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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...

This blog article is the combination of a work that I did with my colleagues Amit Kara with some work that my other colleagues Rebecca Piggott and Arno Hantzsche did.It was first published in NIESR's blog and is reproduced here with permission. The UK government published a White Paper on 12th July outlining its preferences for a future relationship with the EU. In this blog we compare the proposals outlined in the White Paper against other EU free trade agreements (FTA) and also estimate the impact on the UK relative to our central forecast, published in August 2018, that assumes a soft Brexit. Our results suggest that the UK is looking for a trading relationship that is similar in scope to the arrangement between the EU and Switzerland. If that is indeed the case, we believe that the EU will insist that the UK make concessions on the freedom of movement of people and also ask for a budgetary contribution to EU programmes related to the single market. We estimate that the econo...

There is a large literature on the relationship between the yield curve and recessions that started in the 1980s as a result of the inability of macroeconomic models to explain sudden downturns in economic activity. In this box, we review the literature on the predictive power of the yield curve, with a particular focus on the United States, and compute the current implied probability of a recession using data ranging from 1953 to 2018. We find that a recession in the US is not likely soon, but the recent flattening of the yield curve should be monitored carefully. Recessions have often been associated with an inversion of the yield curve, moving from a positive slope to a negative one. A positive slope of the yield curve comes from the fact that investors require a premium for holding longer maturity bonds (the term premium) or expect the short-term rates to be higher in the future. A negative slope is a more unusual event – it has occurred less than 10 per cent of the time in the U...

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...