Claudia Foroni, Massimiliano Marcellino, Dalibor Stevanovic, 29 September 2020

Forecasting the recession and recovery from the COVID-19 crisis is of substantial policy interest. The pandemic shock shares both similarities and differences with previous crises, such as the financial crisis of 2007-2009. This column evaluates the ability of different forecasting and nowcasting approaches to predict the COVID-19 economic shock and forecast the potential recovery path. It shows that adjusting for forecasting errors made during the financial crisis of 2007-2009 better aligns the COVID forecasts with observed data. The results suggest a slow recovery to pre-COVID-19 levels, lasting several years.

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.

Charles Goodhart, Tatjana Schulze, Dimitri Tsomocos, 04 August 2020

A decade of near-zero, and even negative, interest rates in advanced economies has both encouraged the continued accumulation of debt and a search for yield in riskier assets, while at the same time eroding bank profitability in the retail business. This column discusses some of the palliative measures that central banks have taken to offset the erosion of bank profitability, and raises the question of whether, and how, the longer-term implications of the excessive accretion of debt will be handled.

Alex Cukierman, 27 July 2020

The use of helicopter money as a monetary policy response to Covid-19 has drawn significant attention over recent months. This column offers a comparison of helicopter money and quantitative easing, as used in the wake of the global financial crisis. By evaluating the similarities and differences, as well as the contrasting contexts of each crisis, key advantages and disadvantages are identified. It concludes that the two policy mechanisms may not be as different as first thought, and helicopter money could well be crucial in combating the economic effects of COVID-19. 

Thorsten Beck, Orkun Saka, Paolo Volpin, 10 July 2020

A rapidly expanding literature has shown the importance of political economy factors for legislative and regulatory actions in the financial sector and ultimately financial sector stability and efficiency. This column reports on recent research in this field, presented at the first London Political Finance, including work on financial fragility leading to the rise of right-wing extremist parties, private interests in financial regulation, financial gains from political connections, political beliefs and financial decisions and the role of media in financial decisions.  It lays out some of the important takeaways and suggests directions for further research that can shed light on the remaining issues.

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.

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.

Alina Kristin Bartscher, Moritz Kuhn, Moritz Schularick, 18 May 2020

Household debt-to-income has quadrupled in the US since WWII. This column presents historical evidence suggesting that debt-to-income ratios have risen most dramatically for middle-class households with low income growth. Middle-class households have increasingly tapped into rising housing wealth to finance spending in excess of income. Home-equity based borrowing accounts for 50% of the increase in US housing debt and turned the middle-class into the epicentre of financial fragility. 

Chang Ma, John Rogers, Sili Zhou, 13 May 2020

Forecasting the progress and impact of COVID-19 is central to the planning of policymakers around the world. This column provides a historical perspective by examining the immediate and bounce-back effects from six post-war disease shocks. GDP growth contractions are immediate and sizeable, but vary across countries. Despite an immediate ‘bounce back’, GDP tends to remain below its pre-shock level for several years. The negative effect on GDP is felt less in countries with larger first-year responses in government spending, especially on health care, and the indirect effects on GDP growth from affected trading partners are also important.

Gene Ambrocio, 09 May 2020

Across Europe, the COVID-19 pandemic has led to sharp declines in household sentiment and increases in the dispersion of household views about the state of the economy as well as their own individual finances. In contrast, household uncertainty has been left relatively unchanged. This column finds that the drop in household sentiment is larger in countries where the containment measures put in place to address the pandemic are more stringent, suggesting notable additional costs to the lockdown measures.

Juanita Gonzalez-Uribe, Su Wang, Simeon Djankov, 30 April 2020

Loan guarantees to small businesses are emerging as a main policy response during the COVID-19 crisis. Using evidence from the UK’s Enterprise Finance Guarantee scheme from 2009, this column argues that such policies enable some financially constrained firms to retain workers that otherwise would have been laid off, and whose retention was fundamental in rebuilding the businesses post-crisis. However, less-educated workers in jobs with low training costs are more likely to be laid off, implying that the guarantee policy is regressive. 

