Why is euro inflation so low?

Jean-Pierre Landau 02 December 2014

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Inflation in the Eurozone stood at 0.4% (year on year) in November. It has been persistently declining for almost a year, and constantly undershooting forecasts. The Eurozone is now clearly diverging from many advanced economies, where inflation is either on the rise – albeit at moderate levels – as in the US, or, when falling, still remaining close to target, as the UK.

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Topics:  Macroeconomic policy Monetary policy

Tags:  inflation, eurozone, safe assets, safety trap, risk aversion, disinflation, exchange rates, interest rates, liquidity trap, zero lower bound, monetary policy, public debt, Eurozone crisis, Central Banks, ECB, quantitative easing, long-term refinancing operations, unconventional monetary policy, liquidity, asset-backed securities, securitisation, debt sustainability, fiscal space, fiscal capacity, balance sheets

How severe has the zero lower bound constraint been?

Eric T Swanson 08 November 2014

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In December 2008, the Federal Reserve’s Federal Open Market Committee lowered the federal funds rate to essentially zero, and has kept it there ever since. Because physical currency earns an interest rate of zero, it is generally impossible for the Open Market Committee to lower the federal funds rate substantially below zero, since banks would opt to hold physical currency rather than earn a significantly negative rate of return on cash balances held at the Fed. This barrier is commonly referred to as the ‘zero lower bound’.

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Topics:  Global crisis Monetary policy

Tags:  zero lower bound, monetary policy, Federal Open Market Committee

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

Quantifying the macroeconomic effects of large-scale asset purchases

Karl Walentin 11 September 2014

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Central banks have used various unconventional monetary policy tools since the onset of the financial crisis yet the debate continues regarding their efficiency. This column attempts to shed light on the ‘bang for the buck’, or the macroeconomic effects, of one such unconventional monetary policy – the Federal Reserve’s large-scale asset purchases of mortgage-backed securities employed during the Fed’s QE1 and QE3 programs.

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Topics:  Global crisis Monetary policy

Tags:  monetary policy, unconventional monetary policy, large-scale asset purchases, central banking, financial crisis, Federal Reserve, quantitative easing, mortgage-backed securities, term premia, zero lower bound, interest rates, US, UK, Sweden, mortgages, global crisis

The role of corporate saving in global rebalancing

Philippe Bacchetta, Kenza Benhima 24 August 2014

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The increase in global imbalances in the last decade posed a theoretical challenge for international macroeconomics. Why did some less-developed countries with a higher need for capital, like China, lend to richer countries? The inconsistency of standard open-economy dynamic models with actual global capital flows had already been stressed before (e.g. by Lucas 1990), but the sensitivity to this issue became more acute with increasing global imbalances. This stimulated the development of several alternative theoretical frameworks.

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Topics:  International finance International trade

Tags:  interest rates, global imbalances, capital flows, saving, global crisis, credit constraints, savings glut, zero lower bound, corporate saving, global rebalancing

Secular stagnation: Facts, causes, and cures – a new Vox eBook

Coen Teulings, Richard Baldwin 10 September 2014

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Teaser from original column posted on 15 August 2014

Six years after the Crisis and the recovery is still anaemic despite years of zero interest rates. Is ‘secular stagnation’ to blame? This column introduces an eBook that gathers the views of leading economists including Summers, Krugman, Gordon, Blanchard, Koo, Eichengreen, Caballero, Glaeser, and a dozen others. It is too early to tell whether secular stagnation is really secular, but if it is, current policy tools will be obsolete. Policymakers should start thinking about potential solutions.

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Topics:  Global crisis Macroeconomic policy Monetary policy

Tags:  interest rates, US, Europe, Japan, investment, macroeconomics, Great Recession, zero lower bound, savings, secular stagnation, SecStag debate

The impact on the financial sector of long-term low nominal interest rates

Viral Acharya, Richard Portes, Richard Reid 03 July 2013

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The Centre for Economic Policy Research (CEPR) recently organised a conference at the Brewers’ Hall, London, on 10 June 2013 titled ‘A long-term environment of low nominal interest rates: what are the consequences for the financial sector’?

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Topics:  Monetary policy

Tags:  liquidity trap, quantitative easing, Eurozone crisis, zero lower bound, Vox Views

Exit strategies: Time to think ahead

Charles Wyplosz 14 October 2013

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Update

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Topics:  Monetary policy

Tags:  liquidity trap, quantitative easing, Eurozone crisis, zero lower bound, Vox Views

Supply-side policies at the zero lower bound

Jesús Fernández-Villaverde, Juan F Rubio-Ramirez, Pablo A Guerron-Quintana,

Date Published

Mon, 11/07/2011

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Supply-side policies and the zero lower bound

Jesús Fernández-Villaverde, Juan F Rubio-Ramirez 11 November 2011

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The US and the Eurozone are stuck in a situation in which the short-run nominal interest rates cannot fall, either because they are against the zero lower bound (the US) or sufficiently close to it that the monetary authority refuses to allow further reductions (in the Eurozone). When this situation is combined with nominal rigidities in prices and wages, the interest rate cannot play its role of efficiently directing the intertemporal allocation of consumption and investment. Households want to save too much and the economy may get trapped in a “black hole” of contraction (Krugman 2002).

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Topics:  Monetary policy

Tags:  quantitative easing, fiscal expansion, zero lower bound, Supply-side policy

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