Mario Draghi showed great skills in handling all questions in yesterday's press conference. When pressed about why the ECB is not doing more in the presence of low inflation and possibly deflationary pressures he answered that they are are doing enough and that there is no deflation in the Euro area but simply a period of "low inflation from a protracted period of time". Technically he is right, inflation is low but remains positive and expectations of inflation do not point in the direction of immediate deflation.
But what remains unclear is the message that he is giving about future actions. How low should inflation be and for how many months before the ECB considers that it is necessary to have more expansionary monetary policy? And why is the ECB ignoring the second pillar of its strategy (the money supply) when the numbers show growth rates that are clearly below target? [I am not a fan of the monetary pillar but it is always fascinating to see how the ECB feels compelled to report M3 growth numbers and then ignores them.]
Draghi gives two reasons to justify his inaction. One is the usual statement that there are risks on both sides:
"Both upside and downside risks to the outlook for price developments remain limited, and they continue to be broadly balanced over the medium term."
This sentence reminds me of the language used by the Bank of Japan to defend their inaction during the many years with deflation. Here is a quote from the minutes of the Bank of Japan monetary policy meeting in April 2010:
"Regarding risks to prices, some members said that attention should continue to be paid to a possible decline in medium- to long-term inflation expectations. One member expressed the view that attention should also be paid to the upside risk that a surge in commodity prices due to an overheating of emerging and commodity-exporting economies could lead to a higher-than-expected rate of change in Japan's CPI."
How could it be that in 2010 in Japan, after more than 20 years of struggling with deflation and in the middle of a global crisis, the perception of risks looked balanced and that some had the fear of overheating? And even if risk look balanced, what about erring once on the other side of this balance?
The second reason that Draghi gives is that the situation is very complex and that they need to wait for more data in March. Maybe this was a way of saying that action is coming, but it is confusing and it remains unclear why uncertainty should lead to inaction.
Draghi is right, the Euro area does not have deflation today, but if the risks to price developments are perceived as balanced by the ECB, and uncertainty is another excuse for inaction it looks as if the ECB is doing its best to ensure that the Euro area remain close enough to deflation (not to 2%) and Draghi can be sure that he will get the same exact questions in future press conferences.
Antonio Fatás
Friday, February 7, 2014
Tuesday, February 4, 2014
The conservative bias of economic models
Chris House has an interesting post on why economists tend to be more conservative than academics in other fields. His argument is that many economic facts have a conservative bias (e.g. when you look for evidence on politically loaded questions such as the effects of the minimum wage or high taxes).
Noah Smith replies and argues that there is no such bias in economic facts, quite the opposite, the evidence is weak for some of these questions. So where is the bias coming from? My sense is that it is coming from models to which most economists feel very attached to. And this is partly the case because these models and their economic logic is the one that allows us to show the value that our profession adds. Let me explain.
Economists do not have a great reputation when it comes to forecasting. Given the number of jokes about the inability of economists to forecast anything, about how we assume away any interesting real world phenomena, many macroeconomists stay away from practical questions about policy [As an example, when Chris Sims was awarded the 2011 Nobel Prize in economics, he was very reluctant about giving policy recommendations to get out of the economic crisis.]
But even if you avoid those difficult empirical questions you can still impress your friends by showing how the logic of simple economic concepts can go very far in understanding complex real world phenomena. Talking about opportunity cost, the difference between nominal and real variables, introducing a general equilibrium effect in a macroeconomic question or using game theory to help improve the analysis of a strategic situation are examples where economists thrive and show the added value of the discipline.
And in this spirit, when someone asks us why don't we raise wages to increase demand we use our economic logic to explain that this does not work, that increases in wages will do the opposite by reducing employment and GDP because of the effects on labor costs. And when someone suggests that the central bank should print money and distribute it to every household so that we are all richer, we explain to them that this will only create inflation. This is the origin of the conservative bias of economists, the conservative nature of the benchmark model that economists use. Of course we also have models where increases in wages could lead to higher GDP and there are situations where large increases in the money supply could not generate much inflation but those are much more complex models and they represent an exceptions to the benchmark model that economists tend to start with when they teach or explain their subject to others.
