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Publications (454)
We study the role of agents’ limited cognitive capabilities, combined with fiscal and monetary policies, in the generation of a deflationary trap. In order to do so, we employ a heterogeneous expectations New Keynesian model in which the agents’ forecasts are based on simple heuristics. Thanks to a learning mechanism, the model is able to generate...
This article provides a comprehensive assessment of the theoretical and empirical literature on structural reforms in advanced economies. Structural reforms matter because they entail profound and systematic changes that affect economic welfare, productivity, growth, unemployment, macroeconomic stability, and income inequality. Here we focus on str...
We analyze how trust affects the transmission of negative demand and supply shocks using a behavioral macroeconomic model. We define trust to have two dimensions: trust in the central bank's inflation target and trust in the central bank's capacity to stabilize the business cycle. We find, first, that when large negative shocks occur, the subsequen...
A nagyobb központi bankok jelenleg a bőséges kereskedelmi banki tartalékok jellemezte keretek között működnek, következésképpen csak a banki tartalék után járó kamat mértékének növelésével tudják emelni a pénzpiaci kamatokat. Így viszont a jegybankok nyereségéből jelentős összegek vándorolnak a kereskedelmi bankokhoz, ami nem lesz fenntartható, és...
The major central banks now operate in a regime of abundant bank reserves. As a result, they can only raise the money market rate by increasing the rate of remuneration of bank reserves. This, in turn, leads to large transfers of central banks’ profits to commercial banks that will become unsustainable and renders the transmission of monetary polic...
There is thus a fundamental credibility issue about the willingness of the ECB to be a lender of last resort in the government bond markets. This will continue to make the eurozone a fragile construction. As a result, the possibility of a future euro crisis cannot be excluded.
We analyse the question of whether the use of forward-looking data in monetary policy is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of tranquillity alternating with crisis periods characterized by fat tails in the distribution of output gap. We find that in a strict inflation target...
We revisit the fragility of the Eurozone which arises because the sovereigns in the Eurozone issue debt in a currency (the euro) over which they have no control. This prevents them from giving a guarantee to bond holders that they will always be repaid at maturity. This fragility can trigger self-fulfilling liquidity crises, such as those that erup...
This policy brief warns about the risks of discontinuing the policy responses to the COVID-19 crisis by pursuing exit strategies too early and/or too sharply. It outlines a comprehensive strategy for limiting such risks globally and offers an in-depth discussion of the European situation. Due to fiscal rules written in a pre- COVID-19 era and exces...
Inflation is on the rise again in the industrialised world. This has led to fears of a sustained surge in inflation. This article argues that while such fears may make sense in the US, they do not in the eurozone, where the monetary-fiscal policy mix has been much less expansionary than in the US. The fear expressed by some that the monetary overha...
The ongoing COVID-19 pandemic is likely to have a profound impact on the lives of high-risk drug users and on the services responding to their needs in at least two important ways: first, through the restrictive measures introduced to mitigate the spread of the virus and, second, as a result of extensive economic downturn. Currently there is great...
We argue that the various proposals aimed at stabilizing the Eurozone using financial engineering do not eliminate the inherent instability of the sovereign bond markets in a monetary union. During crises, this instability becomes systemic and no amount of financial engineering can stabilize an otherwise unstable system. The real stabilization of t...
We analyse the question of whether the use of forward-looking data in monetary policy is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of tranquillity alternating with crisis periods characterized by fat tails in the distribution of output gap. We find that in a strict inflation target...
Sooner or later, the ECB must accept that monetary financing in support of deficit spending is a necessity not just for mitigating the coronavirus crisis, but also for averting a downward deflationary cycle that could pull the eurozone apart.
It has long been argued that structural reforms constitute a remedy for getting countries out of the low-growth environment that Europe has experienced in the last decade. Many recent studies show long-term benefits of such reforms in cross-country settings, but ignore the heterogeneity across different country experiences. To address this gap in t...
Economic Growth and Structural Reforms in Europe - edited by Nauro F. Campos April 2020
Economic Growth and Structural Reforms in Europe - edited by Nauro F. Campos April 2020
Economic Growth and Structural Reforms in Europe - edited by Nauro F. Campos April 2020
Economic Growth and Structural Reforms in Europe - edited by Nauro F. Campos April 2020
Economic Growth and Structural Reforms in Europe - edited by Nauro F. Campos April 2020
Cambridge Core - Economic Development and Growth - Economic Growth and Structural Reforms in Europe - edited by Nauro F. Campos
We use a New Keynesian behavioral macroeconomic model to analyze how structural reforms affect the economy. There are two types of structural reforms. The first one increases price flexibility; the second one increases competition in the labor market and raises potential output. We find that in a rigid economy business cycle movements are dominated...
With the spectre of a recession looming in the eurozone (and elsewhere), the policy question arises as to how much leeway do the fiscal authorities in the eurozone have to follow counter-cyclical fiscal policies aimed at providing some stimulus to the economy.
