Where danger lurks

Olivier Blanchard 03 October 2014

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Until the 2008 global financial crisis, mainstream US macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment.

The benign view reflected both factors internal to economics and an external economic environment that for years seemed indeed increasingly benign.

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Topics:  Macroeconomic policy Monetary policy

Tags:  macroeconomics, global crisis, great moderation, rational expectations, nonlinearities, fluctuations, business cycle, monetary policy, inflation, bank runs, deposit insurance, sudden stops, capital flows, liquidity, maturity mismatch, zero lower bound, liquidity trap, capital requirements, credit constraints, precautionary savings, housing boom, Credit crunch, unconventional monetary policy, fiscal policy, sovereign default, diabolical loop, deflation, debt deflation, financial regulation, regulatory arbitrage, DSGE models

Shadow banking and the economy

Alan Moreira, Alexi Savov 16 September 2014

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Shadow banking, what is it good for? At the epicentre of the global financial crisis, shadow banking has become the focus of intense regulatory scrutiny. All reform proposals implicitly take a stance on its economic value.

According to the prevailing regulatory arbitrage and neglected risks views, it doesn’t have any – shadow banking is about evading capital requirements, exploiting ‘too big to fail’, and marketing risky securities as safe to unwitting investors. The right response is to bring shadow banking into the regulatory and supervisory regime that covers insured banks.

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Topics:  Financial markets Global crisis Macroeconomic policy

Tags:  shadow banking, banking, financial crisis, global crisis, regulatory arbitrage, liquidity transformation, financial stability, externalities, collateral, business cycle, financial regulation, financial fragility, liquidity, liquidity crunch

The social impact of fiscal policy responses to crises

Carlos A. Vegh , Guillermo Vuletin 12 June 2014

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Fiscal policy in many developing countries is typically procyclical. Expansionary in good times and contractionary in bad times, these policies often amplify business cycles. The most convincing explanations for such practices seem to be limited access to international credit markets during bad times and political pressures that tend to encourage too much public spending during boom periods (Calderon and Schmidt-Hebbel 2008). Whatever the reason, the pattern is well documented (see Frankel, Vegh, and Vuletin 2011 on the spending side and Vegh and Vuletin 2013a on the tax side).

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Topics:  Macroeconomic policy

Tags:  fiscal policy, business cycle, austerity, cyclicality, LAC-7

How important are sectoral shocks to the macroeconomy?

Enghin Atalay 13 December 2013

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Most analyses of business cycles, particularly since Kydland and Prescott (1982), rely on economy-wide shocks to preferences and technologies to engender business cycle fluctuations in aggregate economic activity. Whether these economy-wide shocks have origins at a more micro level – at individual firms or industries – is a key unresolved issue in macroeconomics.

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Topics:  Macroeconomic policy

Tags:  business cycle, sectoral shocks

Banking crises and political survival over the long run – why Great Expectations matter

Jeffrey Chwieroth, Andrew Walter 10 May 2013

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The wave of banking and sovereign-debt crises that began in 2007 has had powerful and continuing economic consequences (IMF 2013a; 2013b). Economists have used long run historical data to investigate the economic aftermaths of financial crises, but we lack any equivalent panoramic analysis of the impact of crises on politics. This is an important gap because these political effects, especially the survival prospects of incumbent governments, can shape governments’ post-Crisis policy choices, market sentiment, and thus economic outcomes.

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Topics:  Global crisis Politics and economics

Tags:  elections, business cycle, Eurozone crisis, Finance

The role of firms in aggregate fluctuations

Julian di Giovanni, Andrei Levchenko, Isabelle Méjean 16 November 2012

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Practical discussions of macroeconomic fluctuations are often couched in terms of the impact of individual firms on aggregate GDP. For instance, according to JPMorgan, sales of Apple’s iPhone 5 could add as much as half a percentage point to US 4th quarter GDP growth this year (CNBC 2012). In France, the recent poor performance of Renault and Peugeot is expected to induce a domino effect across the production chain.

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Topics:  Productivity and Innovation

Tags:  shocks, business cycle, aggregate fluctuations, linkages

Germany should follow in the footsteps of China

Kamil Yilmaz 19 May 2012

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After the bankruptcy of Lehman Brothers in September 2008, leading governments around the world announced fiscal packages to provide stimulus to their respected economies. The Chinese government was one of the first. As early as November 2008, it announced a stimulus package that was planned to go into effect immediately in early 2009. The Chinese government also stood out in terms of the size of the package. Its stimulus package contained an additional fiscal spending of $586 billion over a two-year period (each year’s spending was equivalent to 6.9% of 2008 GDP).

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Topics:  Global economy Macroeconomic policy

Tags:  Germany, China, fiscal policy, business cycle

Have the US and European economies parted company? The signals are increasingly clear

Lucrezia Reichlin, Domenico Giannone, Jasper McMahon, Saverio Simonelli 02 May 2012

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According to the NBER (2012), the last recession ended in June of 2009. CEPR (2012) dates the end of the recession in the Eurozone in the same quarter. For the UK, there is no established chronology but a visual inspection of Figure 1 shows that the recession and the subsequent recovery in the three economies have been highly synchronised.

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Topics:  Global economy

Tags:  US, Europe, recession, UK, business cycle, recovery

Protectionism isn’t countercyclical (anymore)

Andrew K Rose 27 April 2012

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Almost everyone agrees that protectionism is countercyclical; tariffs, quotas, and the like grow during recessions. The abstract of Bagwell and Staiger (2003) begins “Empirical studies have repeatedly documented the countercyclical nature of trade barriers”; for support, they provide citations of eight papers which “all conclude that the average level of protection tends to rise in recessions and fall in booms.” Meanwhile, Costinot (2009) states: “One very robust finding of the empirical literature on trade protection is the positive impact of unemployment on the level of trade barriers.

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Topics:  International trade

Tags:  business cycle, protectionism

What have I done to deserve this? Global winds and Latin American growth

Eduardo Levy Yeyati, Luciano Cohan 12 January 2012

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Four years ago, when what would become the worst crisis in 80 years was just a concern for the important but encapsulated US mortgage market, academics and practitioners were debating whether the emerging world, which showed no signs of weakening as the developed world sunk into recession, had entered a new age of real (business cycle) ‘decoupling’.

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Topics:  Development

Tags:  globalisation, Latin America, decoupling, business cycle, global crisis

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