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Antonio Fatas

A. F.


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Articles by A. F.

Redefining money in a digital age

July 4, 2019

Economics textbooks use a definition of money as an asset that can be used as a means of payment, that constitutes a unit of account and serves as a store of value. This definition is being used often in debates about new forms of digital money and payments (including cryptocurrencies).

I would like to argue that this characterization of money is

a) not a definition

b) not a very useful one to compare alternative forms of payment

c) fails to understand how digital payments and new technologies have changed the nature of money

Let’s deconstruct the "definition" to see what is wrong with it. 

Unit of account and store of value

Prices and wages are denominated in a unit of account that we identify with money or the currency.  This one is quite straightforward but we cannot rule

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Libra: not a currency board and (maybe) not a stable currency

June 19, 2019

Libra, the cryptocurrency backed by Facebook (and the other members of the Libra association) was announced yesterday. The web site and the white paper refer to the new currency as a stable currency:"Libra is designed to be a currency where any user will know that the value of a Libra today will be close to its value tomorrow and in the future." 
The stability is guaranteed by the intrinsic value of the coin, a result of the assets that back the value of the currency. These assets are called the "Library Reserve".  The white paper refers to the similarities of this mechanism and the currency board that some currencies with fixed exchange rates use:"…the mechanics of interfacing with our reserve make our approach very similar to the way in which currency boards (e.g., of Hong Kong) have

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This time might not be different

June 7, 2019

Estimating the probability of a recession over a short horizon has so far proven to be a challenging task for economists. Each cycle looks slightly different from the previous one and trying to come up with precise indicators of crises leads to either overpredicting them or missing their timing as some risks are underestimated. As the US enters its longest expansion ever, we are back to a discussion on whether there are any reliable indicators that can help us forecast the next turning point. 

Without providing an exhaustive list of all candidates, let me highlight the interaction between three statistical patterns and how they inform us (or not) about the risks ahead: 

Three (related) statistical patterns

1. The Yield Curve tends to invert before a recession.

2. The US

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The 2020 (US) Recession

March 12, 2019

Summary: This post is based on a research note I wrote asking whether low unemployment is sustainable. The answer is a clear no for the US. Low level of unemployment are good predictors of the tail risk event of a recession, a sharp increase in unemployment rates. These dynamics are related to the build up of financial and macroeconomic imbalances. If this pattern is to repeated, and given the current level of unemployment rate, a US recession must be around the corner. For details on the analysis, the research note including additional results is available on my web site: Fatas (2019).
A few months away from the longest US expansionThe US economy is a few months short of beating the longest expansion ever, which took place from March 1991 to March 2001. As we approach this milestone,

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How low is low for Chinese GDP growth?

December 17, 2018

The deceleration in the Chinese economy over the last decade has raised concerns about the sustainability of the Chinese economic "miracle". But is that deceleration unusual when compared to other countries? What is to be expected in the coming years?Economists like to look at emerging markets through the lens of the convergence model (based on the work of Robert Solow). Successful emerging economies are supposed to grow faster than advanced economies and catch up. But as the process of catching up materializes, growth will slow down and over time will approach that of the most advanced economies. How does China compares to other successful emerging economies? It is not easy to find a perfect historical example for China but South Korea comes the closest. It is a successful converging

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Global Rebalancing

November 28, 2018

Prior to the Global Financial Crisis the world economy experienced a period of increasing global imbalances where a group of countries saw their surpluses increase rapidly while, on the other side, a group of countries increased their deficits. These patterns were partly related to the "saving glut" hypothesis put forward by Ben Bernanke to explain the decline in global long-term real interest rates. It was also the case that some of the deficit countries (in particular in the Euro periphery) found themselves in a large crisis after 2008.This post is an update of the last ten years. Today the world displays smaller imbalances than at the peak of 2008 but what it was more interesting is the extent to which rebalancing had happened between different country groups.Let’s start with the

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Digital money and payments

November 14, 2018

New technologies in the financial sector are opening the door for potential disruptions: cryptocurrencies, M-Pesa, WeChat,… Many of them are seen as alternatives to either traditional currencies issued by central banks or to the intermediation role played by commercial banks.In this discussions, there is often the assumption that "money" and "payments" are features that always come together, they cannot be separated. The confusion originates in the standard definition of money: It is the asset that allows us to purchase goods and services, the "medium of exchange". The ultimate example is physical currency where a piece of paper that says €50 or $100 is both the asset (where the value is being held) and the medium of exchange (the payment vehicle of the payment technology). Transfer of

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Is the Great Moderation back?

