Deflation in Europe: On the road to double-dipped recession or deflation?

Posted: January 13, 2014 in economy
Tags: , ,

We are hosting a round-table discussion on the risk of deflation in Europe (which we discuss here and here). Our first contributor is Guillermo Calvo, professor of economics, international and public affairs at Columbia University. 

There is a tug‐of‐war between the euro zone and emerging markets (EMs). As American output and interest rates rise, capital outflows in one or both regions are likely to rise. What form these outflows will take, which region will suffer more, depends on each region’s financial vulnerabilities, and how their politicians are expected to operate under duress. That is, in my view, the main game that is being played now in capital markets. It resembles a tug‐of‐war because the effect of American economic recovery may greatly depend on the relative strengths of these regions. The shock coming from America may not be large for the euro zone‐EM combined, but a slight weakening of a region or sub‐region may tilt the balance sharply in the opposite direction. Let me elaborate a little bit. If the balance tilts against the euro zone, investors will shift the composition of their portfolios and deteriorate its credit channel. Whether or not this triggers deflation of euro-zone prices depends on the role of euro‐denominated assets for collateral and in facilitating commercial transactions. Typically, when EMs are faced with an episode of similar …

via Economic Crisis


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s