Macroeconomic policy

James Costain, Anton Nakov, 03 October 2015

Many models rely on the assumption of nominal price stickiness. But the different definitions of frictions can greatly alter their macroeconomic implications. In this column, price stickiness is modelled as the result of errors due to costly decision-making. Errors in the prices firms set help explain micro ‘puzzles’ relating to the sizes of price changes, the behaviour of adjustment hazards, and the variability of prices and costs. Errors in adjustment timing increase the real effects of monetary shocks, by reducing the ‘selection effect’.

Carlos Garriga, Finn Kydland, Roman Šustek, 01 October 2015

An important channel for monetary policy transmission is through mortgage markets. This column illustrates how the effects of an interest rate lift-off, from the zero lower bound, on homeowners depend on three factors: the prevalent mortgage type in the economy (fixed or adjustable rate), the speed of the lift-off, and the inflation rate during the lift-off. This channel of transmission suggests that if the purpose of the lift-off is to normalise nominal interest rates without derailing the recovery, the Federal Reserve Bank and the Bank of England should wait until the economies show convincing signs of inflation taking off. Furthermore, the lift-off should be gradual and in line with inflation.

Dennis Reinhardt, Rhiannon Sowerbutts, 27 September 2015

Regulatory arbitrage is an essential feature of modern banking. This column presents new evidence on avoiding macroprudential policies by borrowing from abroad. Domestic non-banks borrow more from abroad after an increase in capital requirements, but not after an increase in lending standards. This is most likely because of differences in the way the two regulations apply, and suggests that we should have strong frameworks for reciprocating capital regulation.

Agnès Benassy-Quéré, 07 September 2015

The problems in the Eurozone are not a side effect of the Global Crisis but rather date back to the Maastricht treaty. This chapter proposes a few possible remedies. First, it is necessary to make debt restructuring possible within the Eurozone. In particular, the risk loop between sovereigns and banks needs to be stopped through more diversified balance sheets. The second suggestion involves more shared sovereignty, not only for debtor countries, but also for creditors. At a minimum, the Eurozone needs a fiscal backstop for its banking union.

Paolo Pesenti, 07 September 2015

Proposed remedies for the Eurozone crisis abound. But proven, working solutions are hard to come by, especially when traditional solutions – structural adjustment and monetary policy – are seen as causing problems. This column concentrates on the policy recipes prescribed on both supply-side and demand-side to jump-start economic recovery and reduce the extent and spillovers of the crisis itself. It finds that there is no easy and straightforward strategy and that there are no obvious answers. That doesn’t mean, however, that there are absolutely no answers. The alternative option to finding a way out – that is, continuing reliance on deflationary adjustment in a currency union stuck at the zero lower bound – is probably unlikely to convince anyone that structural reforms and monetary policy are back to being part of the solution.

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