Ethan Ilzetzki's picture
Affiliation: 
London School of Economics

Voting history

Should We Worry About Post-Covid Inflation?

 Question 1: Which of the following scenarios is most likely to hold on average for most of the upcoming decade?

Answer:
The BoE will allow inflation to exceed its current target
Confidence level:
Not confident
Comment:
First, the market is predicting this outcome based on the yields of inflation-protected gilts. Second, the combination of high public debt and low nominal interest rates might lead the UK government to raise the BoE's inflation target. This may in fact be a desirable policy if inflation doesn't materialize. Third, I am a little concerned that the Bank, like other central banks, is fighting the last war. Despite the aforementioned market signals, there appears a relatively broad consensus that deflation is a bigger risk than inflation. I have no doubt that the BoE will do what it takes to combat the former.

Post Covid-19 Potential Output in the Eurozone

Question 1: How much lower will the potential level of GDP in the Eurozone in 2025 be due to Covid-19 relative to pre-Covid forecasts?

 

Answer:
Between 2% and 5%
Confidence level:
Not confident at all

Question 2: How much lower will the potential growth rate of GDP in the Eurozone in 2025 be due to Covid-19 relative to pre-Covid forecasts?

 

Answer:
No different
Confidence level:
Not confident at all
Comment:
Looking at economic behavior in France and elsewhere when lockdown restrictions were relaxed suggests large pent up demand. I would predict that this will more than outweigh the growth loss due to debt overhang and other accumulated risks during Covid-19.

Lockdowns and UK Economic Performance

Question 3: Using not only the policy tools that have been part of the UK policy mix thus far but also policy tools implemented in other countries, to what extent does the government face a tradeoff between saving lives and preserving livelihoods? 

Answer:
Large tradeoff
Confidence level:
Not confident
Comment:
There is no single answer to this question. There are some policies that can save lives with nearly no economic impact: for example wearing masks, encouraging moderate social distancing, personal hygiene. But Covid-19 spread eventually even where these "low hanging fruit" were broadly followed. This means that to further mitigate Covid's spread, additional measures need to be taken and these appear to be rather costly at least in certain sectors (closing theaters, enforcing 2-meter distancing in restaurants, closing pubs, ect.).

Question 2: How much will the new lockdown measures introduced on Thursday November 5 hurt UK economic activity this year relative to a counterfactual with the milder measures adopted over the summer?

Answer:
Small damage
Confidence level:
Confident
Comment:
I would assess the damages to be small to moderate. Consumption data over the summer both in the UK and in other countries indicate that individuals (particularly young adults) had returned to nearly normal levels of consumption. In other words, there is far less voluntary social distancing than there was at the beginning of the pandemic. This implies a sharper trade-off between the public health and economic objectives than there previously was.

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