Thank you for reading our updates and highlights. Our International and Monetary Economics Network has been developing in an impressive way, and we would like to express our sincere thanks to our members as well as to all individuals and organizations who have supported us with donations. You can become a member using this form or by joining us on Substack as a paid subscriber. We are open to collaborations, and we support our network members in realizing high-quality projects. Through our channels, we now reach more than 70,000 subscribers and followers.

In our webinars and in-person events, members of the network or guests are invited to present. We welcome high-quality presentations by senior and junior economists from academic, finance, or policy-oriented backgrounds.

Webinar “Beyond the Short Run: Monetary Policy and Innovation Investment”

Olga Goldfayn-Frank (German Bundesbank), joint work with Michaela Elfsbacka-Schmöller and Tobias Schmidt, September 16, 16:00 – 17:00 CEST.

REGISTRATION HERE

LINK TO PAPER

Webinar “Ideas and Firm Dynamics: When It Takes Two to Tango”

Jane Olmstead-Rumsey (London School of Economics), joint work with Seula Kim and Honghao Wang, September 22, 16:00 – 17:00 CEST.

REGISTRATION HERE

LINK TO PAPER

Webinar “Supply Shocks when Workers are Imperfect Substitutes”

Aicha Kharazi (University of Warwick), joint work with Erminia Florio, September 29, 12:00 – 13:00 CEST.

REGISTRATION HERE

Webinar “Empires, Nation-States, and Democracies”

Gérard Roland (University of California, Berkeley), October 14, 18:00 – 19:00 CEST.

REGISTRATION HERE

LINK TO BOOK

Webinar “The Value Gap: Europe Cannot Scale”

Efraim Benmelech (Northwestern University), joint work with Bo Becker (Stockholm School of Economics) and Joao Monteiro (Einaudi Institute for Economics and Finance), October 15, 17:00 – 18:00 CEST.

REGISTRATION HERE

LINK TO PAPER

Webinar “Critical Minerals, Geopolitics, and the Green Transition”

Jonathan Elliott (Johns Hopkins University), joint work with Tomás Domínguez-Iino and Allan Hsiao, October 29, 17:00 – 18:00 CET.

REGISTRATION HERE

LINK TO PAPER

Webinar “Productivity and Inflation Dynamics”

Jenny Chan (Bank of England), joint work with Ludovica Ambrosino and Silvana Tenreyro, November 3, 16:00 – 17:00 CET.

REGISTRATION HERE

LINK TO PAPER

U.S. monetary policy: Most participants in our polls expect the Fed to keep interest rates constant on September 16. After this share had somewhat increased in August, the share of participants expecting a rate hike has risen considerably in our most recent poll.

In case you missed our IMEN Letter August 2026 #6: Kevin Warsh’s speech calms markets and the public, but the macroeconomic situation remains challenging

Euro Area Economy Flash: August 2026 In the second quarter of 2026, GDP growth in the euro area was stronger than many observers had expected.

Very valuable!

"Macroeconometrics" by Alessia Paccagnini.

"Macroeconometrics provides a rigorous yet accessible guide to the tools used to analyse dynamic economic systems in a rapidly evolving empirical environment. The book takes readers from the foundations of univariate time series analysis to the multivariate and structural methods that define modern macroeconometrics. It covers core topics such as stationarity, unit roots, cointegration, ARIMA and GARCH models, VARs, local projections, shock identification, Bayesian methods, and DSGE models, while also introducing recent advances in high-dimensional data, machine learning, nonlinearities, mixed-frequency analysis, quantile methods, Growth-at-Risk, and multi-country policy modelling. Structured as a progressive learning journey, it combines theoretical explanation with practical guidance, empirical applications, summary sections, key equations, exercises, and companion code."

Super interesting!

“Artificial Intelligence and the Brave New World in Finance“ by Markus K. Brunnermeier.

“Economics assumes that even when people know different things, they have a common understanding and hence can describe the world to one another in a shared language. Trust in the understanding of experts, extended by institutions, gives each person access to a broader societal understanding. Society hence understands more than any of its members. The introduction of agentic AI is qualitatively different from previous innovations. It disrupts the trust arrangement, undermines societal understanding and leads to asymmetric understanding: AI agents can learn how humans think and respond, while humans may be unable to understand or reliably anticipate how those agents will act. This asymmetric understanding can make prices harder to read (less informationally efficient) and put central banks at a strategic disadvantage when engaging and communicating with market participants. Preparing for the asymmetric understanding scenario calls for segmented markets that preserve a human fallback, simpler and more robust central bank rules, and less strategic ambiguity.”

At IMEN, we independently select the events featured on our social media channels. However, we warmly encourage everyone to contact us with suggestions. Events may include, for instance, research- and policy‑oriented conferences, workshops, seminars, or panel discussions. You can use this form.

Below, you will find our other updates and highlights. By becoming an INEM member, you can help us further expand our activities – and enjoy special benefits. If you prefer not to join us on Substack as a paid member, membership is also available via this form.

Read more

Central bank meetings in September

Monetary policy stance

Medium‑term inflation outlook: In the next five years, what do you expect average annual U.S. inflation to be?

Medium‑term inflation outlook: In the next five years, what do you expect average annual inflation in the euro area to be?

Oil prices

Economic Effects of AI

GDP growth in the third quarter of 2026

On 24 July, the ECB announced the start of the implementation of the enhanced EUREP facility, decided by the ECB Governing Council in February. It is thus a permanent, open‑ended standing facility providing precautionary liquidity arrangements between the Eurosystem and non‑euro area central banks.

The deepening and widening of EUREP confirms the gradual evolution of an emergency facility created in 2020 into a structural and permanent instrument in the ECB’s monetary policy toolkit.

Repo lines remain relatively more constrained and less attractive to borrowers than swap lines. This is thus a measured yet strategic step, driven by new geopolitical realities affecting both the Eurozone’s domestic and external stability, as well as the euro’s standing as the world’s second most widely used currency. The measure, which now seems almost natural in light of EUREP’s evolution, deserves more attention.

Features of those new Eurosystem liquidity lines

The ECB underlines, on 24 July 2026, that it has begun the onboarding process for non‑euro area central banks to the restructured Eurosystem repo facility for central banks, the “enhanced EUREP”. The institution has indicated that the first drawings will be possible from the last 2026 quarter onwards. It is also worth noting that the ECB Governing Council has also set the rules and operational parameters of operations for EUREP and formally published them in the Official Journal of the EU on July 2026. It might look like a legal detail, but it reflects a more interesting structural shift in the nature of the instrument. The enshrined features include embedded safeguards so that the tool retains its « last resort » nature:

• Line sizes are capped at €50 billion, significantly higher than under the previous EUREP framework. This transaction threshold has also been harmonized. Harmonising and streamlining operations for onboarded parties is a key rationale behind the new standing EUREP. The floor for individual transactions is established at 10 million.

