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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...

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...

I first published this article on the National Institute of Economic and Social Research blog . It is reproduced here with permission. For the non-British readers, the title is a play of words in reference to a famous BBC TV series, the Great British Bake Off. The British Prime Minister and four of her senior cabinet colleagues will in a series of speeches over the next few days set out a vision for the UK after Brexit. Those speeches will likely reiterate the government’s official goal of ‘free and frictionless’ trade with the EU. Less clear are the concessions that the UK is prepared to make to achieve this objective. In this blog we explore the likely trade-offs from the prism of a simple schematic and focus on three key areas of negotiation - market access, labour movement and budgetary contribution. There is no magic formula and the decision is ultimately political. With that in mind, the PM and her colleagues should spell the priorities on each of these three dimensions in th...

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 Gallois report about the French industry's competitiveness has just been made public (links here ) and received a lot of publicity from the French media. As a trained economist and French patriot, I was eager to read it. The author, a respected businessman - formerly head of aerospace giant EADS -  describes rather briefly the declining state of the French industry over the last ten years, which accounted for 18% of GDP in 2000 and is now down to 12.5%. What are the causes of this decline? The author cites various causes, ranging from product quality, technology, labour flexibility, cost, competition, education and regulation. Standard economic theory says the government should increase labour flexibility, promote competition, support education and enact smart regulation. For example, the Porter Hypothesis (cf Ambec et al 2011 ) states that market-friendly environmental policy can enhance business competitiveness through innovation. What are the main propositions? Create...

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...

Since their top in 2007-2008, leading stock markets indices around the World have significantly declined, making this five year period one of the worst performance ever. As the chart below shows, we can distinguish three groups: The worst performers are the South European indices: Greek (ATHEX), Italian (MIB) and Spanish (IBEX) indices are down over 59%, badly hit by the Euro crisis and subsequent double-dip recession. For those countries, their membership in the Eurozone is put in question, their financial systems are strained by a loss of confidence and large outflows of money. This financial sector stress is having a depressing effect on the real economy, through reduced loans to companies and dampened business confidence. The particularity of this group is that they are now trading at their lowest level since the 2007-2008 crisis because the second crisis (Euro crisis) is hitting them much more than the first crisis (sub-prime then global financial crisis). The second group ...

Being part of the Eurozone - and therefore in direct competition with other European nations -means that France has no choice but to enact urgently the following economic reforms: Reduce the weight of public spending in GDP (currently at 57%) Reduce debt before the market forces us to Reform labour market to make it more flexible and reduce unemployment. (cf Unemployment and market frictions Otherwise, they will end up in a Cul de Sac   Which of the 2012 presidential candidates offers such a programme? Not too sure...

Last night, the leaders of Europe agreed on a new  fiscal rule  to try and save their common currency. The official statement details the rule: "General government budgets shall be balanced or in surplus; this principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP." We have computed the historical structural deficits to find out how tough the 0.5% benchmark is to achieve. As can be seen on the table below, among the fifteen major eurozone countries, only three countries (Belgium, Finland and the Netherlands) have managed to pass this rule succesfully (the green cells) in the last 9 years, and only one (Finland) has managed to pass it continously. Most countries have been far off the rule. Eurozone Governments' Structural Balance (computed from IMF data) Taking 30 years of data, we can see on the figure below that every single year, the vast majority of Eurozone countries have...

Are the USA heading for a new recession? One of my favorite economic mentors, John Mauldin, who is the author of a weekly newsletter read by more than a million people in the World - Thoughts from the Frontline - thinks we are likely to get one because the fiscal tightening in the USA and in Europe is happening too soon as the economy is still weak. Paul Krugman also believes in such a scenario. I advise you to be very careful if you buy and hold stocks!!

Bad news for one of the high profile industry in France, which contains for instance wine. According to a research by three economists from the Toulouse School of Economics , the food processing industry in France has lost 0.44%pa of productivity over the decade from 1996 to 2006. Of course, this loss of competitivity is at the expense of foreign competitors. At the same time, agricultural sector has made small competitivity gains (2%pa) which the food processing industry benefitted. The authors suggest that increased regulation may be (partly) responsible for this loss of productivity. However, since most of the regulation is now EU-wide, I doubt that this could explain the difference with our European competitors.

What have we learned from the credit crisis? A lecture by Paul Krugman, my hero. Here are the main extracts: This crisis is any many ways similar to the 30s one Crisis tend to occur when we forget about previous crisis We forgot that banks were unstable (and therefore needed to be regulated). This is mainly targeted at the Americans In the Great Depression, the Fed did not even try to expand the monetary base. In this respect, Bernanke did much better. Big government with all its flows has the advantage of being an "automatic stabilizer" in periods of crisis. Financial crisis have long lasted consequences (cf. "This time is different" by Carmen Reinhart and Kenneth Rogoff). There is a risk that we remove economic stimulus too early and the economy to plunge back into recession.

To celebrate my 100th post on this blog, what would be more appropriate than to write about the great economist Paul Samuelson who died last week? So what did Samuelson actually do? I could not write any better than Paul Krugman, who was a fellow economist at MIT (they actually shared the same desk at one point), and who describes in his NYT blog what his great contributions to economic science have been: "1. Revealed preference : There was a revolution in consumer theory in the 1930s, as economists realized that there was much more to consumer choice than diminishing marginal utility. But it was Samuelson who taught us how much can be inferred from the simple proposition that what people choose must be something they prefer to something else they could have afforded but don’t choose. 2. Welfare economics : What does it mean to say that one economic outcome is better than another? This was a blurry concept before Samuelson came in, with much confusion about how to think about in...

Interesting debate about the performance of economists and the state of this science. It makes me all the more excited at starting my economics degree at the Toulouse School of Economics next week. Original article by Paul Krugman, Princeton economist and response by Bob Eisenbeis, member of the U.S. Shadow Financial Regulatory Committee and former Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. The two articles have been copied one after the other below for your convenience. September 6, 2009 How Did Economists Get It So Wrong? By PAUL KRUGMAN I. MISTAKING BEAUTY FOR TRUTH It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” ...