Wednesday , December 11 2019
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K. E.

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Articles by K. E.

The breakdown of the covered interest rate parity condition

July 1, 2019

A textbook condition of international finance breaks down. Economic research identifies the interplay between divergent monetary policies and new financial regulation as the source of the puzzle, and generates concerns about unintended consequences for financing conditions and financial stability.

The breakdown of the covered interest rate parity condition
What’s at stake: a textbook condition of international finance breaks down. Economic research identifies the interplay between divergent monetary policies and new financial regulation as the source of the puzzle, and generates concerns about unintended consequences for financing conditions and financial stability.
What’s the covered interest rate parity (CIP)?
According to the covered interest rate parity (CIP) condition, the

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The campaign against ‘nonsense’ output gaps

June 17, 2019

A campaign against “nonsense” consensus output gaps has been launched on social media. It has triggered responses focusing on the implications of output gaps for fiscal policy under EU rules, especially for Italy. But the debate about the reliability of output-gap estimates is more wide-ranging.

The debate on the output gap is hardly new. What motivates this review is rather the social media campaign Robin Brooks (Institute of International Finance) recently launched against “nonsense” consensus output gaps (#CANOO) in the euro-area periphery. We review the economic argument, the direct responses, and some less recent pieces related to the output gap and its measurement.
First, some background remarks: the output gap refers to the difference between actual GDP and an unobservable

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The next ECB president

May 27, 2019

On May 28th, EU heads of state and government will start the nomination process for the next ECB president. Leaving names of possible candidates aside, this review tries to isolate the arguments about what qualifications the new president should have and what challenges he or she is likely to face.

On May 28th, two days after European Parliament elections have been held in all 28 member states, heads of state and government will meet in Brussels to start the nomination process for the leadership of many EU institutions.
Most of these posts – i.e. the presidents of the European Council and the European Commission, as well as the high representative of the Union for foreign affairs and security policy – are typically filled every five years when the incumbent European political cycle

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The latest European growth-rate estimates

May 20, 2019

The quarterly growth rate of the euro area in Q1 2018 was 0.4% (1.5% annualized), considerably higher than the low growth rates of the previous two quarters. This blog reviews the reaction to the release of these numbers and the discussion they have triggered about the euro area’s economic challenges.

Two important announcements regarding European economic growth took place in the course of the last two weeks. First, Eurostat announced its preliminary flash estimate for real growth for the euro area and the EU in Q1 2019, on April 30th. And then, on May 7th, the European Commission published its Spring Economic Forecast.
The incoming numbers were important given that growth slowed down substantially in the second half of 2018, especially in the euro area. To illustrate, the European

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Breaking up big companies and market power concentration

April 29, 2019

Senator Elizabeth Warren proposes the break-up of big tech companies. A report for the UK government presents another approach for regulating the digital economy. And IMF research serves as a reminder that concentration of market power extends beyond digital. This blog reviews the debate.

On March 8th, US senator Elizabeth Warren published an essay outlining her proposal to break up the country’s big tech companies, specifically naming Amazon, Google and Facebook. These companies, Warren maintains, have amassed excessive power: “Nearly half of all e-commerce goes through Amazon”, while “more than 70% of all Internet traffic goes through sites owned or operated by Google or Facebook”.
What’s more, they have used this power to stifle competitors and limit innovation.  Warren blames

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The Alstom-Siemens merger and the need for European champions

March 11, 2019

What’s at stake: The European Commission blocked the merger between Alstom and Siemens, triggering the ire of the French and German governments. A Franco-German proposal to revamp merger control in the EU has given rise to a lively debate on the need for European champions.

Siemens and Alstom, Europe’s largest suppliers in the rail market, were one European Commission decision short of merging into a single ‘European champion’ that would become a global leader in the industry. But on 6 February 2019 the European Commission blocked that move, as the “merger would have harmed competition in markets for railway signalling systems and very high-speed trains”.
This decision attracted attention for two reasons. First, merger prohibitions in Europe are few and far between. As Patrick Rey and

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Chinese growth: A balancing act

January 28, 2019

China’s GDP growth in 2018 was 6.6%, its lowest annual growth rate in more than two decades, and the rate is expected to slow further this year. What is driving the slow-down in Chinese growth and what are the implications for Chinese policymakers and the global economy? This post reviews the blogosphere’s take.

According to preliminary estimations of the National Bureau of Statistics of China, the country’s GDP grew 6.4% year-on-year in Q4 2018, the same rate as during the worst of the global recession (in Q1 2009, see Figure 1). For the whole of 2018, the growth rate was 6.6%, the lowest since 1990. And last week, the IMF published its updated World Economic Outlook (see Table 1), in which Chinese growth in 2019 and 2020 is projected to be even slower (6.2%).
Figure 1


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Big Macs in big countries: an update on euro area adjustment

September 20, 2018

Have prices moved in the direction of correcting real exchange rate misalignments everywhere in the euro area in recent years? Not between the largest euro-area economies, i.e. France, Germany and Italy, says evidence from the Big Mac index. However, latest trends may be working in the right direction in these countries too.

What can the Big Mac Index tell us about real exchange rate misalignments in the euro area? Have relative prices between countries adjusted so as to correct them?
Despite its many limitations, The Economist’s Big Mac Index remains a popular and intuitive measure of exchange rate over/undervaluation. In the absence of nominal exchange rates, one would expect prices of Big Macs to vary across euro area countries according to local productivity.
For one thing, Big

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Rebuilding macroeconomics: Initial reflections on a major theory project

January 29, 2018

The ‘Rebuilding Macroeconomic Theory Project’ came to an end in the most recent volume of the Oxford Review of Economic Policy; how were the various papers’ conclusions received?

The latest volume of the Oxford Review of Economic Policy (OREP) marks the conclusion of the Rebuilding Macroeconomic Theory Project. According to David Vines and Samuel Wills, the two economists who conceived it, the central purpose of the project was to invite “a number of leading macroeconomists to describe how the benchmark New Keynesian model might be rebuilt, in the wake of the 2008 crisis”. For Martin Sandbu, it is “the most impressive post-crisis effort of rethinking how macroeconomics should be done, by many of the field’s top practitioners”. This blogs’ review focuses on the initial reactions in the

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Latest data shows developing trends in the European Central Bank’s refinancing operations

December 12, 2017

The stock of liquidity supplied through the ECB’s open market operations has remained relatively stable, though there is a clearer change in the country composition.
Konstantinos Efstathiou
Date: December 12, 2017
Topic: European Macroeconomics & Governance

At this stage, open market operations of the European Central Bank (ECB) primarily consist of long-term funding with maturity exceeding three years, i.e. mostly Targeted Long-Term Refinancing Operations (TLTROs). The importance of traditional, one-week Main Refinancing Operations (MRO) and three-month Long-Term Refinancing Operations (LTROs) has all but disappeared. More recently, the relative role of open market operations as a whole in liquidity provision has

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An irrational choice: behavioural economist wins Nobel Prize

October 16, 2017

Richard Thaler was awarded this year’s Nobel Prize in Economics for his contributions to the field of behavioural economics. His work documents a set of cognitive biases affecting economic decision-making and casts doubt on commonly-held assumptions about the rational ‘homo economicus’ that inhabits economic models and theories. What are the implications for the economics discipline and public policy?

Martin Sandbu in the FT lists some of Thaler’s seminal contributions to behavioural economics, which reveal people’s bounded rationality, willpower and self-interest. Firstly, Thaler discovered the endowment effect, whereby an individual’s willingness to pay for a given object only a fraction of what they are willing to part with it. Secondly, his demonstration that people have a bias

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