Macroeconomic policy

Paul Beaudry, Dana Galizia, Franck Portier, 04 July 2015

Whereas some view the macroeconomy as overall stable and on a smooth long-run growth path, others argue it is unstable with repeated periods of booms and busts. This column suggests that the market economy is inherently unstable and booms and busts arise endogenously as the results of market incentives. Monetary policy is then perhaps not the right tool for addressing macroeconomic fluctuations. Instead, policies aimed at changing the incentives would be more appropriate.

Tamon Asonuma, Said Bakhache, Heiko Hesse, 04 July 2015

Home bias in banks’ holdings of domestic government debt could pose problems for financial stability and crisis management. This column discusses some of the determinants of this bias. Factors that increase macroeconomic instability are associated with higher home bias, while better investment opportunities in the private sector and better institutional quality reduce home bias.

Otaviano Canuto, Francisco Carneiro, Leonardo Garrido, 01 July 2015

Industrialised and developing countries have differing fiscal strategies for dealing with the business cycle. But are countries’ strategies different according to whether they are industrialised? This column presents new evidence suggesting that the picture is complex. Procyclical fiscal policies remain the norm amongst most non-industrialised developing countries, but some key developing countries have recently moved toward a counter-cyclical stance as a result of strengthening institutions.

Minouche Shafik, 25 June 2015

UK long-term yields are extraordinarily low. This could be interpreted as financial markets expecting prolonged low growth or low inflation, or both. This column argues that this view is overly gloomy. Factors pulling down today’s inflation are unlikely to be permanent, and the economic headwinds should ease gradually. Additionally, a return to productivity growth should facilitate faster potential output growth over the long term. A more likely interpretation is that low yields reflect precautionary actions by public and private financial-market participants to reduce vulnerabilities to adverse outcomes.

Giovanni Caggiano, Efrem Castelnuovo, 23 June 2015

There is no consensus on the effectiveness of government spending as a measure for boosting output. This column suggests that increasing government spending is highly effective exactly when it is most needed – when the economy is experiencing a deep recession. But the finding does not imply a one-size-fits-all recommendation. There are potential dangers in increasing spending in countries whose level of debt might be perceived as unsustainable.

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