Macroeconomic policy

Wouter den Haan, Thomas Drechsel, 16 January 2019

It is unavoidable that empirical models are misspecified in various ways, but adopted empirical methodologies rarely address this. This column focuses on the misspecification of exogenous structural disturbances which are the forces that drive fluctuations in modern business cycle models. It shows that the conclusions drawn from estimated models can be severely distorted if structural disturbances enter the model in an incorrect way, even if the misspecification is minor. It proposes the novel concept of an agnostic structural disturbance, which can be used to detect and correct for misspecification of structural disturbances. While agnostic in nature, studying how ASDs affect model properties enables us to give them an economic interpretation.

Samba Mbaye, Marialuz Moreno Badia, Kyungla Chae, 12 January 2019

Since the financial crisis researchers have extensively explored the dangers of excessive public debt, but excessive private debt has received less attention. This column documents a common form of indirect private sector bailout that goes largely unnoticed. Whenever households and firms are caught in a debt overhang and need to deleverage, governments come to the rescue through a countercyclical rise in public debt. This indirect substitution takes place even in the absence of a crisis.

Meghana Ayyagari, Thorsten Beck, Maria Soledad Martinez Peria, 11 December 2018

Macroprudential tools have been implemented widely following the Global Crisis. Using data from 900,000 firms in 49 countries, this column finds that such policies are associated with lower credit growth during the period 2003-2011. The effects are especially significant for micro, small and medium-sized enterprises and young firms that are more financially constrained and bank dependent. The results imply a trade-off between financial stability and inclusion.

Jane Kelly, Julia Le Blanc, Reamonn Lydon, 25 November 2018

Loan-to-value limits and other borrower-based macroprudential measures are now used in two-thirds of advanced economies. This column uses survey data to document changes in credit standards in a cross-section of countries in the run-up to, and aftermath of, the financial crisis. There is clear evidence of laxer credit standards in countries that experienced a real estate boom-bust, and a significant tightening after the bust. The results imply that compared to earlier years, younger and lower-income borrowers have to save for longer before buying.

Christiane Nickel, Derry O'Brien, 20 November 2018

Just like other central banks, the ECB generally monitors a range of measures of underlying inflation to help distinguish noise from signal in headline inflation. This column describes measures of underlying inflation that are routinely used at the ECB for measuring euro area headline inflation and provides some insights on their interpretation. Each of the measures has merits and shortcomings and they should be taken together in arriving at a first-pass assessment of developments in headline inflation. At the same time, the measures need to be complemented by a more structural examination of their driving forces in order to better understand the inflation process.

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