Alistair Dieppe, 18 September 2020

Since the 2008 global financial crisis, improvements in many key correlates of productivity growth have slowed or gone into reverse, and labour reallocation to more productive sectors from less productive ones has also weakened. Furthermore, the pace of convergence of emerging market and developing economies to advanced-economy productivity levels has slowed. This column argues that the COVID-19 pandemic is likely to compound the slowdown, with profound implications for development outcomes. A comprehensive broad-based approach is necessary to rekindle productivity.

Yuxian Chen, Yannis Ioannides, 15 September 2020

With the COVID-19 pandemic raging at the beginning of the summer of 2020, countries that depend heavily on international tourism were confronted with the dilemma of whether or not to let travel restart. This column uses international data to explore the relationship between tourism specialisation and short-run economic growth. The results suggest that a 1% increase in tourism specialisation is associated with 0.01 percentage point increase in the growth rate of GDP per capita for OECD countries. This is in line with previous findings but is based on up-to-date panel data.

Itamar Drechsler, Alexi Savov, Philipp Schnabl, 11 September 2020

In a recent speech in Jackson Hole, Fed Chair Jay Powell laid out the Fed’s new monetary policy framework.  Under this framework, the Fed will allow inflation to run above its 2% target in order to boost employment following a downturn.  The new framework marks a departure from the perceived wisdom of the 1970s’ Great Inflation.  Under this perceived wisdom, the Fed must respond aggressively to rising inflation or risk losing its credibility and letting inflation spiral out of control.  New research on the Great Inflation challenges this perceived wisdom and offers a new explanation for what really drives inflation.  Instead of Fed credibility, this explanation puts the financial system and how it transmits monetary policy front and centre.  In doing so, it reconciles the 1970s with the current environment and provides a foundation for understanding why the Fed’s new framework is unlikely to trigger runaway inflation.

Eric Lonergan, Megan Greene, 03 September 2020

The low interest rate environment since the Global Financial Crisis has led economists and analysts to suggest that major central banks have run out of monetary policy tools with which to face major downturns, including the Covid-19 crisis. This column argues that a dual interest rate approach could help to eliminate the effective lower bound and given central banks infinite fire power. By employing dual interest rates, central banks can go beyond targeting short-term interest rates and providing emergency liquidity to provide a stimulus across the economy. As political support for fiscal stimulus in the face of the Covid-19 crisis wanes, central banks can and should step in with overwhelming force.

Robert McCauley, 26 August 2020

On 23 March 2020, the Federal Reserve announced that it would buy investment grade corporate bonds, and on 9 April set the amount at up to $250 billion and extended the purchase to junk bonds. This column shows that these interventions succeeded in stabilising credit markets: prices lifted and dealing spreads narrowed. However, emergency lending powers provide an inadequate basis for Federal Reserve operations in corporate bonds. In light of these findings, congressional authority to buy and to sell corporate bonds alongside US Treasuries would help to align Federal Reserve operations with what has become a capital-market centred financial system

Davide Delle Monache, Ivan Petrella, Fabrizio Venditti, 24 August 2020

The fast rebound of US stock prices following the Covid-19 shock has reignited discussions over ‘frothiness’ in stock markets. This column examines how asset prices are affected by drastic shocks to the real economy, and what factors drive this relationship. Evidence from the investigation suggests that, from a longer-term perspective, high asset valuations may reflect more than just investor optimism. The greater expected income, in comparison to government bonds, could be the key as to why investors are continuing to trust in the stock market, irrespective of the turbulent wider economic climate.

Gaston Gelos, Umang Rawat, Hanqing Ye, 20 August 2020

Emerging markets and developing countries are particularly vulnerable to economic shocks such as that posed by COVID-19, not least because of their often weaker monetary policy frameworks. This column discusses the extent to which these economies have been able to react to the crisis with a loosening of monetary policy. While the initial inflation level is an important determinant of a country’s ability to cut rates, additional institutional factors can also affect their ability to conduct countercyclical monetary policy during the crisis.   

Robin Döttling, Sehoon Kim, 19 August 2020

Socially responsible investing has been at the centre of recent regulatory scrutiny and academic debate. This column explores how retail investors’ preferences for socially responsible investments respond to market distress, as revealed within mutual fund flows during the COVID-19 pandemic. The results suggest that funds with the highest sustainability ratings experience sharper declines in flows. This suggests that there tends to be a shift away from sustainability among retail investors’ preferences in the face of an economic shock, highlighting a source of fragility in the increasingly popular socially responsible investment  market. 

Reda Cherif, Fuad Hasanov, 15 August 2020

Lockdown measures, contact tracing, and widespread testing have dominated the policy responses of many countries to the Covid-19 crisis. This column argues that a universal testing and isolation policy is the most viable way to vanquish the pandemic. Its implementation requires an epidemiological, rather than clinical, approach to testing, and requires the ramping up of testing kit production in order to achieve a scale and speed that the market alone would fail to provide. The estimated cost of universal testing is dwarfed by its return, mitigating the economic fallout of the pandemic.

