By Christoph Grosse Steffen, Adriana Lojschova and Adrian Penalver

The risk of currency wars is a recurrent theme, given an extra twist with unconventional monetary policy. The US Fed has begun normalising its balance sheet, raising concerns about cross-border spillovers. But the effects of conventional and unconventional policies are too similar for the spillovers to be very different. Greater international coordination is therefore no more or less appropriate with two instruments than one.

The Eurosystem provided long-term loans to banks to fight financial fragmentation during the sovereign debt crisis (2011/2012). Some critics have argued that such interventions had adverse side effects for fiscal sustainability by removing market discipline. This criticism misses a critical mitigating effect: the associated stabilisation of credit to the economy improves public debt sustainability by cushioning the drop in GDP. We show with a calibrated model that fiscal solvency is fostered through temporary access to non-standard central bank liquidity.

Antonin Bergeaud, Gilbert Cette and Remy Lecat

A large proportion of economic growth remains unexplained by labour and capital factors. When the quality of these factors and the diffusion of innovation are taken into account, the unexplained share is reduced by roughly half. We thus remain ignorant as to the sources of a significant share of growth.

According to the latest Eurosystem projections, inflation is expected to be substantially below 2 % by 2018. Some commentators contend that the Eurosystem should adjust to the “lowflation” environment and lower its inflation target. In this post, we argue that this would not be a good idea. A lower inflation target would increase the incidence of depressed output in the future, thereby dragging inflation further below this new ‘target’.

In France, flexibility in the labour market relies mainly on fixed-term and temporary workers. These workers are less well paid, receive less training and find it difficult to obtain permanent employment. This two-tier labour market creates social and economic problems. Public policies can be envisaged to favour transition to permanent contracts.

By Louis de Charsonville, Violaine Faubert and Antoine Sigwalt

Since the start of 2016, French core inflation has been far below the euro area average. This gap can be attributed to the differences in economic fundamentals, such as the slower improvement in the labour market in France compared with that of the euro area as a whole, and, more recently, temporary shocks, such as the decline in the communications prices.

Bruno Cabrillac and Francesco Pappadà

New cross-country evidence shows that VAT compliance is pro-cyclical, and its response to tax-rate hikes is sizeable and negative. Countries with highly sensitive tax compliance have a low ability to reimburse their debt, thus facing higher default risk. Issuing GDP linked bonds may protect such countries from the combined, cyclical risk of growing debt-to-GDP ratios and declining tax revenues.

The effects of the exchange rate on the exports of European firms depend to a large extent on their productivity. The exports of the most productive firms are less affected by exchange rate variations than those of the less productive firms. At the macroeconomic level, this tends to reduce the effects of the exchange rate on trade.

By Yannick Kalantzis and Camille Thubin

The share of the manufacturing industry in French GDP has fallen by 9 percentage points over the past forty years. This decline is mainly due to technical progress and consumer preferences. Foreign trade has only played a minor role.

By Guillaume Gaulier and Jean-François Ouvrard

The upturn in economic activity in France has been accompanied by an acceleration in imports. This dynamism reflects the opening up of economies and the cyclical nature of components of demand. Over the medium term, a one-euro increase in demand generates no more than 0.33 euro of imports (their share in GDP); but import growth of two to three percentage points of GDP since mid-2016 remains difficult to explain.

By Gilbert Cette, Laure Frey and Gilles Moec[1]

The Fed attributes the current disconnect between a tight labour market and low inflation to transitory factors, while also acknowledging an unusual level of uncertainty. It is not the first time such disconnect appears. In the late 1990s already such configuration had triggered a debate on a structural downward shift in inflation. It later transpired that this assessment was based on erroneous data.

By Marie Aouriri and Héloïse Tournoux

The public spending debate merits precise comparisons. The public sector payroll has been higher in France than in Germany by five percentage points of GDP for over 20 years. However it is overestimated by almost two percentage points as a result of hospital work that is not accounted for in Germany as public sector employment. With regard to education, more than one percentage point can be explained by demographics and organisational differences. Nevertheless, for the other government functions, there is still a significant difference, with France spending two percentage points of GDP more than Germany.

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