Parallels are often drawn between the Great Recession of the past decade and the economic turmoil of the interwar period. In terms of global trade, these comparisons are based on obsolete and incomplete data. This column re-estimates world trade since the beginning of the 19th century using a new database. The effect of the Great Recession on trade growth is sizeable but fairly small compared with the joint effect of the two world wars and the Great Depression. However, the effects will become more and more comparable if the current trade stagnation continues.
Giovanni Federico, Antonio Tena-Junguito, 07 February 2016
Dae Woong Kang, Nick Ligthart, Ashoka Mody, 19 January 2016
Although the Great Recession was viewed as a US problem, the Eurozone was affected by it from the start. This column compares the monetary policy responses to the Crisis by the Fed and the ECB. It argues that the US approach has been much more aggressive and proactive. The ECB failed to provide stimulus when needed, and as a result the Eurozone might slip into a low-inflation trap.
Janet Currie, 15 January 2016
Studies of the effects of economic fluctuations on health have come to wildly different conclusions. This may be because the effects are different for different groups. Using US data, this column looks at the health consequences of the Great Recession on mothers, a sub-population that has thus far been largely neglected in the literature. Increases in unemployment are found to have large negative health effects and to increase incidences of smoking and substance abuse among mothers. These effects appear to be concentrated on disadvantaged groups such as minorities, and point to short- and long-term consequences for their children.
Alessandra Bonfiglioli, Gino Gancia, 19 December 2015
The Great Recession highlighted the prominent role that economic uncertainty plays in hindering investment and growth. This column provides new evidence that economic uncertainty can actually play a positive role by promoting the implementation of structural reforms with long-run benefits. The effect appears to be strongest for countries with poorly informed voters. These findings suggest that times of uncertainty may present an opportunity to implement reforms that would otherwise not be passed.
Kevin Daly, Tim Munday, 28 November 2015
The fallout from the Global Crisis and its aftermath has been deeply damaging for European output. This column uses a growth accounting framework to explore the pre-Crisis and post-Crisis growth dynamics of several European countries. The weakness of post-Crisis real GDP in the Eurozone manifested itself in a decline in employment and average hours worked. However, decomposing growth for the Eurozone as a whole conceals significant differences across European countries, in both real GDP growth and its factor inputs.
Refet S. Gürkaynak, Troy Davig, 25 November 2015
Central banks around the world have been shouldering ever-increasing policy burdens beyond their core mandate of stabilising prices. This column considers the social welfare implications when central banks take on additional mandates that are usually the domain of other policymakers. Additional mandates are shown to worsen trade-offs faced by the central bank, while distorting the incentives of other policymakers. Central bank ‘mandate creep’ may be detrimental to welfare.
Andrew Foote, Michel Grosz, Ann Huff Stevens, 17 November 2015
In light of the Great Recession, we continue to learn new ways in which economic downturns directly affect the labour market. This column suggests that following an adverse demand shock, individuals exit local labour markets primarily through migration, but that has become less prominent in the Great Recession. Faced with declining economic prospects, workers are becoming more likely to stay put, without re-entering the labour market.
Lawrence H. Summers, Antonio Fatás, 25 October 2015
The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Using data seven years after the beginning of the crisis as well as estimates on potential output our analysis suggests that attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their negative impact on output. Our results provide support for the possibility of self-defeating fiscal consolidations in depressed economies as developed by DeLong and Summers (2012).
Athanasios Orphanides, 11 November 2015
There is generally consensus among macroeconomists that monetary policy works best when it is systematic. Following the financial crisis, the US Federal Reserve shifted from long-term, systematic policy to short-term goals targeting unemployment. This column argues that, while these were appropriate in the aftermath of the downturn, such policy accommodations have been pursued for too long since. The need for a somewhat accommodative policy cannot be used to defend the current non-systematic policy and excessive emphasis on short-term employment gains.
Lola Gadea, Ana Gomez-Loscos, Gabriel Pérez-Quirós, 26 October 2015
The Great Moderation is one of the most important changes in the US business cycle since statistics where gathered. This column contributes three main ideas – that output volatility remains subdued despite the tumult created by the Great Recession, that the Great Moderation structural break is found when considering a long historical dataset, and that the nature of the volatility reduction associated with the Great Moderation is linked to the features of expansion phases, in particular, to the absence of high growth recoveries.
