Macroeconomic policy

Ozge Akinci, Roland Beck, Paola Donati, Linda Goldberg, Livio Stracca, 15 February 2019

While some improvements have occurred in the wake of the Global Crisis, the international monetary system still is rife with puzzles and challenges. This column summarises the latest Global Research Forum, which took stock of global financial stability a full decade on from Lehman. The starting points for many discussions were that international financial linkages remain strong, but have evolved in their composition; the US dollar continues to be the key currency for international trade and financial transactions; and banking systems have increased their resiliency and broadened their toolkits for dealing with stresses. Meanwhile, corporate debt issuance has soared and average US dollar-denominated liabilities have increased in most major emerging market economies.

Antoine Berthou, Caroline Jardet, Daniele Siena, Urszula Szczerbowicz, 08 February 2019

Escalating tensions between the US and its trading partners have made a global trade war more likely. In addition to the direct effect due to the increase in tariffs, a trade war may also affect GDP via indirect channels, such as a drop in productivity due to uncertainty and changes in the production environment. Using a multi-country model, this column shows that a global and generalised 10 percentage point increase in tariffs could reduce the level of global GDP by almost 2.0% on impact and up to 3.0% after two years, when all the additional indirect channels materialise. 

Ralf Fendel, Nicola Mai, Oliver Mohr, 17 January 2019

The flattening of the US yield curve has left academics, central bankers and market commentators divided, with one camp interpreting it as a sign of impending recession (in line with historical patterns), and the other camp arguing that this time is different given unprecedented changes in monetary policy and other structural forces. This column argues that the ECB’s quantitative easing programme undermined the performance of term spreads as predictors of recessions. It suggests and tests a modified term spread and several other variables that are more successful at predicting recessions. 

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.

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