Current economic developments

1st prize-winning blog in the 2019 Eco Notepad Challenge - By Nicolas Laine (ESCP)

The technological revolution raises numerous questions as it permeates every aspect of our daily lives. Real hopes or legitimate concerns? To separate true from false, let’s take a look at this conversation between two friends, overheard in rue Croix des Petits Champs…

Source: author, with the help of Ariane Mostamandy (drawings)

While the duration of an expansion can intuitively be associated with its age, a study of historical GDP data for the euro area reveals that this is not the case. Old economic expansions are as likely to disappear as new ones. Like J. R. R. Tolkien's Elves, expansions are "biologically immortal": they do not die of old age, but of exogenous causes.

Chart 1 - The duration of expansions does not depend on their age
Chart 1 - The duration of expansions does not depend on their age Source: Author's calculations. The Durland and McCurdy (1994) model is applied to the euro area growth rate.

By Barbara Castelletti-Font, Pavel Diev and William Honvo

Severe financial market stress can result in significant errors in the forecasting of quarterly GDP growth. This post focuses on the impact of financial variables on the short-term forecasting of GDP in France. A financial conditions indicator can provide useful qualitative information to the forecaster on the risks associated with the baseline projection.

Severe financial market stress can result in significant errors in the forecasting of quarterly GDP growth. This post focuses on the impact of financial variables on the short-term forecasting of GDP in France. A financial conditions indicator can provide
Chart 1: Relationship between the Country-Level Index of Financial Stress (CLIFS) and GDP growth in France GDP quarter-on-quarter growth, 10% of the obs. with lowest GDP, rest of the obs. Sources: Banque de France, ECB and INSEE

By Ludivine Berret, Marie-Hélène Ferrer and Céline Rochon

In a world marked by reduced fiscal and monetary leeway and heightened risks, a strengthened Global Financial Safety Net is desirable, in addition to better macroeconomic policy coordination. This issue, discussed under the French G7 Presidency, calls for a renewed multilateralism (see the blog on “The G7, an engine for multilateralism”).

Chart 1: Evolution of the size and composition of the Global Financial Safety Net
Chart 1: Evolution of the size and composition of the Global Financial Safety Net Source: IMF, Adequacy of the Global Financial Safety Net, 2016.

By Clémence Berson, Hadrien Camatte, Antoine Lalliard and Julien Le Roux

The “Phillips cone” is a range of possible values for inflation obtained using different specifications of the Phillips curve. The Eurosystem’s June 2019 projection for euro area inflation is slightly below the median forecast in the Phillips cone for the entire projection horizon, and even slightly below the cone at the start of the horizon. This suggests that the Eurosystem’s projection is fairly prudent.

Chart 1: The euro area projection is prudent relative to the Phillips cone
Chart 1: The euro area projection is prudent relative to the Phillips cone Source: Eurostat, Eurosystem, authors’ calculations Note: after the first quarter of 2019, the black line shows the Eurosystem’s June 2019 projection.

By Florens Odendahl (Banque de France)

If we consider that future economic outcomes are inherently uncertain, this gives rise to the notion of economic risk. For instance, what is the probability of a contraction in future GDP growth? Extending this idea to the case of several variables, we can address questions about the joint development of risks to GDP growth and inflation, for example.

Figure 1: The central tendency alone does not reflect information about macroeconomic risk
Figure 1: The central tendency alone does not reflect information about macroeconomic risk Source: Adrian et al. (2019) Note: one-year-ahead density forecasts of US real GPD growth.

Monetary policy decisions require a prior assessment of different economic scenarios, including the most extreme ones. Assessed on the basis of the Banque de France's Financial Conditions Index, financial risks that are likely to weigh on the distribution of future euro-area GDP growth appear limited.

Expected distribution of euro area quarterly GDP growth between 2001 and 2018
Chart 1: Expected distribution of euro area quarterly GDP growth between 2001 and 2018 Sources: Eurostat, Banque de France, authors' calculations.

By Gilbert Cette, Jimmy Lopez and Jacques Mairesse

The positive effect on productivity of reducing product market regulation and employment protection legislation has been extensively documented and analysed, leading to many structural reforms in OECD countries. On the basis of new measures of rent creation and rent sharing, we show that further product market deregulation could substantially increase productivity, notably in France and Italy.

Chart 1: Expected total factor productivity gains from product market deregulation
Chart 1: Expected total factor productivity gains from product market deregulation Sources: Authors’ calculations assuming a switch to the most pro-competitive regulations

The US Tax Cuts and Jobs Act implemented in 2018 impacts both the domestic and the international activity of US corporates. Nevertheless, the corporate tax cut has only had a transitory effect on the composition of US foreign direct investment income, without having so far delivered any significant improvement in the trade balance.

Chart 1. US primary income
Chart 1. US primary income Source: US Bureau of Economic Analysis (BEA).

By Jean-Baptiste Gossé (Banque de France) and Roger Vicquéry (London School of Economics)

A federal unemployment insurance scheme has been in place in the United States for more than 80 years. It has helped to cushion the effects of successive crises without the need for large fiscal transfers between American states. It provides an example of an unemployment insurance model based on temporary transfers and subsidiarity between federal and state governments.

Chart 1. Permanent federal transfers are limited outside periods of exceptional crisis
Chart 1. Permanent federal transfers are limited outside periods of exceptional crisis Note: Net annual transfers as a % of GDP. Exceptional crisis: increase of more than 5 percentage points in the jobless rate over 3 years. Sources: authors’ calculations based on NBER, Department of Labor and Bureau of Economic Analysis.

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