• The costs: transactions are priced at the main refinancing operations (MRO) rate, plus a spread, or “penalty rate”, to be decided by the Governing Council from time to time. The level of the spread has been kept unpublished by the Governing Council. Once again, EUREP being an « emergency” facility, a backstop pricing makes the new repo pricing intentionally more costly, and therefore less attractive, than funding conditions prevailing in markets outside credit‑crunch episodes.

• Eligible collateral: the enhanced EUREP restricts collateral to a defined subset of high‑quality euro‑denominated marketable securities. Covered bonds are excluded.
Additional requirements for EUREP collateral can be set by the Governing Council at any time.

• Risk associated: the ECB considers that the financial risk for the Eurosystem, potentially associated with operations under this enhanced repo facility, is limited and proportionate to the objective pursued. Moreover, this is closely linked to the previous point, required collateral is valued with haircuts applied, revalued daily, and subject to margin calls, should the revaluation show that the collateral value has fallen below the required minimum threshold. These are standard practice in Eurosystem collateralised credit operations, as a risk‑control measure. In addition, the ECB Governing Council can always introduce further risk‑mitigation measures.

• Short‑term tenor of transactions: the maturity of these operations ranges from overnight to a maximum of one week. However, to meet both counterparties’ need for liquidity access and the backstop nature of the facility, the ECB Governing Council has included an explicit option to extend or roll over repo agreements, should market distress persist.

• Implementation via decentralised legal counterparties: the enhanced EUREP facility will be coordinated by the ECB but implemented by five euro area National Central Banks, acting as legal counterparties. Namely, the Deutsche Bundesbank, the Banco de España, the Banque de France, the Banca d’Italia, and De Nederlandsche Bank. Those five NCBs will open and maintain cash and custody accounts to distribute euro liquidity, hold pledged collateral, and will settle repo transactions under Eurosystem reserve management services guidelines.
Legally, this operating mode complies with the ECB’s decentralization principle (Article 12.1 of the Protocol on the Statute of the European System of Central Banks and of the European Central Bank).

• Agility and flexibility: the ECB has removed any ex ante restriction on the use of liquidity borrowed by onboarded entities. Before this 2026 modification, foreign central banks borrowing under EUREP were only allowed to use the EUREP liquidity to on‑lend to their respective domestic commercial banks.

• Transparency: this point is of interest for ECB watchers. The ECB will not disclose the specific identities of the borrowers. The institution will rather publish, weekly, an aggregate of the total daily amount of liquidity provided under the new EUREP, and under ECB swap lines.

• Onboarding: though the access to the facility has been streamlined, it is not automatic. The ECB Governing Council remains at the helm and retains the ultimate decision-making power to grant access of foreign central banks to the EUREP liquidity lines, verifying their financial compliance and risk profiles to protect overall market stability. Any interested foreign central bank’s governor will have to address a formal letter to the ECB President and obtain the green light of the ECB Governing Council.

The Governing Council retains the right to update these EUREP rules at any time to manage risks or pursue Eurosystem monetary goals.

Broadening the scope of an existing backstop instrument

The measure, decided by the ECB Governing Council in February and presented by ECB President Christine Lagarde at the Munich Security Conference, is aimed at coping with any drying‑up of liquidity worldwide. It is expected to enhance predictability and safeguard the smooth transmission of monetary policy, a process made more complex by globalization. As Christine Lagarde stressed: “The availability of a lender of last resort for central banks worldwide boosts confidence to invest, borrow and trade in euros, knowing that access will be there during market disruptions. In a world where supply chain dependencies have become security vulnerabilities, Europe must be a source of stability - for ourselves and for our partners. That, too, is part of European security. And that is how the ECB plays its part.”

EUREP also strengthens the international use of the euro in financial and trade transactions. The instrument supports its status as an international reserve asset, including by encouraging the retention of euros in FX reserves in times of crisis and preventing large‑scale panic sales of euro assets. It also contributes to financial stability across jurisdictions.

Overall, the ECB stresses that this measure contributes to the ECB’s primary objective of maintaining price stability. This is precisely what already motivated, in 2020, Executive Board members Isabel Schnabel and Fabio Panetta to describe liquidity arrangements as “essential monetary policy instruments for central banks, and for the Eurosystem in particular” (Panetta and Schnabel, 2020).

Bibliography and resources

• Arnold, Vincient (2023). Eurozone: EUREP, 2020. Journal of Financial Crises: Vol. 5 : Iss. 1, 362-379.
Available at: https://elischolar.library.yale.edu/journal-of-financial-crises/vol5/iss1/14

• Andreopoulos, S. & Tordoir, S. (2026, 20 February). The ECB’s bid to strengthen the euro’s global role. Centre for European Reform. [CER Insight].
Available at: https://www.cer.eu/insights/ecbs-bid-strengthen-euros-global-role

• Piero Cipollone, Philip Lane and Isabel Schnabel (2024, 29 January). Learning from crises: our new framework for euro liquidity lines [ECB blog post].
Available at: https://www.ecb.europa.eu/press/blog/date/2024/html/ecb.blog20240129~cc10e6c0b4.en.html

• European Central Bank (2021). The Implications of Globalisation for the ECB Monetary Policy Strategy. Occasional Paper Series, no. 263.
Available at: www.ecb.europa.eu/pub/pdf/scpops/ecb.op263~9b56a71297.en.pdf.