Stephen P. Ferris, Jan Hanousek, Jiri Tresl, 30 April 2020

Corporation corruption is an issue that remains at the forefront of regulatory policy. This column examines the persistence of corruption among a sample of privately held firms from 12 Central and Eastern European countries. Creating a proxy for corporate corruption based on a firm’s internal inefficiency, it is suggested that corruption can enhance a firm’s overall profitability. A channel analysis reveals that inflating staff costs is the most common approach by which firms divert funds to finance corruption. Corruption may persist simply because of its ability to improve a firm’s return on assets.

Gianluca Benigno, Andrew Foerster, Christopher Otrok, Alessandro Rebucci, 19 April 2020

Borrowing constraints can amplify business cycle dynamics and create significant challenges for countries facing negative economic shocks. Based on a new estimated model of sudden stop crises, this column argues that financial crises are often followed by a quick but partial rebound. Thereafter, economies can experience a very protracted period of stagnation. A similar trajectory may be likely for the current COVID-19 crisis, as many countries will face financial frictions in responding to the economic downturn.

Daniel Levy, Tamir Mayer, Alon Raviv, 01 April 2020

Economists and finance scholars faced harsh criticism for failing to anticipate the 2008 financial crisis. This column presents evidence from textual analyses of 14,270 working papers published between 1999–2016 that is consistent with this criticism. However, as soon as the crisis unravelled, economists appeared to dramatically increase their efforts in studying and understanding the crisis, its causes and its consequences.

Ozlem Akin, José M. Marín, José-Luis Peydró, 18 March 2020

There is a broad discussion surrounding the excessive risk-taking by banks and whether this constitutes a reliable early warning signal for future banking problems. This column presents evidence that many top executives of US banks sold their own shares in the buildup to the Global Crisis. This trends appears to be stronger for banks with higher real estate exposure, and weaker for independent directors or middle officers. Although the top bankers in riskier banks sold more shares, thus furthering their own interests, they did not reduce bank risk exposure.

Orkun Saka, Nauro Campos, Paul De Grauwe, Yuemei Ji, Angelo Martelli, 25 June 2019

Financial crises play a key role in changing existing policies concerning financial markets and institutions. This column provides new evidence for the negative impact of financial crises on the process of financial liberalisation. It also shows, however, that such interventions are only temporary and that the liberalisation process resumes quickly after a crisis. These results support the view that governments use short-term policy reversals as a tool to ease crisis pressures.

Sebastian Doerr, José-Luis Peydró, Hans-Joachim Voth, 15 March 2019

Polarised politics in the wake of financial crises echo throughout modern history, but evidence of a causal link between economic downturns and populism is limited. This column shows that financial crisis-induced misery boosted far right-wing voting in interwar Germany. In towns and cities where many firms were exposed to failing banks, Nazi votes surged. In particular, places exposed to the one bank led by a Jewish chairman registered particularly strong increases of support – scapegoating Jews was easier with seemingly damning evidence of their negative influence.  

Mário Centeno, Miguel Castro Coelho, 06 June 2018

Portugal has turned a corner. Having gone through a mild boom, a slump, and a severe recession, all packed into less than two decades, the Portuguese economy has re-emerged with a newfound strength. This column examines this recovery in detail, focusing on important structural reforms that have taken place in the last couple of decades in key areas such as skills, investment, export orientation, labour market, financial intermediation, and public finances. The effects of these reforms were compounded by time as well as efforts to reignite demand.

Ashoka Mody, 01 April 2018

Colin Mayer, 24 January 2018

Following the 2008 financial crisis, investments recovered quicker in the US than in Europe. Colin Mayer discusses how taxation and regulation have exacerbated companies' long-term debt problem. This video was recorded at the RELTIF book launch held in London in January 2018.


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