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The COVID-19 pandemic has the potential to have a significant impact on medium-run inflation expectations particularly if considered in conjunction with large fiscal stimuli, ultra-loose monetary policies and the risk of de-globalization. The recent review of monetary policy framework by the Federal Reserve, focusing on an average inflation target strategy, highlights how difficult it can be to keep inflation expectations well-anchored when secular factors are at play (i.e. decline in the neutral real rate of interest , r*) and a shock of the scale of COVID-19 hits the economy, with ensuing uncertainty. This blog post was written with my colleague Corrado Macchiarelli and also published on  NIESR's blog  and  LSE's blog . Several factors could “in theory” light inflation expectations up over the medium-term There are many factors that play into the formation of inflation expectations. The large government stimuli, for instance, may have the effect of increasing the ba...

As part of NIESR's quarterly World Forecast, you will find a link to a box co-written by my colleagues Corrado Macchiarelli, Barry Naisbitt and myself about the risk of 'Japanisation' for the US and Euro Area economies. Here is an extract. Since the financial crisis, the Euro Area and US economies have had a period during which their economies showed some of the same characteristics as Japan. This note examines their experience in the context of whether they are en route to Japanisation. We conclude that the period from 2013 to 2016 was very similar to that situation but that the US has now clearly moved away from that experience. The Euro Area, however, while it cannot be described as having suffered Japanisation, has not moved as decisively away from that experience.

In recent years, the yield curve has flattened and shifted downwards. The flattening has received a lot of attention because it is viewed as a recessionary signal. In this article, we argue that the fact that the curve has shifted downwards as well as flattening indicates that the yield curve may have changed regime. This regime shift seems to have been caused by lower inflation expectations and lower risk premia. In an environment of lower inflation and lower risk premia, the yield curve may occasionally invert without signalling a recession as it did in 1966. 1. The recessionary signal Inversions of the yield curve have often been used to predict recessions. The 10-year to 3-month spread between US Treasury yields became briefly negative twice this year in March and the May (figure 1), spurring debate about whether this was signalling a forthcoming recession. The negative spread was mainly the result of a decrease of the 10-year yield – from 2.8 per cent on 1 March to 2.4 per cen...

Post date: 11 Feb 2019 As images of unrest in the streets of Paris and other French cities continue to flood in the European media, the data on France contained in our latest global forecast, published last week, painted a subtler but still concerning outlook for the French economy. GDP growth was at 1.5 per cent in 2018 and recent developments suggest that the acceleration in growth in 2019 that we were previously expecting may not occur. We have therefore downgraded our forecast of annual GDP growth from 1.9 to 1.6 per cent in 2019. Turner's famous yellow A broad range of surveys point to a marked and sudden deterioration in the business environment and consumer confidence. The business climate composite indicator, a survey of business managers compiled by INSEE, declined in December 2018 to a two-year low and the composite PMI dropped in December from 54.2 to 48.7, below the 50 mark which indicates expansion. Social protests represented by the ‘gilets jaunes’ movemen...

During the recent negotiations between Greece and its creditors about a debt restructuring programme, we learned that both parties were very keen on maintaining the Eurozone intact (aka Greece staying in the Eurozone). Why is it in their interests to do so? Let's see both sides arguments. First the Greek argument. The Greeks are going through incredibly harsh times with sky-high unemployment and plummeting income, so it's fair to wonder why they are so keen on staying in the Eurozone. What is so great about the Euro that a country is ready to face the threat of economic collapse to stay in it? Indeed what is happening in Greece now, with all banks being closed, capital controls and cash redrawal close to impossible, is a financial collapse similar to the one the U.S. had feared after Lehman Brothers  bankruptcy. With no lending, an economy cannot function properly, companies face liquidity crisis leading to being shut down, people don't invest or rather emigrate and the...

The Nobel Prize in Economics has been awarded to US economists Lloyd Shapley and Alvin Roth for their work on market design . Market design is a subfield of microeconomics that studies how to make markets work efficiently. By efficiently (also called Pareto efficiency), economists mean that the outcome (in terms of who gets what in the market) cannot be improved without making at least one person worse off. Most often this outcome can be achieved by letting people freely trade goods using money as a means of exchange. However, there are some cases where money cannot be used. For example, Alvin Roth studied the market for kidney transplants where buying kidneys is not allowed on ethical grounds. By creating a database of likely donors and patients along with an algorithm to match them, his work allowed to increase the number of transplants and therefore of lives saved. Below is a lecture from Alvin Roth where he explains this case and other applications of market design: At a time...

