The fiscal response to COVID-19: The time to act is now

It’s becoming increasingly clear that the fiscal response to COVID-19 in Europe and the United States will fall massively short. Policymakers are, as yet, not up to the task.

The “principle of effective demand,” the cornerstone of immediate post-war macroeconomics, requires that the government spends when the private sector might otherwise refuse—preventing a depression in spending and unemployment that would otherwise emerge. In so doing, the government ensures that employment and income across the community remains higher than individual spending choices alone would deliver. Government spending reasonably offsets private prudence. Continue reading “The fiscal response to COVID-19: The time to act is now”

Interpreting the ECB’s EUR120 billion APP envelope

Amongst the policy innovations introduced last week, the ECB’s new EUR120 billion Asset Purchase Program (APP) envelope was most interesting. The policy statement described: “a temporary envelope of additional net asset purchases of €120 billion until the end of the year, ensuring a strong contribution from the private sector purchase programmes.”
Meanwhile, when asked about the capital key, Lagarde confirmed that: “we will make use of all the flexibilities that are embedded in the framework of the asset purchase programme, and that, second, at the end of the asset purchase programme we will converge towards the capital keys.”

Continue reading “Interpreting the ECB’s EUR120 billion APP envelope”

Loose lips cost ships: Lagarde’s language and Italy’s EUR14 billion bill

“We are not here to close spreads.” How expensive were these seven words? It’s impossible to know, of course. But we can put down a marker based on some reasonable assumptions. And they probably cost Italy EUR14 billion in interest payments over the next decade, though it could be even more. That’s EUR2 billion per word. Continue reading “Loose lips cost ships: Lagarde’s language and Italy’s EUR14 billion bill”

ECB: What just happened?

ECB_WTF

Today’s policy meeting and press conference were astonishing for a number of distinct reasons. Amid the noise, there are three crucial take-aways.

First, TLTRO3 has been unleashed from money market rates. Second, the deposit rate is no longer the fulcrum of policy—but for good reasons. And, third, we might have seen the end of the Draghi put—the end of “whatever it takes.” Continue reading “ECB: What just happened?”

Macroeconomics and COVID-19

As the COVID-19 shock continues to fan out across the global economy, policymakers are contemplating the correct response. Curiously, though the shock is of a different character to that during the Great Financial Crisis (GFC) the policy response should be broadly similar—monetary easing, (where possible) liquidity provision by central banks, and fiscal expansion. Whether policymakers react in the correct manner is crucial; the biggest danger facing the global economy right now is that they take the view that a different shock requires a different policy response. This is not the case—with an important caveat. Here we briefly frame the challenge of responding to COVID-19.

Macroeconomics and the COVID.

United Kingdom: Calibrating fiscal policy for Brexit

Text. Charts.

With a new Chancellor of the Exchequer safely in place, Rishi Sunak’s Budget on March 11th promises to be the most important fiscal announcement in the United Kingdom (UK) since Chancellor Osborne’s politically astute, but economically and socially destructive austerity budget in June 2010.

The next Budget needs to provide clarity on two aspects of fiscal policy for the generation ahead: first, how will the UK navigate inevitable Brexit-related disruptions; second, what is the overall fiscal envelope available for necessary long-term investment and “levelling up” of the UK economy. Continue reading “United Kingdom: Calibrating fiscal policy for Brexit”

Argentina: A sustainability assessment

Slides: Argentina_sustainability note_FINAL

Text, charts, tables, and technical annex: Argentina sustainability note_FINAL

What is needed to restore Argentina to sustainability? An emerging view suggests: (i) domestic law debt—largely held by residents, including the central bank (BCRA)—will carry most of the “sustainability” burden, including through a “haircut” of principal and coupons if necessary; while, related, (ii) foreign law debt—held largely by non-residents—might expect to be reprofiled, but no substantial action in terms of coupon or principal haircut is needed. Continue reading “Argentina: A sustainability assessment”

How did the Eurosystem facilitate tiering?

Slides: Tiering adjustment_FINAL

pdf: How was tiering facilitated_FINAL

On 30th October, the European Central Bank’s (ECB) new tiering system came into operation, resulting in the reshuffling of liquidity across the Eurosystem. As noted previously, and reported variously, this caused a record one month decline in Italy’s TARGET2 debit, falling EUR48bn to reach EUR420bn—the lowest debit for 2 years. At that time this blog speculated the introduction of tiering created an arbitrage opportunity, allowing Italian banks to draw in liquidity to deposit at 0%. As liquidity was returned to the periphery, TARGET2 balances adjusted. Continue reading “How did the Eurosystem facilitate tiering?”

Argentina: BCRA accounting and government debt

Slides: BCRA_October 2019

pdf: Argentina_BCRA accounting

Buried deep within the monthly balance sheet of the Banco Central de la República Argentina (BCRA) is an arcane accounting entry of crucial import. The entry in question, reported as “Cents Varias,” is more often labelled in IMF documents as Other Items Net (OIN.)

Now, OIN is indeed a misunderstood accounting entry—thus greatly abused. People sometimes think of it as similar to “errors and omissions” reported in the BOP—a measure of our ignorance. This makes it tempting to use OIN as a residual when projecting or interpreting the monetary accounts. But OIN is completely different. Rather, it scoops up balance sheet items that, though not typically pivotal, can still of value in interpreting macro-financial developments. As for Argentina. Continue reading “Argentina: BCRA accounting and government debt”

Italy: Tiering up in October

Tiering up for Italy in October

THE ECB’s new two-tier system for excess liquidity began operation on October 30th. As a result, up to six times banks’ required reserves held in current accounts with National Central Banks (NCBs) of the Eurosystem will no longer be subject to the negative deposit rate (currently -50bps) but rather the new tiering rate of 0% interest. The surplus above this will be charged, however. Continue reading “Italy: Tiering up in October”