September 11, 2018

The "Great Moderation" was a term used to describe the reduction in business cycle volatility observed in several advanced economies. It started in the mid-1980s and it coincided with the period of time where inflation had successfully brought down to a low level (and remained low and stable since then).There was a debate about the causes of the Great Moderation. Some put central banks at the center of the phenomenon while others thought good luck was a significant part of the explanation for these benign years. The crisis that started at the end of 2007 represented for some the end of this period and a validation of theories that had seen good luck as the main reason for it. The deep and protracted recession that followed 2007 questioned the idea that business cycles had become less

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Lost decades: Italy 3 – Japan 0.

June 7, 2018

The last decade has not been good for many advanced economies. The Global Financial Crisis, a second recession in the Euro area and central banks hitting the zero lower bound have led to disappointing GDP growth rates. But GDP growth rates can be a  misleading indicator about the true performance of different economies. For example, as Matt O’Brien summarizes well, Japan has done much better than what most people believe.The confusion comes from the fact that there are two forces driving GDP growth. One is the number of hours we work and the other one is how productive those hours are. The absolute number of hours we work is a function of the population of a country. Because of that reason we usually measure GDP per capita growth instead of GDP growth. But this is not enough. Hours per

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It’s a (low inflation) trap!

May 11, 2018

Mark Carney did his best yesterday to justify the decision of keeping interest rates at 0.5% at the same time that it was promising that the economic momentum will be regained and that interest rates will have to rise soon.Unfortunately, this is not new. Since March 5th, 2009 (more than nine years ago), when interest rates were lowered to 0.5% in the UK, we have not seen much action despite all the talk and promises of higher interest rates. And inaction of interest rates has mostly come as a surprise as projections on interest rates were always much higher than what was later delivered by the central bank (see image below).

What we are seeing in the UK is not different from what we have seen in the US after the Federal Reserve stopped quantitative easing and engaged in a slow path of

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The shrinking (US) Risk Premium

January 19, 2018

As the US stock market continues to climb and reaches "record-high" levels, questions on overvaluation and bubbles become more common. Robert Shiller CAPE measure of the US stock market shows now a market that is at a higher level than during the Great Depression. The market has only been more expensive in the years 1998-2000 in the run up to the burst of the internet bubble.

While high CAPE values signal potential overvaluation, one has to compare those numbers to levels of interest rates to assess whether stock prices are truly overvalued relative to other asset prices. One simple way to compare the two is to calculate the stock market risk premium implied by current levels of stock prices, earnings, nominal interest rates, expected inflation as well as expectations of future

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The narrative of high debt and powerful central banks

January 5, 2018

In 2017 GDP growth picked up solidifying a global expansion phase that had previously been slow and erratic. The number of countries growing at rates consistent with their potential increased to levels not seen since prior to the global financial crisis. As the expansion gathers pace and, in some cases, becomes long by historical standards, it is time to wonder where the next crisis will come from and how we will deal with it.

Among the many potential reasons why the world might fall into another recession there is one that is repeated very often and it is linked to the narrative we created after the 2008 crisis. We find ourselves again at a point where debt levels are at record high, asset prices are in bubble territory and the only reason why we have growth is because of the

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Moving Blog Location

January 5, 2018

New Year, new address and look for my blog. The new address is http://antoniofatas.blogspot.comIf you have been subscribing to this blog, you can change your subscription by going to this new link.Antonio Fatás

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Experts, facts and media

November 23, 2017

Jean Pisani-Ferry has written a very interesting post about the need for trusted experts in a democracy. The post addresses the criticisms that economic experts have received as a result of the Brexit vote. Quoting from his post:"Representative democracy is based not only on universal suffrage, but also on reason. Ideally, deliberations and votes result in rational decisions that use the current state of knowledge to deliver policies that advance citizens’ wellbeing."Very well said. He also brings up the point that the lack of influence of economic experts is not that different from that of other experts (as illustrated by the debates on climate science, GMOs,…). I share that view and my guess is that the mistrust of economic experts is simply more visible because of their influence (or

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Micromanagement of European reforms

November 23, 2017

The agreement between Greece and its Euro partners is full of very detailed policies to be approved by the Greek government in the coming week. How did we end up in a situation where the domestic policies of a Euro country are decided by other countries? I recently wrote a paper on the European reform agenda where I had a discussion on the role of Europe in the reform process. Here are some of what I wrote in the paper which is very appropriate for what we just witnessed over the last 24 hours.Historically Europe has served as a catalyst for reform in some of the least-advanced EU economies. Through the imposition of requirements to join certain European initiatives it has fostered enough social consensus around the need for compromises. As an example, it worked well to transform and

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You can lower interest rates but can you raise inflation?