And what is interesting is that this bias does not always show in casual conversations. Many macroeconomists do not use the intuition of the benchmark model when having a casual conversation about economic policy. For example, as Paul Krugman argues today in his blog, most economists share the view that during the current crisis monetary and fiscal policy should have been more aggressive. Similarly, in casual conversations and when confronted with questions about efficiency of financial markets or labor markets or health care economists tend to describe a world full of inefficiencies and where government intervention makes sense. But it is rare that you hear the same strong message when you read their research or when they speak about it in public. Paul Krugman is right in the sense that his views are in many ways mainstream today but it is the fact that he expresses them in such an open manner that sets him aside from many other macroeconomists. I can see why some feel uncomfortable about making such strong policy recommendations given the uncertainty we have about our models or the evidence. I personally find it very refreshing to see more academics being willing to share their views to a broader audience through blogs or articles in a way that enriches the economic debate (even if, unfortunately, it might not have such a big impact on economic policy).
Antonio Fatás
Noah Smith replies and argues that there is no such bias in economic facts, quite the opposite, the evidence is weak for some of these questions. So where is the bias coming from? My sense is that it is coming from models to which most economists feel very attached to. And this is partly the case because these models and their economic logic is the one that allows us to show the value that our profession adds. Let me explain.
Economists do not have a great reputation when it comes to forecasting. Given the number of jokes about the inability of economists to forecast anything, about how we assume away any interesting real world phenomena, many macroeconomists stay away from practical questions about policy [As an example, when Chris Sims was awarded the 2011 Nobel Prize in economics, he was very reluctant about giving policy recommendations to get out of the economic crisis.]
But even if you avoid those difficult empirical questions you can still impress your friends by showing how the logic of simple economic concepts can go very far in understanding complex real world phenomena. Talking about opportunity cost, the difference between nominal and real variables, introducing a general equilibrium effect in a macroeconomic question or using game theory to help improve the analysis of a strategic situation are examples where economists thrive and show the added value of the discipline.
And in this spirit, when someone asks us why don't we raise wages to increase demand we use our economic logic to explain that this does not work, that increases in wages will do the opposite by reducing employment and GDP because of the effects on labor costs. And when someone suggests that the central bank should print money and distribute it to every household so that we are all richer, we explain to them that this will only create inflation. This is the origin of the conservative bias of economists, the conservative nature of the benchmark model that economists use. Of course we also have models where increases in wages could lead to higher GDP and there are situations where large increases in the money supply could not generate much inflation but those are much more complex models and they represent an exceptions to the benchmark model that economists tend to start with when they teach or explain their subject to others.
And what is interesting is that this bias does not always show in casual conversations. Many macroeconomists do not use the intuition of the benchmark model when having a casual conversation about economic policy. For example, as Paul Krugman argues today in his blog, most economists share the view that during the current crisis monetary and fiscal policy should have been more aggressive. Similarly, in casual conversations and when confronted with questions about efficiency of financial markets or labor markets or health care economists tend to describe a world full of inefficiencies and where government intervention makes sense. But it is rare that you hear the same strong message when you read their research or when they speak about it in public. Paul Krugman is right in the sense that his views are in many ways mainstream today but it is the fact that he expresses them in such an open manner that sets him aside from many other macroeconomists. I can see why some feel uncomfortable about making such strong policy recommendations given the uncertainty we have about our models or the evidence. I personally find it very refreshing to see more academics being willing to share their views to a broader audience through blogs or articles in a way that enriches the economic debate (even if, unfortunately, it might not have such a big impact on economic policy).
Antonio Fatás
Sunday, January 12, 2014
The anti-demand coalition
In yesterday's blog post Paul Krugman summarizes very well the position of some academic economists who deny the potential role that aggregate demand might have in explaining business cycles and, as a result, they reject any policies that might have an effect via the demand channel. Their models are only driven by changes in the productive capacity of an economy which means that the Great Recession (or the Great Depression) must have been the result of some destruction in our capital stock or our inability to remember how to work or produce or somehow our technology got worst than in previous years.
It might be that these economists are just describing an ideal world using assumptions that are very far from the real world but how is it possible that these ideas seem to have such a strong influence in economic policy and even support among the general public? Why is it that countercyclical policy (fiscal or monetary) has been challenged so much during the current crisis? Most policy makers and certainly the public at large do not share the assumptions used by those economic models. In fact, when most people are asked to describe the dynamics of economic crisis, they immediately refer to some notion that shortages of demand cause recessions. When I teach about recessions and I ask my students about the cause of business cycles they immediately tell a story that sounds like the very basic keynesian multiplier (spending reduces income which further reduces spending...). But when the same students are asked to give their views about appropriate economic policies during a crisis, they immediately show their distrust in governments and central banks in their ability to help smooth business cycles. Somehow, expansionary fiscal policy or monetary policy cannot work because it is driven by the government.
