France reaches the Alps. The European economy, meanwhile, has been pedalling uphill since the beginning of this year. 2017 was easy riding as strong global growth boosted domestic investment, but economic growth has had to move into lower gear in the first half of 2018 as this transmission is no longer working properly, and escalating trade conflicts could derail it. This column presents the European Commission’s Summer 2018 Interim Forecast, which suggests that a tightening of global financial conditions could add to the headwinds, though central banks' balance sheets will remain large for a long time, and domestic fundamentals in the euro area remain strong. 

Akvile Bertasiute, Domenico Massaro, Matthias Weber, 07 July 2018

A key critique of commonly used macroeconomic models is their reliance on the assumption of rational expectations. This column addresses this concern with a model of currency unions wherein expectations are formed through behavioural reinforcement learning, that is, learning from past mistakes. The model suggests that economic integration is of crucial importance to the functioning of a currency union. Monetary policy, in contrast, can only play a limited stabilising role.

Òscar Jordà, Moritz Schularick, Alan Taylor, Felix Ward, 25 June 2018

Asset markets in advanced economies have become more integrated than ever before in the history of modern finance. This is especially true for global equities starting in the 1990s. This column argues that this increase in synchronisation is primarily driven by fluctuations in risk appetite rather than in risk-free rates, or in dividends. US monetary policy plays a major role in explaining such fluctuations, and this transmission channel affects economies with both fixed and floating exchange rates, although the effects are more muted in floating rate regimes.

Narayana Kocherlakota, 18 June 2018

Modern macro models offer insights into the outcomes of adopting entire policy regimes, but in reality, policymakers are rarely required to make such broad-ranging policy decisions. This column suggests how theoretical and applied microeconomics can be used to develop a framework for modern macroeconomic policymaking, and demonstrates how game-theoretic principles could be used to make series of sequential policy decisions. While this approach requires large amounts of data, it would allow academic macroeconomists to refocus on important policy questions.

Thomas Cooley, Espen Henriksen, 11 June 2018

Demographic change represents an important contributing factor to the slowdown of long-run growth. This column explores some of the channels through which this occurs and how the effects of demographic change can be mitigated. Policies that target consumption-saving choices, labour-leisure choices, and human capital accumulation over the lifecycle are likely to be most effective.

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