Fiscal stimulus in times of high public debt: Reconsidering multipliers and twin deficits
Christiane Nickel, Andreas Tudyka, 7 September 2013
Fiscal stimulus can either be a boon for an economy or its bane. This column discusses new empirical research on how the effects of fiscal stimuli interact with public debt-to-GDP ratios. Using data on real GDP, private investment and the trade balance, evidence suggests that the cumulative effect on real GDP is positive at moderate debt-to-GDP ratios but turns negative as the ratio increases. The evidence also suggests that the cumulative trade-balance effect is negative at first but switches sign at higher degrees of indebtedness.
The stimulus impact of a government-spending shocks varies with the economic environment (Ilzetzki, Mendoza, and Végh 2013). One important determinant is the level of government indebtedness – particularly when the nation’s fiscal sustainability may be in doubt. The economic logic of this is straightforward.
Topics: Macroeconomic policy
Tags: Eurozone crisis, fiscal stimulus
Sovereign default risk and banks in Europe’s monetary union
Harald Uhlig, 5 September 2013
EZ banks are more exposed to their own nation’s government bonds than ever. This column argues that Eurozone members can now afford to tell their banks to diversify, but pressure from Germany, Austria, France and the ECB might be necessary. Defusing the pernicious entanglement between the Eurozone’s weak banks and weak sovereigns would reduce the cost of any new crisis and reduce the likelihood of such a crisis occurring.
With the one year anniversary of ECB President Draghi’s announcement to “do whatever it takes” and the announcement of the OMT (Outright Monetary Transactions) programme, bond yields have declined and fears of sovereign defaults have receded in countries such as Portugal, Spain and Italy. We all hope that this danger has passed!
Topics: Global crisis, International finance
Tags: Eurozone crisis
External liabilities and crisis risk
Luis AV Catão, Gian Maria Milesi-Ferretti, 4 September 2013
Debt seems to be a lightning rod for crises. This column presents new research showing that the ratio of net foreign liabilities to GDP, and in particular its net external debt component, is indeed a significant crisis predictor for both advanced economies and emerging markets. Large current-account deficits and real exchange rate appreciation – the standard predictors – still matter, but we should be thinking more about net external debt.
Much has been written about the causes of the global financial crisis of 2008 – the role of the US subprime crisis as a triggering event, the generalised period of easy credit and financial excesses fuelling growing economic and financial vulnerabilities, the failures to properly regulate large systemic financial institutions.
Topics: Global crisis
Tags: debt, Eurozone crisis, liabilities, net external debt
The downsizing dilemmas of European employers
Hendrik P van Dalen, Kène Henkens, 28 August 2013
In times of economic crisis, managers often take drastic measures to survive. This column presents new research on the preferences of managers from across Europe when faced with ‘downsizing’. It seems that, when recession bites, the instincts or ‘animal spirits’ of employers that were previously suppressed by prosperity or considered to be outdated resurface. European employers predominantly resort to offering early retirement packages (and to a lesser extent buy-outs) in response to the threat of downsizing, exacerbating, in the long run, the problems associated with Europe’s ageing population. The only notable exception to this rule is the response of Danish employers, who prefer to tackle this problem by reducing the working hours of their employees.
Drastic measures are taken when managers formulate strategies to survive economic crises. Among these are downsizing, outsourcing, firing workers and cutting back on wages. But how do firms balance their interests against those of their workers?
Topics: Labour markets
Tags: downsizing, Eurozone crisis, firing, hiring, unemployment
Is there a future for international banks?
Dirk Schoenmaker, 25 August 2013
After the financial crisis, there was a shift from international to multinational banks due to supervisors’ increasingly national approach. This column provides an alternative solution that aims to keep international banking alive. What is key is that, first, national supervisors are internationally coordinated and, second, that the whole system is supported up by an appropriate fiscal backstop.
The international, centralised, business model of banks has come under pressure after the global financial crisis. Supervisors are leaving their traditional consolidated approach, under which a bank as a whole is assessed. Instead, they are moving towards a stand-alone approach, under which the national subsidiaries are supervised separately.
