Aida Caldera, Shashwat Koirala, 30 June 2020

International cooperation amplifies individual countries’ efforts; in the fight against the COVID-19 pandemic, international cooperation is not only useful, but indispensable. This column discusses eight priorities to strengthen international cooperation against COVID-19, both in the short term for crisis response, and to facilitate an inclusive and sustainable recovery. In the short run, cooperation between governments is needed to curb the pandemic and expedite exit from the crisis. In the medium and long run, internationally coordinated policies can facilitate recovery and the rebuilding of socioeconomic systems in inclusive and sustainable ways and help prepare for future risks and pandemics.

Oliver de Groot, Alexander Haas, 16 June 2020

The magnitude of the COVID-induced economic downturn is forcing central banks around the world to rethink the set of monetary policy tools available to them. Many central banks have long shied away from negative interest rates, concerned about the impact on bank profits and financial stability. This column explores how negative interest rate policies can be used by central banks to signal a commitment to a prolonged period of monetary accommodation. Using a quantitative monetary model, it shows that the signalling channel of negative interest rates can result in a rise in banks’ net worth even if net interest margins shrink.

Jeffrey Chwieroth, Andrew Walter, 23 May 2020

Although necessary, many of the economic policy responses to the COVID-19 crisis may end up damaging political incumbents in the medium and long term. This column presents evidence suggesting that voters expect great things from their leaders in deep crises. Yet the potential for great disappointment arises from the inevitable perceived inequities that will follow from the coronavirus crisis bailouts. As the pandemic exacerbates existing divisions within societies, the political costs predicted implies that only a minority of the most skilled political leaders are likely to survive this crisis.

Marcus Hagedorn, Kurt Mitman, 15 May 2020

Heterogeneous-Agent New Keynesian models offer new perspectives on fiscal and monetary policy interaction in the euro area. The current question is whether ECB measures are predominantly motivated to ensure price stability (with fiscal consequences a side effect), or whether they are motivated by an overriding economic policy objective. This column presents evidence that, according to the HANK models, there is no distinct separation between fiscal and monetary policy. Fiscal policy is an important determinant of inflation at the zero lower bound, and properly designed asset purchases are an effective instrument to satisfy the price stability mandate.

Francesco Bianchi, Renato Faccini, Leonardo Melosi, 13 May 2020

Fighting the consequences of the COVID-19 pandemic poses a difficult task for fiscal and monetary authorities alike. The current low interest rate environment limits the tools of central banks while the record high debt levels curtail the efficacy of fiscal interventions. This column proposes a coordinated policy strategy aiming at creating a controlled rise of inflation and an increase in fiscal space in response to the COVID-19 shock. The strategy consists of the fiscal authority introducing an emergency budget while the monetary authority tolerates an increase in inflation to accommodate this emergency budget.

Fredrik N G Andersson, Lars Jonung, 08 May 2020

Negative interest rates were once seen as impossible outside the realm of economic theory. However, recently several central banks have imposed such rates, with prominent economists supporting this move. This column investigates the actual effects of negative interest rates, taking evidence from the Swedish experience during 2015-2019. It is evident that the policy’s effect on the inflation rate was modest, and that it contributed to increased financial vulnerabilities. The lesson from the experiment is clear: Do not do it again.

Ceyhun Elgin, Gokce Basbug, Abdullah Yalaman, 07 May 2020

The economic measures that governments around the world have taken in response to the Covid-19 pandemic vary in breadth and scope. This column presents a comprehensive review of the measures adopted by 166 countries. The findings show that the median age of the population, the number of hospital beds per capita, GDP per capita, and the number of total cases are all significantly associated with the extent of the economic policy response.

Paul De Grauwe, Yuemei Ji, 05 May 2020

In times of crisis and extreme uncertainty, forward-looking policymaking becomes difficult. In the midst of the Covid-19 crisis, major central banks appear to be adopting policies based on current conditions, rather than forecasts. This column generalises this observation in a behavioural macroeconomic model which compares forward-looking and current-looking monetary policy. Although both approaches perform similarly in normal times, current-looking monetary policy performs better in crisis periods. When uncertainty is extreme, prudent central banks should be guided by what they observe, and not by unreliable forecasts.

Marcin Kolasa, Grzegorz Wesołowski, 01 May 2020

Several major central banks announced new rounds of massive asset purchases following the outbreak of the Covid-19 pandemic. This policy instrument seems to have performed well for economies that have been implementing it since the Global Crisis, but its spillover impact on external countries has remained a bone of contention within the policy debate. Using previous episodes of quantitative easing as a guideline, this column analyses its international spillovers, showing that they are qualitatively and quantitatively different from the impact of changing short-term rates by the major central banks.

Ricardo Caballero, Alp Simsek, 30 April 2020

The Covid-19 shock has caused large turmoil on financial markets. This column argues that non-financial supply shocks such as the current one can endogenously lead to financial shocks and severe contractions in asset valuations and aggregate demand, which substantially amplify a recession. Conventional monetary policy can mitigate the downward pressure as long as the interest rate is unconstrained. If it is, large-scale asset purchases by government facilities are needed to prevent a downward spiral.

