Markets have been buoyed by the huge US fiscal stimulus package announced this week and President Trump’s statement that the US economy should re-open by Easter. For our first exclusive this week we feature top macro thinker Dominique Dwor-Frecaut on the trade-offs between economic growth and containment measures given the likelihood of any vaccine for COVID-19 is well past the feasible limits of shutdowns and continued fiscal stimulus.
For today’s COVID tracker we focus on the data for individual US states where New York has now overtaken Italy on a per capita basis. We also update our US election tracker which shows Trump’s popularity jumping to the highest level since he took office.
We also feature a wrap-up on the policy response to coronavirus across Central Europe from the team at CEEMarketWatch. Similar to other regions, CEE central banks are rapidly to loosening policy, with today’s 75bps rate cut from the Czech National Bank marking the second cut in less than two weeks, and several have now also announced a move to QE.
Finally, we include a response to our Deep Dive published yesterday on demystifying central bank DSGE models. The author (a seasoned practitioner in building such models) highlights how experts try to account for the practical limitations of DSGE models, how the models are not designed to deal with shocks such as COVID-19 and the absence of financial market variables in these models.
We Can Protect Both Lives And Livelihood (3 min read) President Trump’s announcement that he plans on having the US economy re-open by Easter has proved controversial. Yet whether or not we agree, the move usefully highlights the limits of the trade-off between economic growth and containment of the COVID-19 epidemic.
With a vaccine at least 12-18 months away, keeping our economies shut down until the epidemic ends would cause not just the care of COVID-19 patients to unravel, but basic social functions as well.
If we keep cranking out ever-larger stimulus packages while stopping the production of goods and services, we will eventually end up with hyperinflation, since money will grow exponentially while output will contract deeply. Hyperinflation would arrive faster in countries such with low central bank credibility, for instance Argentina, than say in Germany. But even Germany witnessed hyperinflation after World War I when its money printing spiralled out of control…
(Dominique Dwor-Frecaut | 26th March, 2020)
The CEE Response To COVID-19 (4 min read) Central Europe has acted swiftly against the coronavirus spread. Czech Republic, Hungary, Poland, and Romania have all closed their borders to non-residents, and domestic movements are severely restricted also. All four central banks have loosened policy, with Poland and Romania also announcing a move to QE. The National Bank of Hungary is the only one not to cut rates but announced other liquidity measures. On the fiscal side, support is modest compared with some of the major economies, but we expect more could well be announced…
(CEEMarketWatch | 26th March, 2020)
• We’ve had a bunch of requests to include individual US states, so we’ve now added them to our tracker.
○ NY cases have surged and on a per capita basis have overtaken Italy.
○ The next highest number of cases (on a per capita basis) are in New Jersey, Louisiana, and Washington.
○ West Virginia, Massachusetts, and Alabama saw the fastest daily growth rate yesterday.
• We’ve also added heatmaps of the daily cases seen in every country and region we follow – this will give you a sense of the momentum of COVID.
The answer is a clear yes. An average of recent polls suggests his job approval rating has surged to its highest level since Trump took office. There was always a question as to whether Trump would be viewed along the lines of Bush junior in response to 9/11 (approval up) or Bush junior in response to Hurricane Katrina (approval down). Clearly, it’s currently more than former than the latter.
First Things First
The models are only stable when the Taylor rule features a sufficiently strong long-run reaction to deviations of inflation from target. The nominal policy rate must move more than one-for-one with deviations of inflation from target. Here’s another way to think about it: the real interest rate needs to rise when inflation rises and vice versa.
(C. B. Anker | 26th March, 2020)
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