The recent surge in commodity prices and the European Central Bank’s decision in June to raise interest rates to combat inflation have ignited a debate about the appropriateness of raising interest rates during a phase of weakening activity. In addition, it is relevant to examine the approaches to measuring the rate of inflation, to consider the advantages and drawbacks of these methods, and finally to throw new light on the possible influence of monetary policy on the fundamental trends in prices.

The question of whether central banks should target stock prices so as to prevent bubbles and crashes from occurring has been hotly debated. This paper analyses this question using a behavioural macroeconomic model. This model generates bubbles and crashes. It analyses how ‘leaning against the wind’ strategies, which aim to reduce the volatility of stock prices, can help in reducing volatility of output and inflation. We find that such policies can be effective in reducing macroeconomic volatility, thereby improving the trade-off between output and inflation variability.

This paper, which draws on a longer, more analytical Working Document by the same author (No. 304/September 2008), explores the question of whether central banks should target stock prices so as to prevent bubbles and crashes from occurring. It analyses how ‘leaning against the wind’ strategies, which aim to reduce the volatility of stock prices, can help in reducing volatility of output and inflation. Its finds, however, that a critical element in the success in such a strategy is the degree of credibility of the inflation-targeting regime.

This CEPS Commentary explores the cause of the rapid and intense deterioration suffered by the eurozone business cycle since early 2007. It finds that the key explanation lies in the exchange rate of the euro and points a finger at the European Central Bank for abdicating its responsibility to intervene in the foreign exchange market and to oppose exchange rate developments that are out of touch with economic forces.

Paul De Grauwe is Professor of Economics at the University of Leuven and Associate Senior Fellow at CEPS.

This ECMI Commentary by Piero Cinquegrana considers the phenomenon of the six-fold increase in oil prices over the last seven years and asks whether this massive increase is justified by fundamentals or is the result of a speculative frenzy in commodities driven by bear markets in bonds and stocks.

Industrialised countries are currently facing a triple shock: an increase in the risk premium because of financial market stress, a fall in house prices and a deterioration in terms of trade due to higher commodity prices. The last two occasions oil prices spiked, house prices tanked and the world economy experienced a severe recession. This Commentary looks at the likelihood of extreme deviations of GDP from potential and whether the current bust in housing coupled with a spike in the oil prices will also have a strong negative impact on growth in the US and Europe.

The EU has ambitious goals for economic performance. The goals are to be reached in combination with social cohesion and environmentally sustainable development. The main economic policy instruments to be used by the EU member states are taxes and benefits. The economic and political framework for implementing measures in these areas is currently delineated, and is both encouraged and constrained by factors such as population ageing, globalisation and more intense international competition in tax and social policies.

Russia is now once again one of the ten largest economies in the world (representing around 70% of Germany’s GDP in purchasing power parity in 2007). In addition, Russia is the third largest trading partner of the EU, the fourth largest trade partner of the eurozone and an essential energy supplier to the EU. This recovery makes Russia an economic – and political – actor that cannot be ignored.

In this commentary, CEPS Director Daniel Gros compares housing markets’ dynamics in the EU and the US, arguing that the downturn in house prices is likely to undermine consumer spending on both sides of the Atlantic.

This paper provides background information on the likely challenges the rise of China and India will pose for the economy of the EU. The purpose is mainly descriptive, namely to spell out what kind of trading partner China and India will represent for the EU in the foreseeable future. A first observation is that India is several times smaller than China in economic terms. Moreover, because its investment rates in both human and physical capital are much lower than in China, its growth potential is likely to remain more limited.

The past 20 years have seen a series of unsuccessful attempts to reform the EU budget. Despite a growing consensus that the budget does not correspond to the realities of the EU, it has proved extremely difficult to reach a political agreement among the member states on how to improve it. But with France, Germany and the UK having three ‘reformer’ heads of state, the political situation is now favourable for change. Filipa Figueira, research assistant at CEPS, explains why 2008 could be the year for the long-awaited overhaul of the EU-budget.

The re-launch of the Lisbon strategy in March 2005 was meant to inject a new momentum into what is now known as the Partnership for Growth and Jobs, and to highlight the challenges that Europe faces in responding to globalisation. More than two years on, it has become clear that most member states fully understand the need to adapt their economies and have shown a growing willingness to embrace economic reform. However, countries continue to differ markedly in their enthusiasm for reform and it is far from clear that ‘Lisbon’ can take much credit for the recent economic upturn.

In this Commentary, CEPS Director Daniel Gros and Stefano Micossi, Director General of Assonime, hold up policy coordination at the EU level as an effective remedy for handling the negative spillover effects resulting from uncoordinated policies in the critical areas of labour market reform and immigration.