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Articles by G.

A Corona financial solidarity levy

April 22, 2020

As the economic costs of the pandemic are becoming apparent all over Europe, a consensus is developing that some sort of European solidarity is required to help those countries which are hardest hit by the crisis (Baldwin and Weder di Mauro 2020a,2020b). It is also becoming clear that expenditure in the hundreds of billions will be needed at the EU level to make a meaningful contribution to the extraordinary budgetary efforts member states are making.
Given that the EU budget is rather small (1 % of GDP),1 it is commonly assumed that the expenditures needed now to fight the crisis should be financed by a solidarity fund, which would finance itself via some form of Coronabonds, or similar instruments. A number of proposals have been made for how to finance such a solidarity fund.

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Corona transfers instead of Coronabonds

April 5, 2020

There can be little question that the economic fallout from the COVID-19 epidemic is hitting different EU member states with very different intensity levels. In this exceptional situation, solidarity is warranted. The weakest members, which are unfortunately often hit hardest, deserve help. Those member states which are able to help, mostly in the North, are likely to themselves experience a sharp recession. However, they have the financial means to overcome the crisis by providing generous assistance to their enterprises and provide a safety net to their unemployed citizens. They would also be able to provide some assistance to the member states most in need.
The first question to ask is whether the coronavirus crisis calls for solidarity within the EU or the euro area. During

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Standardised European sample tests to uncover the true spread of the coronavirus

March 28, 2020

Creating an EU ‘Corona Panel’: Standardised European sample tests to uncover the true spread of the coronavirus
The increasingly draconian measures that European governments have put in place to control the spread of COVID-19 have been taken without reliable information on the true spread of the disease. This column argues that it would be possible to quickly organise an EU-wide survey test of a representative sample of the entire population using an existing panel of European households. This would yield key data on the spread of the disease, for example by showing whether suppression is still possible. Having reliable data which are comparable across countries would also be indispensable for any exit strategy from the internal border controls which have

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Welfare effects of Trump’s China tariffs

September 9, 2019

Trump’s China tariffs: Lessons from first principles of classic trade policy welfare analysis
Textbooks on international trade devote considerable space to basic welfare analysis of tariffs in a partial equilibrium setting. The analysis demonstrates the basic economic mechanisms through which tariffs cause economic losses. It has important implications for the large and discriminatory tariffs currently used by the US.
The small country case
The starting point, usually called the ‘small country case’, is usually the case when the imposition of a tariff does not affect the world (net of tariff) price. This analysis is usually focuses on the areas under the demand and supply curves due to the price changes induced by the tariff (for an example see Krugman and

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Italian risk spreads: Fiscal versus redenomination risk

August 29, 2018

Since June of this year, the risk premia on Italian government bonds have increased considerably. A priori, this could be due to two different sources of investor concerns:
the risk that the country leaves the euro (‘Italexit’, for example, via a plan co-signed by one of the Ministers of the present government); or
the risk that increased deficit spending might make the country’s public finances unsustainable, leading to a default, possibly while remaining in the euro, as transpired in Greece.
A comparison of credit default swaps (CDS) spreads and yield differences between US dollar- and euro-denominated government bonds suggests that the first risk – redenomination – is responsible for about one-half of the overall increase in the spread.1
Disentangling fiscal and

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Banks as buyers of last resort for government bonds

November 27, 2017

One of the key remaining issues for the completion of the Banking Union is the concentrated exposure of banks in many countries to their own sovereign.  A number of contributions have argued that banks should be discouraged from holding too much government debt and, in particular, should be discouraged from holding too much debt of their own government (Andritzky et al. 2016, ASC 2015, Korte and Steffan 2014).
The key counter-argument is that banks should be allowed to buy large amounts of their own sovereign because this way they can stabilise the market in a crisis.
Visco (2015) argues: “… tight concentration limits could create substantive difficulties in “crisis” times. They could be particularly disruptive for banks’ ability to act as shock absorbers in the event of

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The hype, reality, and causes of the global trade slowdown

June 30, 2017

Globalisation: The hype, the reality, and the causes of the recent slowdown in global trade
Trade and international financial transactions have grown massively in recent decades. This phenomenon, also called globalisation, is often described as a ‘mega-trend’. Business and political leaders never tire of repeating that ‘globalisation’ is the future, that it delivers more jobs and higher incomes. However, more recently globalisation seems to be in retreat—in 2015 trade actually fell, both in absolute terms and relative to GDP. Does this mean globalisation has gone into reverse (OECD 2016, IMF 2015, 2016)?
In this column, I argue that the slogan ‘globalisation equals growth’ is wrong. There is no general economic theorem that links more trade to growth and other

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Tightening by stealth

June 12, 2017

Why keeping the balance sheet of the Federal Reserve constant is equivalent to a gradual exit
When interest rates are at the zero lower bound, the stance of monetary policy is judged by the size of the balance sheet of the central bank. However, this is not quite correct since one part of the balance sheet is determined by the demand for cash, which has little to do with monetary policy or the state of financial markets. The proper metric for the stance of monetary policy (under the zero lower bound) should thus be excess reserves. Under this metric, the Federal Reserve already started to exit some time ago, and its balance sheet will ‘normalise’ automatically over the next decade, provided the trend of increasing demand for banknotes does not stop.
How to

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