Claim OwnershipThe Week That Was in Europe
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© Klaus Adam
Description
Every week, we discuss topical economic themes from a European perspective and provide perspective on key macro data news.
102 Episodes
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The neutral rate is relevant for understaning the stance of monetary policy and for the fiscal outlook, as it determines the financing conditions for government debt. We explain how the neutral rate is defined, discuss its economic determinants and provide estimates of how it has changed since the pre-pandemic period. Increased government debt supply appears to have excerted substantial upward pressure on the neutral rate.
We make reference to the following papers:
Thiago Ferreira and Samer Shousha titled “The supply of safe assets and global interest rates” , Journal of International Economics, 2023.
Atif Mian, Ludwig Straub, and Amir Sufi. titled “What explains the decline in r*? Rising income inequality versus demographic shifts.” Proceedings of the Jackson Hole Symposium, 2021.
We review the fiscal position of France, Germany, Italy and Spain, discuss the need for consolidation and how it could be implemented with minimal harm to output.
Provided wage growth moderates and inflation develops as expected, the ECB will start cutting interest rates in June. We discuss the uncertainties around this outlook and recent headwinds on the inflation front.
We discuss with Prof. Harald Fadinger (University of Mannheim) how the EU taxes the carbon content of imported goods via its Carbon Border Adjustment Mechanism (CBAM).
We critically review the effectivenes of CBAM to prevent "carbon leakage", i.e., the international reallocation of production to locations with low carbon prices, and its effect on the international competitiveness of EU firms. CBAM appears to perform badly on both of these and a number of other fronts.
We also discuss alternative approaches for international carbon price adjustments, partly based on research by Harald and his coauthors:
"Designing Effective Carbon Border Adjustment with Minimal Information Requirements. Theory and Empirics", by A. Campolmi, H. Fadinger, C. Forlati, S. Stillger and U. Wagner.
We discuss with Veronika Grimm (German Council of Economic Experts) about lifting Germany's long-run growth potential. We focus on measures that increase labor supply, human capital formation and the role of long-run electricity prices.
The @ecb is getting close to cutting interest rates: it signaled following it March 7 Governing Council Meeting its readiness to start cutting rates in June, if everything goes according to plan.
We talk about recent trends and future challenges for productivity growth in the French economy. Our guest, Alain Durré, is Head of the Macroeconomics and Europe Division at the Bureau of the French Prime Minister and Rapporteur Général of the French National Productivity Board.
Euro Area inflation fell like a rock: from the peak of 10.6%, reached in October 2022, it dropped to levels below 3% a year later. We analyze how much of this decline can be attributed to policy tightening by the ECB. We find that the direct effect of ECB policy is likely small. ECB policy may have had important indirect effecta via anchoring inflation expectations, but quantifying this effect is difficult.
The podcast makes reference
Speech by ECB's Philip Lane, The ECB's hiking cycle: an interim assesssment, https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230216_1~f8cf2cd689.en.html
Adam Shapiro, Decomposing Supply and Demand Driven Inflation, Federal Reserve Bank of San Fransciso, https://www.frbsf.org/research-and-insights/publications/working-papers/2022/10/decomposing-supply-and-demand-driven-inflation/
We present the main academic insights about how government debt should evolve over time, if the government seeks to maximize social welfare. We discuss (i) how to deal with positive/negative expenditure surprises, (ii) how refinancing risk, due to interest rate risk, impacts optimal government debt dynamics, and (iii) the optimal long-run level of government debt.
The academic papers we mention are:
Barro, R. J., On the Determination of Public Debt, Journal of Political Economy, 1979, https://www.journals.uchicago.edu/doi/abs/10.1086/260807
Aiyagari, S.R., A. Marcet, T.J. Sargent, J. Seppälä, Optimal Taxation without State-Contingent Debt, Journal of Political Economy, 2002, https://doi.org/10.1086/343744
Adam, K., Government Debt and Optimal Monetary and Fiscal Policy, European Economic Review, 2011, https://doi.org/10.1016/j.euroecorev.2010.11.003
Adam, K. and M. Grill, Optimal Sovereign Default, American Economic Journal: Macroeconomics, 2017, https://www.jstor.org/stable/pdf/26156466.pdf
We talk with Bernard Dadah (Head of Commodity Research, Natixis) about critical minerals. What are these? How big of market do they have? Who mines and refines them? What can the EU's Critical Raw Materials Act (CRMA) achieve?
We discuss with the ECB's Director General for Economics Oscar Arce about the Euro Area's macroeconomic outlook, the ECB's past forecast errors, the way forecasts are produced at the ECB and the difficulties associated with producing macroeconomic projections.
A true tour de force through the topic!
We review the ECB's assessement of the economic situation & the outlook for policy rates going forward.
We take stock of Germany's recent underperformance relative to its European peers and analyze its sources. We identify (real) household income dynamics as one of the main drivers.
We review and critically discuss the decisions taken by the ECB after the suprisingly benign November inflation numbers.
We discuss how various forms of uncertainty affect the conduct of optimal monetary policy. We provide a summary of key insights from the academic literature, some of which are quite surprising. We explain how to make sense of them.
We make reference to the following academic papers:
Indicator variables for optimal policy, LEO Svensson, M Woodford - Journal of Monetary Economics, 2003 https://www.sciencedirect.com/science/article/pii/S0304393203000308
Indicator variables for optimal policy under asymmetric information, LEO Svensson, M Woodford, Journal of Economic Dynamics and Control
Volume 28, Issue 4, January 2004, Pages 661-690
https://www.sciencedirect.com/science/article/pii/S0165188903000393
The learning cost of interest rate reversals, Martin Ellison, Journal of Monetary Economics, Volume 53, Issue 8, November 2006, Pages 1895-1907
https://www.sciencedirect.com/science/article/pii/S0304393206001498
We discuss with Professor Lars Feld (Advisor to the German Finance Minister) about what led to the Constitutional Court Ruling on the Debt Brake, what it implies for German federal budget and the Green Transition going forward.
Euro Area labour markets show astonishing resilience: unemployment rates are hovering around record lows despite serious adverse shocks having hit the Euro Area economy. We explore different explanation for this pheonmon and discuss whether it can last.
In October 2023, the European Council agreed on a reform of the European electricity market. We shed light on what went wrong in electricity markets in the past & critically review the main elements of the reform, together with Professor Andreas Loeschel, Chair of Resource Economics and Sustainability at the Ruhr University, Bochum, and Chairman of the German Governments’ Expert Commission for Monitoring the Energy Transformation.
We discuss with Prof. Jean-Marie Meier (Wharton School) about technology transfer to China: (i) what coercive methods does China deploy to force a transfer?, (ii) how do Western CEOs' incentives contribute to technology transfer? Based on Jean-Marie's latest research finding, we provide surprising insights, in particular on the latter mechanism.
Jean-Marie Meier's research paper is available here:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3949536#new_tab
We discuss the decisions taken by the ECB Governing Council and provide perspective on them.
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