Marcin Wolski, Patricia Wruuck, 05 August 2020

The COVID-19 crisis has had a substantial impact on labour markets throughout Europe. This column uses new data sources based on Google Trends reports in order to investigate the speed of transmission of the crisis into individuals’ concerns about becoming unemployed. The results indicate that this transmission is linked to corporate resilience. A stronger financial position of firms to withstand liquidity shortfalls may have helped to cushion the deterioration in job market sentiment during the outbreak of the pandemic, suggesting the importance of bolstering liquidity as a way of sheltering jobs. 

Marco Le Moglie, Giuseppe Sorrenti, 01 August 2020

Criminal organisations invest vast sums of money within the legal economies of many countries worldwide. These investments provide criminal organisations with a powerful tool to raise forms of social consensus in some portions of the population. This column provides a characterisation of organised crime’s investment in Italy’s legal economy, a country historically plagued by the presence of criminal groups. The results indicate that during periods of economic and social downturn, organised crime may capitalise on the weaknesses of the institutional response to the crisis, consolidating and possibly expanding, its role as an investor in the legal economy.

Gianluca Violante, 31 July 2020

Most high earners bounce back from recessions. But Gianluca Violante tells Tim Phillips that, for the last 50 years, it has been a different story for low earners. 

Muhammad Cheema, Robert Faff, Kenneth Szulczyk, 25 July 2020

The COVID-19 pandemic has severely impacted the financial markets, which has triggered a flight from risky assets to safe haven assets. This column compares the performance of the safe havens across the world’s ten largest economies during COVID-19 and the 2008 Global Financial Crisis. The findings suggest that the character of safe haven assets has changed since the 2008 crisis. Gold, the traditional safe haven asset, has lost its glitter. However, the Swiss franc, the US dollar and US Treasuries retained their safe haven status, and Tether, a cryptocurrency, shows some promise.

Robin Greenwood, Samuel G. Hanson, Andrei Shleifer, Jakob Ahm Sørensen, 15 July 2020

There is a long-standing debate on whether financial crises can be predicted. This column draws on a chronology of past financial crises and data on credit and asset prices for a panel of 42 countries between 1950-2016 and finds that if there is a large credit expansion with an asset price boom, then financial crises are highly predictable. These results are used to motivate a simple indicator that identifies periods of potential credit-market overheating. The indicator is shown to predict past crises in advance, suggesting that policymakers have time to act and take prophylactic policy interventions.

Marco Buti, 13 July 2020

Both the severity of the recession in Europe in 2020 and the subsequent bounce back of economies are likely to differ markedly across member states. Avoiding that the current crisis risks will be remembered as the Great Fragmentation is a key goal of the EU strategy. This column looks at the lessons learned during the financial crisis, and argues that a more consensual narrative, the lower risks of moral hazard and the rising political awareness that Europe has to count on ‘indigenous’ growth drivers provide a better chance of adopting an ambitious EU policy response. Whether it will also lead to deeper political integration, will depend on finalising long-lasting open institutional 'chantiers' such as Banking Union and Capital Markets Union.  

Nicolas Gonne, Olivier Hubert, 08 July 2020

The shutdown of passenger air travel at the height of the COVID-19 pandemic slowed the spread of the disease but caused major economic losses for the sector. This column presents a cost-benefit analysis of the global freeze of passenger air traffic. While any conclusion is highly dependent on a handful of factors, including the controversial and difficult-to-calculate ‘value of a statistical life’, the simulations provide useful anchoring points at a time when governments are contemplating reopening air routes, as well as in the face of a potential second wave of infections.

Martin Götz, Luc Laeven, Ross Levine, 07 July 2020

Banks with more equity tend to lend more, create more liquidity, have higher probabilities of surviving crises and if they do, they tend to recover faster. The degree to which a bank issues new stock to replenish bank equity in response to a crisis is therefore crucial. This column shows that ownership structure is an important determinant of a bank’s new stock issuance during a crisis. US banks with greater insider ownership are found to have had significantly less common stock sales following the onset of the 2008 Global Crisis.

Robert Gilhooly, Carolina Martinez, Abigail Watt, 22 June 2020

China has implemented a wide range of measures to support the economy through the ongoing coronavirus shock. This column examines China’s policy response, and suggests that the recent loosening in financial conditions should support activity over the next six to nine months, but it will only be at best half that seen in 2016 and a third of that after the Global Crisis given the relative change in financial conditions thus far. Moreover, the policy levers are at best only 40% of that deployed during the Global Crisis. This contrasts with the approach of many other countries, which have reacted more aggressively to the coronavirus shock. 

Dirk Niepelt, Martín Gonzalez-Eiras, 05 June 2020

The COVID-19 shock has changed the discipline of economics in that it has brought an interest in epidemiology into the foreground of economic analysis. This column explores how traditional models of infectious diseases can be combined with an additional economic layer on top. This hybrid approach can help draw accurate predictions for the long run impact of the crisis, without substantive loss in terms of ‘realism’ or flexibility.

Anil Ari, Sophia Chen, Lev Ratnovski, 30 May 2020

Non-performing loans are a crucial policy consideration, especially in times of wider economic crisis. This article uses a new database covering 88 banking crises since 1990 to draw lessons for post-COVID-19 resolution of non-performing loans.  Compared to the 2008 crisis, the pandemic poses some different challenges. Despite some respite from the credit-crash of 2008, policymakers today are faced with substantially higher public debt, less profitable banks, and often weaker corporate sector conditions, making resolution of non-performing loans even more challenging.



CEPR Policy Research