Sebastian Hauptmeier, Fédéric Holm-Hadulla, Katerina Nikalexi, 22 April 2020

In many parts of the world, the economic fortunes of poorer and richer regions have drifted apart over recent years, triggering debate on how to explain and address this trend. This column adds a further angle to this debate: the link between monetary policy and regional inequality. Using data on economic activity at the city and county level in Europe, it documents pronounced heterogeneity in the regional patterns of monetary policy transmission. As a consequence of this heterogeneity, monetary policy tightening aggravates regional inequality and policy easing mitigates it. The COVID-19 crisis may temporarily reinforce regional inequality.

Rabah Arezki, 20 April 2020

COVID-19 will precipitate ‘peak demand’ for oil with dramatic consequences on oil-exporting countries in the short and medium run. This column provides a perspective on the role of monetary policy in these countries at different horizons. In the short run, (independent) monetary policy should flexibly target inflation. In the medium run, central banks need to coordinate with fiscal authorities to ensure that monetary policy operates around a credible and sustainable fiscal anchor. In the long run, central banks should beware of the existential threats posed by new risks related to stranded assets.

Mariarosaria Comunale, 20 April 2020

The concept of shock dependency of the pass-through emerged from an understanding that exchange rate movements, driven by different shocks, can have different effects on prices. This column attempts to shed a light on shock-dependent exchange rate pass-through for the euro area and its member states by drawing comparisons and looking at the robust results across the available structural empirical frameworks and theoretical models. It finds that different domestic and global shocks can be associated with widely different pass-throughs, but these are similar across models, with the largest value experienced in the case of monetary policy shocks. 

Olivier Blanchard, Jean Pisani-Ferry, 10 April 2020

The extraordinary operations that are under way in most countries in response to the COVID-19 shock have raised fears that large-scale monetisation will result in a major inflation episode. This column argues that so far, there is no evidence that central banks have given up, or are preparing to give up, on their price stability mandate. While there are obviously some reasons to worry, central banks are doing the right thing and the authors see no reason to panic.

Stephanie Ettmeier, Chi Hyun Kim, Alexander Kriwoluzky, 09 April 2020

The ongoing COVID-19 pandemic in Europe is severe and spreads economic uncertainty. This column explores the evolution of financial market participants’ expectations during the COVID-19 pandemic, estimating yield curves of bonds in France, Germany, Italy, and Spain. The authors carry out an event study to investigate the potential impact of European fiscal and monetary policy measures on these yields. The results suggest that policy measures must be large and coordinated on the European level, and that fiscal and monetary policy must act jointly to fight the pandemic’s negative economic consequences

Yosuke Takeda, Masayuki Keida, 17 April 2020

Communication strategies are increasingly seen as an important tool for central bankers to guide expectations. This column applies statistical natural language processing algorithms to press conferences given by two different governors of the Bank of Japan during a time without any formal changes in institutional arrangements for communication policy at the Bank. Communication strategies are found to differ vastly across the two governors, with one governor focusing on the topic of ‘discretion’ and the other on the topic of ‘policy goals’.

Rabah Arezki, Ha Nguyen, 01 April 2020

Countries in the Middle East and North Africa face a dual shock from the COVID-19 pandemic and a collapse in oil prices. This column explores the policy options available to deal with such shocks, arguing that authorities should sequence and tailor their responses. MENA countries should first focus on responding to the health emergency and economic depression, postponing fiscal consolidation linked to the persistent drop in oil prices until the recovery from the pandemic is well underway. 

Martin Blomhoff Holm, Pascal Paul, Andreas Tischbirek, 31 March 2020

Empirical evaluations of monetary policy have traditionally focused on the responses of macroeconomic aggregates. Instead, this column uses detailed administrative data from Norway to uncover substantial heterogeneity in the effects of monetary policy at the household level. The authors find that not only low-liquidity households but also high-liquidity ones show strong responses. Interest rate changes faced by borrowers and savers feed into consumption, and indirect effects of monetary policy are sizable, but occur with a delay. While the results confirm several predictions of recent heterogeneous-agent New Keynesian models, they also provide new challenges.

Lucrezia Reichlin, Dirk Schoenmaker, 26 March 2020

Fiscal and monetary policy coordination is not working in the euro area. This column argues that in order to rebalance the weight of both during major crises, the asymmetry between decision making at the ECB (by majority voting) and the ESM (by unanimity or qualified majority) must be harmonised. This is urgent since the ESM is the only instrument available to provide the common fiscal capacity needed to fight the COVID-19 pandemic.

Alexander Dietrich, Keith Kuester, Gernot Müller, Raphael Schoenle, 24 March 2020

The effects of the COVID-19 pandemic on the global economy are still largely unknown. The short-term economic impact will depend importantly on people’s expectations of the overall effect, and the amount of uncertainty thereof. This column uses a survey of US households to show that the expected economic effect is negative, large, and highly uncertain. An asset-pricing equation is used to quantify the implication of these expectations for the natural rate of interest. The natural rate declines by several percentage points, suggesting a role for monetary accommodation to (partially) offset the shock.

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