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.

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?

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.