So we end up with an odd coalition of views against countercyclical economic policy: those who rely on models where by definition countercyclical policy is ruled out and those who do not believe in these models (they laugh at them if you explain all the assumptions) but because they have no trust in governments they end up reaching the same conclusion.
It might be that these economists are just describing an ideal world using assumptions that are very far from the real world but how is it possible that these ideas seem to have such a strong influence in economic policy and even support among the general public? Why is it that countercyclical policy (fiscal or monetary) has been challenged so much during the current crisis? Most policy makers and certainly the public at large do not share the assumptions used by those economic models. In fact, when most people are asked to describe the dynamics of economic crisis, they immediately refer to some notion that shortages of demand cause recessions. When I teach about recessions and I ask my students about the cause of business cycles they immediately tell a story that sounds like the very basic keynesian multiplier (spending reduces income which further reduces spending...). But when the same students are asked to give their views about appropriate economic policies during a crisis, they immediately show their distrust in governments and central banks in their ability to help smooth business cycles. Somehow, expansionary fiscal policy or monetary policy cannot work because it is driven by the government.
So we end up with an odd coalition of views against countercyclical economic policy: those who rely on models where by definition countercyclical policy is ruled out and those who do not believe in these models (they laugh at them if you explain all the assumptions) but because they have no trust in governments they end up reaching the same conclusion.
Wednesday, January 8, 2014
The increasing number of Euro fools.
Via the Irish Economy Blog I find this very interesting interview of Mario Draghi with Der Spiegel. I was first surprised by the aggressive responses from Draghi every time he is asked about the German negative assessment of recent ECB monetary policy. I like his honesty and clarity when he asserts that all German fears about increasing inflation in the Euro area have turned to be wrong. Here is one of his answers:
"DRAGHI: No, but the fears felt by some sectors of the public in Germany have not been confirmed. What haven’t we been accused of? When we offered European banks additional liquidity two years ago, it was said there would be a high rate of inflation. Nothing has happened. When I made my comment in London, there was talk of a violation of the central bank’s mandate. But we had made clear from the beginning that we are moving within our mandate. Each time it was said, for goodness’ sake, this Italian is ruining Germany. There was this perverse Angst that things were turning bad, but the opposite has happened: inflation is low and uncertainty reduced."
Of course, the journalist is not convinced and continues asking questions about the potential damage that ECB policies are inflicting in Germany. He follows with a set of questions on how the low interest rate policy of the ECB is hurting savers in Germany. Here is the first one:
"SPIEGEL: In Germany, ECB policy is unpopular because you have now pushed the interest rates for investments down so far that they are often no longer enough to compensate for inflation. In other words, only fools save."
This question reflects a really poor level of understanding of some basic economic principles. The statement "only fools save" can only be consistent with the data if the number of fools has increased dramatically in recent years. Interest rates are low because saving is high (and investment is low). Not the other way around.
And here is the next one:
"SPIEGEL: People can see in the statements from their life insurance companies that they are getting ever smaller payouts from year to year because of the interest rates. The truth is that savers are paying the price for rescuing the euro."
Savers are paying the price of fear and a long-lasting crisis. Both have reduced spending and as a result the equilibrium (real) interest rate. And more so in countries that are perceived as safe (as in the case of Germany).
Draghi is good at responding to both of these questions but I find his tone less aggressive than when he answers the questions on inflation. Maybe central bankers need to be more explicit about their (limited) influence on interest rates. The (wrong) perception among many is that interest rates, both nominal and real, for all maturities and risk profiles are determined by central bank policies.
Antonio Fatás
"DRAGHI: No, but the fears felt by some sectors of the public in Germany have not been confirmed. What haven’t we been accused of? When we offered European banks additional liquidity two years ago, it was said there would be a high rate of inflation. Nothing has happened. When I made my comment in London, there was talk of a violation of the central bank’s mandate. But we had made clear from the beginning that we are moving within our mandate. Each time it was said, for goodness’ sake, this Italian is ruining Germany. There was this perverse Angst that things were turning bad, but the opposite has happened: inflation is low and uncertainty reduced."
