Are public debts in the European Union sustainable? This recent article is a great introduction to this topic, I learned a lot by reading it.

One thing that struck me is that debt sustainability analyses typically abstract from the impact of fiscal policy on productivity growth.
My feeling is that this may be a big miss, and that integrating endogenous productivity dynamics in debt sustainability analyses could be an important area for future research.

Let me explain by citing a few recent works.

New paper with @mw_econ on Fiscal Stagnation.

Key insights: 1) High public debt may push the economy into fiscal stagnation, i.e. a persistent state of low growth and high fiscal distortions. 2) Pro-growth policies are crucial to exit stagnation, but they require credibility. Let's start from Italy. Since the early 1990s, Italy had to post high primary surpluses - high taxes + low public investment - to sustain its public debt. Over this period, productivity growth slowed down dramatically. Will other high-debt countries face a similar scenario?

Interesting note by Krugman. But is it true that fast growing economies typically attract capital inflows and run trade deficits? A 🧵 on a recent literature challenging this notion, and on why China's trade surpluses could be a problem for global productivity growth.
The traditional view is that a country with good growth prospects attracts capital inflows to finance its investment. But in the data the opposite occurs: fast-growing countries run trade surpluses and export capital abroad academic.oup.com/restud/article…

Since there is some interest, a 🧵 listing a few books/papers on (mostly international) macro with a historical bent that I enjoyed reading. Classic book by @B_Eichengreen on the history of international capital flows, a must read.

Insightful 🧵by @paulkrugman on sectoral reallocation as key driver of high inflation

https://twitter.com/paulkrugman/status/1601628013229400066?s=20&t=LUEatu9BJGVzwJApok39oQ

I think that this perspective helps explain a couple more post pandemic facts: i) high profit margins & weak productivity ii) global rise in inflation. First, sectoral reallocation should come with high profit margins and weak productivity. Why? Because some firms will face unusually high demand, and run into short-run capacity constraints. Close to capacity, firms face decreasing returns to production and charge high markups.

Large negative supply shocks trigger permanent output losses. Does it matter for monetary policy?

A 🧵 on supply shocks, hysteresis and the Volcker-Reagan disinflation, based on joint work with @mw_econ

crei.cat/wp-content/upl… Empirically, large negative supply shocks - such as hikes in energy prices - are associated with permanent output losses papers.ssrn.com/sol3/papers.cf…. Fear of these scarring effects is now particularly high in the euro area ecb.europa.eu/press/key/date….

Following the Fed, many central banks are engaging in sharp rate hikes ft.com/content/d189b2… Could this tightening cycle go too far, leading to reverse currency wars? At the latest NBER IFM meeting, @Federomei1 and I presented a paper tackling this issue conference.nber.org/conf_papers/f1… Our paper argues that, during periods of global stagflation, central banks may tighten too much. The reason is that interest rate increases trigger exchange rate appreciations and trade deficits. While these two factors contain domestic inflation, they have the side effect of

Lot of focus on inflation and the labor market, but what about productivity growth and investment?

After the Great Recession, US productivity growth was very weak. Will the recovery from the Covid recession reverse this trend? Too early to say, but let's look at investment. Business investment plummeted during the Great Recession, and then recovered slowly. This time is different: strong business investment is a distinguishing feature of the Covid recovery.

Interesting piece by @MESandbu (ft.com/content/cdb165…), arguing that high demand may lead firms to invest to increase their productivity. Here is a thread on recent academic research related to this idea. Let's start with a bit of theory. There are at least two channels linking aggregate demand to investment and productivity growth. First, the classic endogenous growth literature highlights how higher expected profits induce firms to invest to increase their productive capacity.