• European Central Bank (June 2020). Decisions taken by the Governing Council of the ECB (in addition to decisions setting interest rates). [Press release]
Available at: https://www.ecb.europa.eu/press/govcdec/otherdec/2020/html/ecb.gc200626~01f8790541.en.html

• European Central Bank (25 June 2020). New Eurosystem repo facility to provide euro liquidity to non-euro area central banks. [ECB Press release]
Available at: https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200625~60373986e5.ga.html

• European Central Bank (November 2022). ECB extends liquidity lines with non-euro area central banks until 15 January 2024. [ECB Press release]
Available at: https://www.ecb.europa.eu/press/govcdec/otherdec/2022/html/ecb.gc221202~2708f7d351.en.html

• European Central Bank (15 December 2022). Decisions taken by the Governing Council of the ECB (in addition to decisions setting interest rates). [ECB Press release]
Available at: https://www.ecb.europa.eu/press/govcdec/otherdec/2022/html/ecb.gc221202~2708f7d351.en.html

• European Central Bank (2026). Guideline of 15 July 2026 on the Eurosystem liquidity facility for non-euro area central banks (ECB/2026/17). Official Journal of the European Union, (EU 2026/1861).
Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202601861

• Christine Lagarde (2026, 14 February). Preparing for geoeconomic fragmentation [Speech]. Available at: https://www.ecb.europa.eu/press/key/date/2026/html/ecb.sp260214~8944ba0fee.en.html

• Fabio Panetta and Isabel Schnabel (2020, 19 August). The provision of euro liquidity through the ECB’s swap and repo operations.
Available at: https://www.ecb.europa.eu/press/blog/date/2020/html/ecb.blog200819~0d1d04504a.en.html

• Reiter, O., Stehrer, R. Tordoir, S., Vallée, S. (2025, March). Europe’s policy options in the face of Trump’s global economic reordering. In Monetary Dialogue Papers, March 2025. In‑depth analysis requested by the European Parliament ECON Committee. Available at: https://www.europarl.europa.eu/RegData/etudes/IDAN/2025/764352/ECTI_IDA(2025)764352_EN.pdf

• Shahin Vallée (2025, 22 December). A global Euro. How to internationalize the European currency. Phenomenal World. Available at: https://phenomenalworld.org/analysis/a-global-euro/

The conflict in the Middle East has changed the inflation and interest rate outlook. Inflation has risen sharply due to higher energy prices. Even under a favorable scenario, the inflation target is unlikely to be reached before the second quarter of 2027. Increasingly, attention is turning to the fact that inflation in the United States has been persistently above target since the pandemic. Changes to U.S. monetary policy initiated or contemplated by Kevin Warsh, such as the departure from forward guidance, were partly welcomed, but they also introduced additional uncertainty and confusion.

Concerns about the growing U.S. debt burden and a somewhat unfortunate press conference by Kevin Warsh in July increased uncertainty further among financial market participants and the general public. Looming over everything are Donald Trump, his views on monetary policy, his rough treatment of Jay Powell, and the approaching midterm elections in November. For such reasons, Kevin Warsh’s speech at the annual Jackson Hole symposium was eagerly anticipated.

Warsh delivered a thoughtful and well‑crafted speech that could be described as fairly traditional, the kind one would expect from a central bank president. The inflation target was reaffirmed, and the PCE inflation measure was emphasized. In the recent past, Warsh himself had repeatedly brought alternative inflation measures into the discussion. These might indeed have certain advantages, but prompting speculation and debate about alternative measures at a time of elevated inflation makes it difficult for the public to interpret the goals and reaction functions of central bank policy-makers. It is possible that the debate about the definition of price stability will intensify again in the winter. The task forces established by Warsh may also address this issue and present proposals.

Warsh also offered the financial markets a touch of forward guidance or, more precisely, some indications of his interpretation of the economy and his monetary policy reaction function. He made his concern about elevated inflation very clear. From his remarks, one can infer that a rate hike in September has become somewhat more likely. Perhaps Warsh also hopes that speeches like this could spare him and the entire committee from having to implement actual rate increases. In the end, of course, Kevin Warsh does not decide alone. His words matter, but the decision in September is likely to be close and will depend heavily on the August employment report and the August Consumer Price Index. Both will be released shortly before the meeting.

For the moment, the speech likely reassured many critics. Warsh has bought himself some time and calm. But the monetary policy environment remains challenging. Even the prospect of a close vote at the mid‑September meeting creates uncertainty. At the same time, we can expect that over the course of the winter, changes (many may be initiated by the task forces) will become more concrete. Even though some of these changes will certainly be sensible, we are likely to remain in a challenging monetary policy phase in the near future.

Thank you for reading our updates and highlights. Our International and Monetary Economics Network has been developing in an impressive way, and we would like to express our sincere thanks to our members as well as to all individuals and organizations who have supported us with donations. You can become a member using this form or by joining us on Substack as a paid subscriber. We are open to collaborations, and we support our network members in realizing high-quality projects. Through our channels, we now reach more than 70,000 subscribers and followers.

In our webinars and in-person events, members of the network or guests are invited to present. We welcome high-quality presentations by senior and junior economists from academic, finance, or policy-oriented backgrounds.

Webinar “Beyond the Short Run: Monetary Policy and Innovation Investment”

Olga Goldfayn-Frank (German Bundesbank), joint work with Michaela Elfsbacka-Schmöller and Tobias Schmidt, September 16, 16:00 – 17:00 CEST.

REGISTRATION HERE

LINK TO PAPER

Webinar “Ideas and Firm Dynamics: When It Takes Two to Tango”

Jane Olmstead-Rumsey (London School of Economics), joint work with Seula Kim and Honghao Wang, September 22, 16:00 – 17:00 CEST.

REGISTRATION HERE

LINK TO PAPER

Webinar “Supply Shocks when Workers are Imperfect Substitutes”

Aicha Kharazi (University of Warwick), joint work with Erminia Florio, September 29, 12:00 – 13:00 CEST.

REGISTRATION HERE

Webinar “Empires, Nation-States, and Democracies”

Gérard Roland (University of California, Berkeley), October 14, 18:00 – 19:00 CEST.

REGISTRATION HERE

LINK TO BOOK

Webinar “The Value Gap: Europe Cannot Scale”

Efraim Benmelech (Northwestern University), joint work with Bo Becker (Stockholm School of Economics) and Joao Monteiro (Einaudi Institute for Economics and Finance), October 15, 17:00 – 18:00 CEST.

REGISTRATION HERE

LINK TO PAPER

Webinar “Critical Minerals, Geopolitics, and the Green Transition”

Jonathan Elliott (Johns Hopkins University), joint work with Tomás Domínguez-Iino and Allan Hsiao, October 29, 17:00 – 18:00 CET.

REGISTRATION HERE

LINK TO PAPER

Webinar “Productivity and Inflation Dynamics”

Jenny Chan (Bank of England), joint work with Ludovica Ambrosino and Silvana Tenreyro, November 3, 16:00 – 17:00 CET.

REGISTRATION HERE

LINK TO PAPER

U.S. monetary policy: Most participants in our polls expect the Fed to keep interest rates constant on September 16. After this share had somewhat increased in August, the share of participants expecting a rate hike has risen considerably in our most recent poll.

In case you missed our IMEN Letter August 2026 #6: Kevin Warsh’s speech calms markets and the public, but the macroeconomic situation remains challenging

Euro Area Economy Flash: August 2026 In the second quarter of 2026, GDP growth in the euro area was stronger than many observers had expected.