Of course, the journalist is not convinced and continues asking questions about the potential damage that ECB policies are inflicting in Germany. He follows with a set of questions on how the low interest rate policy of the ECB is hurting savers in Germany. Here is the first one:
"SPIEGEL: In Germany, ECB policy is unpopular because you have now pushed the interest rates for investments down so far that they are often no longer enough to compensate for inflation. In other words, only fools save."
This question reflects a really poor level of understanding of some basic economic principles. The statement "only fools save" can only be consistent with the data if the number of fools has increased dramatically in recent years. Interest rates are low because saving is high (and investment is low). Not the other way around.
And here is the next one:
"SPIEGEL: People can see in the statements from their life insurance companies that they are getting ever smaller payouts from year to year because of the interest rates. The truth is that savers are paying the price for rescuing the euro."
Savers are paying the price of fear and a long-lasting crisis. Both have reduced spending and as a result the equilibrium (real) interest rate. And more so in countries that are perceived as safe (as in the case of Germany).
Draghi is good at responding to both of these questions but I find his tone less aggressive than when he answers the questions on inflation. Maybe central bankers need to be more explicit about their (limited) influence on interest rates. The (wrong) perception among many is that interest rates, both nominal and real, for all maturities and risk profiles are determined by central bank policies.
Antonio Fatás
Monday, December 16, 2013
Four missing ingredients in macroeconomic models
It is refreshing to see top academics questioning some of the assumptions that economists have been using in their models. Krugman, Brad DeLong and many others are opening a methodological debate about what constitute an acceptable economic model and how to validate its predictions. The role of micro foundations, the existence of a natural state towards the economy gravitates,... are all very interesting debates that tend to be ignored (or assumed away) in academic research.
I would like to go further and add a few items to their list that I wished could become part of the mainstream modeling in economics. In random order:
1. The business cycle is not symmetric. Most macroeconomic models start with the idea that fluctuations are caused by a succession of events that are both positive and negative (on average they are equal to zero). Not only this is a wrong representation of economic shocks but is also leads to the perception that stabilization policy cannot do much. Interestingly, it was Milton Friedman who put forward the "plucking" model of business cycles as an alternative to the notion that fluctuations are symmetric. In Friedman's model output can only be below potential or maximum. If we were to rely on asymmetric models of the business cycle, our views on potential output and the natural rate of unemployment would be radically different. We would not be rewriting history to claim that in 2007 GDP was above potential in most OECD economies and we would not be arguing that the natural unemployment rate in Souther Europe is very close to its actual.
2. As much as the NBER methodology emphasizes the notion of recessions (which, by the way, is asymmetric in nature), most academic research is produced around models where small and frequent shocks drive economic fluctuations, as opposed to large and infrequent events. The disconnect comes probably from the fact that it is so much easier to write models with small and frequent shocks than having to define a (stochastic?) process for large events. It gets even worse if one thinks that recessions are caused by the dynamics generated during expansions. Most economic models rely on unexpected events to generate crisis, and not on the internal dynamics that precede the crisis.
[A little bit of self-promotion: my paper with Ilian Mihov on the shape and length of recoveries presents some evidence in favor of these two hypothesis.]
3. There has to be more than price rigidity. Keynesian models rely on price rigidity to explain business cycles and why demand matters. There is plenty of evidence that price rigidities are important and they help us understand some of the features of the business cycle. But there must be more than that. There are other frictions in the real economy that produce a slow adjustment and are responsible for the persistence of business cycles. They might not be easy to measure or model, they might be different across different economies but it is difficult to imagine that an adjustment of prices and wages to its optimal level would automatically restore full employment. Larry Summers referred to these frictions in his recent IMF conference speech although he did not elaborate on them.
4. The notion that co-ordination across economic agents matters to explain the dynamics of business cycles receives very limited attention in academic research. It some times appear in our economic policy debate (e.g. Olivier Blanchard (at the IMF) has referred to multiple equilibria as a way to explain the sovereign-debt crisis in Europe) but it does nor receive the credibility it deserves in academia.
I am aware that they are plenty of papers that deal with these four issues, some of them published in the best academic journals. But most of these papers are not mainstream. Most economists are sympathetic to these assumption but avoid writing papers using them because they are afraid they will be told that their assumptions are ad-hoc and that the model does not have enough micro foundations (for the best criticism of this argument, read the latest post of Simon Wren-Lewis). Time for a change?
