Many international economists have recently claimed that fiscal multipliers are much larger now than in normal times. The economic recession in Europe’s South, so the view, is primarily to be attributed to the fiscal consolidation undertaken that together with the larger multipliers has had devastating effects. Many good arguments speak in favor of this interpretation, including the fact that overall government spending in the four largest economies in the euro area has been growing below inflation in the last 3 years despite a weakening growth performance. Read more
Bruegel blog
-
The multiplier myth
22nd February 2013
-
Towards further liberalisation of the capital account in China
22nd February 2013
In China, discussions on capital account liberalisation have recently intensified. The Chinese government plans to gradually liberalise certain capital account items in the areas in which there is sufficient demand from the real economy and areas with relatively low investment risk, while maintaining tight regulation/supervision over the other items of the capital account and the financial sector. In response, Korean financial institutions need to establish strategies that will enable them to take part in this change, especially in the areas expected to undergo capital account liberalisation in the early stage. Read more
-
Blogs review: The safe asset shortage
22nd February 2013
What’s at stake: Safe debts – or what is often called information insensitive assets, as they do not suffer from the types of financial frictions that are characteristic to other financial assets – play a major role in facilitating transactions for institutional investors. And, as we have learned in the recent years, they also play a major role in triggering financial crises when they loose their safety status and turn into information sensitive assets. As central bankers start backpedalling on their commitments to increase the supply of safe assets and start worrying about the negative effects of the “search for yield”, there has been a renewed discussion in the blogosphere about the role of safe assets and whether they remain in short supply. Read more
-
The implications of the weakening Yen*
21st February 2013
The recent trend of the weakening Japanese yen reflects a major policy shift in Japan, following the formation of the government of prime minister Shinzo Abe. While the speed of yen depreciation has been rather fast, the depreciation has not yet even corrected the yen’s appreciation since the global financial crisis erupted. The new inflation target, two percent per year, is not extraordinary. Therefore, the talks about ‘currency wars’ are not justified. The desperate economic situation of Japan warranted a new policy approach, but there are concerns about the effectiveness of the new policy mix. In the coming quarters, both the euro and the Korean won are expected to appreciate, which could increase concerns that the exports of euro-area and Korean companies will be weakened. In particular, it will make it much more difficult for southern European countries to correct their external imbalances. Read more
-
What Mr Rehn should tell France.
21st February 2013
When he presents the forecasts on Friday, should Olli Rehn, the commission’s vice-president, coerce governments in France and other countries into further adjustment to ensure they meet their 2013 deficit targets? Or should he give them more time? It is a difficult balancing act. Read more
-
Competition policy trends in South Korea
20th February 2013
Economists often talk about a strong correlation between market development and enforcement of competition policy rules. That is not surprising: competition policy aims at removing obstacles to economic activity, such as barriers to market entry, and it encourages new businesses to challenge incumbent players’ market power. Economic theory suggests that this dynamic brings about an increase in total production. It also suggests that the pressure from competition can trigger a ‘Darwinian selection’, so that firms are forced to be as efficient as possible if they want to survive in the market. This generally means lower production costs, higher quality and lower prices paid by consumers. Conversely, in specific circumstances, excessive competitive pressure may reduce incentives to invest (reducing profit expectations); and therefore, slow down the growth pace. Read more
-
Basel III: Europe’s Interest Is to Comply
18th February 2013
On February 14, European Commissioner Michel Barnier and Federal Reserve Governor Daniel Tarullo indicated their agreement to quickly give the Basel III accord binding force over, respectively, European and American banks. This is welcome. But even more important than the exact timing of adoption is that it should stay true to what the accord actually stipulates. At this point, and contrary to many perceptions in Europe, this is likely to be the case of the US but not in the EU. Read more
-
Blogs review: Asset prices and monetary policy redux
15th February 2013
What’s at stake: Federal Reserve Governor Jeremy Stein gave serious consideration to the idea that monetary policy has a role to play in managing financial stability (read asset prices) in a speech titled “Overheating in Credit Markets: Origins, Measurement, and Policy Responses” given last week at a conference hosted by the St. Louis Fed. Governor Stein provided evidence that risk was building in certain segments of financial markets and discussed policy tools that go beyond countercyclical macroprudential regulation or the simple use of the Federal Funds rate to address these risks. Read more
-
Same old Europe
14th February 2013
The deal on the Multiannual Financial Framework 2014-2020, which will regulate the EU’s annual budget, is a missed opportunity. As in the past, the EU was captive to agonising negotiations in two separate European Councils for just a handful of money. The process clearly indicates that the EU budget is still perceived as an entitlement budget, from which each national government tries to extract the highest possible return. Read more
-
How to read the EU budget deal? II
13th February 2013
Structural and Cohesion Funds, if properly used, can represent an important instrument for economic growth. The European Council conclusions of 8 February 2013 include the decision to impose a capping to the maximum amount of Structural and Cohesion Funds each member state can receive per year. The capping is set at 2.35 percent of GDP or 2.59 percent if average real growth over 2008-2010 was lower than - 1 percent. Read more