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inflation as dependent on inflation expectations and the level of economic slack, with changes in expectations or slack leading to changes in the inflation rate. The global slowdown and the subsequent sovereign debt crisis caused the greatest divergence in unemployment rates among euro area member countries since the monetary union was founded in 1999. The pronounced differences in economic performances of euro area countries since 2008 should have led to significant differences in price behavior. That turned out to be the case, with a strong correlation evident between disinflation and labor market deterioration in euro area countries.
This post is the seventh in a series of thirteen Liberty Street Economics posts on Large and Complex Banks. For more on this topic, see this special issue of the Economic Policy Review.
Paraphrasing a famous Supreme Court opinion: “I know bank complexity when I see it.” This expression probably speaks to the truth that, if we look at a given banking organization, we ought to be able to state whether it is more or less “complex.” And yet, such an approach hardly offers any guidance if one wants to understand the intricacies of global banks and to monitor and regulate them. What should be the appropriate metrics? It seems to us that there is not a consensus just yet on what complexity might mean in the context of banking. The global dimension of a bank adds many layers, so focusing on global banks is bound to yield a more comprehensive take on the issue than examining purely domestic banking entities. Therefore, in this piece, we view complexity through the lens of the operations of global banks.
The global sell-off last May of emerging market equities and currencies of countries with high interest rates (“carry-trade” currencies) has been attributed to changes in the outlook for U.S. monetary policy, since the sell-off took place immediately following Chairman Bernanke’s May 22 comments concerning the future of the Fed’s asset purchase programs. In this post, we look back at global asset market developments over the past summer, and measure how changes in global risk aversion affected the values of carry-trade currencies and emerging market equities between May and September of last year. We find that the initial signal of a possible change in U.S. monetary policy coincided with an increase in global risk aversion, which put downward pressure on global asset prices.
The European Central Bank (ECB) released its 2014:Q1 Survey of Professional Forecasters (SPF) on February 13. The release comes at a time of growing concern about low Euro-zone inflation: consumer prices were up only 0.7 percent over the year in January, the fourth consecutive monthly reading of less than 1 percent and well below the ECB’s target of just below 2 percent. Some commentators have argued that falling inflation after five years of recession or very slow growth has raised the threat of deflation.
The financial crisis, recession, and slow recovery have emphasized the interactions between financial markets and the real economy. These developments have also motivated macroeconomists, central bankers, and financial regulators to think of new policy instruments that could help limit “systemic” or “systemwide” financial risks, as the Bank for International Settlements and the Financial Stability Board describe them. But apart from finding the right tools, policymakers are also interested in understanding how such instruments should be set in conjunction with monetary policy. In this post, we discuss the issues that arise when deciding how to design institutions for monetary and macroprudential policymaking. It turns out that the answer to this question hinges on a key issue in monetary policy: the ability of a decisionmaker to make binding commitments regarding his or her future behavior.
in the euro area periphery such as Greece, Italy, Portugal, and Spain saw
large-scale capital flight in 2011 and the first half of 2012. While events
unfolded much like a balance of payments crisis, the contraction in domestic
credit was less severe than would ordinarily be caused by capital flight of
this scale. Why was that? An important reason is that much of the capital
flight was financed by credits to deficit countries’ central banks, with those
credits extended collectively by other central banks in the euro area. This balance of payments financing was
paired with policies to supply liquidity to periphery commercial banks. Absent
these twin lifelines,
periphery countries would have had to endure even steeper recessions from the
sudden withdrawal of foreign capital.
deficits in euro area periphery countries have now largely disappeared. This
represents a substantial adjustment. Only two years ago, deficits stood at nearly
10 percent of GDP in Greece and Portugal and 5 percent in Spain and Italy (see
chart below). This sharp narrowing means that spending has been brought in line
with income, largely righting an imbalance that had left these countries
dependent on heavy foreign borrowing. However, adjustment has come at a sizable
cost to growth, with lower domestic spending only partly offset by higher
export sales. Downward pressure on domestic spending should abate now that the
periphery countries have been weaned from foreign borrowing. The risk, though,
is that foreign creditors might demand that the countries pay down (rather than
merely service) accumulated external debts, forcing them to reduce spending
Euro area GDP remains below its 2007 level due to the global financial meltdown
and the subsequent sovereign debt crisis in the periphery countries. Unemployment
rates make it clear that some countries have fared much worse than others—the
rates in Spain and Greece today are over 25 percent and are much higher
than rates in the next highest, Portugal (15.7 percent), and in the euro
area (11.6 percent). Quite a change from 2007, when Spain and Greece had
lower unemployment rates than the euro area as a whole. In this post, we show
that while the unemployment rates in the two countries are similar today, the
paths have been very different. The employment decline in Greece, like in the
euro area, has been proportional to the country’s steep decline in GDP; Spain’s
employment has fallen much more than output, due in part to its notable labor
In this post, we document the relationship between crime and house prices in the city of Rio de Janeiro, Brazil. One fully expects crime, as a public “bad,” to exert a downward force on prices; indeed, this is a common finding in the literature on amenity valuation. Our recent study quantifying this relationship is novel in its: (i) use of extremely detailed property price data for a large number of neighborhoods, (ii) application to a developing economy, and (iii) examination of the link between crime and reduced house-price inequality. We focus on the extent to which prices are responsive to crime-related outcomes, as demonstrated by a recent policy experiment and with the use of detailed offer-price data from the online classified website ZAP (www.ZAP.com.br). We find that prices are quite sensitive to falling crime, which implies large welfare gains due to crime reduction.
Euro area periphery countries borrowed heavily from abroad in the run-up to the sovereign debt crisis. How were these funds used? In this post, we recap our recent Current Issues study, showing that pre-crisis borrowing by the periphery countries (Greece, Ireland, Portugal, and Spain) went mainly to finance private consumption or housing booms rather than productivity-enhancing investments. Most analysis of the crisis has focused on the need for fiscal adjustment in the periphery. A look at the drivers of the run-up in foreign borrowing, however, suggests that private spending in the periphery will also need to move to a lower plane. The fact that debts were built up without adding to these countries’ productive capacity is likely to make the needed adjustment in spending all the more difficult.
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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