How does the exchange rate regime affect the macroeconomy? A (longish) thread on a growing literature suggesting that financial markets and capital flows it's really where it's at. Let's start with a bit of empirics. The introduction of the euro has arguably been the biggest monetary experiment of our era. In a classic paper, @ecb's Philip Lane argues that the most visible impact of the euro has been an increase in financial integration and capital mobility

Wanna know more about the recent literature on the Keynesian growth synthesis? Here are some notes that you may find useful dropbox.com/s/ffwsxsvxvgxv…. First, they provide a benchmark Keynesian growth model, to study jointly business cycles and growth. The model is simple enough so that many results can be derived analytically, and can easily be embedded into medium-scale New Keynesian style models. Moreover, the notes touch on themes such as the hysteresis effects from recessions and financial crises, the impact of monetary and fiscal expansions on

Hysteresis strikes back! The view that deep recessions may damage future productive capacity, e.g. by leading firms to reduce investment in innovation, is gaining more and more traction in the policy debate (chapter 2 of April 2021 IMF WEO, ecb.europa.eu/press/key/date…). I find this fascinating, because when I was in grad school (already more than 10 years ago!) I was taught that business cycles and productivity growth are two independent phenomena, which could be studied in isolation. But then the Great Recession happened...

A thread on the euro and on its impact on welfare. Perhaps the most visible consequence of the euro has been a huge increase in capital mobility and financial integration among member countries (aeaweb.org/articles?id=10…, ceps.eu/ceps-publicati…). The idea, which goes back at least to Keynes, is that national governments can expropriate foreign creditors by devaluing the exchange rate . Forming a currency union eliminates this possibility, leading to higher capital mobility (crei.cat/wp-content/upl…).

Many commentators worry that the Covid 19 crisis, and the associated supply disruption, will leave deep scars on future potential output. In "The Scars of Supply Shocks", @mw_econ and I show that scarring effects might radically change the macroeconomic impact of supply shocks. The traditional view - based on the New Keynesian model - is that supply disruptions lead to excessive demand, overheating and inflation above target. The optimal policy response then entails a monetary tightening. But the NK model does not allow for scarring effects.

Updated version of The Global Financial Resource Curse (dropbox.com/s/6wch3u3pjdrz…). Since the late 1990s, a global saving glut has pushed capital from developing countries to the US. But investment and productivity growth in the US have been weak, in spite of low global rates. Why? We provide a model connecting the global saving glut and productivity growth. Think of a world composed by US and developing countries. Innovation by US firms pushes forward the world technological frontier. Developing countries, instead, grow by absorbing knowledge from the US.

Over the last 30 years, various factors have pushed up the global saving supply and depressed interest rates (

https://twitter.com/profsufi/status/1272564374599864321?s=20

). But the investment response has been lukewarm at best. So why did we see a global saving glut, but not a global investment boom? Here's my take. First, higher saving supply means weaker demand. In turn, weak demand lowers firms' incentives to invest. Due to this effect, an increase in saving supply may lead to a fall in investment and growth! This is what we show in Stagnation Traps (academic.oup.com/restud/article…).

Some thoughts on supply vs. demand and the Covid-19 crisis, partly sparked by this very nice thread by @jasonfurman

https://twitter.com/jasonfurman/status/1261750314753036291?s=20

. To me, especially looking at the post-epidemic phase, a key aspect is how bad the Covid-19 shock is damaging future productive capacity (by making firms scrap their investment plans, companies going bankrupt, destroying worker-firm matches). Some recessions triggered long-lasting supply disruptions and slowdowns in productivity growth, a phenomenon known as hysteresis (voxeu.org/article/persis…, @AntonioFatas).

The Covid-19 recession might hit the euro area particularly hard, here is why. Fighting Covid-19 requires a massive rise in public spending. How can governments finance it? In the US, as argued by @paulkrugman, the solution is a rise in public debt.

https://twitter.com/paulkrugman/status/1244965253164793857?s=20

Due to the lockdown, households are cutting consumption and increasing savings, making borrowing particularly cheap for the US government. But this logic might not apply to those euro area countries, such as Italy or Spain, most hit by Covid-19.