November 23, 2017

Last week the Bank of England lowered their interest rates. This combined with previous moves by the ECB and the Bank of Japan and the reduced probability that the US Federal Reserve will increase rates soon is a reminder that any normalization of interest rates towards positive territory among advanced economies will have to wait a few more months, or years (or decades?).The message from the Bank of England, which is not far from recent messages by the Bank of Japan or the ECB is that they could cut interest rates again if needed (or be more aggressive with QE purchases).Long-term interest rates across the world decreased even further. The current levels of long-term interest rates have made the yield curve extremely flat.And in several countries (e.g. Switzerland) interest rates at all

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The missing lowflation revolution

November 23, 2017

It will soon be eight years since the US Federal Reserve decided to bring its interest rate down to 0%. Other central banks have spent similar number of years (or much longer in the case of Japan) stuck at the zero lower bound. In these eight years central banks have used all their available tools to increase inflation closer to their target and boost growth with limited success. GDP growth has been weak or anemic, and there is very little hope that economies will ever go back to their pre-crisis trends.Some of these trends have challenged the traditional view of academic economists and policy makers about how an economy works. Some of the facts that very few would have anticipated:- The idea that central banks cannot lift inflation rates closer to their targets over such a long horizon.-

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The OECD procyclical revision of fiscal policy multipliers

November 23, 2017

The OECD just published its November 2016 Global Economic Outlook.  Their projections suggest an acceleration of global growth rates in particular in countries with plans for a fiscal expansion. In the case of the US, and based on the "plans" of the Trump administration, the OECD projects an acceleration of GDP growth to 3% in 2018.I am very glad to see that the OECD is more open to the idea that a fiscal expansion might be the right policy choice in a low growth environment. I am also very happy that they are ready to admit that fiscal policy multipliers are larger than what they previously thought.But I am puzzled that they seem to ignore their previous disastrous economic policy advice. And I am even more puzzled that they are upgrading their estimates of fiscal policy multipliers (in

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The stock market looks cheap

November 23, 2017

How expensive is the US stock market? Have the strong gains since the financial crisis of 2008 built yet another massive bubble that will require a correction? Some investors fear that recent stock market record levels are a sign that this is the biggest bubble ever. Of course, such a simplistic comparison of stock prices is flawed both because stock prices are nominal and therefore likely to go up over time and also because they are driven by (real) earnings which are also likely to increase as (real) GDP increases.To correct for these trends we can do a simple adjustment and look instead at the price-to-earnings ratio. I will use here the one constructed by Robert Shiller (although some ague that recently the index could be less informative because of the way earnings are being

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Greece: negotiating without trust

November 23, 2017

The Eurozone and Greece are going through the last hours of a negotiation to ensure release of additional funds from the previous agreement and possibly setting the basis for the next one.The leaked details of the latest Greek proposal and the Eurozone counterproposal is full of details and discussions around technical issues (for example, whether the pension reform is effective from October 31 or July 1st). But what the technical discussions reveal is a negotiation that can only lead to an outcome that will not satisfy any of the parties.Reading between the lines of the technical details we see the Eurozone asking Greece for a strong package of front loaded fiscal measures many of which are exactly the ones the Greek government wanted to avoid as they go against the electoral platform

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BIS redefines inflation (again)

November 23, 2017

An interview with Hyun Song Shin, economic adviser and head of research at the BIS, reposted in the BIS web site reminds us of the strange and heterodox views that the BIS (and others) have about the behavior of inflation. The views run contrary to most of what we all teach about inflation. They can only be understood if one has a very special and radical view on what determines inflation and are supported by a unique reading of the data. You probably need to read the whole interview to understand what I mean but here is a summary of the new BIS theory of inflation:1. Inflation is a global phenomenon, not a national one. Monetary policy has very little influence on inflation, demographics and globalization are much more relevant factors.2. The idea that monetary policy affects demand and

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Make the Risk Premium small again

November 23, 2017

In one my previous posts I looked at the stock market valuations in the US to conclude that they were in line with recent historical data. In fact the stock market looked cheap relative to most years since the mid 1980s.But that was before the US election! Since the election the stock market has gone up and interest rates have gone up as well. How do stock market valuations look like today?I follow the same methodology of the previous post and start with the Price-Earnings ratio constructed by Robert Shiller. We know that this P/E ratio has been high relative to historical averages (today it stands above 28, a level only achieved before in the 2000 bubble or in 1929.But the P/E ratio depends on several macroeconomic variables, in particular the level of real interest rates. In my previous

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Savings glut and financial imbalances

November 23, 2017

Martin Wolf in today’s Financial Times discusses the reasons for low interest rates and suggests some interesting scenarios for the years ahead. I agree with most of what he says but I have doubts about the role that he assigns to central banks.Let me start with the arguments with which I agree 100%. The logic of the Bank for International Settlements that low interest rates are the outcome of central banks managing to keep interest rates artificially low for decades is "wildly impossible". And the main reasons are that we have no economic model (or evidence) that suggests that central banks are able to manipulate real interest rates for decades and we do not either have any model (or evidence) that supports the idea that a central bank policy of low interest rates will not generate

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The Greek Dra(ch)ma is back?

