Macroeconomics by Davide Buccheri

Money supply in Europe has been in an astonishing uptrend for the past 20 years now, driven by extremely expansionary monetary policies. The latest innovation in this field was introduced in late 2013, when the ECB announced that it was ready to cut interest rates into negative territory. More recently, the incumbent ECB President, Christine Lagarde, has signalled her intentions of further lowering rates. However, this move might be short-sighted and potentially pushing the ECB further into a corner from which it is becoming extremely difficult to get out, without massive market turmoil. Policy objectives First of all, it isn’t at all clear how negative rates would help the ECB pursuing its monetary policy objectives. The ECB has as its main target price stability above all. This is quantified as an inflation rate below but close to 2%. It is debatable whether the ECB was successful in its objectives so far, as “close” is a vague term. The yoy monthly inflation rate a...

For years we’ve now lived in an environment of falling rates. Both in the US and Europe, central banks have repeatedly slashed interest rates in an effort to kick start the economy. However, these policies also have an effect on valuations: a shrinking discount rate inflates the value of securities. In a previous analysis , I showed how the S&P 500 is currently at a level significantly higher than what the GDP growth rate suggests is reasonable. Here, I try to provide a possible explanation for this deviation, by estimating the effect that these expansionary policies might have had on the valuation of the index. Due to the nature of the topic, a lot of assumptions will be needed, such as the use of a pricing model. Nonetheless, the findings are remarkably in line with what economic fundamentals suggest and quite intriguing. Trend in yields The chart below was obtained using data from FRED St.Louis and shows the trend in the yield of the 10-year constant-maturity Treasury Bond ...