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Articles by Ilzetzki

Post-Covid inflation risks for the UK

20 days ago

Over the past year, concerns about inflation have reappeared. The January 2021 Centre for Macroeconomics (CfM) survey asked members of its UK-based panel whether inflationary or deflationary pressures would dominate in the upcoming decade and about the main driving forces of inflation.
Should we worry about post-Covid inflation?      
Since the Global Crisis, inflation expectations have been subdued in most advanced economies. Central banks have made herculean efforts to hit their inflation targets from below. The consensus prior to Covid-19 was certainly that high rates of inflation would not be a major threat to advanced economies in the foreseeable future. 
This past year, new voices have emerged expressing concern about inflation. In a provocative book, Goodhart and Pradhan

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Post-Covid-19 potential output in the euro area

January 2, 2021

Global economic activity took a large hit during the Covid-19 pandemic. The euro area is no exception, with the ECB currently projecting an 8% decline in GDP this year and that GDP will only recover to its pre-pandemic level at the end of 2021. But looking five years ahead, the ECB has made no change to its long-run growth forecast (of 1.4% in five years’ time) throughout the pandemic. This particular forecast suggests a permanent loss in the level of GDP, but no effect on its growth in the long run. Yet, the long-run effect of Covid-19 on the euro area’s economic potential remains very uncertain.
Bodnár et al. (2020) give an overview on the theory and evidence on the effects of Covid-19 on the euro area’s potential output (defined as the maximal level of economic activity that

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Rethinking the ECB’s inflation objective

November 16, 2020

The ECB is in the process of reviewing its monetary policy strategy. The review was due to for the end of 2020, but was postponed to mid-2021 because of the Covid-19 pandemic. The review will consider whether the ECB’s inflation aim should be reformulated and over which time horizon prices should be stabilised, among other questions. 
Across the Atlantic, the Federal Reserve concluded its own strategic review in August.  One of the policy changes arising from the review was a commitment by the Fed to allow inflation to overshoot if inflation was persistently below its long-term target of 2%. As Fed Chairman Jay Powell stated in the Fed’s September 16 statement: “With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately

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The economic cost of UK school closures

August 5, 2020

Schools across the UK have been closed to most students since March 2020. They are scheduled to reopen in September, according to Department for Education guidelines, but concerns about further closures remain as a second wave of the pandemic is a distinct possibility in the autumn.
There is an open epidemiological debate on the effect of school openings on the rate of COVID-19 spread. Evidence from Saxony in Germany showed a very low infection rate for students and staff when schools reopened, although the researchers note that the infection rate in Saxony was low overall. Contact tracing in South Korea indicates that children under the age of 10 are far less likely to spread the virus, but that teenage children pose similar risks as do adults. Of course, risks likely depend on

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The risks to a rapid recovery: Views from top UK economists

July 6, 2020

The UK economy is suffering its worst recession in centuries, with national income declining and unemployment rising at unprecedented rates. This column reports on the latest Centre for Macroeconomics survey, which reveals that despite this worrisome news, the panel is optimistic that the UK economy will recover to its pre-pandemic trend within five years or less, no worse than past UK recessions. Panellists emphasised that these predictions depend on the government effectively containing the spread of the virus and not reverting to austerity policies following the pandemic. The panel was split on the biggest risks to the pace of recovery, with firms’ productive capacity, scarring effects of unemployment, and a slow demand recovery cited as prominent concerns.

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COVID-19 and UK public finances

June 11, 2020

Public debt has risen to unprecedented peacetime levels, due to policies put into place to address the economic fallout from COVID-19. Nevertheless, as this column reveals, the Centre for Macroeconomics panel was nearly unanimous that the Treasury should not take any action to decrease the deficit in the upcoming budget. The panel is split on when it would be wise to publicly announce long-run plans to address the deficit and the debt. The majority of the panel supports a mix of financing options when action is taken, with tax increases receiving strong support and not a single panellist supporting public spending cuts.

The UK government has supported the economy with a variety of measures in response to the COVID-19 crisis. This has led to an unprecedented

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COVID-19: The economic policy response

March 28, 2020

The COVID-19 pandemic and its economic fallout hardly require an introduction. To date, it is estimated that COVID-19 has infected over half a million people worldwide and claimed over 20,000 lives.1 The virus is still on the upward sloping portion of the epi curve (Baldwin 2020), so the eventual global death toll is certain to multiply by orders of magnitude this year. Countries have taken a variety of measures to contain the spread of the virus, including full or partial lockdowns, testing, contact tracing, and case isolation. 
The economic damage is already tangible, with China’s manufacturing index and fixed investment both declining by 30% so far this year relative to December 2019. European manufacturing indices fell by similar amounts in March. Stock markets have

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The UK productivity puzzle: CFM survey

March 11, 2020

The UK has seen slow rates of productivity growth over the past decade (ONS 2020), with output per hour and real wages no higher today than they were prior to the global financial crisis. The February 2020 survey by the Centre for Macroeconomics (CFM) asked its panel of top UK economists about the causes of, and possible policy responses to, this slow growth in productivity. Respondents were first invited to pick which are the first and second most important causes of the slowdown in UK productivity growth from these options:
Human capital, including education and employee skills
(Insufficient) investment in research and development
Labour market factors
Low demand (including due to the financial crisis, austerity policies or Brexit)
Productivity mis-measurement
They were then

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