Antonio Fatás
I would like to go further and add a few items to their list that I wished could become part of the mainstream modeling in economics. In random order:
1. The business cycle is not symmetric. Most macroeconomic models start with the idea that fluctuations are caused by a succession of events that are both positive and negative (on average they are equal to zero). Not only this is a wrong representation of economic shocks but is also leads to the perception that stabilization policy cannot do much. Interestingly, it was Milton Friedman who put forward the "plucking" model of business cycles as an alternative to the notion that fluctuations are symmetric. In Friedman's model output can only be below potential or maximum. If we were to rely on asymmetric models of the business cycle, our views on potential output and the natural rate of unemployment would be radically different. We would not be rewriting history to claim that in 2007 GDP was above potential in most OECD economies and we would not be arguing that the natural unemployment rate in Souther Europe is very close to its actual.
2. As much as the NBER methodology emphasizes the notion of recessions (which, by the way, is asymmetric in nature), most academic research is produced around models where small and frequent shocks drive economic fluctuations, as opposed to large and infrequent events. The disconnect comes probably from the fact that it is so much easier to write models with small and frequent shocks than having to define a (stochastic?) process for large events. It gets even worse if one thinks that recessions are caused by the dynamics generated during expansions. Most economic models rely on unexpected events to generate crisis, and not on the internal dynamics that precede the crisis.
[A little bit of self-promotion: my paper with Ilian Mihov on the shape and length of recoveries presents some evidence in favor of these two hypothesis.]
3. There has to be more than price rigidity. Keynesian models rely on price rigidity to explain business cycles and why demand matters. There is plenty of evidence that price rigidities are important and they help us understand some of the features of the business cycle. But there must be more than that. There are other frictions in the real economy that produce a slow adjustment and are responsible for the persistence of business cycles. They might not be easy to measure or model, they might be different across different economies but it is difficult to imagine that an adjustment of prices and wages to its optimal level would automatically restore full employment. Larry Summers referred to these frictions in his recent IMF conference speech although he did not elaborate on them.
4. The notion that co-ordination across economic agents matters to explain the dynamics of business cycles receives very limited attention in academic research. It some times appear in our economic policy debate (e.g. Olivier Blanchard (at the IMF) has referred to multiple equilibria as a way to explain the sovereign-debt crisis in Europe) but it does nor receive the credibility it deserves in academia.
I am aware that they are plenty of papers that deal with these four issues, some of them published in the best academic journals. But most of these papers are not mainstream. Most economists are sympathetic to these assumption but avoid writing papers using them because they are afraid they will be told that their assumptions are ad-hoc and that the model does not have enough micro foundations (for the best criticism of this argument, read the latest post of Simon Wren-Lewis). Time for a change?
Antonio Fatás
Tuesday, December 10, 2013
Debt and secular stagnation
In a recent post Paul Krugman refers to the potential link between rising levels of debt prior to the 2008 crisis and the current discussion on secular stagnation. The argument can be illustrated by the chart below (borrowed from Krugman's post).
Quoting from Krugman's post:
"Debt was rising by around 2 percent of GDP annually; that's not going to happen in the future, which a naive calculation suggests a reduction in demand, other things equal, of around 2 percent of GDP"
In summary, increasing debt ratios area unsustainable and the adjustment can have a negative effect on growth. The argument is probably right but when it comes to assessing the real impact on growth I think we need to do a more careful analysis before reaching that conclusion.
Here is where I think the reading of the previous chart becomes more complicated: Why was debt going up? For some this is simply a reflection of excessive spending that directly feeds into demand. The fact that it is excessive leads to the need to reverse the trend in the years that follow and, using the same logic but now going back, it will lead to a reduction in demand. But to reach that conclusion we first need to do a more careful analysis of the balance sheet of US households by looking not only at their liabilities but also at their assets. Below is a chart of total assets (blue line) and just financial assets (red line) during the same period of time (and both measured as % of GDP).
We also observe an upward trend. How do these two trends (assets and liabilities) compare? We can measure it by looking at the difference between assets and liabilities = net wealth of US households (as % of GDP).
What we see is also an upward trend with large volatility around the last two recessions. An upward trend means that asset values are growing faster than debt. Today's net wealth is below the peak of 2005-2006 but it is above the level of any other year in the sample. With this new perspective it is more difficult to conclude that debt is still high or that it cannot grow from current levels.
What I find more interesting (and intriguing) is that rising debt (as a % of GDP) at the same time as asset values increase (even faster) is not the exception but the norm when one looks at a larger sample.
