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...

While French Hollande is ready to negotiate for pro-austerity, "fiscal consolidation" if you will, others take serious steps for the best of the entire Eurozone's interest. Mario Draghi is (claims to be) ready to take bold action against deflation threat  ( Reuters ),  and Matteo Renzi publicly denouncing budget cuts in a recessionary environment ( Le H uffington Post ). Both are in the trenches with Berlin. At the same time, the rest of the leaders are conspicuous by their absence. I do not know anything about politics, but while the "fiscally sound" Eurozone failed to ram unemployment, an actual human index, the US did far more better job. The "cost" of fully recovering from recession was an approximately 9% of GDP additional debt burden for the US. Hopefully, Euro leaders will realize that unemployment is far more important than fiscal soundness, before it's too late!

Reading " Euro zone trade surplus rises more than expected in June " in  uk.reuters.com , we may feel either happy or concerned or indifferent. Since the trade surplus has, per definitionem, two branches; the imports and the exports, one has to check both of them in order to make and assessment. For that purpose, the latest relevant  Eurostat News Release (ENR) can  be found  here . In this ENR we observe that the  growth of exports (non seasonally adjusted)  was really sluggish as compared to the more vigorous rise of imports,  for the 18-membered Euro Area  over the first semester of 2014. This might be a result of the weakening Euro of the second quarter, following the deflation concerns. By checking the seasonally adjusted data we see that imports have shown some month-to-month growth signs lately ( feel free to compare it with 2013 ). If we take under consideration the dwindling Euro-zone inflation compared to the more vivid evolution of p...

European Union's "Food and Live Animals" (SITC01) exports to Russia in 2013 accounted for some more than 7.3% of the block's flows towards this trade partner (see European Commission Trade Statistics with Russia ), and were of approximately 8.6bn Euros gross value. Not outstanding in aggregate, but in industry level whose total exports had a value of approximately 75.3 bn Euros (see European Commission Trade Statistics with the World ), gross, it is something. Image Source: http://www.tradeandexportme.com/2013/12/eurozone-inflation-rises-in-november/ What does this mean for the inflation? It is simple! SITC01 firms of the Eurozone will have to cut their prices to boost the demand of their undisposed goods in the interior and in other trade partners. Should this scenario be realized, it will add further downward price pressure in the already fragile price and product developments of the Monetary Union. On the other hand, the SITC01 firms might seek to li...

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?

There is much talking about deflation lately in both sides of the Atlantic. How probable deflation is? How did we get to worry about negative price developments while last year some economists (fortunately, not too many) were arguing for the risk of high inflation as a result of the expansionary monetary policy?  10 months ago Paul Krugman was looking for the " Missing Deflation ", and I made an attempt  (with some mistakes...) to find it. Currently, energy cost evolution is weak (Eurostat) and growth in the EMU remains feeble, while the US are getting better. I will attempt to explain the recent deflationary pressure through a Medium term Aggregate Demand - M/term Aggregate Supply (AD-AS).  In Figure 1, economy's midterm equilibrium is at point A, where AD and AS intersect over the Full Employment locus- that was back in 2007. The negative aggregate demand shock following the Great Recession of 2008 is represented by the shift of AD to AD', where the expect...

ECB board members meet today. As shown in the following graphs overnight interbank rate (EONIA, 1st graph*) presents great volatility upon Emerging Economies' capital outflows, Eurozone inflation declines (blue line, 2nd graph*), and recent developments  do not leave much space for optimism.  Reuter's Paul Carrel examines the available policy tools of ECB , but which one would be the most probable? The board will surprise me (a lot) if they decide to suspend Sterilization operations and to proceed to aggressive QE, which are rather unconventional. The other three policy responses, namely forward guidance, cutting rate (currently at 0.75%) and LTROs at low rate are much more likely (and convnetional) to happen. P. Carrel also mentions negative deposit facility rate; an innovation. So, no marvel for now! (I might be wrong though, as previously - do not bet any money!!!!) Apart from interbank lending which will become cheaper and somewhat less volatile upon today's ...

After reading Paul Krugman's "Missing Deflation"  I started wondering why prices have not declined in view of the dull recovery at both sides of the Atlantic. After some thought I think I might have a few answers. First of all, the prices are sticky! There are contracts and imperfect competition. A firm might be bounded by a contract, the price is subject to that contract and thus cannot be adjusted. In case of imperfect competitions, firms of the same sector or from the same geographical region might have formed a trust- alternatively, some short of silent (or not) coordination scheme- and thus have agreed not to reduce their prices. These factors of rigidity are, more or less, influential mostly during short periods; a five-yeared period is not what you would call "short", but they conserve some explanatory value. Secondly, in a fundamental general equilibrium model, i.e. labor market, AS-AD and money market, an adverse shock in demand is dealt with a cont...