What lessons from the 1930s?

This paper explores three areas in which the experience of the Great Depression might be relevant today: monetary policy, fiscal policy and the systemic stability of the banking system. We confirm the consensus on monetary policy: deflation must be avoided. With regard to fiscal policy, the picture is less clear. We cannot confirm a widespread opinion according to which fiscal policy did not work because it was not tried. We find that fiscal policy went to limit of what was possible under the conditions as they existed then. Our investigation of the US banking system shows a surprising resilience of the sector: commercial banking operations (deposit taking and lending) remained profitable even during the worst years. This suggests one policy conclusion: At present the authorities, in both the US and Europe, have little choice but to make up for the losses on ‘legacy’ assets and wait for banks to earn back their capital. But to prevent future crisis of this type one should make sure that losses from the investment banking arms cannot impair commercial banking operations. At least a partial separation of commercial and investment banking seems thus justified by the greater stability of commercial banking operations.Great depression; Monetary policy; Fiscal policy; Commercial banks

The Spanish hangover. CEPS Policy Brief No. 267, April 2012

Spain faces high unemployment and slow growth. This paper focuses on an important source of those problems, namely its housing market. While some adjustment has occurred since Spain's housing bubble burst in 2008, the authors find that house prices and construction need to decrease more to slow Spain's unsustainable accumulation of foreign debt

Smart strategies to increase prosperity and limit brain drain in Central Europe. CEPS Special Report, 6 November 2018

This is a summary of the expert conference held by CEPS and the Aspen Institute Central Europe on 6 November 2018. Citizens of new EU member states are increasingly leaving their countries to pursue better opportunities and reap the benefits of intra-EU mobility. In the immediate aftermath of accession to the European Union, economic reasons were the main drivers of mobility. Today, governments in new member states need to develop a clear vision about the reforms necessary to improve economic and social conditions and create incentives for their citizens to return and to stay. The danger is that, in the long-run, the benefits of intra-EU mobility for these countries will not be enough to compensate for a permanent ‘brain drain’

The Effect of Equity Market Integration on the Transmission Monetary Policy. Evidence from Australia

This paper investigates the effects of equity market integration on the transmission of monetary policy shocks. Based on the assumption that financial market liberalization and integration lead to falling portfolio holding costs, we analyze its effect on a two-country DSGE model with staggered prices and endogenous portfolio choice under incomplete markets. The model predicts that the reaction of stock prices, output and RER becomes muted upon impact and less persistence with falling portfolio holding costs. To test for a similar pattern in the data, we estimate a VAR with rolling coefficients for Australia, which provides a good case study. We identify a monetary policy shock with the sign restriction approach. The impulse responses generated by the data are consistent with the prediction of the model and imply that equity market liberalization seems to weaken the impact of monetary policy, at least on stock prices.Endogenous portfolio, Monetary policy, Financial liberalization, FAVAR

"Taylored rules". Does one fit (or hide) all?

Modern monetary policymakers consider a huge amount of information to evaluate events and contingencies. Yet most research on monetary policy relies on simple instrument rules and one relevant underpinning for this choice is the good empirical fit of the Taylor rule. This paper challenges the solidness of this foundation. We investigate the way the coefficients of the Taylor-type rules change over time according to the evolution of general economic conditions. We model the Federal Reserve reaction function during the Greenspan’s tenure as a Logistic Smoothing Transition Regime model in which a series of economic meaningful transition variables drive the transition across monetary regimes. We argue that estimated linear rules are weighted averages of the actual rules working in the diverse monetary regimes, where the weights merely reflect the length and not necessarily the relevance of the regimes. Accordingly, an estimated linear Taylor-type reaction function tends to resemble the rule adopted in the longest regime. Thus, the actual presence of finer monetary policy regimes corrupts the general predictive and descriptive power of linear Taylor-type rules. These latter, by hiding the specific rules at work in the various finer regimes, lose utility directly with the uncertainty in the economy.Instrument Rules, LSTR, Monetary Policy Regime, Risk Management, Taylor Rule

The Greek economy is unlikely to benefit from further devaluation. CEPS Commentary, 3 July 2015

Martin Wolf offers an excellent analysis of how the Greek voter may feel about Sunday’s referendum.1 There is no good option: either be engulfed in the chaos following the rejection of the programme, exit and collapse of the economy or accept another programme

Twenty years of the euro - Resilience in the face of unexpected challenges. Monetary Dialogue. CEPS Special Report, January 2019

The first 20 years of the euro were very different from what had been anticipated. Deflation, rather than inflation became a problem. Financial markets, which had been neglected, became a major source of instability. However, the euro area proved resilient and support for the euro is at historic highs. Looking to the future, the greatest danger might not be another financial crisis, but sluggish growth and an increasing gulf between countries that have successfully adjusted their public finances and those where this goal remains increasingly distant. This document was provided by Policy Department A at the request of the Committee on Economic and Monetary Affairs

The Greek elections and the third bailout programme: Why it could work this time round. CEPS Commentary, 21 September 2015

Following the decisive victory won by the Syriza party in Greece’s general election on September 20th, this commentary explores the key question of whether the third bailout programme can work, where the previous two programmes failed. Whereas most observers argue that the third one cannot work because it merely represents a continuation of an approach that has manifestly failed, the authors argue that a closer inspection of the conditions today give grounds for cautious optimism

Fiscal Risk Sharing and Resilience to Shocks: Lessons for the euro area from the US. CEPS Working Document No 2017/07, May 2017

The classic argument for a euro area (EA) fiscal capacity revolves around the need to “dampen the effects of asymmetric shocks”. According to authors who expound this conventional wisdom, the euro area (EA) needs a common fiscal capacity along the lines of the ‘US federal fiscal system’ because it lacks automatic stabilisers to deal with asynchronous output fluctuations. This paper provides empirical evidence to indicate that the abovementioned view largely overstates the stabilising role of US federal transfers to states. Despite the absence of a centralised EA stabiliser, the automatic stabilisers in the EA bring about a larger degree of insurance against asymmetric shocks (about 20%) than that provided by the US federal budget (11%). To some extent, this is attributable to the higher degree of market-based risk sharing in the US and to the existence of other public institutions enhancing financial stability and private risk sharing in the US. Yet we show that US federal fiscal policy appears to be primarily a stabiliser of US-wide shocks, rather than idiosyncratic shocks