Macroeconomic policy

Agnès Benassy-Quéré, 12 February 2016

The euro is unique in that it is a currency without a sovereign. Since the crisis, there have been major developments towards making the Eurozone more resilient, including the banking union and the European Stability Mechanism (ESM). This column explores whether further normalisation is required to make the Eurozone function properly. It argues that the Eurozone, unlike existing federations, lacks the ability to deliver counter-cyclical fiscal policies while complying with fiscal discipline. Macroeconomic coordination will thus require rules, a strong and independent European Fiscal Board, and the strengthening of the ESM.

André Sapir, 12 February 2016

Misalignments of real exchange rates continue to be the most visible and painful symptom of asymmetric shocks within the Eurozone. An important factor behind such misalignment is the difference in national wage formation and bargaining systems, especially between core and periphery members. This column argues that all members need to have institutions that ensure wage developments are in line with productivity developments. This would eliminate an important source of asymmetric behaviour and reduce resistance to EZ-wide fiscal mechanisms capable of absorbing asymmetric shocks.

Kristin Forbes, Ida Hjortsoe, Tsvetelina Nenova, 12 February 2016

A major challenge for monetary policy is predicting how exchange rate movements will impact inflation. This column explains why rules of thumb could be misleading and proposes a new approach that incorporates the source of exchange rate movements when evaluating how they pass through to import prices and inflation.

Eugenio Cerutti, Stijn Claessens, Luc Laeven, 10 February 2016

Macroprudential policies are meant to reduce procyclicality in financial markets and associated systemic risks. However, empirical evidence on which policies are most effective is still preliminary and inconclusive. This column documents the use of macroprudential policies by a large set of countries over an extended period, and covering many instruments. It shows which policies are most effective in reducing the growth rates of overall credit and household and corporate sector credit, and explores differences across countries, degrees of avoidance, and whether policies work better during booms or busts. 

Christiane Baumeister, Lutz Kilian, 08 February 2016

Expectations play a key role in assessing how oil price fluctuations affect the economy. This column explores how consumers, policymakers, financial market participants, and economists form expectations about the price of crude oil, the differences in these expectations, and why future realisations of the price of oil so often differ substantially from these expectations. Differences in oil price expectations are shown to matter for quantifying oil price shocks and their transmission. 

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