Eco+Nomics

So, Mario Draghi said that an inflation much lower than 2% is against his mandate. And it is! If you ask me, early 2015 is the right time, if not too late, to buy sovereign bonds. Let me, please, tell you what I think. First of all, given that Eurozone economy is below its potential, inflation risk will remain low, and the zero lower bound will prevent monetary policy to be "hazardously" inflationary. But, this is an argument why we should not fear of inflation, if the ECB decides to take bold action. True! For now... Moreover, given that we remain below our potential output, member states have begun to deviate from austerity and call for more expansionary budgets. Sooner or later, they will start creating budget deficits as a mean of expansion. And this has two implications. The first one, which relates to my previous argument is that budget deficits will boost expansion, and, hence, the return to the potential output. Therefore, the later the ECB decides to act, the mo...

There is some concern about the anticipated QE from the ECB, with respect to the public debt yields (e.g. Reuters article ). In other words, there is some widespread (?) concern that Eurozone bond yields will rise due to higher inflation expectations following the highly awaited intervention of the ECB. Expectations matter, but what about the Supply & Demand Laws? If we take under consideration the vast shift in the demand for bonds, their price will move upwards and, hence, their yields will fall. This is what happened in the US following each QE. So, inflation has been firmly tamed and both long-term and short-term Government debt yiels have decreased.  Is there any case with monetary expansion accompanied with increases in Government's cost of borrowing while GDP being way off course?

This week I feel like the entire world is waiting for Ben Bernanke's announcement of the monetary policy decisions. So, is a tapering likely this month? No! I do not think so. Three reasons: [1] Inflation expectation are well anchored (see Cleveland Fed ) [2] Inflation is low [3] Although unemployment declines, it still can get better. [4] Real investment growth rate is not that remarkable. Overall,  inflation , i.e.  half of the FED's d ouble mandate , is low (perhaps, dangerously low) while  unemployment , i.e.  the other half , remains high and declines dully. That is to say there is no reason for tapering now