Very valuable!

"Macroeconometrics" by Alessia Paccagnini.

"Macroeconometrics provides a rigorous yet accessible guide to the tools used to analyse dynamic economic systems in a rapidly evolving empirical environment. The book takes readers from the foundations of univariate time series analysis to the multivariate and structural methods that define modern macroeconometrics. It covers core topics such as stationarity, unit roots, cointegration, ARIMA and GARCH models, VARs, local projections, shock identification, Bayesian methods, and DSGE models, while also introducing recent advances in high-dimensional data, machine learning, nonlinearities, mixed-frequency analysis, quantile methods, Growth-at-Risk, and multi-country policy modelling. Structured as a progressive learning journey, it combines theoretical explanation with practical guidance, empirical applications, summary sections, key equations, exercises, and companion code."

Super interesting!

“Artificial Intelligence and the Brave New World in Finance“ by Markus K. Brunnermeier.

“Economics assumes that even when people know different things, they have a common understanding and hence can describe the world to one another in a shared language. Trust in the understanding of experts, extended by institutions, gives each person access to a broader societal understanding. Society hence understands more than any of its members. The introduction of agentic AI is qualitatively different from previous innovations. It disrupts the trust arrangement, undermines societal understanding and leads to asymmetric understanding: AI agents can learn how humans think and respond, while humans may be unable to understand or reliably anticipate how those agents will act. This asymmetric understanding can make prices harder to read (less informationally efficient) and put central banks at a strategic disadvantage when engaging and communicating with market participants. Preparing for the asymmetric understanding scenario calls for segmented markets that preserve a human fallback, simpler and more robust central bank rules, and less strategic ambiguity.”

At IMEN, we independently select the events featured on our social media channels. However, we warmly encourage everyone to contact us with suggestions. Events may include, for instance, research- and policy‑oriented conferences, workshops, seminars, or panel discussions. You can use this form.

Below, you will find our other updates and highlights. By becoming an INEM member, you can help us further expand our activities – and enjoy special benefits. If you prefer not to join us on Substack as a paid member, membership is also available via this form.

Read more

Central bank meetings in September

Monetary policy stance

Medium‑term inflation outlook: In the next five years, what do you expect average annual U.S. inflation to be?

Medium‑term inflation outlook: In the next five years, what do you expect average annual inflation in the euro area to be?

Oil prices

Economic Effects of AI

GDP growth in the third quarter of 2026

This increases the probability that we will see again moderate GDP growth in the third quarter. In the second quarter, the German economy expanded by 0.3 percent.

At IMEN, we will probably revise our forecast for GDP growth in 2026 upwards. It is now reasonable to assume that growth in 2026 could reach at least 1.0 percent.

Which Europe needs more growth?

Europe’s four large economies (Germany, France, the UK, and Italy) have struggled in recent years. Against this backdrop, initiatives, projects, and other efforts have emerged to strengthen economic dynamism in Europe.

A few days ago, the Rhine Group was launched around Mario Draghi, Luis Garicano, and other prominent figures from economics, politics, and academia. What they intend to do sounds entirely sensible. However, hardly any members appear to come from Central or Eastern Europe. This is now criticized by various commentators.

We do not know anything about how the members were selected. But more generally, it is true that in Western Europe, the economic successes of Poland and other countries in Central and Eastern Europe are often not enough appreciated. Over the past thirty years, they have experienced an economic miracle. Of course, it helped that they started from a low level and were able to integrate into the European single market.

It is also the case that small and medium‑sized countries in Western Europe have generally performed somewhat better than the four large economies. The debate about Europe’s economic situation is strongly shaped by the experiences of the big countries.

That is not wrong. Together, they account for a large share of Europe’s economic output. But it is not the whole picture. Europe is capable to achieve solid economic growth.

Read more

Thank you for reading our updates and highlights. Our International and Monetary Economics Network has been developing in an impressive way, and we would like to express our sincere thanks to our members as well as to all individuals and organizations who have supported us with donations. You can become a member using this form or by joining us on Substack as a paid subscriber. We are open to collaborations, and we support our network members in realizing high-quality projects. Through our channels, we now reach more than 70,000 subscribers and followers.

In our webinars and in-person events, members of the network or guests are invited to present. We welcome high-quality presentations by senior and junior economists from academic, finance, or policy-oriented backgrounds.

Webinar “Beyond the Short Run: Monetary Policy and Innovation Investment”, Olga Goldfayn-Frank (German Bundesbank), joint work with Michaela Elfsbacka-Schmöller and Tobias Schmidt, September 16, 16:00 – 17:00 CEST.

REGISTRATION HERE

LINK TO PAPER

“This paper investigates the impact of monetary policy on firms' innovation investment using unique, representative firm-level data. We provide novel evidence on how systematic monetary tightening, exogenous policy rate changes and forward guidance affect innovation spending, challenging traditional assumptions about the transmission channels and persistence of monetary policy and its effects on longer-term aggregate supply.”

Webinar “Ideas and Firm Dynamics: When It Takes Two to Tango”, Jane Olmstead-Rumsey (London School of Economics), joint work with Seula Kim and Honghao Wang, September 22, 16:00 – 17:00 CEST.

REGISTRATION HERE

LINK TO PAPER

Abstract: “Teams of inventors now produce over 80% of U.S. patents, up from just 45% in 1976. Over the same period, inventor employment has become increasingly concentrated in large firms, rising six times more than overall employment concentration…Because firms do not internalize knowledge spillovers, there is misallocation of inventors across firms. The rise of team production amplifies this misallocation by a factor of six by reallocating inventors away from small firms that generate disproportionately large knowledge spillovers.”

Highly relevant!

"Can fiscal, AI, or monetary news explain the rise in r*?" by Jens H. E. Christensen and Glenn D. Rudebusch.

"Following decades of secular decline, many estimates of r*—the natural or steady-state short-term real interest rate—have risen roughly 1 percentage point since 2020 in the United States. The most prominent explanations attribute this reversal to heightened expectations of rising government debt and faster productivity growth from artificial intelligence (AI). However, a high-frequency event study finds that news about fiscal and AI developments does not explain this increase. Furthermore, contrary to earlier evidence that persistent shifts in longer-term yields occurred around monetary policy meetings, we find that monetary policy news does not account for the recent rise in r*."

U.S. monetary policy: Most participants in our poll expect the Fed to keep interest rates constant on September 16. This share has recently increased.

Euro Area Economy Flash: August 2026 In the second quarter of 2026, GDP growth in the euro area was stronger than many observers had expected.