Topics: Global crisis, International finance
Tags: banking, Eurozone crisis, international banks, Too big to fail
To end the Eurozone crisis, bury the debt forever
Pierre Pâris, Charles Wyplosz, 6 August 2013
The Eurozone’s debt crisis is getting worse despite appearances to the contrary. How can we end it? This column presents five major options for reducing crisis countries’ debt. Looking into the details, it seems the only option that is both realistic and effective is for countries to default by selling monetised debt to the ECB. Moral hazard aside, burying the debt seems to be the only way we can end the crisis.
The Eurozone’s debt crisis is getting worse despite appearances to the contrary.
Topics: EU institutions, Macroeconomic policy
Tags: Debt crisis, debt monetisation, Eurozone crisis
How have financial markets reacted to financial-sector reforms after the crisis?
Alexander Schäfer, Isabel Schnabel, Beatrice Weder di Mauro, 2 August 2013
Lax financial-sector regulation was the fulcrum of the Global Crisis and policymakers reacted by introducing sweeping reforms. But has it had any impact? This column reviews evidence from bank stock returns showing that four major reforms in the US and Europe have reduced bailout expectations – especially for systemic banks. The strongest effects were found for the Dodd-Frank Act (especially the Volcker rule); the German restructuring law had little effect.
After the near-collapse of large parts of the financial system and unprecedented support measures from the public sector and central banks, the leaders of the G20 agreed on the need for a radical overhaul of the financial system.
Topics: International finance
Tags: CDS, credit default swap, Eurozone crisis, global crisis, regulation
Unity in diversity: Protecting the common market with divergent macroprudential policies
Aerdt Houben, Jan Kakes, 30 July 2013
Financial cycles have increasingly diverged across members of the Eurozone. National macroprudential tools are thus key to managing financial imbalances and protecting Europe’s economic integration. This column discusses research suggesting that reasonable macroprudential policies by the GIIPS countries in the euro’s first decade would have helped avoid much pain in Italy, Portugal and Spain. Greece’s public debt problems were far too large and its banks could not have been shielded with macroprudential policies.
The credit crisis and ensuing sovereign crisis powerfully illustrate the limitations of traditional macroeconomic policies to contain financial imbalances. Despite debate on the desirability to dampen credit cycles and asset-price fluctuations, countries have long been reluctant to include this in policy objectives.
Topics: Global crisis, International finance
Tags: Eurozone crisis, GIIPS, Greece, Ireland, Italy, macroprudential tools, Portugal, Spain
Why economics needs economic history
Kevin Hjortshøj O’Rourke, 24 July 2013
The current economic and financial crisis has given rise to a vigorous debate about what training graduate and undergraduate economics students are receiving. This column argues that we don't teach enough economic and financial history, even though it is crucial in thinking about the economy. It also offers a wealth of opportunities for teachers who wish to motivate their students.
The current economic and financial crisis has given rise to a vigorous debate about the state of economics, and the training which graduate and undergraduates economics students are receiving. Importantly, among those arguing most strongly for a change in the way that young economists are trained are the ultimate employers of these students, in both the private and the public sector.
Topics: Economic history
Tags: Eurozone crisis, global crisis
How to limit the ECB’s OMT?
Harald Benink, Harry Huizinga, 12 July 2013
How well has OMT done? This column attempts to temper Mario Draghi’s recent plaudits that “it’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent times”. Yes, OMT should provide unlimited liquidity to troubled countries, but not at the expense of necessary structural reforms. The ECB should cover Eurozone countries’ current expenditures, but should not pay off all long-term debt holders. That way, capital markets will be disciplined and incentives for implementing economic reforms will be maintained.
Speaking about the Outright Monetary Transactions (OMT) facility during a recent press conference Mario Draghi, ECB President, said that “frankly, when you look at the data, it’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent times” (Draghi 2013).
Topics: Europe's nations and regions
Tags: banking union, Eurozone crisis, OMT