In March, the Chairman of the Federal Reserve (ie the US Central Bank) gave a series of four lectures about the Federal Reserve system and the Financial Crisis to students of Georges Washington University. I have enclosed the videos of these classes. Dr. Bernanke, who is also a prominent academic researcher, is very skilled at explaining very complex problems with easy words. So, even non economists will find these lectures accessible and useful to understand the sequence of events that led to a global financial crisis and how the Federal Reserve responded to it. Let me give you a few extracts and comments that I found particularly worth highlighting: The three pillars of central bank action are: Monetary policy (setting interest rates) Provision of liquidity (lender of last resort) Financial regulation and supervision (shared with other agencies) "We did not foresee that declining house prices would trigger a financial crisis." This is an honest but clear ...

A state-of-the-art conference on macroeconomics has been organized by Olivier Blanchard at the IMF. Although I could not attend it, I followed it on the website of the IMF. A lot of the most well-known economists attended: Joseph Stiglitz, Robert Solow, David Romer, George Akerlof, Maurice Obsfeld. As it was presented by academics, it's very research oriented, but definitely very informative even for the non-academics people. A summary of the results of this conference is given by Olivier Blanchard on VoxEU , a leading website for European economists. Here is the video:

Barbara Petrongolo 15 October 2010 The 2010 Nobel Prize in Economics has been awarded to Peter Diamond, Dale Mortensen, and Christopher Pissarides "for their analysis of markets with search frictions". This column explains how their research relates to fundamental economic issues that are both at the core of the wellbeing of society at large and now near the top of many policymakers’ agendas. Various forms of imperfections or “frictions” characterise most real-world transactions. The coexistence of buyers and sellers in a given market, who can in principle agree on a price, may not be sufficient for immediate trade, as both buyers and sellers may need to invest in a costly search process in order to locate matching partners, and eventually need to agree to enter a transaction rather than wait for better trading opportunities. These frictions derive from several sources, including imperfect information about trading partners, heterogeneous demand and supply, slow m...

By Douglas Irwin A large body of research has linked the gold standard to the severity of the Great Depression. This column argues that while economic historians have focused on the role of tightened US monetary policy, not enough attention has been given to the role of France, whose share of world gold reserves soared from 7% in 1926 to 27% in 1932. It suggests that France’s policies directly account for about half of the 30% deflation experienced in 1930 and 1931. A large body of economic research has linked the gold standard to the length and severity of the Great Depression of the 1930s, primarily because fixed exchange rates precluded the use of monetary policy to address the crisis (see for example Temin 1989, Eichengreen 1992, and Bernanke 1995) But it has never been entirely clear why the gold standard produced the massive worldwide price deflation experienced between 1929 and 1933 and the enormous economic difficulties that followed. In particular, worldwide gold reserves ex...

“The Company of Strangers” (2004, Princeton University Press) In a very rich and lively book, Paul Seabright, an economist from the University of Toulouse, explains how human beings have evolved from an ordinary animal species to a highly organised society through what he calls “The Great Experiment”. This experiment consists in the building of social and economic institutions and Seabright shows that our subsequent evolution has little to do with genetical or biological evolution. These institutions – mostly embedded in the modern state via some core principles: army, law enforcement, property rights,… - have made it possible the development of markets by nurturing trust and allowing specialisation. Trust and specialisation are linked to each other because one cannot specialize in what she does best if she doesn’t trust that others will provide her with everything else she needs to live. Specialisation has grown to such a high level that the manufacturing and delivery of a new shi...

As economics has a lot to answer following the crisis, I feel it is useful to go back to basics. Here is a rap song of Hayek vs. Keynes presenting the opposition between the Austrian and Keynesian schools of economics.

As part of a research assignment, I analyzed with my fellow Toulouse School of Economics colleagues Maria Garcia , Saniya Tapalova and Rodolfo Tupayachi the drivers of oil prices. Here is a link to the Analysis  and the presentation .