Very valuable!

"Trading Global Macro Markets" by Dirk Willer and Alex Saunders.

"In Trading Global Macro Markets, accomplished global macro veterans Dirk Willer and Alex Saunders deliver a complete and incisive guide to navigating global macroeconomic trends as the low volatility world of quantitative easing gives way to the post-pandemic world of increased interest rates and macro volatility. The authors offer coverage of every major asset class, from government debt and credit to equity, commodity, and foreign exchange markets, along with back-tested frameworks going back over two decades and more that illustrate how to trade each class and how to make cross-asset trading decisions."

Really cool!

"Macroeconomics" by Marina Azzimonti, Per Krusell, Alisdair McKay, and Toshihiko Mukoyama.

"Macroeconomics offers a modern and comprehensive introduction to the tools and methods that define contemporary graduate training in the field. Written for first-year PhD students and advanced MA/MS students, the book provides a rigorous yet accessible foundation in dynamic optimization, recursive methods, competitive equilibrium, stochastic modelling, and welfare analysis. Building on these foundations, the text applies macroeconomic tools to consumption, savings, labor supply, unemployment, economic growth, business cycles, fiscal and monetary policy, inequality, and international macroeconomics. Combining rigor, intuition, and empirical relevance, this book serves as both a core graduate resource and a long-term reference for modern macroeconomic analysis."

Available for pre-order from Oxford University Press

Available for pre-order on Amazon

At IMEN, we independently select the events featured on our social media channels. However, we warmly encourage everyone to contact us with suggestions. Events may include, for instance, research- and policy‑oriented conferences, workshops, seminars, or panel discussions. You can use this form.

Below, you will find our other updates and highlights. By becoming an INEM member, you can help us further expand our activities – and enjoy special benefits. If you prefer not to join us on Substack as a paid member, membership is also available via this form.

Read more

Central bank meetings in September

Monetary policy stance

Medium‑term inflation outlook: In the next five years, what do you expect average annual U.S. inflation to be?

Medium‑term inflation outlook: In the next five years, what do you expect average annual inflation in the euro area to be?

Oil prices

Economic Effects of AI

GDP growth in the third quarter of 2026

Read more

Read more

In the United States, where AI creation and adoption tend to be faster than in European economies, we have indeed seen a moderate acceleration in labor productivity growth in recent years. The same pattern can be observed for total factor productivity growth. While labor productivity growth is also affected by the investment boom since the pandemic, total factor productivity growth captures productivity gains unrelated to factor accumulation. Future analyses might be better able to disentangle the productivity‑enhancing effects of AI from other potential determinants such as remote work or demographic factors.

Thank you for reading our updates and highlights. Our International and Monetary Economics Network has been developing in an impressive way, and we would like to express our sincere thanks to our members as well as to all individuals and organizations who have supported us with donations. You can become a member using this form or by joining us on Substack as a paid subscriber. We are open to collaborations, and we support our network members in realizing high-quality projects. Through our channels, we now reach more than 70,000 subscribers and followers.

This looks like a must-read!

"Terra Incognita: The Economics of a Shrinking World" by Jesús Fernández-Villaverde and Patrick Norrick.

"As of 2026, humanity is likely below replacement fertility. That has never happened before, not in wars or pandemics. But the real surprise is that the fall has been concentrated in low- and middle-income countries and among poorer and less educated women. We fit a single-factor model to 236 countries since 1950: the common component peaked in 1978, and what drives fertility down today are country-specific trends, 219 of them negative and not one leveling off. None of the commonly cited mechanisms can account for this pattern, so we offer a conjecture: modernity itself, which makes a third child expensive and childlessness cheap. Children come in integers, so it takes very little to move a cohort’s fertility rate from 1.8 to 1.3. And nothing in an economy pushes fertility back to 2.1. We close with the main economic consequences, in particular slow growth."

U.S. monetary policy: Most participants in our poll expect the Fed to keep interest rates constant on September 16. This share has recently increased.

Euro Area Economy Flash: August 2026 In the second quarter of 2026, GDP growth in the euro area was stronger than many observers had expected.

Great Books for Summer or Winter Reading: Thought-provoking, perhaps controversial, and definitely worth reading!

"Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk" by Philipp Carlsson-Szlezak and Paul Swartz.

"In this perspective-shifting book, BCG Chief Economist Philipp Carlsson-Szlezak and Senior Economist Paul Swartz provide a fresh and accessible way to assess macroeconomic risk. Casting doubt on conventional model-based thinking, they demonstrate a more powerful approach to building sound macroeconomic judgment. Using incisive analysis built upon frameworks, historical context, and structural narratives—what they call "economic eclecticism"—the book empowers readers with the durable skills to assess continuously evolving risks in the real economy, the financial system, and the geopolitical arena."

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We know that, due to the new immigration policy of the U.S. government and the aging of the population, the number of jobs the economy can structurally be expected to add each month is no longer roughly between 100,000 and 150,000 as in earlier years, but likely below 50,000. Yet even against the backdrop of these structural changes, today’s numbers are disappointing.

What does today’s report mean for the Federal Reserve? On its own, it makes an interest rate increase in September somewhat less likely. However, the central bank is likely to place particular emphasis on inflation at the moment. As for persistently elevated inflation, we will learn about the July inflation data in the coming weeks. And before the Fed’s next meeting, we will also receive the employment report for August, among other data. As we know, such a report can significantly change the perception of the U.S. economy.

The Fed is unlikely to be pleased with today’s report. Speculation about stagflationary tendencies will pick up somewhat again, something a central bank never likes to see.

Thank you for reading our updates and highlights. Our International and Monetary Economics Network has been developing in an impressive way, and we would like to express our sincere thanks to our members as well as to all individuals and organizations who have supported us with donations. You can become a member using this form or by joining us on Substack as a paid subscriber. We are open to collaborations, and we support our network members in realizing high-quality projects. Through our channels, we now reach more than 70,000 subscribers and followers.

Highly relevant!

"AI and the global economy: implications for central banks" by Iñaki Aldasoro, Leonardo Gambacorta, Enisse Kharroubi, and Matthias Rottner.

"This Bulletin assesses how the AI boom is shaping near-term macroeconomic dynamics and the attendant implications for monetary policy and financial stability. It documents four sets of findings. First, AI is driving a large investment and financing impulse: spending on data centres, semiconductors and related infrastructure has reached around 1% of GDP in the most exposed economies, and the associated capital expenditures increasingly rely on public debt markets as well as private credit. Second, these forces are reshaping trade and equity markets, generating sizeable terms-of-trade and wealth effects that differ markedly across countries. Third, the productivity payoff, though potentially large, remains uncertain and uneven and is accompanied by some early signs of labour market softening in the economies most exposed to AI. Finally, by moving demand and supply at the same time, AI blurs the cyclical signals on which central banks rely, thereby complicating monetary policy calibration."

