Macro-prudential: if not now when?

At the turn of 2000, when the € was at 0.85, very weak, against the dollar, the then Economic Counselor of the International Monetary Fund, Michael Mussa, issued a statement that made some waves in the monetary world: "if not now when?" [1]. With that statement he made the point that if there was a time when a central bank had to resort to the unusual step of intervening in the foreign exchange market, that time had arrived for the European Central Bank.

Galileo Galilei and the €-crisis

Just a few days it ago was the 450th anniversary of the birth of Galileo Galilei and this suggested me a comparison with the €-crisis.

Legend says that when Galileo Galilei exited, on the 22nd of June of 1633, from Santa Maria sopra Minerva, in Rome, where the Catholic church held a process against him, he pronounced the famous sentence: “And yet, it moves”, referring to the fact that, contrary to the view of the then majority of people, it was the earth that moves around the sun and not the opposite.  Since that day, the case of Galileo Galilei has become the archetypal case to demonstrate that the majority, even when supported by a strong institution such as the catholic church, is not always necessarily right.

When will it be "1989" in China?

Many market commentators are trying to assess whether China will manage to fully implement the decisions of the Third Plenary Session of the 18th Communist Party of China Central Committee, held from 9th to 12th of November 2013. The top of the Communist Party seems to be convinced that, as former Premier Wen Jiabao said, the Chinese economy is fundamentally unbalanced and needs a significant redirection [1].

Emerging Market turmoil and the canary in the coal mine

There was a time when developments in Emerging Markets (EM) mattered a lot for them, but much less for the rest of the world, as they were too small and too isolated to really influence the global economy. These days are long gone: Chart 1 shows that in the eighties the share of EM in the global economy was still only a half of that of Developed Markets (DM), now the EM are slightly bigger than the DM economies in aggregate terms and the trend is forecast to continue.

A cobweb in the Eurotower

Eurotower is the name of the building currently hosting the European Central Bank, waiting to move into its new premises later in the year, but it is not that the cleaning people in the Eurotower are not serious about their job: the cobweb I refer to in the title is the one presented in old microeconomic textbooks.

Should the ECB go quantitative?

Many commentators either complain that the European Central Bank has not followed the FED, the Bank of England and the Bank of Japan on the Quantitative Easing (QE) path of purchasing very large amounts of securities or, more kindly, advice the ECB to go that way, to more forcefully fight the risk of too low inflation [1].

Trust in Europe paid handsomely!

Over the first few days of January, the prices of sovereign bonds of peripheral €-area countries have recorded large increases. This has been matched by positive developments in market access and issuance. In some market commentaries these developments were noted with something of a surprised tone (for having made wrong forecasts about the demise of the €?). Such surprise is indeed surprising, since the posting of large gains by sovereign peripheral bonds is a persistent development that has brought large capital gains to those investors, included the ECB, which bought peripheral bonds when their prices were stressed.[1]

Three liquidity scenarios after the year-end.

There are 3 main scenarios that could develop in the liquidity and money market in the €-area at the beginning of 2014, after the tensions at the end of 2013.

First, tensions could dissipate since the reinforced year-end effect has gone.

€ liquidity is getting more valuable: what can be done about it?

It is a recurrent phenomenon that liquidity gets more valuable at the end of the year: this is seen in the fact that, notwithstanding the higher amount outstanding, the overnight money market rate (EONIA) increases in the last weeks of the year. While the phenomenon was suppressed during the crisis by the overabundant liquidity provision, before the crisis, the average increase between the beginning of December and the end of the year, was of the order of 36 basis points, concentrated in the last few days of the month (see table 1). 

Should German workers be paid more? Or, Do we have an omitted variable bias?

A recurrent problem in regression analysis is the omitted variable bias: if you estimate a regression and you do not include on the right side a variable that belongs to the model and is correlated with some included variables, the OLS estimates will be biased. The gist of this post is whether we have something of an analogous problem in addressing the current macroeconomic problems in the €-area, namely by not considering the possible influence of income distribution.