Global Economics and COVID-19: Researcher Andrea Ferrero Discusses Possible Directions

Richard Jacobs: Hello, this is Richard Jacobs with the Finding Genius Podcast.  My guest today is Andrea Ferrero.  He’s an associate professor in the Department of Economics at the University of Oxford.  He’s also a Levine Fellow in Economics at Trinity College of Oxford.  He teaches undergraduate and graduate macro-economics.  And I wanted to talk to him because the situation with government-imposed shutdowns economically, I don’t know what’s going to happen, so I wanted to ask and see if someone that’s in the economic world has insights on what he thinks going to happen from here onwards.  So, