What’s at stake: Since the financial crisis, the role of finance has been put into question. Beyond the political process of re-regulation, it is useful to go back to the fundamental questions on the role of financial intermediation on growth, employment, risk sharing, etc. Does finance allocate capital efficiently, and allow better inter-temporal consumption and investments decisions or does it concentrate risks, create volatility, and increase inequality? Whether you look at its share of GDP or of profits, finance has undoubtedly become bigger over the last decade? Should something be done about it? The crisis and the Occupy Wall Street movement have renewed the urgency of these questions and the responses might drive the policy agenda over the next few years. Read more
Bruegel blog
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Blogs review: What's finance for?
23rd March 2012
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Blogs review: The fiscal compact
16th March 2012
What’s stake: The Treaty for Stability, Coordination and Governance, also known as Fiscal Compact has been negotiated and signed in a record amount of time. Its ratification is now the source of an important debate, especially in Ireland where it will have to be ratified through a referendum but also amongst the European Social Democrat parties that are now openly challenging it. Meanwhile, experts are increasingly divided over its effectiveness but they seem to converge on the importance of its symbolic nature. It has become an important pillar of the current European institutional changes and its growing challenge could have important repercussions on other ongoing negotiations (ESM, Eurobonds…). Read more
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Microfoundations in Macroeconomics
9th March 2012
What’s at stake:The role of aggregate or ad-hoc models for policy discussions in an age where journal papers in macro theory are always microfounded DSGE was brought to the forefront more than 2 years ago by Paul Krugman’s provocative essay `How Did Economists Get It So Wrong?’ (see here for a review). Since then, an interesting discussion – in the sense that it is not a discussion between those who do not understand the language of modern macroeconomics and those who do – has been going in the blogosphere on the importance of microfoundations for macroeconomic analysis. In a previous post,we outlined recent extensions of the basic IS-LM framework and pointed to a specific strand (modeling financial frictions into New Keynesian models) of a burgeoning literature: models with heterogeneous agents. We use the flurry of debate this week on the blogosphere to provide more background on these heterogeneous agents models and on other alternative approaches to the representative agent framework (behavioral macro models and agent based models). Read more
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Microdata for macroeconomics
2nd March 2012
What’s at stake: Over the last few years, there has been a significant increase in the use of microdata to address macroeconomic questions. Microeconomic data in the form of state level data or even zip-code level data has been used to address traditional macroeconomic questions such as the size of policy multipliers and to test alternative macroeconomic theories. An important advantage of this approach for investigating policy multipliers is the ability to control for other contemporary macro shocks. Another advantage of the use of microeconomic data in the form of zip code level data is that it can isolate channels much more effectively than traditional aggregate datasets, and hence more easily test alternative explanations of a same phenomenon. The difficulty of the approach generally lies in the translation of these cross-section estimates of policy multipliers or channels into estimates for the aggregate economy. Read more
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Odds and consequences of a GREXIT
24th February 2012
What’s at stake: As the private sector involvement is still underway and the application of the conditionality for the second program appear both economically and politically daunting, a growing number of observers have expressed the need to work on an orderly Greek exit from the euro area. The integrity of the euro used to be non negotiable but there is now a growing number of European policymakers that are openly raising the question. Although, some argue that this could help Greece to rebalance its economy faster, there is limited experience of exit in such a financially integrated monetary union and the consequences inside and outside of Greece are difficult to fathom. The odds of a Greek exit Wilem Buiter and… Read more
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Bubbles and potential output
17th February 2012
What’s at stake: What started as a speech on inflation targeting by the President of a regional Fed has turned into a fierce economic debate on the impact of the collapse of a bubble on potential GDP. While it is natural for the current debate to focus on this phase of the problem, a growing literature has also explored the impact of bubbles on potential GDP during the boom phase. We start by reviewing the provocative body of work that studies bubbles in the presence of financial frictions, which often come to the conclusion that bubbles can increase potential output by reducing the inefficiency induced by financial market frictions. We then review the current debate on the econ blogosphere following… Read more
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Does manufacturing really matter?
10th February 2012
What’s at stake: As countries seek to reinvigorate their job markets and move past an economic recession, the state of manufacturing has become a hotly debated topic. In the U.S., President Obama’s SOU address featured a revival of US manufacturing as one of the keys to secure a better economic future. In France, the decline in manufacturing is seen by virtually every party with disquiet and has become a central theme of the presidential race. But while new schemes to single out manufacturing for special tax breaks and supportive measures are being proposed, a compelling case for treating manufacturing differently remains to be made. The state of manufacturing Derek Thompson – a senior editor at The Atlantic – points that… Read more
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The communication channel
3rd February 2012
What’s at stake: Over the last year the Federal Reserve has been confronted with growing challenges to meet its dual mandate. In this context, it has taken a number of steps to improve its communication strategy and change its monetary policy framework. At its latest meeting on January 25, the Fed decided essentially three things, (i) it changed the language of its statement to indicate that low rates would likely be justified through at least late 2014. (ii) it said that the Fed had adopted an inflation target of 2% for personal consumption expenditures (PCE), and (iii) it released new information alongside the standard economic projections, which showed the distribution of the committee's views on when rates ought to rise.… Read more
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The persistence of euro-area imbalances
20th January 2012
What’s at stake: Eurozone imbalances have long been considered a key factor in the build-up of the euro crisis. But the question of whether and how rebalancing is taking place between countries of the Eurozone has been overlooked amongst European policymakers as the narrative of the crisis has focused on fiscal issues and the flawed institutional design of the eurozone. After several years in the Lesser Depression, the currency bloc still appears to be afflicted with fundamental imbalances that are harbingers of slow growth and persistent unemployment. Fighting the wrong crisis Michael Pettis argues that the real problem with Europe is the huge divergence in costs between the core and the periphery – in the past decade costs between Germany… Read more
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Taxing the 1%
20th December 2011
What’s at stake: While the movement of the “99 percent” is receding, some of the issues it raised continue to be highly discussed in academic and policy circles. In particular, a crucial public policy question is whether governments should tax high earners more. While in previous election cycles, the narrative on inequality and the crisis was not completely set out, detailed proposals on how to tax the 1% have, this time, already been laid out. President Obama made, for example, clear that this issue was going to be a “defining issue” of the 2012 presidential election. This could also have implications in other advanced economies where tax policy, in a context of difficult fiscal outlooks ought to become a more… Read more