Below is the evolution of Household Debt (blue, right axis) and Net Worth (red, left axis), both as % of GDP during the 1975-1995 period. So I am excluding the last two asset price bubbles to look at a more "normal" period. We still see rising trends for both series. So debt ratios were increasing fast but asset values were growing at an even faster rate, so the net worth kept going up through those 20 years.
What these charts suggest is that the analysis of debt is a complex one and it requires a careful look at both sides of the balance sheet. And unless I am missing some relevant academic research, we do not have a good framework to think about these trends. And things can get a lot more complicated if we start adding other issues, such as the distribution of holdings of assets and liabilities. It could be that the households that are holding the assets are not be the same as the ones holding the debt, and this can change the way we think about the implications of these trends.
Antonio Fatás
Thursday, December 5, 2013
Battle lost: austerity won.
It has been surprising to see how over the last five years some have been holding to their economic theories even if the facts kept proving them wrong (Yyperinflation? Confidence and austerity?). At the end, it seems that ideology dominates much of the macroeconomic analysis we see these days. But what is more surprising is how broad this phenomenon is and how the general economic commentary that one reads in the press cannot move away from those theories either.
One statement that will not go away is the constant reference to "printing money" which is not only incorrect from a factual point of view (most of the increase in the monetary base corresponds to reserves not to bank notes being printed) but also misleading when it comes to the understanding of the role of central banks. Even those who support central bank actions during the crisis have to add a sentence at the end to warn us about the danger of so much liquidity.
And austerity, as much as the data has disproven the claim that it would be through reduction in government spending and increased confidence that advanced economies will return to healthy growth rates, it does not seem to lose its appeal either. As an example, here is a CNBC article that provides a long list of arguments of why austerity is winning the war. The arguments: the UK is finally growing, Spain's GDP is not falling anymore and even in Greece we now start seeing the possibility of positive growth. And where is this coming from? From the austerity that these wise governments have implemented over the last year. This is, of course, a misleading analysis of the data. It is still the case that countries where austerity was the strongest have seen the lowest growth rates (and the largest increase in debt). The only reason why these three countries are either returning to growth or not collapsing anymore is that after such a deep crisis, growth must return at some point. Yes, even without any policy actions to support growth, economies recover. But they do so slowly and they will never return to where they should have been. And just to get the facts straight, in these three countries, governments have stopped being a large drag in the economy. When you reduce government spending growth suffers. Once government has stabilized at a low level it does not become a drag on growth.
The last five years have provided an incredible macroeconomic experiments to learn about the effects of monetary and fiscal policy to stabilize cycles. But it seems that this crisis will be wasted, not so much in terms of implementing reforms but in terms of our ability to use data to improve our understanding of macroeconomics.
Antonio Fatás
One statement that will not go away is the constant reference to "printing money" which is not only incorrect from a factual point of view (most of the increase in the monetary base corresponds to reserves not to bank notes being printed) but also misleading when it comes to the understanding of the role of central banks. Even those who support central bank actions during the crisis have to add a sentence at the end to warn us about the danger of so much liquidity.
And austerity, as much as the data has disproven the claim that it would be through reduction in government spending and increased confidence that advanced economies will return to healthy growth rates, it does not seem to lose its appeal either. As an example, here is a CNBC article that provides a long list of arguments of why austerity is winning the war. The arguments: the UK is finally growing, Spain's GDP is not falling anymore and even in Greece we now start seeing the possibility of positive growth. And where is this coming from? From the austerity that these wise governments have implemented over the last year. This is, of course, a misleading analysis of the data. It is still the case that countries where austerity was the strongest have seen the lowest growth rates (and the largest increase in debt). The only reason why these three countries are either returning to growth or not collapsing anymore is that after such a deep crisis, growth must return at some point. Yes, even without any policy actions to support growth, economies recover. But they do so slowly and they will never return to where they should have been. And just to get the facts straight, in these three countries, governments have stopped being a large drag in the economy. When you reduce government spending growth suffers. Once government has stabilized at a low level it does not become a drag on growth.
The last five years have provided an incredible macroeconomic experiments to learn about the effects of monetary and fiscal policy to stabilize cycles. But it seems that this crisis will be wasted, not so much in terms of implementing reforms but in terms of our ability to use data to improve our understanding of macroeconomics.
Antonio Fatás
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