It is now generally accepted that financial factors can significantly influence output, sometimes driving it away from sustainable levels. Yet, when it comes to assessing potential output – the maximum level of economic activity that can be sustained over time – the influence of financial conditions is generally neglected. This column argues that embedding information from variables that proxy the financial cycle leads to estimates of potential output that are much more precise and, above all, much more robust in real time. These estimates could help improve policymaking.
Depositors in Eurozone banks are facing a steep learning curve on just exactly what deposit insurance means. This column points out that the precedents set in Cyprus and Iceland show that deposit insurance is only a legal commitment for small bank failures. In systemic crises, these are more political than legal commitments, so the solvency of the insuring government matters. A Eurozone-wide deposit-insurance scheme would change this.
This reposted column corrects an error, due to the editor, that was in the first posting.
David Cameron’s promise of a referendum on British participation in the EU has re-ignited the debate about the EU’s democratic legitimacy, just as the struggle to overcome the crisis continues. This column argues that in order to both successfully resolve the crisis and maintain states’ ability to sustain liberal finance, a substantial shift in policy is required. Enhancing the democratic legitimacy of crisis resolution measures and wider financial reforms is essential. Without diffuse support for reforms, crisis resolution is likely to collapse under centrifugal populist pressures.
Eurozone policy seems driven by market sentiment. This column argues that fear and panic led to excessive, and possibly self-defeating, austerity in the south while failing to induce offsetting stimulus in the north. The resulting deflation bias produced the double-dip recession and perhaps more dire consequences. As it becomes obvious that austerity produces unnecessary suffering, millions may seek liberation from ‘euro shackles’.
The stock market is a powerful tool for controlling corporations’ behaviour. But which is better, a highly liquid market or a number of large blockholders? This column argues in favour of liquidity. Evidence suggests that policymakers should not reduce stock liquidity through greater regulation. While the idea that liquidity encourages short-term trading – rather than long-term governance – sounds intuitive, deeper analysis shows that liquidity is beneficial because it encourages large shareholders to form in the first place, and allows shareholders to punish underperforming firms through selling their stake.
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