This paper evaluates (i) the transmission of global uncertainty shocks to the expectations of professionals and disagreement among them and (ii) the relevance of policy choices in open economies in the context of the impossible trinity. Relying on a large set of survey data covering a wide range of expected macroeconomic outcomes for 33 countries, we establish evidence for an expectation channel of global uncertainty shocks. Global uncertainty exerts significant and adverse effects on expectations over domestic macroeconomic outcomes across the board and also frequently spills over to disagreement over these outcomes, increasing domestic uncertainty. Finally, we identify nonlinear relationships between the policy choices in an open economy and the transmission of uncertainty shocks. Policy choices affect the expected downswing in GDP in the aftermath of uncertainty shocks, the expected response of monetary policy, and the exchange rate and disagreement over future macroeconomic outcomes.

We provide empirical evidence that the impact of quantitative easing (QE) programs on investment is weaker for countries with high-credit market regulations. We then extend a simple DSGE model with segmented financial markets to include credit regulation and examine its impact on the transmission of conventional and unconventional monetary policies. In our model, the government requires banks to hold a fraction of their assets in government debt. We show that the presence of such regulation can invert monetary transmission under QE policy: An expansionary QE program raises term premiums on corporate bonds and causes a contraction instead of an expansion in the economy. Such a perversion is absent under conventional policy. Further, in contrast to Carlstrom et al. (2017), we show that a simple Taylor rule welfare dominates a term premium peg under financial shocks, while the peg does better in the case of non-financial shocks.

This paper empirically examines the dynamic relationship between stock market volatility and commodity prices through the time-varying risk aversion channel using daily data between December 31 in 1999 and June 14 in 2021. We employ a time-varying structural-form vector autoregressive model (VAR) model with (aggregate, sectoral and sixteen individual) commodity prices. The results suggest that the transmission mechanism of stock market volatility shocks on the commodity prices change over time. The negative effect of stock market volatility on commodity prices is more statistically significant in the 2008–09 Global Financial Crisis than that during the COVID-19 pandemic in 2020. Further, the effect is greater in energy commodities compared to the agricultural and metals markets. The long-lasting negative effect of risk aversion is stronger compared to that of the expected stock market volatility on the commodity price. The change in the stock-commodity transmission mechanism is likely due to changes in underlying sources of risk aversion and expected uncertainty over time.

We extend the growth-at-risk (GaR) literature by examining US growth risks over 130 years using a time-varying parameter stochastic volatility regression model. This model effectively captures the distribution of GDP growth over long samples, accommodating changing relationships across variables and structural breaks. Our analysis offers several key insights for policymakers. We identify significant temporal variation in both the level and determinants of GaR. The stability of upside risks to GDP growth, as seen in previous research, is largely confined to the Great Moderation period, with a more balanced risk distribution prior to the 1970s. Additionally, the distribution of GDP growth has narrowed significantly since the end of the Bretton Woods system. Financial stress is consistently associated with higher downside risks, without affecting upside risks. Moreover, indicators such as credit growth and house prices influence both downside and upside risks during economic booms. Our findings also contribute to the financial cycle literature by providing a comprehensive view of the drivers and risks associated with economic booms and recessions over time.

This article studies how sudden changes in bank credit supply impact economic activity. I identify shocks to bank credit supply based on firms’ aggregate debt composition. I use a model where firms fund production with bonds and loans. In the model, bank shocks are the only type of shock that imply opposite movements in the two types of debt as firms adjust their debt composition to new credit conditions. Bank shocks account for a third of output fluctuations and are predictive of the bond spread.

In this paper I examine the effect of introducing an account-based central bank digital currency (CBDC) on liquidity insurance and monetary policy implementation. An asset-exchange model is constructed with idiosyncratic liquidity risk, in which one type of agents require currency and/or CBDC to consume while the other type of agents can use any assets to trade. There arises a liquidity insurance to distribute assets efficiently by type. Since central bank reserve accounts are accessible by the public directly, the large excess reserves (LER) in a floor system can make it difficult to separate the types under private information. Therefore, raising the interest on reserves in the floor system can reduce the aggregate liquidity excessively, and the equilibrium allocation with the LER can be suboptimal.

In a monetary model based on Lagos and Wright (2005) where unsecured credit and money are used as means-of-payments, we analyze how the cost and quality of the record-keeping technology affect welfare. Specifically, monitoring agents’ debt repayment is costly but is essential to the use of unsecured credit because of limited commitment. To finance this cost, fees on credit transactions are imposed, and the maximum credit limit that is incentive compatible depends on such fees and monitoring level. Alternatively, the use of money avoids such costs. A higher credit limit does not necessarily improve welfare, especially when the limit is high: the benefit from increased trade surpluses from a higher credit limit is offset by the increased cost of monitoring to achieve the improvement. Moreover, under the optimal arrangement, optimal credit limit decreases with the marginal cost of monitoring. When the cost is sufficiently low, a pure credit equilibrium is optimal. When the marginal cost is high, it is optimal to have a pure-currency economy. But when the cost is at an intermediate level, we show that credit is sustainable but not socially optimal. In this range, the implementable credit limit leads to a higher trade surplus than in a pure monetary economy, but owing to the cost of operating the record-keeping system, social welfare in credit equilibrium is lower than the welfare in a pure monetary equilibrium. In addition, we show that there can be a non-monotonic relationship between the optimal record-keeping level and the optimal credit limit.

