Macroeconomic policy

Francesco Furlanetto, Ørjan Robstad, Pål Ulvedal, Antoine Lepetit, 09 November 2020

Modern macroeconomic models imply that demand factors have only a small transitory effect, if any, on the productive capacity of the economy. By extending the econometric framework proposed by Blanchard and Quah, this column enables fluctuations in aggregate demand to have a long-run impact on the productive capacity through hysteresis effects. It finds that these demand shocks are quantitatively important in the US, in particular if the Great Recession is included in the sample. More specifically, demand-driven recessions lead to a persistent decline in employment and investment but leave labour productivity largely unaffected.

Patrick Honohan, 30 October 2020

With the knock-on financial impact of the Covid pandemic, it is likely that several countries could soon face macro-financial crises, with investors rushing for the exit (as in Lebanon, where a crisis is already well underway). Currency devaluation, capital controls, and bail-in are the main tools available to national financial authorities, but there is no universally agreed playbook. This column contrasts the post-Global Crisis recovery experiences of Cyprus, Iceland, and Ireland – each of them over-banked like Lebanon – and shows how different the mixture of these tools used in handling such country crises have been.

Joshua Aizenman, Hiro Ito, 27 October 2020

The economic policies of the US in the post-COVID era will have important implications for the global economy. This column outlines two different exit strategies for the US from the COVID-related debt-overhang and analyses their implications for emerging markets and global stability. A strategy of continuing loose fiscal policies and accommodating monetary policies may spur short-term growth but would also increase the risks a deeper crisis in the future. Alternatively, the US could adopt a two-pronged approach of shifting fiscal priorities towards expenses with high social payoffs and then promoting fiscal adjustments aimed at a primary surplus and debt resilience. The post-WWII success story illustrates the feasibility of, and gains from, a two-pronged fiscal strategy.

Victor Degorce, Eric Monnet, 21 October 2020

The surge in savings following the 2008-2009 Global Crisis and the recent pandemic have rekindled the interest of economists and policymakers in the paradox of thrift, formulated by Keynes in the 1930s. Subsequent research on the Great Depression of the 1930s, however, has not addressed the link between precautionary savings and growth. Using data on deposits in savings institutions of 22 countries, this column studies the fate of savings during the Great Depression and shows that Keynes' intuition was right. Banking crises had an impact on economic growth not only through the direct lending channel, but also indirectly through an increase in precautionary savings. This bears important lessons for today.

Patrick Bolton, Mitu Gulati, Ugo Panizza, 13 October 2020

The Covid-induced economic harm may soon result in multiple sovereign debtors moving into default territory – a situation that the global financial architecture is not built to tackle. This column makes the case for ex post state intervention in debt contracts to provide temporary legal protection to debtor countries while they divert resources to deal with the Covid-19 crisis. It shows that in the case of Greece, when such intervention was necessary, there were no negative spillovers on periphery euro area debt markets associated with the Greek ex post modification of contract terms.

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