Nice article from @MESandbu. This from a theme in sellside research before Christmas. Could the pandemic break secular stagnation & deliver a decade of strong growth?

Historical evidence clear - pandemics are usually deflationary, causing lower r*. Big difference with wars, which usually cause r* to rise. Great Jorda et al paper on this https://t.co/f3a9O3Hw3c
Here is their main result
Historically, Wars destroyed both capital stock and labour force. Pandemics killed millions but left capital stock untouched. Covid-19 is neither of these things. Workforce hasn't plunged, capital stock untouched. Comparison with 1920s is a stretch. So precedent for today..
Some more recent evidence based on modern health crises shows only a short-lived boost to GDP, then weaker trend then before. See this Vox column https://t.co/NXZWP3QNlL
And their main result
The only lesson I would draw from 1920s is in the comparison between Germany/UK and France/US. The former went down the austerity route. Far from the "roaring 20s", they had a decade of deflation and unemployment. Politicians should know this by now...but maybe not 😉
So @MESandbu warns about danger of premature monetary policy tightening. But I think CBs are leaning heavily against such an error. They have internalised the 2010s, eff raising their inflation targets. The policy risk is on the fiscal side. Not sure politicians learnt anything
Bear in mind also that the 2020 recession compounded many of the underlying causes of secular stagnation: esp income/wealth inequality, corporate divergence (weak SMEs), monetary policy at lower bound and will leave a legacy of even higher corporate debt ratios

More from Economy

The International Monetary Fund (IMF) is analyzing damage due to COVID and projecting further severe consequences if current policies persist. They state “despite involving short term economic costs, lockdowns may lead to faster economic recovery by containing the virus”

1/


Note: This report doesn’t do a dynamic analysis that makes things much clearer, but it does a thoughtful statistical analysis based upon increasingly available data.

https://t.co/5Xmt8y7lCL

A few more quotes:

2/


“The analysis also finds that lockdowns are powerful instruments to reduce infections, especially when they are introduced early in a country’s epidemic and when they are sufficiently stringent.”

3/


“lockdowns become progressively more effective in reducing COVID-19 cases when they become sufficiently stringent. Mild lockdowns appear instead ineffective at curbing infections.”

4/

“The results suggest that to achieve a given reduction in infections, policymakers may want to opt for stringent lockdowns over a shorter period rather than prolonged mild lockdowns...

5/
On Jan 6, 2021, the always stellar Mr @deepakshenoy tweeted, this:

https://t.co/fa3GX9VnW0

Innocuous 1 sentence, but its a full economic theory at play.
Let me break it down for you. (1/n)


On September 30, 2020, I wrote an article for @CFASocietyIndia where I explained that RBI is all set to lose its ability to set interest rates if it continues to fiddle with the exchange rate (2/n)

What do I mean, "fiddle with the exchange rate"?

In essence, if RBI opts and continues to manage exchange rate, then that is "fiddling with the exchange rate"

RBI has done that in the past and has restarted it in 2020 - very explicitly. (3/n)

First in March 2020, it opened a Dollar/INR swap of $2B with far leg to be unwound in September 2020.

Implying INR will be bought from the open markets in order to prevent INR from falling vis a vis USD (4/n)

The Second aspect is now, that dollar inflow is happening, and the forex reserves swelled -> implying the rupee is appreciating, RBI again intervened from September, by selling INR in spot markets. (5/n)
https://t.co/9kpWP7ovyM

You May Also Like