Fiscal consolidation: Too much of a good thing?
John Van Reenen 27 April 2012
Many policymakers in Europe seem to stick to the idea that fiscal consolidation might inspire confidence and help the economy to grow. This column argues these sentiments may be understandable but are basically wrong. For countries like the UK where borrowing is relatively cheap and sovereign default unlikely, slowing down the pace of fiscal consolidation would be a rational response. The obsession over the fiscal stance is a distraction from sustainable long-run growth.
This week’s political events in the Netherlands and France which look likely to lead to government dissolution, have been interpreted as a set-back for the pace of fiscal consolidation in Europe with popular resentment punishing incumbent leaders (“Leaders in Austerity Backlash” was the headline of the Financial Times on 24 April 2012). The response of the European economic establishment has been to stay the course.
eurozone, fiscal consolidation, Bond market, austerity
Understanding and quantifying contagion
Harald Hau, Choong Tze Chua, Sandy Lai 05 February 2011
Fear of contagion across asset classes is again stalking European sovereign bond markets. This column discusses how shocks to bank stocks spread to non-financial stocks in 2007 and 2008. It finds that equity fire sales by mutual funds had a surprisingly large and devastating effect on the price of non-financial stocks. Could the sale of bonds trigger a similar reaction?
Contagion is one of the more elusive concepts in the current debate about the financial crisis. Indeed, the logic behind it is often unclear.
Europe's nations and regions Global crisis International finance
contagion, Eurozone crisis, Bond market
Is there a bubble in the bond market?
Luis M Viceira, John Y Campbell, Adi Sunderam 27 October 2010
The historically low yields on Treasury bonds are the hallmark of a bubble, according to some commentators. This column analyses the relationship between bond yields, the stock market, and inflation over the past 50 years. It finds that the riskiness of nominal bonds changes over time and that investors and policymakers can use the changing stock-bond correlation as a real-time measure of inflation expectations.
The yields on government bonds are at their lowest levels since the depths of the financial crisis in late 2008. On Monday 18 October, the yield on 10-year Treasury notes hit 2.52%, down from 3.85% at the beginning of the year. This movement is huge by the standards of the Treasury market. An investment in 10-year Treasury notes has returned about 11.4% this year.
Financial markets Frontiers of economic research
inflation, expectations, stock market, Bond market, yield