Macroeconomic policy

Stephen Hansen, Michael McMahon, 03 February 2016

In addition to setting interest rates, central banks also communicate with the public about economic conditions and future actions. While it has been established that communication can drive expectations, less is known about how it does so. This column attempts to shed light on this question. Applying novel measures to the content of Federal Reserve statements, it shows that forward guidance is a more important driver of market variables than disclosure of information about economic conditions.

Daron Acemoglu, Ufuk Akcigit, William Kerr, 30 January 2016

How shocks reverberate throughout the economy has been a central question in macroeconomics. This column suggests that input-output linkages can play an important role in this issue. Supply-side (productivity) shocks impact the industry itself and those consuming its goods, while a demand-side shock affects the industry and its suppliers. The authors also find that the initial impact of an industry shock can be substantially amplified due to input-output linkages. 

Athanasios Orphanides, 29 January 2016

Helmut Schmidt, one of the great post-war architects of Europe, passed away in November 2015. This column, by a former governor of the Central Bank of Cyprus, reminds us of Schmidt’s analysis of the political and economic dimensions of the Eurozone Crisis delivered in speeches in late 2011. As Schmidt said: “What we have, in fact, is a crisis of the ability of the EU’s political bodies to act. This glaring weakness of action is a much greater threat to the future of Europe than the excessive debt levels of individual Eurozone countries.”

Michael McMahon, Martin Ellison, Ethan Ilzetzki, Ricardo Reis, Wouter den Haan, 28 January 2016

The beginning of 2016 has seen dramatic developments in key markets, including falls in share prices, low oil prices, and a slowdown in some emerging market economies. This column summarises the views expressed on these issues by leading experts in the monthly Centre for Marcoeconomics survey. While all recognise the considerable uncertainty in the world economy, fewer than a third fear that these events will have a significant negative impact on the UK’s economic recovery. The prevailing argument is that any negative effects of lower foreign demand and market instability will be compensated by the benefits of lower oil prices.

Łukasz Rachel, Thomas D. Smith, 15 January 2016

Many candidate explanations for the low level of real interest rates have been put forward. Less progress has been made on bringing together the different hypotheses into a unifying framework, on quantifying their relative importance and on predicting the future path for real interest rates. This column attempts to fill that gap, and suggests that persistent shifts to global desired savings and investment are behind the bulk of the fall in real interest rates. Those trends are unlikely to unwind anytime soon, so that the global equilibrium rate is likely to remain low, perhaps settling at or below 1% in the medium to long-run.

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