Category Archives: Monetary policy

Lessons from the 1970s and monetary policy today

In my previous analysis (link) I contrasted the Bundesbank and the Fed during the high-inflation episodes of the 1970s. I concluded that the Bundesbank fared better: German inflation was lower and less volatile. Today’s situation resembles the situation in the 1970s. What can monetary policymakers today learn from events back then? A lot, I think. At the same time it also seems as if some important lessons have been forgotten.

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Lessons from the 1970s: Germany vs. U.S.

Today’s situation shares many similarities with the situation in the 1970s: Sky-high inflation, war, insufficient tightening of monetary policy, uncertainty about the economic outlook, and more. Countries responded differently to the events back then, though. I analyse the reactions of the German and U.S. central banks and emphasize lessons relevant for today. My next analysis will examine what current monetary policy can learn from those experiences.

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ECB’s additional dilemma

In December I argued that inflation is too high but that the European Central Bank (ECB) faced a dilemma (link): Raise rates and high-debt countries will suffer, or keep rates low and inflation will remain too high. I concluded that the ECB should start raising rates. Inflation is now even higher, and the ECB faces an additional dilemma: Raise rates and risk derailing a recovery already suffering under the weight of elevated uncertainty and high energy prices, or keep rates low and inflation will remain too high for too long. Another worrying development is that ECB risks losing its grip on inflation expectations. What to do?

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Three unusually good years in markets. Why and will it continue?

A few months ago, I argued that there is a real risk stock markets will suffer when central banks tighten monetary policy in response to high rates of inflation (link). This is what we are witnessing now. Stock markets have struggled since the turn of the year in response to monetary policy take-offs and rising rates. To understand why this is happening and where we come from, this blog analyses the performance of the stock market during the past couple of years. Stock returns have been unusually high, given subdued economic growth. How can we comprehend this apparent contradiction and what does it imply for the future?

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ECB’s dilemma: Choosing between the devil (raise rates) and the deep blue sea (don’t raise rates)

Inflation in the Eurozone is historically high. One would expect that the European Central Bank (the ECB) would only talk about raising rates. Instead, they only talk about keeping rates low, in contrast to other central banks. Why is the ECB so strongly ruling out even the possibility that rates might be raised? Probably because there are highly indebted countries in the Eurozone that would suffer. The ECB is caught in a dilemma: Raise rates and risk that Italy (and other countries) will face debt-servicing challenges or keep rates low and risk that inflation remains too high. What to do?

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Frothy stock and housing markets: How worried should we be?

Historically, either stock markets or real estate markets have been frothy during periods of market exuberance. Today, according to usual metrics, both stock markets and real estate markets trade at historically elevated levels. I admit I am getting nervous. True, there are comforting factors. Most importantly, credit growth is low. Second, it is always difficult to predict when markets turn sour. I discuss arguments for and against looming real estate and stock market turbulence. I conclude that monetary policy fuels bubble-like behavior in asset prices, and that Quantitative Easing (QE) should stop. But what will happen then?

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From Main St. to Wall St.: The business cycle

What is the relation between economic activity and the stock market over the business cycle? This blog post presents some of the conclusions from my book From Main Street to Wall Street. One conclusion is that the business cycle has a strong impact on the stock market, another that post-1945 business-cycle dynamics are very different from pre-1945 business-cycle dynamics.

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Yields and inflation expectations

During the last couple of weeks, yields have been rising and stock markets falling. Standard market turbulence is not interesting for this blog – stocks go up and down, most of the time up, and yields fluctuate – but intriguing (and expected) patterns characterize recent events.

Everybody seems to agree what is going on markets these weeks: Vaccines are successful and being rolled out, so economies will open up soon, and Biden will get his stimulus package to the tune of USD1.9tn. These two things (an already strong economy when opening up and on top of that a large stimulus package) will lead to very strong growth during the second half of 2021. Inflation will rise and the Fed will have to tighten monetary policy. The expected rise in inflation and the policy rate leads to increases in yields today. This hurts stocks. These US developments spill over to other countries.

This story largely makes sense. Looking at the data, however, interesting outstanding issues remain.

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2020

It’s this time of the year. This post recalls events of 2020. It has been such an unusual year, so different from what we expected. Luckily, there seems to be light at the end of the very long and dark tunnel, and – I hope – that 2021 will be considerably more joyful than 2020.

2020 started out so well. The roaring twenties and all that. Wuhan was a city I had not heard of, corona a beer people tell me is best served ice-cold with a slice of lime (I do not drink beer, tough I do enjoy wine), and social distancing words we would only get to know too well. Today, we know that Wuhan is a Chinese city with more than eleven million inhabitants and a marketplace where it presumably all started, corona also means something terrible, and social interaction is an activity we have come to miss so dearly.

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