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Fiscal stimulus for debt-intolerant countries

Emerging markets on the eve of the sub-prime shock

Fortunately for most emerging markets, this synchronous export and financing shock from the North came once they had built vast war chests of international reserves through the “bonanza” years (Figure 1). Emerging market reserve managers learned the lesson of the Asian Crisis – when times get tough, the advanced economies look inward, so emerging markets’ first type of defence should be their own resources. In the fat years, commodity prices were booming, growth in the North was buoyant, international interest levels were low and stable, and international capital was plentiful. In this environment, fiscal positions in lots of emerging markets improved markedly. Public debt levels were stabilised as well as reduced, and several countries substituted public external debt with domestic debt and lengthened the maturities of their outstanding debt.

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Fiscal policy remains in the stone age

Fiscal policy remains in the stone age

With unemployment remaining saturated in the euro area and core inflation well below target, Simon Wren-Lewis argues that German fiscal policy, specifically, is too tight, calling for stimulus by means of public investment.

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Fiscal policy remains in the stone age.

Or maybe the center ages, but definitely not anything more recent compared to the 1920s. Keynes advocated using fiscal expansion in what he called a liquidity trap in the 1930s. Nowadays we use a different terminology and discuss the necessity for fiscal expansion when nominal interest levels are stuck at the zero lower bound or effective lower bound. (I slightly choose the latter terminology since it is up to central banks to choose at what point reducing nominal interest levels further will be risky or counterproductive.) The logic may be the same today since it was in the 1930s. When monetary policy loses its reliable and effective instrument to control the economy, you must bring in another best reliable and effective instrument: fiscal policy.

Covid-19

A hamiltonian glimpse in europe

A Hamiltonian glimpse in Europe

Thorsten Beck believes that as the compromise reached on the European recovery support will never be enough to overcome the COVID-19 challenges in the EU, it really is an important first rung on the ladder.

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The European Council has come to a compromise on the European recovery support, after four days of negotiations. The primary pillars as proposed by Macron and Merkel time ago still stand – joint financing and a significant grant element. However the grant amounts have been down and many forward-looking programmes, including support for climate change, have already been reduced. So, is this a glass half empty or a glass half full? Taking the viewpoint a year ago none of the could have been even imaginable is a valid point if one takes the long-term view towards a slow move towards European fiscal policy integration. As my buddy Sony Kapoor highlights, however, this will not remember that the COVID-19 crisis constitutes a massive risk to the complete European project, you start with the euro, when there is asymmetric recovery and divergence over the EU (and again, especially the euro area). Many economists, including yours truly, have therefore called in early stages for a joint recovery effort on the European level, on economic, political and social grounds. And as a decade ago with the banking union, when these calls were first dismissed as unrealistic, it ultimately did happen. Angela Merkel and Emmanuel Macron have stepped up to the task.