Existing data show that the historically well-documented relationship between growth, competitiveness, and trade protectionism does not hold in the context of the recent financial crisis. This column presents new evidence that this relationship, in fact, holds. G20 governments continue to pursue trade-restrictive policies in a recession, or when their competitiveness deteriorates. This holds for a wide array of trade policies, including ‘murky’ protectionism.
Households tend to smooth their consumption and that’s why expenditures do not display a large variability over time. However, the recent financial crisis has been associated with a large decrease in consumption in certain countries. This column presents evidence that a drop in income during a crisis leads to a lower short-run consumption. Furthermore, micro data analysis shows that some households are affected more than others. Thus, policy recommendations can be made only after taking household heterogeneity into account.
The sustainability of government debt cannot be determined with certainty. This column presents an early warning indicator to predict sovereign debt crises using a stochastic simulation framework. What counts is the risk of a significant rise in public debt, more so than the expected evolution of the debt level. A key determinant of the indicator is the quality of budgetary policies in controlling the government budget in the event of adverse shocks.
During the Great Recession, advanced economies have not experienced the disinflation that has historically been associated with high unemployment. This column shows that using consumers’ (as opposed to forecasters’) inflation expectations restores the traditional Phillips curve relationship for recent years. Consumers’ inflation expectations are more responsive to oil prices than those of professional forecasters. The increase in oil prices between 2009 and 2012 may in fact have prevented the onset of pernicious deflationary dynamics.
Governments wary of fiscal expansion have turned to monetary policy to stimulate slowly recovering economies. This column presents evidence that lowering interest rates is ineffective during recessions – just when fiscal policy would be most effective. If this result is robust, we are seeing recent signs of recovery in spite of austerity, not because of it.
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