Walter Bagehot noticed once that “John Bull can stand many things, but he cannot stand two per cent.” Well, for several years, he has had to stand interest rates well below that, in some countries even below zero. However, despite this sacrifice, the economic recovery from the Great Recession has been disappointingly weak. This book’s aim is to answer this question. The central thesis of the book is that the standard understanding of the monetary transmission mechanism is flawed. That understanding adopts erroneous assumptions—such as, that low interest rates always stimulate economic growth by boosting the credit supply, investment, and consumption—and does not fully take into account several unintended channels of monetary policy, such as risk-taking, high level of debt, or zombification of the economy. In other words, the effectiveness of monetary policy is limited during economic downturns accompanied by the debt overhang and the balance sheet recession, and generates negative effects, which can make the policy counterproductive. The author provides a thorough analysis of the issues related to the interest rates in the conduct of monetary policy, such as the risk-taking channel of monetary policy, the portfolio-balance channel and the wealth effect, zombie firms in the economy, the misallocation of resources, as well as the neutral interest rate targeting and the difference between the neutral and natural interest rate and the negative interest rate policy. The book is written in an accessible and engaging manner and will be a valuable resource for scholars of monetary economics as well as readers interested in (unconventional) monetary policy.

This book collects selected articles addressing several currently debated issues in the field of international macroeconomics. They focus on the role of the central banks in the debate on how to come to terms with the long-term decline in productivity growth, insufficient aggregate demand, high economic uncertainty and growing inequalities following the global financial crisis. Central banks are of considerable importance in this debate since understanding the sluggishness of the recovery process as well as its implications for the natural interest rate are key to assessing output gaps and the monetary policy stance. The authors argue that a more dynamic domestic and external aggregate demand helps to raise the inflation rate, easing the constraint deriving from the zero lower bound and allowing monetary policy to depart from its current ultra-accommodative position. Beyond macroeconomic factors, the book also discusses a supportive financial environment as a precondition for the rebound of global economic activity, stressing that understanding capital flows is a prerequisite for economic-policy decisions.

We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.

This paper takes stock of the global economic recovery a decade after the 2008 financial crisis. Output losses after the crisis appear to be persistent, irrespective of whether a country suffered a banking crisis in 2007–08. Sluggish investment was a key channel through which these losses registered, accompanied by long-lasting capital and total factor productivity shortfalls relative to precrisis trends. Policy choices preceding the crisis and in its immediate aftermath influenced postcrisis variation in output. Underscoring the importance of macroprudential policies and effective supervision, countries with greater financial vulnerabilities in the precrisis years suffered larger output losses after the crisis. Countries with stronger precrisis fiscal positions and those with more flexible exchange rate regimes experienced smaller losses. Unprecedented and exceptional policy actions taken after the crisis helped mitigate countries’ postcrisis output losses.

We examine economic convergence among euro area countries on multiple dimensions. While there was nominal convergence of inflation and interest rates, real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. New euro area members, in contrast, have seen real income convergence. Business cycles became more synchronized, but the amplitude of those cycles diverged. Financial cycles showed a similar pattern: sychronizing more over time, but with divergent amplitudes. Income convergence requires reforms boosting productivity growth in lagging countries, while cyclical and financial convergence can be enhanced by measures to improve national and euro area fiscal policies, together with steps to deepen the single market.

Routledge Handbook of the Economics of European Integration provides readers with a brief but comprehensive overview of topics related to the process of European integration in the post-World War II period. Its short chapters reflect the most up-to-date and concise research, written by a collective of experts on their own subjects. The aim of this book is twofold. Firstly, the text illustrates the broad and diverse range of issues associated with European integration, and lastly, the key approaches and findings are summarised. Since institutional integration in Europe is an ongoing process, with possibly frequent and sometimes rapid changes, the chapters are intended to focus on the key features of the economic analyses of these topics. A wide and diverse set of economic issues is of direct relevance for European integration. These topics cover various fields, ranging from the history of the European Economic and Monetary Union, EU Trade Policy and the stability of international trade, single market issues over fiscal, monetary and other policies, the crisis that faces the Euro area, and institutions such as EU Council of Ministers. Not surprisingly, many of these issues have also been analysed from a European perspective. This handbook is designed to provide students, researchers, the public and policy makers with ready and accessible knowledge of issues related to European integration and will provide the definitive overview of research in the area.