Interesting results emerged in our poll on the labor productivity effects of AI. There is no consensus among our respondents. 48 percent expect a moderate acceleration in labor productivity growth, while significant shares anticipate either a boom or no meaningful change.

In the United States, where AI creation and adoption tend to be faster than in other economies, we have indeed seen a moderate acceleration in labor productivity growth in recent years. The same pattern can be observed for total factor productivity growth. While labor productivity growth is also affected by the investment boom since the pandemic, total factor productivity growth captures productivity gains unrelated to factor accumulation. Future analyses might be better able to disentangle the productivity‑enhancing effects of AI from other potential determinants such as remote work or demographic factors.

AI and inflation: Will AI be inflationary, neutral, or deflationary? In our monthly polls, no consensus emerges.

Great Books for Summer or Winter Reading: Thought-provoking, perhaps controversial, and definitely worth reading!

"Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy" by Jeffrey E. Garten.

"Over the course of three days—from August 13 to 15, 1971—at a secret meeting at Camp David, President Richard Nixon and his brain trust changed the course of history. Before that weekend, all national currencies were valued to the U.S. dollar, which was convertible to gold at a fixed rate. That system, established by the Bretton Woods Agreement at the end of World War II, was the foundation of the international monetary system that helped fuel the greatest expansion of middle-class prosperity the world has ever seen...In making his decision, Nixon shocked world leaders, bankers, investors, traders and everyone involved in global finance. Jeffrey E. Garten argues that many of the roots of America’s dramatic retrenchment in world affairs began with that momentous event that was an admission that America could no longer afford to uphold the global monetary system."

At IMEN, we independently select the events featured on our social media channels. However, we warmly encourage everyone to contact us with suggestions. Events may include, for instance, research- and policy‑oriented conferences, workshops, seminars, or panel discussions. You can use this form.

Below, you will find our other updates and highlights. By becoming an INEM member, you can help us further expand our activities – and enjoy special benefits. If you prefer not to join us on Substack as a paid member, membership is also available via this form.

IMEN Treasure Trove - What Caught Our Eye (Selection): Global imbalances, productivity and inflation, global value chains, and much more…

Highly relevant!

"Global Imbalances, Tariffs, and Industrial Policy" by Pierre-Olivier Gourinchas, Gene Kindberg-Hanlon, Manasa Patnam, Lorenzo Rotunno, and Michele Ruta.

This paper develops "a framework to think about the role of tariffs and industrial policies in driving current account balances. Importantly, it lays out the conditions where these policies work to improve balances (often at the expense of output and consumption), and importantly, when they will fail and even generate the opposite effect. We analyze the role of tariffs as a tool to reduce current account deficits, and of industrial policy as a determinant of current account surpluses. We consider different forms of industrial policy in our analysis: a more traditional sector-specific policy of support via subsidies or other targeted instruments (micro industrial policy), and broader policies of support through macroeconomic policies targeting interest rates with induced effects on the exchange rate (macro industrial policy)."

Very valuable!

"The Paris Club Dataset (1956–2026): Sovereign Debt Restructuring Agreements" by van der Zaag, Jochem Date; van Mourik, Sven; Blackmon, Pamela.

"The Paris Club Dataset 1956–2026 provides structured, agreement‑level data on all known sovereign debt restructuring agreements negotiated through the Paris Club of official creditors between 1956 and April 2026, covering 543 agreements by 102 debtor countries and approximately USD $863 billion in treated debt. The dataset was constructed by systematically scraping and reverse‑engineering the Paris Club’s official website (clubdeparis.org), followed by extensive manual cleaning, completion of missing agreements, and validation of monetary amounts and links in response to major website changes in 2025."

Highly relevant!

"The Anatomy of Tariff Pass-through into Consumer Prices" by Mary Amiti, Sebastian Heise, and David Weinstein.

"Tariffs raise the prices of goods made at home, not just the imports they tax—an effect that standard pass-through estimates largely miss. Studying the 2025 U.S. tariffs, we find that about 26 percent of the tariff increase passes through to consumer prices. These estimates are measured relative to less-exposed goods and hold aggregate conditions fixed. The direct effect accounts for 64 percent of this increase, as tariffs raise the consumer prices of foreign varieties of a good. The remaining 36 percent arises indirectly—tariffs raise the cost of imported inputs used by U.S. producers, and domestic producers raise their markups because they face less competition from higher-priced imports. The direct effect passes through quickly, since tariffs raise import prices almost immediately, but the indirect effect takes nine to twelve months to work its way through supply chains. As a result, tariffs have a larger and more drawn-out impact on consumers than the direct effect alone would suggest."

Highly relevant!

"Productivity and Inflation Dynamics" by Ludovica Ambrosino, Jenny Chan, and Silvana Tenreyro.

"How does higher productivity affect inflation? Productivity shifts both supply and demand (through real incomes), and its effect on inflation depends on their relative magnitude and timing, as well as on the monetary policy response. We distinguish between a one-off level shock that temporarily increases productivity above trend and a persistent rise in productivity growth. A one-off, temporary increase in productivity lowers marginal costs and raises potential output, generating downward pressure on the price level. Once prices adjust however, inflation returns to target. By contrast, higher productivity growth raises expected permanent income and stimulates investment and consumption, increasing the natural real rate. Absent a tightening of monetary policy, inflationary pressures may emerge. Anticipation effects are central: if demand rises ahead of realised supply gains, inflation can increase despite higher productive capacity. In an open economy, the sectoral incidence of the shock also determines the impact on inflation. In summary, the inflationary consequences of productivity gains are a priori ambiguous and depend on the balance and timing of demand and supply responses, the composition of demand, and crucially, the monetary policy response."

Very valuable!

“Rich Heterogeneity in Dynare 7: A Practical Description“ by Normann Rion.

“This document is the mathematical companion of the heterogeneous-agent toolkit shipped with Dynare 7.”

Highly relevant!

“Tariff Uncertainty and the U.S. Dollar“ by Şebnem Kalemli-Özcan, Can Soylu, and Muhammed A. Yıldırım.

“Standard models predict that a unilateral tariff appreciates the implementing country’s currency; in 2025, U.S. tariffs rose and the dollar fell. We show that tariff uncertainty can reverse the textbook prediction. ...we find markets priced the announced tariffs as largely transitory, so the uncertainty channel — not the tariff level, valuation effects, or covered convenience-yield erosion — accounts for the dollar’s depreciation at announcement frequencies.”