Modern financial crises are difficult to explain because they do not always involve bank runs, or the bank runs occur late. For this reason, the first year of the Great Depression, 1930, has remained a puzzle. Industrial production dropped by 20.8 percent despite no nationwide bank run. Using cross-sectional variation in external finance dependence, we demonstrate that banks’ decision to not use the discount window and instead cut back lending and invest in safe assets can account for the majority of this decline. In effect, the banks ran on themselves before the crisis became evident.

In the follow-up to the 1926 political and monetary crisis in France, a new government led by Raymond Poincaré attempted to restore monetary stability by restructuring public debt. A sinking fund was missioned to withdraw short-term public bills from money markets. This policy disorganized the largest Parisian banks of the time, as they relied on these bills to manage their liquidity. Without developed domestic money markets, no other asset could absorb the excess liquidity freed by the withdrawal of these bills, and these leading banks faced a low-rate environment. In search of yield, they expanded their activities abroad a few months before the 1929 crash. These findings renew our understanding of the expansion of France's banking sector in the 1920s. In addition, they shed new light on the role of public debt in financial stability in an open economy.

The title of this article is a riff off a publication of G. C. Harcourt’s 1974 piece, ‘The social consequences of inflation’. He wrote this in a period of the global economy that bears some strong similarities to our own contemporary phase when inflation is suddenly back in the global headlines. There is at least one significant difference: at that time, Harcourt highlighted inflation as the outcome of an excess of total demand in real terms over available supplies of goods and services when the potential workforces and existing stocks of capital goods were fully employed. Current inflationary pressures, by contrast, arise from the combination of specific sectoral supply bottlenecks, rising profit margins in oligopolistic global markets for food and fuel and financial speculation in these markets.

Unless the global financial system is radically reformed – and the necessary reforms are looking increasingly unlikely to occur – it will continue to be conducive to financial crises. Government rhetoric and actions can often influence in desirable ways both the speculative actions that now determine the exchange rate and the effect of exchange rate movements on the domestic economy. Managing the exchange rate should start with Australian support for measures such as the Tobin tax that dampen speculation. In 2008 and 2009, exchange rate changes were helpful in reducing the impact of the global financial crisis on Australia, largely because of a very clear commitment by the Australian government to make preservation of jobs its top priority. In 2009, a rapid rise in the exchange rate was unhelpful. In the short run, little can be done about this, but in the longer run, it is possible to offset the adverse effects.

The failure of exceptional monetary measures pursued in response to the financial crisis in advanced economies to achieve a strong recovery has created a widespread concern that these economies suffer from a chronic demand gap and face the prospect of stagnation. This article reviews and discusses the alternative views on the causes of the slowdown in accumulation and growth and the policies implemented and proposed to deal with it. It is argued that growing inequality, notably the secular decline in the share of wages, and financialisation are the main factors. Neither spending booms driven by financial bubbles, nor exporting unemployment through trade provides sustainable solutions. It is necessary to rebalance capital and labour, restrain finance and assign a greater role to the public sector in aggregate demand management and income and wealth distribution. However, the dominant neoliberal ideology rules out such socially progressive and economically effective solutions. Consequently, stagnation is likely to remain the new normal in the years to come with governments attempting to reignite growth by creating credit and asset bubbles and/or trying to export unemployment through beggar-thy-neighbour macroeconomic, labour market, trade and exchange rate policies, thereby generating financial and economic instability and tensions in international economic relations with significant repercussions for emerging and developing economies.

Far from being an event of a decade ago, the 2008 global financial crisis is a manifestation of an ongoing crisis of the world order, with social, political and ecological dimensions that cannot be seen separately from each other. The root cause of the crisis can be traced back to the collapse of the Bretton Woods System in August 1971, and the failure to design an equitable and inclusive global financial and economic governance architecture consistent with the changed global economic realities. The vacuum was quickly taken up by the neoliberal orthodoxy that pushed the agenda of wholesale liberalisation, resulting in unprecedented domination of speculative finance capital and multinational corporation–led globalisation. This has seen falling share of wages in national income, growing wealth concentration, rising income inequality and ballooning of household debts. The consequence was frequent and increasingly deeper and wider financial crises.

