Macroeconomic policy

Kathryn Judge, Anil Kashyap, 21 July 2021

That a shock the size of the Covid-19 pandemic would trigger distress in financial markets is far from surprising. What is surprising is how much of the distress arose in domains that could have been identified posing a potential threat to stability well before the pandemic hit. This column explores how the US financial regulatory regime is falling short and proposes reforms to increase the likelihood that policymakers will identify and address threats to stability – before they harm the real economy. 

Rui Esteves, Seán Kenny, Jason Lennard, 20 July 2021

There is little consensus on the macroeconomic impacts of sovereign debt crises, despite the regularity of such events. This column quantifies the aggregate costs of defaults using a narrative approach on a large panel of 50 sovereigns between 1870 and 2010. It estimates significant and persistent negative effects of debt crises starting at 1.6% of GDP and peaking at 3.3%, before reverting to trend five years later. In addition, underlying causes matter. Defaults driven by aggregate demand shocks result in short-term contractions, whereas aggregate supply shocks lead to larger, more persistent losses. 

Laurent Ferrara, Valérie Mignon, 17 July 2021

Identifying the peaks and troughs of recessionary episodes helps economists to understand the conditions surrounding crises. But deciding when a recession starts or finishes is not straightforward, and several methods exist. This column presents the dating specification for the French Business Cycle Dating Committee, describing how the group identifies key phases in France’s economic performance based on a quantitative and a qualitative pillar. The committee has dated the peak of the recession linked to the recent Covid-19 pandemic to the last quarter of 2019, it is still too early to identify the exit date of this recession, which is unprecedented in its source and profile. 

Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge, 14 July 2021

Global inflation has rebounded from last year’s lows faster and sooner than after any previous global recession in the past five decades. This column presents model- and survey-based estimates which suggest that global inflation will rise by about 1-1.4 percentage points this year, pushing it above target in about half of inflation-targeting emerging market and developing economies. This may not be reason for concern provided the increase is temporary and inflation expectations remain well-anchored. However, even if temporary, higher global inflation may complicate the near-term policy choices of economies that still rely on expansionary support measures to ensure a durable recovery. 

Marek Ignaszak, Petr Sedláček, 02 July 2021

To gauge the efficacy of policies aimed at spurring growth, we must first fully understand the sources of aggregate growth. This column argues that understanding the drivers of economic growth requires paying attention not only to productivity and R&D dynamics at the firm level, but also to changes in demand for firms’ products. The authors provide a new perspective on commonly used supply-side pro-growth policies and open the door to analysing demand-side policies such as public procurement or product market regulation, which have been present in the policy debate but have largely escaped academic circles.

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