Macroeconomic policy

Hiroshi Yoshikawa, Hideaki Aoyama, Yoshi Fujiwara, Hiroshi Iyetomi, 05 September 2015

Deflation is a threat to the macroeconomy. Japan had suffered from deflation for more than a decade, and now, Europe is facing it. To combat deflation under the zero interest bound, the Bank of Japan and the European Central Bank have resorted to quantitative easing, or increasing the money supply. This column explores its effectiveness, through the application of novel methods to distinguish signals from noises.

Stefano Neri, Stefano Siviero, 15 August 2015

EZ inflation has been falling steadily since early 2013, turning negative in late 2014. This column surveys a host of recent research from Banca d’Italia that examined the drivers of this fall, its macroeconomic effects, and ECB responses. Aggregate demand and oil prices played key roles in the drop, which has consistently ‘surprised’ market-based expectations. Towards the end of 2014 the risk of the ECB de-anchoring inflation expectations from the definition of price stability became material.

Andrea Consiglio, Stavros A. Zenios, 12 August 2015

Some experts view Greek debt as sustainable, while others claim it is not sustainable. This column argues that the distinction between tactical and strategic debt sustainability can explain this difference of opinions. Moreover, strategic debt sustainability analysis should account for tail risk. This approach shows that Greek debt is highly unsustainable, but sustainability can be restored with a nominal haircut of 50%, interest rate concessions of 70%, or a rescheduling of debt to a weighted average maturity of 20 years. Greece and its creditors should ‘bet on the future’ and embrace debt relief.

Jon Danielsson, Jean-Pierre Zigrand, 07 August 2015

The long-running Greek crisis and China’s recent stock market crash are the latest threats to the stability of the global financial system. But as this column explains, systemic risk is an inevitable part of any market-based economy. While we won’t eliminate systemic risk entirely, the agenda for researchers and policymakers should be to create a more resilient financial system that is less prone to disastrous crises and that still delivers benefits for the economy and for society.

Alex Pienkowski, Pablo Anaya, 06 August 2015

During the Global Crisis, sovereign debt-to-GDP ratios grew substantially in the face of shocks to growth, increased fiscal deficits, bank recapitalisation costs, and rising borrowing costs. This column looks at how these various shocks interact with each other to exacerbate or mitigate the eventual impact on debt. Choice of monetary policy regime is an important determinant of how public debt reacts to these shocks.

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