We argue that the case for the existence of some deterministic force that condemns countries in the periphery to stay in the periphery indefinitely, is weak. Countries that are in the periphery today can become part of the core and vice versa. We also argue that the long run success of the Eurozone depends on a continuing process of political unifi...
Dynamic stochastic general equilibrium models are still dominant in mainstream macroeconomics, but they are only able to explain business cycle fluctuations as the result of exogenous shocks. This paper uses concepts from behavioural economics and discusses a New Keynesian macroeconomic model that generates endogenous business cycle fluctuations dr...
The behavioural model of De Grauwe and Macchiarelli (2015) is extended to include financial frictions on the (aggregate) supply side. The result is a tight and sustained feedback loop between animal spirits on one hand, and supply of credit, capital purchase and production on the other. During phases of optimism, credit is abundant, access to produ...
Nous identifions trois problèmes structurels au sein de la zone euro. Premièrement, il y a un manque d’instruments pour corriger les divergences de compétitivité. Ceci a pour effet d’introduire un biais déflationniste dans le système.Deuxièmement, les marchés des titres souverains dans la zone euro sont fragiles, ce qui en temps de crise entraîne d...
The recent dynamics characterizing the Eurozone economy suggest the existence of a new policy trilemma faced by its member countries. According to this policy trilemma, there is a trade-off between free capital mobility, financial stability and fiscal policy flexibility. In this paper, we analyze the foundations of such a trade-off and, based on th...
Issues in debates about foreign currency exposure—the denomination of liabilities or assets in foreign currency.
The foreign currency denomination of contracts in international transactions can lead to international currency exposure at the country level with important economic and policy implications. When debts are denominated in foreign currency...
Business cycles among industrial countries are highly correlated. We develop a two-country behavioral macroeconomic model where the synchronization of the business cycle is produced endogenously. The main channel of synchronization occurs through a propagation of “animal spirits”, i.e. waves of optimism and pessimism that become correlated internat...
Controversies surrounding the European sovereign debt crisis loom prominent in the public debate. From a legal perspective, the no-bailout rule and the ban on monetary financing constitute the main principles governing the legality review of financial assistance and liquidity measures. Interpretation of these rules are full of empirical claims. Acc...
The behavioural agent-based framework of De Grauwe and Gerba (2015) is extended to allow for a counterfactual exercise on the role of banks for monetary transmissions. A bank-based corporate financing friction is introduced and the relative contribution of that friction to the effectiveness of monetary policy is evaluated. We find convincing eviden...
The design failures of the Eurozone have been recognized quite late and have led the Eurozone policymakers to apply wrong macro-economic policies since the eruption of the sovereign debt crisis. This has led to a dismal macroeconomic performance of the Eurozone countries as compared to the EU-countries that decided not to be part of the monetary un...
We extend the financial accelerator DSGE model to include a powerful feed-back mechanism between asset prices, financial sector and (aggregate) production in an attempt to understand and explain secular stagnation. In particular, we focus on the simultaneous manifestation of anemic production levels, unpaired financial sector and price-to-book rati...
We analyse the relation between the level of the inflation target and the zero lower bound (ZLB) imposed on the nominal interest rate in the framework of a behavioral New-Keynesian macroeconomic model in which agents, experiencing cognitive limitations, use adaptive learning forecasting rules. The model produces endogenous waves of optimism and pes...
The optimal currency areas (OCA) theory has been influential in pushing eurozone countries towards structural reforms to make product and labour markets more flexible. The underlying assumption of the OCA prescription for structural reform is that asymmetric shocks are permanent. However, when shocks are temporary it does not follow that more flexi...
How should the European Union react to the decision of the UK to withdraw from the union? This is the question that has been at the centre of the political debate in Europe since Brexit became a reality. In this article, I will first discuss the nature of the reforms that are called for as a result of the Brexit vote. I will then turn to the issue...
In this paper we compare the interregional and international degree of real exchange rate variability of a number of EMS-countries. This allows us to gain insights into the costs of a monetary union. Our major conclusion is that a monetary union among all EMS members would be costly for some of them if it were instituted today. We also find that a...
La présente note contient une évaluation des propositions faites par Jacques Drèze dans sa contribution récente au colloque de l’I.R.E.S. Dans une première partie, j’essaierai de distiller les idées de force qui sont implicites dans le diagnostic du chômage établi par Drèze. Ma critique sera que, si ce diagnostic est exact, il existe de meilleurs i...
The crisis management set up in the Eurozone after the eruption of the government debt crisis was characterized by two features. The first was the asymmetric adjustment to the current account imbalances that forced the deficit countries into intense austerity without a compensating policy of stimulus in the surplus countries. This led to a deflatio...
In this paper we suggest that Eurozone countries face a policy trade-off between: (1) a common rule imposing co-movements in fiscal policy; (2) financial stability; and (3) financial integration. We provide empirical evidence documenting the existence of such a trade-off in the period characterized by the financial crisis and by the sovereign debt...
