COVID-Economics Daily Links (May 2)

Where did the saving glut go?

I have written before about the investment dearth that took place in advanced economies at the same time that we witnessed a global saving glut as illustrated in the chart below. In particular, the 2002-2007 expansion saw lower investment rates than any of the previous two expansions. If one thinks about a simple demand/supply framework using the saving (supply) and investment (demand) curves, this means that the investment curve for these countries must have shifted inwards at the same time that world interest rates were coming down. But what about emerging markets? Emerging markets' investment did not fall during the last 10 years, to the contrary it accelerated very fast after 2000. This is more what one would expect as a reaction to the global saving glut. The additional saving must be going somewhere (saving must equal investment in the world). As interest rates are coming down, emerging markets engage in more investment (whether this is simply a move along a downward-sloppin...

You can lower interest rates but can you raise inflation?

Last week the Bank of England lowered their interest rates. This combined with previous moves by the ECB and the Bank of Japan and the reduced probability that the US Federal Reserve will increase rates soon is a reminder that any normalization of interest rates towards positive territory among advanced economies will have to wait a few more months, or years (or decades?). The message from the Bank of England, which is not far from recent messages by the Bank of Japan or the ECB is that they could cut interest rates again if needed (or be more aggressive with QE purchases). Long-term interest rates across the world decreased even further. The current levels of long-term interest rates have made the yield curve extremely flat. And in several countries (e.g. Switzerland) interest rates at all horizons are falling into negative territory. The fact that long term interest rates is typically seen as the outcome of large purchases of assets by central banks around the world. In fact, many se...

Hartar Blog

Search This Blog