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The Fed Signals a Tiny Tightening

As was widely expected, the Federal Open Market Committee (FOMC) raised the target for the federal funds rate by 0.25 percentage point to a range of 1¾ to 2 percent at its June meeting. This was the second hike in 2018. The FOMC remains closely divided on whether it is likely to raise rates a total of three or four times this year, and only one participant's changed projection was enough to push the median from three to four hikes. The committee slightly decreased projected rates of...

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Spain and Italy: Roads Taken and Not Taken

It is rare for the euro area to get two new governments on the same day, and even more rare for them to take such different directions. Italy is now led by a populist coalition of the nationalist and euro-skeptic League Party and the left-leaning Five Star Movement (MS5). In Spain, Pedro Sanchez of the center-left PSOE party is the new prime minister following the downfall of Mariano Rajoy of the conservative Popular Party (PP) amid a string of corruption convictions against senior members of...

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Deconstructing CEA Estimates of US Tax Cuts Spillover Effects

Council of Economic Advisers (CEA) Chair Kevin Hassett recently argued that US tax cuts typically have very large effects on growth outside of the United States. This post investigates the extent of international spillovers, using a standard approach in the empirical literature on the effect of tax changes,[1] and finds no statistical basis for Hassett's argument. Hassett comes to this conclusion in his April 23 remarks: CEA’s own in-house analysis finds that exogenous tax changes in the...

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Why Have Employment Rates in the United States Lagged Other Countries?

From 2007 to 2017 the fraction of Americans employed fell by 2.9 percentage points. As we discussed in a previous blog post coauthored with Harris Eppsteiner, the aging population has been driving the decline in the US employment-population ratio, or employment rate. (The employment-population ratio, or the employment rate, is the fraction of the overall population working, and as such it reflects a combination of the labor force participation rate and the unemployment rate.) In contrast,...

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Still No Inflation Puzzle

As the US unemployment rate continues to drift down to levels not seen in decades, many observers point to relatively low wage and price inflation as evidence that the Phillips curve is dead. Yet inflation is behaving exactly as the Phillips curve—which shows the inverse relationship between the inflation rate and the unemployment rate—would predict. The decline in the US unemployment rate is too recent and too small to have caused any significant rise in inflation to date. Inflation is...

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Italy Heads for Confrontation with Itself, Financial Markets, and Europe

President Sergio Mattarella has put Italy on a path of political confrontation domestically and most likely with financial markets and the rest of Europe. By vetoing the candidate for finance minister insisted on by Italy's majority coalition between the nationalist, anti-immigrant, and anti-Europe League (formerly the Lega Nord) and Five Star Movement (MS5) parties—over objections to his past support for an Italian exit from the euro (even organized in secret)—and instead appointing  an...

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Macron’s Outsized Role in European Governance in 2019

The coming shakeup in the leadership of top positions in the European Union has given President Emmanuel Macron of France an unusually strong hand in determining its future. The question of how he will play that hand looms over the next European elections in May 2019, where—as in 2017 when he denied Marine Le Pen the French presidency—his main task may become to help secure a pro-European majority in the European Parliament. The next European Commission president is likely to be selected by...

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Europe’s Coming Game of Musical Chairs

The distribution of jobs in the superstructure of European-wide government is due for a shakeup in the next year, determining who will set the pace of the region’s integration at a time of intermittent economic growth. Personalities always matter in the jockeying for these jobs, and the political views of the various candidates also matter. But the selection process for Europe’s top jobs is driven more by the broad political circumstances at the time of transition than the attractiveness of...

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Completing Europe’s Banking Union Means Breaking the Bank-Sovereign Vicious Circle

Several euro area leaders, including the German chancellor, her finance minister, and the French president, have recently referred to the need to “complete the banking union.” These public calls echo those made in more formal settings, in intergovernmental meetings and European Commission communications over the last half decade. They inevitably raise the question of what criteria should be used to assess the banking union’s completeness. A narrow interpretation, based on euro area leaders’...

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Argentina: Back to the Brink

In a largely unexpected move, Argentina has abruptly called on the International Monetary Fund (IMF) for financial help to shore up its reserves and stave off currency pressures. The action by the government of President Mauricio Macri is hard to square with the fact that a little over a year ago, the country was the darling of the financial markets, having pulled off the sale of a 100-year bond, the so-called “century bond,” taking advantage of the low interest rate environment and...

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