Super interesting!

“Estimating the rise in expected inflation from higher energy prices“ by Paula Patzelt and Ricardo Reis.

“When the price of electricity increases by 1%, households’ expected inflation increases by 1.2 to 1.5 basis points. If those expectations have become unanchored, then the effect is higher by 0.2 to 1.5 bps. Further, the impact of a supply shock to electricity prices is gradual, peaking only 8 to 12 months after impact. This paper arrives at these estimates by exploiting cross-sectional variation from newly-available panel data on expected inflation by Euro area households across region, gender, education, and income together with time-series variation in the cost of energy across region and source, and by proposing new measures of supply shocks. The estimates imply that households under-react to electricity price changes, that the rise in electricity prices in 2021-23 accounted for a small share of the rise in expected inflation, and that anchoring expectations is important in the face of supply shocks.”

Food for thought!

“Capitalism, Socialism, and Political Economy: Volumes I, II, and III” by Kui-Wai Li.

“Capitalism, Socialism, and Political Economy, is a three‑volume examination of the ideological, historical, and economic forces shaping global politics in the early twenty‑first century. Throughout the volumes, Kui‑Wai Li argues that many political dynamics commonly associated with the alt‑right have roots in the geopolitical and institutional arrangements formed at the end of World War II. Integrating political trends into economic analysis, these books provide an analytical framework for understanding how competing ideological systems continue to influence global development, institutional behavior, and public sentiment.”

“Volume I presents the conceptual groundwork, clarifying the distinctions between capitalism and socialism/communism. It provides particular attention to the historical contexts that shaped these ideologies after 1945. …Building on this foundation, Volume II applies the framework to contemporary global trends across advanced economies, socialist states, emerging economies, Middle Eastern regions, and newer blocs such as BRICS. …Volume III extends the analysis to the politics of fear and sympathy—two themes the author identifies as shaping current debates around climate change, COVID‑19, welfare systems, and unauthorized immigration. It further examines how concepts such as freedom, choice, privacy, trade, and investment function within different political‑economic systems, including the growing influence of AI on perceptions of autonomy and national strategy.”

Highly relevant!

“From Stocks to Flows: Debt Service and Fiscal Sustainability” by Barry Eichengreen, Maxime Menuet, and Gregory Donnat.

“We revisit fiscal sustainability through the lens of the government’s budget constraint. What constrains fiscal policy is not the stock of outstanding liabilities per se, but the fiscal cost of servicing debt. Using two centuries of U.S. fiscal data (1800–2023) and a long-run panel of advanced economies, we show that primary surpluses are systematically more closely associated with debt-service burdens, while debt ratios lose explanatory power when debt service is taken into account. Fiscal responses intensify when financing conditions deteriorate, specifically when the interest-growth differential is positive. We rationalize these findings using a simple flow-based framework in which debt stabilization depends on the responsiveness of fiscal surpluses to financing pressures. The results suggest that fiscal sustainability depends less on debt thresholds than on financing regimes and governments’ ability to absorb debt-service burdens.”

Food for thought!

“The Alignment Economy: Rebuilding the Connection Between Effort and Stability” by Christine Marletti.

“The system isn’t broken. It’s misaligned. There’s a difference.

A broken system fails. A misaligned system keeps running — it just stops delivering its output to the people who generated it. …This isn’t a failure of capitalism. The economy produced enough. It’s a failure of alignment.”

Highly relevant!

“Exorbitant Privilege of the Periodic Table? Geoeconomics, Endogenous Centrality and Strategic Minerals for the Green Transition“ by Josh Kirk, Evgenia Passari, and Hélène Rey.

“Trade networks underpinning the energy transition are endogenous economic objects, and their structure is a source of market power. Using bilateral trade data for thirteen electrification metals over 1995–2023, we show that trade in these materials has reorganised into a hub-and-spoke system centred on China, in sharp contrast to the diffuse, multilateral structure of fossil fuels. This centrality did not follow from resource endowments: China holds few of the underlying reserves. It was built through processing investment, industrial policy, and commodity-targeted development finance—an equilibrium outcome rather than a geographical accident.”

Highly relevant!

"Reserves and the Buyer of Last Resort" by Frederic Boissay and Harald Uhlig.

"We examine the role of central bank reserves and public liquidity when secondary markets may freeze. Central bank reserves help intermediaries purchase assets during stress but crowd out investment. Under laissez-faire, intermediaries hold insufficient reserves, overlooking how aggregate liquidity reduces freeze risk. We propose a "market-backstop principle", akin to Bagehot’s principle for intermediaries. It combines state-contingent buyer-of-last-resort interventions to restore trading with modest liquidity requirements to limit moral hazard. The welfare benefits of restoring market functioning exceed the fiscal costs of interventions. We explore implications for the size and composition of central bank balance sheets."

Highly relevant!

“Forecasting the Covid Surge in Inflation“ by Mark W. Watson.

“The persistent surge in U.S. inflation that began in 2021 caught forecasters and policymakers by surprise. The 2021 inflation shocks were viewed as transitory, not persistent, leading to large forecast errors in late 2021 and 2022. This paper asks whether time series models – using only data on current and past inflation, but incorporating stochastic volatility and exhibiting time-varying persistence – performed better. Univariate models, using real-time data, did not. Multivariate models, incorporating sectoral inflation measures, did.”

Highly relevant!

“Trends in Global Value Chains“ (OECD)

“Global value chains (GVCs) remain highly globalised in the post-COVID-19 era but are being reconfigured in more complex ways. New OECD evidence shows that, in real terms, the use of imported goods and services in world production is near its historical peak in 2024. Recent changes are driven more by shifts across sectors and sourcing structures than by post-pandemic shortening or reshoring of supply chains. This report highlights changing bilateral dynamics among major economies and the growing role of connector economies. It shows that multinational enterprises remain central to international production, with foreign affiliate output rebounding after 2020. In addition, services – especially those supplied through foreign affiliates – are shown to be a larger and more complex dimension of GVCs than cross-border statistics alone suggest. These findings draw on three complementary OECD datasets: real-terms GVC indicators, ownership-based input-output tables and services trade by mode of supply.”

Our Global Economy Flash July 2026

The world economy has shown resilience, but the dampening effects of supply chain stress, geopolitical uncertainty, protectionism, and high public debt are considerable. Will the AI boom continue?

China Economy Flash July 2026: Exports and policy support cushion energy and property headwinds

How strong is the U.S. economy?