The power of finance ensured that, other than for an initial fiscal push to salvage financial institutions, monetary measures in the form of quantitative easing, involving the infusion of large volumes of cheap liquidity, were the principal response to the 2008 global financial crisis. The effects of the generalised and prolonged dependence on such measures have been a substantial increase in vulnerability, at the centre of which is a huge build-up of private – especially corporate – debt, and unwarranted and unsustainable asset price inflation in both developed country and ‘emerging economy’ markets. A consequence of these processes is a massive increase in income and wealth inequality across the world, which limits the level of effective demand and growth.

This article argues that the current global economic crisis is an outcome of the excessive growth of the financial market over the real economy, and hence, of fictitious profits over real profits. In investigating the interrelation between the financial market and the real economy, it makes a comparative inquiry into two key assertions regarding economic crisis within Marxism: the tendency for the rate of profit to fall and overaccumulation of capital. Accepting the claim that economic crisis is inherent to capitalism, this article probes the role of countervailing tendencies in battling the tendency for the rate of profit to fall. While crisis is an outcome of both the extensive growth of fictitious profits and the tendency for the rate of profit to fall, the latter is identified as the fundamental reason for the current crisis. Labour market reforms that were implemented following the emergence of the economic crisis represent the resurgence of countervailing tendencies and are the most explicit evidence that the fundamental reason for the crisis resides in the real economy.

The Swiss financial centre, as it developed during the twentieth century, has for a long time been presented and perceived as a singularly stable and solid environment escaping crises and restructuring. This view, promoted by the dominant actors – private banks, cantonal banks and large commercial banks – presenting their own development, in a teleological vision, as success stories, is strongly challenged by more recent research developments. Our article deals with the evolution of banking demography in Switzerland between 1850 and 2000 and examines the exits of banking institutions from the statistics, identifying six periods of crisis and restructuring. The article proposes a new statistical series that makes it possible to scrutinise with a high level of granularity the banks that fail or are taken over, in particular by observing their category of bank and, for the period 1934–99, their size. It uses historical banking demography as a gateway to understand more broadly the phases of transformation of the financial centre. In doing so, this contribution questions the gap between the existence of significant phases of banking instability, their low importance in collective memory, and the perception of the Swiss banking sector as a model of stability. It also helps to refine our understanding of the evolution of the Swiss financial centre in general.

This paper quantitatively examines the macroeconomic effects of size-dependent financial frictions on capital misallocation and aggregate total factor productivity. Based on panel data from China’s manufacturing sector, I find that among non-state-owned enterprises, (i) the dispersion of the marginal product of capital is large and persistent and (ii) large firms tend to have higher leverage, and lower mean and dispersion of the marginal product of capital than their small counterparts. This paper analyzes a dynamic stochastic general equilibrium model with heterogeneous agents and size-dependent financial frictions. By calibrating the model to a Chinese firm-level dataset, I show that in addition to matching the aforementioned stylized facts, the economy with a size-dependent borrowing constraint is able to reproduce the observed negative correlation between firm size and the marginal product of capital, as well as generate quantitatively modest TFP loss. Furthermore, ignoring firms’ size-dependent financing patterns may lead to an overstatement of TFP loss due to financial frictions.

In this paper we revisit the issue of currency regime choice for an independent Scotland using an international macroeconomic/ finance framework. Specifically, we consider the main competing proposals for currency choice with an emphasis on the SNP’s official policy of the informal use of sterling post-independence. We conclude that from a macroeconomic perspective this option is unlikley to be credible to international capital markets. The option that would be credible, and avoids the austerity associated with the choice of a fixed exchange rate option, would be a free float at least during the transition period of independence.

We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the “missing disinflation” during the Great Recession. We apply a Bayesian vector autoregressive model to US data and identify financial shocks through a combination of narrative and short-run sign restrictions. Our main finding is that contractionary financial shocks temporarily increase inflation. This result withstands a large battery of robustness checks. Negative financial shocks help therefore to explain why inflation did not drop more sharply in the aftermath of the financial crisis. Our analysis suggests that higher borrowing costs after negative financial shocks can account for the modest decrease in inflation after the financial crisis. A policy implication is that financial shocks act as supply-type shocks, moving output and inflation in opposite directions, thereby worsening the trade-off for a central bank with a dual mandate.

This paper quantitatively examines the macroeconomic and welfare effects of macroprudential policies in open economies. We develop a small open economy dynamic stochastic general equilibrium (DSGE) model, where banks choose their funding sources (domestic vs. foreign deposits) and are subject to financial constraints. Our model predicts that banks reduce leverage in response to a macroprudential policy tightening, but increasingly rely on foreign funding. This endogenous shifts of funding composition significantly undermine the stabilizing effect and welfare gains of macroprudential policies. Our results also suggest macroprudential policies are less effective in financially more open economies, and optimal policy should take capital flows into consideration. Finally, we find empirical support for the model predictions in a group of developing and emerging economies.