Category Archives: Macroeconomics

May in August at the ECB

After the recent meeting at the ECB’s Governing Council, it was decided to keep the policy rate fixed at its record-low level of 0.75%. As the (bleak) economic outlook has not changed markedly since the last meeting, it seems a sensible decision given the ECB’s mandate. Many, however, forget that the mandate of the ECB is to secure stable prices in the Euro area, which by the ECB is defined as a HICP inflation rate close to, but not above, 2%. It is currently at 2.4%, so it is difficult to accuse the ECB for being particularly hawkish. But the policy rate setting, and how it was aligned with the … Continue reading

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That strange feeling of Déjà Vu: EU’s New Fiscal Compact

The new “Fiscal Compact” of the European Union is now ready to be signed. The purpose of the compact is to strengthen fiscal discipline among member countries (at least those who sign). The desire for enhancing discipline is obviously triggered by the debt crises felt by many EU countries recently. It is, however, still an open question to which extent the current debt performance is due to the global recession or prior fiscal indiscipline. As debt is cumulated deficits it is hard to separate these matters. As seen in the data, it is nevertheless clear that the crisis itself is associated with a substantial worsening of the average government deficit … Continue reading

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New-Keynesian explosions: The Cochrane interpretation and explosive solution

John Cochrane has some interesting comments on New Keynesian economics in his latest blog post on “New Keynesian Stimulus“. The interesting is not the part of the blog-literature to which it also contributes; the part about mudslinging in fiscal stimulus discussions, about which prominent economist got basic theory wrong, about who is acting most disrespectful and whatnot. I.e., the extremely counterproductive style of “debate” that was basically initiated by he-who-shall-go-unmentioned for once. I normally find that Cochrane behaves quite academic and adhere to scientific arguments (which is not entirely unfair given that he is a professor of economics), but even he has to defend himself every once in a while, … Continue reading

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Aaa – aaa – PLUS! Gesundheit!

Rating agencies dominate the financial markets and the news these days. Standard & Poor’s recent downgrading of French, Spanish, Austrian (and other, but not German) government bonds from “AAA” to “AA+” caused waves in media and markets even before they were official. But maybe it is much ado about nothing. Bond yields didn’t go up in France and Spain, as markets have seemed to downplay the downgrade. Maybe common sense is ticking in? Because, what is it that these rating agencies can? They could rate junk financial instruments “AAA” before the financial crisis. Standard & Poor’s rated Lehman Brothers “A” in September 2008 (just before Lehman went bankrupt). This rating … Continue reading

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The Krugman Multiplier is too big

Paul Krugman is a very active blogger. Almost every time he writes a post on his New York Times blog, there are several comments made around the economic blogosphere. And sometimes Krugman will respond to a few of the comments made, and then it sets off further comments, and so on. It is a Krugman Blog Multiplier. I posit that it needs no formal empirical evidence to establish that it is way above 1. Way above. In this New Year’s post I’ll show a recent example, and argue why this multiplier is too high, and why one should not always “exploit” large multipliers. Probably one of the issues on which … Continue reading

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Structural Divergence in Europe: Death Foretold

One of my mantras is that doing economics is not about “being right,” but about getting wiser all the times. Note that the two things may not overlap. I, for example, would rather be wrong all of the time but know why I am being wrong instead of being right without having a clue as to why. So, I think it is a good mantra, and I will stick with it. Now, after the beginning of the current financial crisis and recession, more or less prominent economists lined up to tell the world that they were “right” as they had seen the crisis coming. Some actually had something to back … Continue reading

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Sargent and Sims (2011): LIVE!

This year’s Nobel Prize Lectures in Economic Sciences: “United States Then, Europe Now” (at the site) Thomas J. Sargent, New York University “Statistical Modeling of Monetary Policy and its Effects” (at the site) Christopher A. Sims, Princeton University YouTube version of live TV broadcast of everything. Lectures start 10 minutes into the broadcast (with an introduction by Per Krusell):

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At the Fed: What did come next?

September 22 the Federal Reserve initiated “Operation Twist” where they announced that they would start restructuring its debt by buying up long bonds with the proceedings from short bond sales, with the aim of lowering the long-term yields. As I mentioned in my post on that occasion, the Fed and Ben Bernanke had then exhausted the three main ways of conducting unconventional monetary policy as defined by Bernanke himself in a paper from 2004: I. Shaping Interest-Rate Expectations; II. Altering the Composition of the Central Bank’s Balance Sheet;  III. Expanding the Size of the Central Bank’s Balance Sheet. In case nothing new would happen to the American economy, the obvious … Continue reading

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