Volume 19, Issue 2

Economic sanctions negatively affect the target country’s economic potential. As a type of enforced protectionism, sanctions shift the relative power in the target country between its citizens and its (autocratic) government. This shift tends to favor autocrats as their power over the limited means of production increases and as they control the remaining international exchange opportunities. Resistance against autocratic governments would require collective action by citizens or an organized political opposition, but the autocrats’ relative gain in power due to sanctions increases their likelihood of staying in power. Internationally, an economically weakened country may present less of an external military threat. However, as the stabilization of a target regime is a likely outcome of sanctions, sanctioned regimes remain an international threat. Therefore, we also discuss potential alternatives to sanctions as policy tools.

International economic relations and trade in particular have been thriving since World War II. Whilst the lowering of trade barriers and the dismantling of trade restrictions have long enjoyed support both among trade economists and policymakers, there has recently been a swing back to protectionist policies. In virtually all major economies, a surprising new interest in autarky can be observed. Today, both the USA and the member countries of the European Union prioritize domestic production of certain products, especially semiconductors. China has taken a decisive turn to trade policies that emphasize self-sufficiency and domestic production. India, which has long favoured sourcing from domestic producers, has at least partially embraced self-sufficiency. We analyze and add a historical lens to these recent developments. If they will continue, we argue that the world will see negative effects on welfare if these trends continue unchecked.

The Federal Open Market Committee’s revised Statement on Longer-Run Goals and Monetary Policy Strategy implements flexible average inflation targeting and mitigates shortfalls , rather than deviations , of employment from its maximum level. We show how the Taylor, balanced approach, and balanced approach (shortfalls) rules in the Monetary Policy Report could be modified to be consistent with the revised statement. Federal funds rate prescriptions from the consistent rules are both closer to the liftoff from the effective lower bound in December 2015 and provide a better fit to the actual federal funds rate than the rules currently included in the Report. The prescriptions from the balanced approach rules are closer to the liftoff and provide a better fit than the prescriptions from the Taylor rules.

This paper advances a simple framework explaining how monetary policy normalization (“exit policies”) may impact central bank profits. The cases of seven central banks of major and smaller economies serve as an illustration. The notion of the break-even point is applied to study the financial situation of these institutions for the period of 2014–2021. During the normalization process, interest rate increases may adversely affect profit changes, and through transfers may have an impact on the fiscal space available to the governments, creating political economy concerns. Possible remedies are discussed together with accompanying policy dilemmas.

This paper addresses the question whether the recent rise in inflation can be explained by financial dominance. It is motivated by the fact that the monetary policy response has been slow and timid which might have reflected concerns that a proper response would have triggered substantial financial risks. We find that a misjudgement of aggregate supply conditions provides a better explanation than financial dominance arguments. Still, recent policy moves such as the Transmission Protection Instrument by the European Central Bank and asset purchases by the Bank of England indicate that financial dominance concerns might become more pressing with further monetary tightening.

We empirically analyze to what extent economic freedom can explain the size and development of the shadow economy in OECD and other European countries. We econometrically examine the relation between a change of the overall index of economic freedom and the change of the shadow economy. We undertake an econometric panel estimation of 141 countries over the period 2000–2007. Our results demonstrate that first, the higher the economic freedom, the lower is the shadow economy. This holds especially for the index-sub-component legal structure and security of property rights. The sub-component freedom to trade internationally provides further support for this relation, limited to cases of positive changes of economic freedom. Second, the effects are asymmetrically, they are stronger when economic freedom increases than in the case of a decrease.

This paper aims to explain key concepts of the EU Taxonomy for Sustainable Activities, a common classification system established to clarify which investments are environmentally sustainable. Additionally, it provides insight on the compliance of corporate activities with the EU Taxonomy’s criteria based on a first survey on market data.

The EU Taxonomy stands in sharp contrast to the principles of a market economy. It requires regulatory knowledge that cannot be expected to exist and hampers rather than stimulates entrepreneurial initiatives for coping with socially relevant scarcities. For all objectives addressed with his approach, more efficient policy instruments exist that play with and not against market forces. Apart from allocative inefficiencies, the Taxonomy-approach opens the door for all kinds of particularistic maneuvers and hidden political agendas. The Taxonomy absorbs high-skilled labor that is in high demand elsewhere in the economy and creates a massive extra bureaucratic burden without any expectable benefit for the total economy. Given the fundamental flaws in the overall concept, policy makers should stop it rather sooner than later.

The introduction of the taxonomy will alter trade patterns and trade specialisation, in spite of the signs that EU members are specialised in industries and economic activities that are favoured by its introduction. The taxonomy is likely to further work not only directly but also through supply chains, as obtaining more attractive funding for companies is indirectly linked to the compliance of the company’s suppliers as well. However, managing the transition to green production will require further policy measures at the regional, national, and international levels. Given that several policy measures and initiatives are already in place, doubts can be raised as to whether the green transition can be achieved efficiently by the introduction of the taxonomy.

The EU taxonomy on sustainable activities is expected to pave the way for steering capital towards sustainable investments. However, the economic effects are problematic. Promoting “green” capital will lead to income losses due to productivity differences, while greenhouse gas emissions do not change at a given EU emission allowance cap. Worldwide emissions may even increase as carbon intensive production moves outside the EU. While green finance may be used to bind future governments, committing to future climate goals directly is a superior policy since efficiency losses can be avoided.

Prominent ECB representatives have stressed the goal of the ECB to green its monetary policy, inter alia by moving from market neutrality to (green) market efficiency as guiding principle of monetary policy making. The paper explores how the EU taxonomy could become the benchmark for a monetary policy of the ECB, which influences the credit allocation of commercial banks, with a negative impact on allocation efficiency and growth in the European Union.

One of the key pillars of the European Green Deal is a renewed sustainable finance strategy to finance sustainable growth and to channel private investments towards projects that support the transition to a climate-neutral economy. The aim of this policy is to make the private sector take into account sustainability-related non-financial factors when making financing and investment decisions. Within this framework, the EU Taxonomy provides a uniform definition and classification system of environmentally sustainable economic activities. In addition, the EU Taxonomy itself provides the basis for further legislation and regulation. Banks as the main financiers of firms in Europe and therefore important players in directing capital flows towards sustainable projects are thus targeted with several requirements based on the Taxonomy. The question then is how banks’ lending to firms is affected by these regulatory changes and whether an impact on the greening of firms’ economic activities can be achieved. The existing literature provides evidence that firms’ environmental, social and governance (ESG) risks, profiles and performance influence their loan conditions, but it is unclear whether better funding conditions lead to reduced carbon emissions or “greener” activities at the firm level.