In this paper, I analyze the experience of European monetary and financial integration to shed some light on the question of the desirability and feasibility of monetary unification in East Asia. The experience of Europe shows that trying to fix the exchange rates when capital is freely moving is unsustainable and leads to frequent speculative cris...
I argue first that the Eurozone crisis has left a legacy of unsustainable government debt levels. These will continue to exert a deflationary dynamics in the Eurozone. Second, I argue that the institutional innovations since the start of the debt crisis fall short of what is needed to solve the design failures of the Eurozone. In addition, they are...
Macroeconomic policies in the Eurozone have been dysfunctional since the eruption of the financial crisis. The failure of these policies to guide the Eurozone out of the crisis has everything to do with the design failures in the Eurozone. In this article, we first remind the reader of the nature of these design failures. We then analyze how these...
In this paper we extend the behavioral macroeconomic model as proposed by De Grauwe (2012) to include a banking sector. The behavioral model takes the view that agents have limited cognitive abilities. As a result, it is “rational” to use simple forecasting rules and to subject the use of these rules to a fitness test. Agents are then driven to sel...
Economists were early critics of the design of the Eurozone, though many of their warnings went unheeded. This column discusses some fundamental design flaws, and how they have contributed to recent crises. National booms and busts lead to large external imbalances, and without individual lenders of last resort – national central banks–these cycles...
The behavioural model of De Grauwe and Macchiarelli (2015) is extended to include financial-and information frictions on the aggregate supply side. The result is a tight and sustained feedback loop between animal spirits on one hand, and supply of credit, capital purchase and production on the other. During phases of optimism, credit is abundant, a...
In this paper we provide empirical evidence documenting the nature of the Eurozone’s fragility. We find that during periods of turmoil, financial markets have tended to impose strong programs of austerity on member countries of the Eurozone. This confirms the evidence we found in a previous paper (De Grauwe and Ji(2013)). In addition we find that t...
The agent-based (behavioural) model is extended to include a financial friction on the supply side. Firms finance capital purchases using external financing, but need to pay for it in advance. In addition, firm financing constraint and net worth are determined by stock market prices, which can (and will) deviate from the fundamental value. The resu...
On 14 January 2014 the German judges of the Constitutional Court in Karlsruhe came to a preliminary ruling: the European Central Bank’s government bond buying programme (OMT) is illegal according to EU law. The judges referred the case to the European Court of Justice, asking the Luxembourg judges to add conditions to the OMT programme to make it p...
We argue, first, that the Eurozone crisis has left a legacy of unsustainable government debt levels. These will continue to exert a deflationary dynamics in the Eurozone except if creditor nations are willing to contemplate a debt restructuring. Second, we argue that the institutional innovations since the start of the debt crisis fall short of wha...
We analyse the similarities and the differences in the fragility of the European Monetary System (EMS) and the Eurozone. We test the hypothesis that in the EMS, the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets; whereas in the Eurozone, it was the absence of a lender of last resort in the long-...
We argue first that the Eurozone crisis has left a legacy of unsustainable government debt levels. These will continue to exert a deflationary dynamics in the Eurozone except if creditor nations are willing to contemplate a debt restructuring. Second, we argue that the institutional innovations since the start of the debt crisis fall short of what...
Fiscal Implications of the ECB’s Bond Buying Program
The perception that the government bond buying program (OMT) announced by the ECB may lead to future tax burdens on countries, in particular on Germany, is based on an erroneous application of solvency principles that apply to private agents, but not to central banks. We argue that the creditor n...
The perception that the government bond buying program (OMT) announced by the ECB may lead to future tax burdens on countries, in particular on Germany, is based on an erroneous application of solvency principles that apply to private agents, but not to central banks. We argue that the creditor nations’ taxpayers, in particular the German taxpayers...
In this paper we extend the behavioral macroeconomic model as proposed by De Grauwe (2012) to include a banking sector. The behavioral model takes the view that agents have limited cognitive limitations. As a result, it is rational to use simple forecasting rules and to subject the use of these rules to a fitness test. Agents then are driven to sel...
On 6 September 2012 the European Central Bank (ECB) announced its ‘Outright Monetary Transactions’ (OMT) programme, which promised to buy unlimited amounts of sovereign bonds during crises. It is interesting to quote Mario Draghi who justified the OMT programme as follows: "[Y]ou have large parts of the euro area in a bad equilibrium in which you m...
I analyse the nature of the design failures of the Eurozone. I argue first that the endogenous dynamics of booms and busts that are endemic in capitalism continued to work at the national level in the Eurozone and that the monetary union in no way disciplined these into a union-wide dynamics. On the contrary the monetary union probably exacerbated...
The nature of fiscal policies was changed dramatically by the creation of the Eurozone. While prior to the start of the Eurozone, national governments were sovereign in that they could back up the issue of debt by the issue of money, they lost this sovereignty in the Eurozone. This had dramatic effects that were largely overlooked by the designers...
We analyze the similarities and the differences in the fragility of the European Monetary system (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was the absence of a lender of last resort in the long-term...
