Sunday , October 20 2019
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Antonio Fatas

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A. F.

Stock market getting cheaper (relative to bonds)

Several indicators are signaling an increase in the probability of a recession. Most of these indicators are variables that have shown to be statistically leading the recession but they cannot always be seen as the cause of one (for example, an inverted yield curve)In the search of a cause for a recession we typically look for imbalances. One that has mattered in the past is asset price bubbles. Standard valuation metrics of the stock market suggest that in the last quarters the market has...

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Redefining money in a digital age

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...

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

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...

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This time might not be different

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...

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The 2020 (US) Recession

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...

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How low is low for Chinese GDP growth?

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...

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Global Rebalancing

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...

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Digital money and payments

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...

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Is the Great Moderation back?

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...

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Lost decades: Italy 3 – Japan 0.

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...

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