November 23, 2017

One more round of negotiations between Greece and the rest of is European partners to seek a last-minute solution before the Greek government runs out of money. Negotiations could end up going in any direction. Greece is unlikely to score a massive win but it could buy itself some time if there is agreement around a reasonable set of reforms that are to be implemented over the coming months. Reforms that could be sold domestically very differently from the way they are presented in Brussels.What Greece really wants out of these negotiations is straightforward: a restructuring/reduction of its current debt that allows them to survive over the coming years with a primary balance in (small) surplus. This would mean that their pressure is gone and and that they can implement any policies they

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9, 8, 7, 6.7,… Speculating on China growth

November 23, 2017

The deceleration of China’s GDP growth rate has been seen both as a natural transition towards more sustainable growth rates and a sign that the Chinese model of growth is coming to an end. How does this deceleration of growth rates compared to similar historical episodes for other countries? Is 6-7% a sustainable growth rate for China?Let’s frame these questions in the traditional model economists use to look at growth rates of emerging and low-income economies: the convergence model (based on the work of Robert Solow). The main prediction: countries that are lagging have more opportunities for investment and they are likely to grow faster than countries at the technology frontier. Because of faster growth rates we expect to see convergence in GDP per capita. As convergence happens,

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Missing the anti-inflation central bankers.

November 23, 2017

In two recent posts, Martin Feldstein and Andrew Sentance (former member of the Bank of England monetary policy committee) criticize the recent actions of central banks to bring inflation back to its 2% target.Andrew Sentance clearly misses the central bankers of the 1980s, the fighters against high inflation. He has an interesting definition of a central banker job:"The job of a central banker is to make unpopular decisions when politicians will not. We saw that in the 1970s and 1980s from the Bundesbank and the US Federal Reserve."And, unfortunately, central bankers are not fighting inflation anymore (maybe because inflation is too low?):"It is a measure of how much has changed in the world of central banking that the very institutions that won their credibility by keeping a lid on

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A 2016 recession would be different

November 23, 2017

If the US or the Eurozone entered a recession this year, a few macroeconomic variables would look very different relative to previous recessions.1. The Yield curve would be very steep. Unlike in any previous recession when the yield curve was flat or inverted.2. The real federal funds rate (or the ECB real repo rate) would be extremely low and would be at a level similar to that of the beginning of the expansion. Unlike in previous recessions where the real central bank interest rates was high relative to the beginning of the expansion.3. And nominal central bank interest rates would be stuck at zero so there will be no room to lower them in response to the recession. Unlike in previous recessions where nominal interest rates came down by about 4-7 percentage point (this is also true for

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Interest rates: natural or artificial?

November 23, 2017

The debate about who is responsible for the low level of interest rates that has prevailed in most economies over the last years heated up when Ben Bernanke wrote a series of blog posts on what determines interest rates. He argued, once again, that it is the global dynamics of saving and investment the one that created a downward trend in interest rates starting in the mid 90s and that it accelerated as a result of the crisis. In his story, central banks are simply reacting to economic conditions rather than driving the interest rate (always refreshing to see a former central banker explaining how powerless central banks are). What Bernanke described can be interpreted as a decrease in what economists called the natural real interest rate.There are, however, those who have a very

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ECB: I cannot do whatever it takes

November 23, 2017

The ECB just announced a further reduction in interest rates, extended its QE program by increasing the rate at which buys assets, beefed up the TLTRO program and extended its horizon. It all sounds like good news and many of these actions had been expected in the last meeting of 2015 and they did not happen. Markets reacted very positively on announcement but later, after the press conference, they went down to levels that were significantly below where they were before the announcement.It is always hard to comment on why markets react in a certain way to monetary policy announcements but I must say that watching the press conference I learned about the state of desperation and possibly confusion of the ECB, which was not very reassuring. It might not be their fault, this is life when

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Did the IMF provide support to Syriza?

November 23, 2017

The IMF published yesterday a preliminary analysis on the debt sustainability of the Greek government. The timing of the publication, a couple of days ahead of the referendum, has triggered a variety of interpretations of the conclusions. The Greek government has quickly jumped to argue that the results confirm that government debt in Greece is not sustainable and a substantial haircut is needed.Is the interpretation of the Greek government correct? Yes and no. The IMF analysis suggests that under reasonable assumptions on growth and interest rates for Greece, it is very difficult to imagine a path of primary budget surpluses that makes the current situation sustainable. This is what the Greek government says and in that sense it seems that the IMF is providing empirical support to their

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