The COVID-19 Inflation Weighting in Israel

Significant shifts in the composition of consumer spending as a result of the COVID-19 crisis can complicate the interpretation of official inflation data, which are calculated by the Central Bureau of Statistics (CBS) based on a fixed basket of goods. We focus on Israel as a country that experienced three lockdowns, additional restrictions that significantly changed consumer behavior, and a successful vaccination campaign that has led to the lifting of most of these restrictions. We use credit card spending data to construct a consumption basket of goods representing the composition of household consumption during the COVID-19 period. We use this synthetic COVID-19 basket to calculate the adjusted inflation rate that should prevail during the pandemic period. We find that the differences between COVID-19-adjusted and CBS (unadjusted) inflation measures are transitory. Only the contribution of certain goods and services, particularly housing and transportation, to inflation changed significantly, especially during the first and second lockdowns. Although lockdowns and restrictions in developed countries created a significant bias in inflation weighting, the inflation bias remained unexpectedly small and transitory during the COVID-19 period in Israel.

EU Governments Must not Return to Their Dysfunctional Fiscal Rules

Fiscal rules such as the European Stability and Growth Pact and the German debt brake have been suspended in the Covid19-pandemic in order to provide emergency measures and to overcome the crisis. Now, the controversial debate is back again: When should governments return to fiscal rules? Should they return to fiscal rules, at all? This article argues that it is not so much a question whether governments should return to fiscal rules at all, but to which kind of rules they should return. Following the deficit bias argument and the need for fiscal policy coordination in a monetary union some kind of limitation for government debt and some kind of fiscal rules may easily be justified. However, that does not mean that governments should return exactly to the previously existing rules, because these are economically flawed. Recently the argument for reform has become even stronger due to new empirical evidence about the macroeconomic effectivity of fiscal policy, the experience of the dysfunctionality of the existing rules during the Euro crisis and the fact that the cost of public debt has been reduced dramatically because of persistently low if not negative nominal interest rates.

Serendipity or a Missed Chance? On the Interaction Between Vaccine Distribution and the EU Recovery Funds

In this article, we discuss the interaction between the Covid-19 vaccine rollout in EU member states and the effective use of grants and soft loans from the EU pandemic recovery fund. With some of the national spending plans for the Recovery Fund still awaiting initial submission (Bulgaria), others pending the Commission’s endorsement (Poland, Hungary) or formal Council’s approval (Romania, Estonia), and various other national plans in their implementation stage, the next challenge for policymakers will be to ensure that the initial and subsequent tranches of EU funds are released as economies reopen. We claim that special attention ought to be paid to Central and Eastern Europe, where some countries are lagging in their vaccine rollout and/or the preparation for their use of the EU recovery funds. This is likely to be an important test for EU institutions in determining the stability and coherence of the European project as a whole.

Conceptualizing the Cost of COVID Policy: The Role of Institutional Trade-Offs

In this short article, I summarize recent research in economic history that suggests long-run institutional trade-offs in public health that affect both health and economic outcomes. These trade-offs suggest that a long timespan is necessary to fully measure the consequences of heavy-handed public health interventions. This timespan means that those who have declared “victory” or “defeat” in the wake of COVID policy are premature. Modesty in terms of policy evaluation and prescription is still warranted.

In an Imperfect World Policy Rules Cannot be Perfect Either

It is striking that economists in particular firmly believe in the benefits of rule-binding, even though this belief runs counter to the standard assumption of economic theory that we humans are self-interested and therefore extremely resourceful when it comes to circumventing inconvenient government regulations, e.g. taxes. In Public Choice Theory, politicians are even assumed to have nothing but self-interest as their guiding motive for action. Why then, in this world of thought, should ultra-self-interested politicians of all people adhere to simple rules such as the debt brake instead of bypass them, if – as is also assumed in this model world all that matters to them is short-term electoral success, for which government debt can be helpful.

Sustainability of the Bank of Japan’s ETF Purchasing Policy

The Bank of Japan is the only central bank that holds enormous amounts of stocks of listed companies by purchasing ETFs via its unconventional monetary policy measures. The Bank of Japan has been buying ETFs for more than a decade and, seemingly, has no awareness that it has become a huge investor in the stock market. This article explains how this policy has potentially distorted market mechanisms and how it is difficult to find an exit strategy.

Taliban Soft or Hard Makes No Difference

This article examines whether a softer Taliban leadership will lead to a new regime similar or different from earlier experience. The application of signaling models of group formation predicts that even if the leadership is more willing to operate within international expectations of governance, the Taliban will lose fighters to more fundamentalist terrorist organizations. The loss will cut into the Taliban ranks because of incentives to invest in hardening militant skills.

Joe Biden: A Bearer of Hope

Expectations on Biden’s Presidency are immense. The international community hopes for a paradigm shift away from US unilateral policies and towards more international cooperation. International economic experts expect positive growth effects far beyond the United States. President Biden’s early actions point towards reversing some of President Trump’s core economic policies. President Biden’s reform proposals include large-scale fiscal expansions, a substantial increase of the corporate income tax rate and increased international cooperation in the upcoming years.

Monetary Policy and Asset Price Gap Signal Technology in a New Keynesian Framework

This article develops a New Keynesian model in which the inflation rate depends on the present value of future output gaps and asset prices gaps. The latter follows a price adjustment process. These asset price gaps are driven by ‛asset price gap signal technology’, a measure of exponentially distributed asset price gaps with a signalling mechanism. Within a dynamic stochastic optimisation approach, I identify a policy rule for the central bank in which the asset price gap the difference between the actual asset price at time t to its fundamental value plays a crucial role in determining the nominal rate of interest.