L'Information est d'Or

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.

Very informative speech by Peter Praet, the European Central Bank's chief economist, in which he describes the decision making process in the ECB, and which tools it implemented after the beginning of the financial crisis. Reproduced with courtesy from the ECB's website . I was fortunate to be able to attend the MMF conference in London where the speech was delivered. The euro area continues to experience a solid, broad-based and resilient recovery. Deflationary risks have disappeared and some measures of underlying inflation have ticked up over recent months. But overall inflation developments, despite the solid growth, have remained subdued. Accordingly, while we remain confident that inflation developments will eventually return to levels below, but close to, 2% our medium-term objective, the evidence still shows insufficient progress towards a sustained adjustment in the path of inflation towards those levels. Such “sustained adjustment” is the principal contingency tha...

One of the main means for a central bank to promote financial stability is to set the interest rate at which it lends to banks. The lower the rate, the bigger the incentive for banks to do loans to finance companies and consumers' projects. The relationship is straightforward as long as the interest rate stays positive. Indeed, if the interest rate turns negative, negative side effects start to come up, and the point of this article is to highlight those side effects. A Euro dipping in the Aegean sea, in front of Mount Olympus (picture from the author) 1. Which rates does a central bank set? A typical central bank actually sets 3 different rates: - Deposit facility rate (or fed funds rate in the USA) = defines the interest banks receive for depositing money with the central bank overnight. It is compulsory for banks to depose part of their capital at the central bank and this amount is called reserve. - Main refinancing rate (or discount rate in the USA) = defines th...

Yesterday, the US Federal Reserve Chairman Ben Bernanke gave an argumented speech in defense of Large Scale Asset Programs (also called Quantitative Easing in the Financial jargon) initiated in 2009 and that have been since then continued and expanded. Being a former academic researcher, Professor Bernanke was very careful in explaining his vision and his speech was both nice to read and very informative. What are the Large Scale Asset Programs? The role of LSAP is to continue easing financial conditions in the economy when the Central Bank's benchmark rates have reached the zero lower bound. This program is called unconventional because it lacks a standard model explaining why and how it should be used, and has been little used in history. It consists in letting the Central Bank purchase government assets (Treasury boons, or bonds issued by government sponsored agencies) so as to reduce the yield of such assets.  Quantitative evidence Econometric evidenc...

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 ...