What’s at stake: European policymakers eventually came to an agreement at 4am on Thursday after 11 hours of talk. The package consists of three related parts: (i) reducing Greece’s debt to a sustainable level by a voluntary agreement with private creditors to accept the loss of half the value of the bonds; (ii) recapitalizing Europe’s banks to the tune of €106 billion; and (iii) creating a larger firewall to prevent the spread of panic with a leverage of the EFSF. There has therefore been an agreement on all the sticking points but it could be weeks before the details that underpin the entire package are finally ironed out. Many hope that a significant amount of details will to be filled… Read more
Bruegel blog
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The European Summit and its aftermath
28th October 2011
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Traditional vs. Modern Macro
21st October 2011
What’s at stake: Larry Summers did not make a lot of friends earlier this year when he said that DSGE models played no role at all in the White House policy response to the crisis. That it was all IS-LM augmented by a liquidity trap. Since then, a series of debates has taken place on the econ blogosphere on the role of intermediate macro models, the usefulness of DGSE models, and the merits of calibration. The IS-LM ghost Paul Krugman, Greg Mankiw, and Brad DeLong have been strong defenders of the IS-LM framework as an important tool to give the intuition of how the economy works in the short run, a useful teaching device to understand the interaction of markets… Read more
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Occupy Wall Street
14th October 2011
What’s at stake: Around the world, young people – students, workers, and the unemployed – are bringing their grievances to the public square. Anti-corporate and anti-big bank protests have started up in Washington and on Wall Street, and they are spreading elsewhere. The Occupy Wall Street movement is in its infancy but seems to be getting political traction and finding echoes globally. Although its direction remains unclear, it is already raising some eyebrows in Wall Street and might be a force that traditional political formation might have to reckon with. Some are already portraying it as the Tea Party of the left but it seems to lack an integrated and cohesive platform. Infancy and political traction John Hanrahan takes stock… Read more
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The uncertainty hypothesis
7th October 2011
What’s at stake: Uncertainty is frequently blamed for the sorry state of the economy. In the US, the Speaker of the House John Boehner, for example, recently declared that regulatory, tax, and trade uncertainties are playing a hampering role on the recovery from the Lesser Depression by straining the incentives for companies to invest. After reviewing conditions under which an increase in uncertainty (second moment) – as opposed to a decrease in prospects (first moment) – can have a detrimental impact on the economy, we review the empirical evidence on the topic. We start by the specific type of uncertainty outlined by Boehner and then turn to another kind of uncertainty: our lack of knowledge about the shape of post-financial… Read more
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Is it too late for Eurobonds to draw a line under the crisis?
30th September 2011
What’s stake: Although considered by many as a non-starter for political, legal and economic reasons, there have increasing calls for a more definitive solution to the euro crisis that would involve the mutualisation of debt in the euro area. Short of a definitive solution, European policymakers could in the meantime draw a roadmap towards deep changes to economic governance embedded in a far-reaching Treaty overhaul. This discussion is on-going in Germany but appears lagging in the rest of the euro area. In the meantime, it seems difficult to avoid the ECB playing a bigger role in the crisis resolution either directly or through a possible leverage of the EFSF’s resources. Of silver bullets, necessary roadmaps and bad ideas Mario Monti… Read more
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Evaluating the July 21 Eurogroup Meeting
26th July 2011
What’s at stake: European leaders reached an accord Thursday to reduce Greece’s debt burden and prevent a collapse of confidence that has threatened to engulf some of the region’s largest economies. The total package agreed to on Thursday includes some startling breakthroughs in Europe's approach to solving the destabilizing euro debt crisis. Although it is more than many hoped for or expected to get, market participants have remained confused about certain elements of the deal. General impression: better than expected, but short of a once-and-for-all resolution Gavyn Davies writes that the European summit on Thursday has resulted in a belated, but still impressive, step towards a resolution of the sovereign debt crisis. The measures were clearly more significant than the… Read more
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Playing the blame game: contagion edition
12th July 2011
What’s at stake: Until now, Europe has managed to keep Spain and Italy – the third largest bond market in the world – out of the eye of the storm. After an epic week, this is no longer the case. As the policy response is gradually moving from providing liquidity to raising genuine solvency question, financial markets are panicking. We round up here the usual suspects for such a failure: speculation, ratings agencies and policymakers’ complacency at the domestic and European level. No, Greece is not Italy Mario Monti writes that it is, to a certain extent, surprising that the eurozone crisis is now finally knocking on Italy’s door. Unlike Greece, Italy has gradually brought its deficit under control in… Read more
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Financial Repression Redux
8th July 2011
What’s at stake: Another concept with a catchy name – financial repression – is quietly starting to creep into the policy debate following European discussions of a ‘voluntary’ private sector involvement and American discussions on the debt ceiling. To avoid default and outsized fiscal retrenchment, capturing savings is an increasingly tempting alternative for fiscal authorities as it provides a third way apart from default and fiscal adjustment. Financial repression can take many forms: directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, bank nationalization. While it is generally agreed that monetary policy and regulatory policy could both make significant contribution fiscal consolidation efforts by directly… Read more
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Then and now: historical perspectives on the 2007 financial crisis
1st July 2011
What’s at stake The mortgage boom of the late 19th century in the US, the German and French financial crises in the 1880s and the build up of consumer debt in the run-up to the Great Depression provide interesting parallels with the subprime crisis of 2007. It is also noteworthy to look at the extent to which the Fed followed the Bagehot rule in its provision of liquidity when the boom went bust. As a recent paper argued, although the Fed somewhat deviated from the Bagehot rule by providing liquidity without charging a penalty rate and requesting safe collateral, its actions followed closely the recommendations of Milton Friedman for dealing with such emergency situations. Run-up to the crisis: global imbalances,… Read more
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High Frequency Data for investors and policymakers
24th June 2011
What’s at stake “The sexiest job in the next 10 years will be statistician” – says Hal Varian– “and I’m not kidding.” With increased connectivity, Internet usage and data availability a new world of statistical analysis has indeed opened up. Whether it is very high frequency data, or the vast amount of them (big data), there is a growing appetite for forecasting (or nowcasting) social and economic behaviors live. The possibilities offered are quasi infinite and truly in their infancy but a few firms and research groups are paving the way for a work that could be extremely relevant to investors, policymakers and researchers alike. Making policy in the dark light In an article for the New Yorker, James Surowiecki… Read more