We model a reinsurance mechanism for the national unemployment insurance programs of euro area member states. The proposed risk-sharing scheme is designed to smooth country-level unemployment risk and expenditures around each country's median level, so that participation and contributions remain incentive-compatible at all times, and there is no permanent redistribution across countries. We show that, relative to the status quo, such a scheme could have provided nearly perfect insurance of the euro area states' unemployment expenditure risk in the aftermath of the 2009 sovereign debt crisis if allowed to borrow up to 2.5 percent of the euro area GDP. Limiting or not allowing borrowing by the scheme would have still provided significant smoothing of surpluses and deficits in the national unemployment insurance programs over the period 2000-2019.

We analyze fiscal and monetary policy interactions when interest rate policy is hampered by the zero lower bound (ZLB) in an environment where expectations are formed with perpetual learning. The ZLB induces a deterioration of economic performance and raises the risk of persistent low inflation that can disanchor inflation expectations and lead to debt deflation. Systematic use of quantitative easing (QE) can partially substitute for interest rate easing and, if sufficiently aggressive, can maintain average inflation in line with the central bank's goal. By compressing term premia on long-term interest rates, QE creates fiscal space that facilitates expansionary fiscal policy and reduces debt-deflation risk. The ZLB can be counteracted with less aggressive QE if mildly negative policy rates are feasible, if more countercyclical fiscal policy can be activated, or if the central bank can credibly communicate a clear inflation goal. Timidity in implementing QE and excessively debt-averse fiscal policies are counterproductive.

In this paper, we build portfolios with decreasing carbon footprint, which passive investors can use as new Paris-consistent (PC) benchmarks and have the same risk- adjusted returns as business as usual (BAU) benchmarks. As the distribution of firms' carbon intensity is very skewed, excluding a small fraction of highly polluting firms can massively reduce the carbon footprint of a portfolio of corporate stocks. We identify the worst polluters globally, exclude them from the portfolio, and re- allocate the proceeds so as to keep sectoral and regional exposures similar to those of the business as usual (BAU) benchmark. This approach limits divestment from corporates in Emerging Countries that would result from implementing exclusions and reinvestment without the objective of preserving regional exposures. We show that reducing the carbon footprint of the portfolio by 64% in 10 years would be obtained by excluding sequentially up to 11% of the corporates, which together amount to less than 6% of the global market portfolio. While this reallocation preserves regional and sectoral exposures similar to those of the BAU benchmark, it does not change its risk-adjusted return. We define PC benchmark portfolios at the global level, for Emerging Countries, Europe, North America, and the Pacific.

We propose a method for creating a sovereign securities portfolio that gradually reduces its carbon footprint, in line with the Paris Agreement. This allows passive investors to achieve net zero (NZ) targets while maintaining risk-adjusted returns similar to a business-as-usual benchmark. From 2015 to 2021, our approach would have cut carbon intensity by 34.7% with a 7.5% yearly target, compared to just an 8.5% reduction for the benchmark. Total emissions would have dropped by 27.5%, while they would have risen by 25.4% in the benchmark. Notably, NZ portfolios match the benchmark's financial performance and creditworthiness without significant foreign exchange risks.

We study the impact of green investors on stock prices in a dynamic equilibrium model where investors are green, passive or active.Green investors track an index that progressively excludes the stocks of the brownest firms; passive investors hold a value-weighted index of all stocks; and active investors hold a mean-variance efficient portfolio of all stocks.Contrary to the literature, we find large drops in the stock prices of the brownest firms and moderate increases for greener firms.These effects occur primarily upon the announcement of the green index's formation and continue during the exclusion phase.The announcement effects imply a first-mover advantage to early adopters of decarbonisation strategies.

Fiscal policies in advanced economies have become less redistributive over the last two decades, as the steady reductions in tax progressivity and insurance against unemployment risk illustrate. This shift towards less redistribution has coincided with a broad-based reduction in fiscal policy countercyclicality, particularly in expansions. Periods of rising incomes have therefore not translated into equally rising government revenues, thereby accelerating the pace of public debt accumulation. Simulations show that the reduction in fiscal redistribution could have contributed up to 7 percentage points of GDP of additional public debt over the last two decades.

