The Financial Cycle Around the World in 2016

As the year is coming to a close, the financial economy in large parts of the world is characterised by high levels of uncertainty and central banks navigating through widely unknown territory. In this article, I want to take a brief look at the state of affairs in a few different economic areas and analyse potential implications for monetary policy decisions. For this purpose, a proxy for the financial cycle as developed by Drehmann et al. (2012) from the Bank for International Settlements (BIS) is presented as a visualisation tool. This concept captures cyclical fluctuations in both private credit and house prices. A high point represents above-trend volume of credit to the private non-financial sector and elevated asset prices. A low point on the other hand indicates a contracted credit and housing market (You can find a very brief description how the financial cycle is derived at the end of this article). Additionally, I consider some other important developments throughout the global financial economy. Continue reading “The Financial Cycle Around the World in 2016”

Inflation, Growth and Monetary Policy – A Case Study of the United States

rates
Central bank target rates (%); data sources: FRED, ECB, Bank of England

Ever since the Great Recession, central bank rates in all major developed economies have been on historic lows. The European Central Bank (ECB), whose official sole mandate is to maintain price stability, has lowered its rate even further to 0.00 percent in March in response to consistently low inflation rates across the Euro area, and the Bank of England (BoE), whose mandate combines maintaining price stability and supporting economic growth, has lowered its rate down to 0.25 percent in August, in response to the Brexit decision. Meanwhile, the Federal Reserve of the United States (Fed), whose objectives are maximum employment and stable prices, has increased its target rate to 0.375 percent in December for the first time in several years. However, at its most recent meeting in mid-September , the Fed has been reluctant to further increase its target rate due to an ongoing slow economic recovery and inflation rates below its 2-percent target (Inflation measures the yearly increase in consumption good prices). Consistently low inflation rates despite lengthy phases of expansionary monetary policy, even in countries that appear to be back on economic growth paths, are a concern for central bankers around the globe and puzzle many observers. In this article, I take a look at the case of the United States (simply because it provides by far the best data), derive the main two possible causes and argue in favour of a rate hike in combination with additional monetary and fiscal measures. Continue reading “Inflation, Growth and Monetary Policy – A Case Study of the United States”

Double Bubble Trouble? A Brief Look at House Price Inflation

US HPI
Real Residential House Price Index (HPI) for the United States, 1Q1991 = 100 (Data sources: US Bureau of Labor Statistics and Federal Housing Finance Agency)

(This week’s post is kept very short as I am busy proofreading some of my friends’ enthralling master theses at the moment.)

The last financial crisis was ignited by the bust of the US housing market bubble. And it is argued by many that this bubble was to a large extent caused by too low Fed rates during the beginning of the last decade (see Financial Crisis Inquiry Commission, 2011). Looking at the Real Residential House Price Index for the United States (which I obtained by correcting the official nominal house price index with the consumer price index), one can observe that during the crisis, US real house prices plunged to the levels of 2000 after they had been rapidly climbing for a decade. However, it is also evident that since 2012, real house prices are on a new rally. This means that nominal house prices are growing faster than still stagnant nominal prices for regularly consumed goods and services (which are used to derive the inflation rate). As the Fed once again hesitates to raise its rate in order to fuel inflation and not to stunt fragile economic growth, there is arguably reason to be concerned about the creation of a new housing bubble in the United States. Continue reading “Double Bubble Trouble? A Brief Look at House Price Inflation”