US Economy Flash August 2026: Will the AI boom last?

Nowcasts for U.S. GDP growth in the third quarter of 2026 currently indicate annualized growth rates between 2.0 and 5.8 percent. Early in a quarter, these nowcasts show limited reliability and will probably start to converge in September. Although the economy is facing several headwinds, GDP growth is currently expected to remain solid. However, recent data, particularly from the labor market, were worrying.

U.S. monetary policy: Most participants in our poll expect the Fed to keep interest rates constant on September 16. But one third thinks that there will be a hike.

Monetary Policy Stance in the United States: Most participants in our recent poll characterize the current monetary policy stance as broadly neutral. In June, sizeable shares of respondents still had viewed policy as either expansionary or restrictive.

Monetary Policy in the Euro Area: Most participants in our poll expect the ECB to keep interest rates constant on September 10. But a sizeable share expects a hike.

Monetary Policy Stance in the Euro Area: The ECB raised interest rates in June and kept them unchanged in July. Most participants in our recent poll characterize the current monetary policy stance as broadly neutral.

Our poll on the productivity effects of AI continues to reflect the significant uncertainty we currently face. Interestingly, there is less divergence when it comes to the unemployment effects of AI.

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Central bank meetings in September

Monetary policy stance

Oil prices

Economic Effects of AI

GDP growth in the third quarter of 2026

“Don’t blame global imbalances on the undervalued yuan” by Gita Gopinath, Pierre-Olivier Gourinchas, and Hélène Rey.

“The World Should Not Ignore China’s Undervalued Currency” by Brad Setser.

Brad Setser argues that a “weak renminbi directly led to China’s latest export boom, and a stronger renminbi is the only realistic cure.”

“Amid Rising Imbalances, the Case for Rebalancing” by the International Monetary Fund.

“This year’s report provides the external assessment of 30 of the world’s largest economies based on the 2025 data. Global current account balances widened further in 2025. Staff assessment suggests that excess current account balances have also increased, with China and the United States as the main drivers. Persistent and large excess current account balances can signal uneven growth patterns and increase the risk of a disorderly adjustment. Simultaneous policy actions to address domestic imbalances yield the most favorable outcome for the global economy. Rebalancing effort by one country can still meaningfully reduce excess global balances but could pose risks for the financial market with negative impacts on growth.”

“Understanding Global Imbalances” (IMF)

“After more than a decade of steady decline, global imbalances have widened in recent years. While current account surpluses and deficits can be appropriate when they reflect economic fundamentals and desirable policies, the buildup and persistence of of large imbalances raise concerns when they are driven by policy distortions and unwind in a disorderly manner. The expansion of industrial policies and the rise in trade restrictions—often motivated by imbalances themselves—has intensified the debate on the causes and consequences of global imbalances, despite limited analytical and empirical clarity on how both policies affect the current account.”

Having narrowed after the global financial crisis, imbalances have widened again in the 2020s. China stands out. Its current account surplus reached around 4% of GDP in 2025. The headline ratio, however, understates the picture. On customs data, China’s goods surplus is now around USD 1.2 trillion (roughly 6% of Chinese GDP). Since China changed its balance-of-payments methodology in 2022, customs and balance-of-payments figures have diverged noticeably, so that the measurement of the surplus has itself become part of the dispute. Apart from China, South Korea and Taiwan also show large current account surpluses.

The United States, meanwhile, continues to run persistent deficits. The euro area records a surplus, but a shrinking one: 1.7% of GDP in 2025, down from 2.7% in 2024. Germany contributes the bulk of it, with a surplus of 4.5% of GDP in 2025, certainly large, though well below the peak of almost 9% reached in the middle of the last decade. Ireland also runs large current‑account surpluses, but it is a special case, largely driven by U.S. multinationals, particularly pharmaceutical companies.

The current debate about China’s surplus is not purely economic; it is also shaped by geoeconomic considerations. Europe aims to reduce its dependence on China and sees its industries threatened by Chinese imports. That concern is visible in the euro area’s own external accounts. The ECB identifies growing competition from China as one factor behind the narrowing of the euro area surplus, although changes in services trade and income flows were quantitatively more important.

Criticism of China’s surpluses must therefore be read together with what is now often called the second China shock. Unlike the original episode after China’s WTO accession, which was felt mainly in labor-intensive manufacturing, Chinese producers today compete with European firms across a far wider range of sectors, including the automotive industry, and European companies often cannot match Chinese prices. Part of the explanation lies in state subsidies and in cheap credit from state-linked banks and enterprises; part of it lies in weak domestic demand in China, which has depressed producer prices and turned excess capacity outward.

China is a country of stark contrasts. On the one hand, it is a high-tech economy that increasingly competes with Western producers across a wide range of goods. On the other, it is a country with many people on low incomes and limited social protection. It is also a country struggling with a protracted real-estate crisis that is weighing on potential growth and feeding deflationary tendencies. That crisis is not a separate story from the external accounts: with households still saving heavily and investment in property collapsing, domestic demand absorbs less of what China produces, and the difference shows up as a current account surplus.

A purely economic approach, one that abstracts from geopolitical considerations, would suggest that the Chinese government should aim for a higher wage share and an expansion of social benefits in order to reduce the savings rate and, with it, the surplus. This is the kind of recommendation large international organisations make when they focus on overall welfare, and it is broadly the agenda Beijing has itself endorsed rhetorically for more than a decade. Implementation has been another matter: the structure of fiscal federalism and the debt burden of local governments stand in the way of a durable shift towards household consumption.

Adjustment on the deficit side is no less demanding. The US external deficit partly reflects a low domestic savings rate and persistent fiscal deficits. A meaningful correction of global imbalances would require action in both the United States and China.

From a geopolitical perspective, in any case, the rebalancing agenda is unlikely to change the situation fast enough for governments that are under political pressure. A more immediate, though politically and economically difficult, adjustment mechanism would be an appreciation of the Chinese currency: the undervaluation of the renminbi is probably somewhere between 15 and 20%.

This raises the question of whether China would have any interest in a significant appreciation. China is unlikely to welcome a significant appreciation, since it would reinforce deflationary pressures and weaken the competitiveness of Chinese exporters.

Given weakened international institutions and elevated geopolitical tensions, we will probably have to live with these imbalances for some time. But the question remains how they will eventually be resolved: through a disorderly adjustment in China as excess capacity meets closing export markets; through renewed financial stress in deficit countries; or through a further escalation of trade restrictions that reduces the imbalance by fragmenting the trading system rather than by correcting the underlying saving and investment behaviour.

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