The maturity mismatch between their short-term financing and long-term lending exposes banks to the risk of rolling over their funding. Such a rollover risk is sufficient on its own to cause a panic at the bank level and have ripple effects on the banking system as a whole. We propose a new indicator that helps central banks monitor rollover risk and thus design liquidity support operations when needed. Building on forward rates, our rollover risk indicator (RRI) captures the way banks price the risk of not being able to obtain funding at the horizon of specific interest rate derivatives. We show that our RRI has a better predictive power for economic growth and bank lending than usual bank credit spreads. In addition, our indicator helps to contrast three liquidity regimes (crisis, moderate, and abundant), which coincide with the levels of excess liquidity supplied by central banks.

We propose a strategy to build portfolios of sovereign securities with progressively declining carbon footprints. Passive investors could use it as a new Paris-consistent benchmark to construct a “net zero” (NZ) portfolio while tracking closely the risk-adjusted returns of a business-as-usual (BAU) benchmark. Our strategy rewards sovereign issuers that have made stronger efforts in reducing carbon intensity, measured by total domestic emissions per capita. The NZ portfolio would have reduced carbon intensity by 41% between 2014 and 2019, by assigning higher weights to countries that have had lower carbon emissions. Among advanced economies, rebalancing leads to raising shares of France, Italy and Spain in the portfolio at the expense of the United States. And among emerging market economies, this leads to higher shares for Chile, the Philippines and Romania at the expense of China. Importantly, the NZ portfolio retains the same creditworthiness as the BAU benchmark without entailing materially higher foreign exchange risks.

It is important to understand the growth process under way in China. However, analyses of Chinese growth became increasingly more difficult after the real GDP doubling target was announced in 2012 and the official real GDP statistics lost their fluctuations. With a dataset covering 31 Chinese provinces from two decades, we have substantially more variation to work with. We find robust evidence that the richness of the provincial data provides information relevant to understand and project Chinese aggregates. Using this provincial data, we build an alternative indicator for Chinese growth that is able to reveal fluctuations not present in the official statistical series. Additionally, we concentrate on the determinants of Chinese growth and show how the drivers have gone through a substantial change over time both across economic variables and provinces. We introduce a method to understand the changing nature of Chinese growth that can be updated regularly using principal components derived from the provincial data.

The economic downturn prompted by the Covid pandemic was historically deep and highly divergent at a sectoral level. We project corporate credit losses for the G7 economies, China and Australia until 2022 and find that they could be substantial for the sectors most affected by the pandemic. Yet, because those sectors account for a relatively small share of total corporate borrowing, aggregate corporate credit loss rates (ie losses in relation to the stock of corporate debt) could fall short of those sustained during the Great Financial Crisis of 2007–09.

Interest rates have been falling since the mid-1980s while the return on capital has not. In a calibrated OLG model with recursive preferences encompassing many of the "usual suspects" cited in the debate on secular stagnation, we find that lower trend growth accounts for the trends in the US and the euro area real rates. The increase in the risk premia reflects two sets of forces. Bonds have become better hedges for stocks, notably in the euro area, and risk aversion has increased. In our model, changes in labor share, longevity and inequality had negligible effects on interest rates. (c) 2021 Elsevier B.V. All rights reserved.

The momentum toward greening the economy implies transition risks that are new threats to financial stability. In particular, the expectation that other investors may exclude high carbon corporate emitters from their portfolio creates a risk of runs on brown assets. We show that runs can be contained by a liquidity backstop with an access fee that depends on the firm’s carbon intensity, while the interest rate on the liquidity lent through this facility is independent from its carbon intensity.

Designing operations for liquidity support requires central banks to properly measure and monitor bank funding risk in real time. We construct a new indicator of rollover risk for banks, called the forward funding spread. By accounting for market participants' expectations of how funding costs will evolve over time, it serves as a better signal of the change in the stance of monetary policy than the usual spot InterBank Offered Rate-Overnight Interest Swap spread. Our indicator helps to contrast three liquidity regimes, which coincide with the levels of excess liquidity supplied by central banks.

The cost of bank funding on money markets is typically the sum of a risk-free rate and a spread that reflects rollover risk, i.e., the risk that banks cannot roll over their short-term market funding. This risk is a major concern for policymakers, who need to intervene to prevent the funding liquidity freeze from triggering the bankruptcy of solvent financial institutions. We construct a new indicator of rollover risk for banks, which we call the forward funding spread. It is calculated as the difference between the three-month forward rate of the yield curve constructed using only instruments with a three-month tenor and the corresponding forward rate of the default-free overnight interest swap yield curve. The forward funding spread usefully complements its spot equivalent, the IBOR-OIS spread, in the monitoring of bank funding risk in real time. First, it accounts for market participants' expectations of how funding costs will evolve over time. Second, it identifies liquidity regimes, which coincide with the levels of excess liquidity supplied by central banks. Third, it has much higher predictive power for economic growth and bank lending in the United States and the euro area than the spot IBOR-OIS, credit default swap spreads or bank bond credit spreads.

Given the historical persistence of economic activity, the reduction of GDP due to confinement measures is likely to drag on over several quarters. The total GDP shortfall could be as much as twice that implied by the direct initial effects of confinement. This persistence reflects in part two types of spillovers across countries. One is due to the risk that uncoordinated confinements lead to repeated virus outbreaks and confinements across the globe. Another is the more traditional trade and financial integration interlinkages. Economic spillovers and spillbacks across the major economic blocs are large. There is no immunity from the economic effects if the epidemic is controlled in only one or two regions. Countries should adopt confinement, border control and macroeconomic policies that internalise these global considerations.

The liquidity trap is synonymous with ineffective monetary policy. The common wisdom is that, as the short-term interest rate nears its effective lower bound, monetary policy cannot do much to stimulate the economy. However, central banks have resorted to alternative instruments, such as QE, credit easing and forward guidance. Using state-of- the-art estimates of the effects of monetary policy, we show that monetary easing stimulates output and inflation, also during the period when short-term interest rates are near their lower bound. These results are consistent across the United States, the euro area and Japan.

Designing operations for liquidity support requires central banks to properly measure and monitor bank funding risk in real time. We construct a new indicator of rollover risk for banks, called the forward funding spread. By accounting for market participants’ expectations of how funding costs will evolve over time, it serves as a better signal of the change in the stance of monetary policy than the usual spot InterBank Offered Rate–Overnight Interest Swap spread. Our indicator helps to contrast three liquidity regimes, which coincide with the levels of excess liquidity supplied by central banks.

Initially mainly dedicated to financial stability tasks, central banks did not develop their macroeconomic steering role until after the Second World War. The 1973 collapse of the Bretton Wood system led them to replace the loss of external monetary anchoring with domestic objectives, first targeted at monetary aggregates and then, from the 1980s onwards, at inflation. Through a process of experimentation-imitation, inflation targeting has become widespread in most OECD countries and in many emerging countries. However, the 2008 crisis sparked a wide-ranging debate on the validity of such a strategy in a low-inflation environment. The paper presents counterfactual simulations of alternative options for nominal GDP and the price level. While these options have advantages, for example in terms of the responsiveness of monetary policy in turbulent times, they do not invalidate flexible inflation targeting policies as practiced in large currency areas. The crisis has also put financial stability tasks back at the heart of central banks? concerns, raising three questions related to their scope of competence, its compatibility with their independence status and the interactions between their monetary and prudential functions.

Central banks’ announcements that rates are expected to remain low could signal either a weak macroeconomic outlook, which would slow expenditures, or a more accommodative stance, which may stimulate economic activity. We use the Survey of Professional Forecasters to show that, when the Fed gave guidance between 2011:III and 2012:IV, these two interpretations coexisted despite a consensus on low expected rates. We rationalize these facts in a New-Keynesian model where heterogeneous beliefs introduce a trade-off in forward guidance policy: leveraging on the optimism of those who believe in monetary easing comes at the cost of inducing excess pessimism in non-believers. (JEL D83, E12, E43, E52, E58, E65)

Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show that this may be due to an ongoing change in the composition of the labor supply. Indeed, the participation rate of workers aged between 55 and 64 has increased steadily over the last decade, from a third to above a half on average across OECD countries. This is most likely the consequence of ageing and the reform of pensions. We show that the participation rate of workers aged 55 to 64 contributes to explain why wage inflation has remained weak over the last five years. Our second result is that Phillips curves are alive and well. When exploiting the cross-country variance of the data, wage inflation remains highly responsive to domestic unemployment rates, including after the Great Recession.