Zoltan Jakab, Michael Kumhof, 18 June 2015
Problems in the banking sector played a seriously damaging role in the Great Recession. In fact, they continue to. This column argues that macroeconomic models were unable to explain the interaction between banks and the macro economy. The problem lies with thinking that banks create loans out of existing resources. Instead, they create new money in the form of loans. Macroeconomists need to reflect this in their models.
Francesco Bianchi, 22 April 2015
During the Great Recession, the possibility that the US might enter a second Great Depression was a real concern. This column argues that until early 2009, financial markets behaved in a manner consistent with the early years of the Great Depression. The large stock-market fall saw growth stocks outperforming value stocks. This pattern ended March 2009, arguably in light of robust policy interventions. These dynamics suggest that poor performance of growth stocks during regular times may be compensated by superior performance in crises.
Anusha Chari, Peter Blair Henry, 06 March 2015
In the wake of the Great Recession, a contentious debate has erupted over whether austerity is helpful or harmful for economic growth. This column compares the experiences of the East Asian countries – whose leaders responded to the East Asian financial crisis with expansionary fiscal policy – with those of the European periphery countries during the Great Recession. The authors argue that it was a mistake for the European periphery countries to pivot from fiscal expansion to consolidation before their economies had recovered.
Jan van Ours, 27 February 2015
The Great Recession has been characterised by an unprecedented decline in GDP, and unemployment rates remain above pre-Great Recession levels in many countries. This column argues that economic growth is a ‘one size fits all’ solution for the problem of unemployment, because the unemployment rates of different kinds of workers are strongly correlated within countries. That said, economic growth affects above all the position of young workers, and so benefits mostly those who need it the most.
Hans Holter, Dirk Krueger, Serhiy Stepanchuk, 20 February 2015
Since the Global Crisis, debt sustainability has received increasing attention. This column argues that the maximum sustainable debt level depends negatively on the progressivity of the tax system. The authors estimate that the US is still relatively far from the peak of its Laffer curve and from its maximally sustainable debt level. However, adopting a flat tax would raise the maximum sustainable debt from 330% to more than 350% of benchmark GDP, whereas adopting Danish-style progressivity would lower it to less than 250%.
Philippe Bacchetta, Kenza Benhima, Céline Poilly, 19 February 2015
The corporate cash ratio – the share of liquid assets in total assets – comoves with employment in the US. This column argues that disentangling liquidity shocks and credit shocks is key to understanding this comovement, and that liquidity shocks appear to be crucial. These shocks make production less attractive or more difficult to finance, while they also generate a need for internal liquidity to pay wages, which can be satisfied by holding more cash.
Juan J. Dolado, 09 February 2015
Youth unemployment has been a problem in Europe for several decades, but some European countries have fared much better than others in recent years. This column summarises the policy lessons to be drawn from a new VoxEU.org eBook that compares the labour market experiences of different European countries and provides an early evaluation of the European Commission’s Youth Guarantee scheme.
Paul De Grauwe, 30 January 2015
Nowhere in the developed world is secular stagnation more visible than in the Eurozone. This column explains this phenomenon with asymmetric external balances within the Eurozone. Southern countries had accumulated current-account deficits and became debtors when the Crisis hit, whereas the northern ones became creditors. The burden of the adjustments has been borne almost exclusively by the debtor countries creating a deflationary bias. Suggested fiscal policy prescriptions are government investment programmes, to be implemented by northern countries (and in particular, Germany).
Laurence Ball, Sandeep Mazumder, 07 January 2015
Researchers have put forward two explanations for the failure of the US inflation rate to fall as far during the Great Recession as the Phillips curve would predict. Either expectations have been successfully anchored by the Fed’s inflation target, or the Phillips curve is focusing on the wrong thing – aggregate unemployment instead of short-term unemployment. This column shows that the two explanations are complementary; together, they explain the puzzle, but separately they cannot.
Atsushi Inoue, Chun-Hung Kuo, Barbara Rossi , 24 November 2014
The Great Recession uncovered the difficulties that economic structural models have in explaining the data. This column proposes a methodology that can help identify the sources of mis-specification by introducing exogenous processes. These exogenous processes are not structural shocks but processes that can improve the fit. The results indicate that including more labour and asset frictions in economic models could improve their performance.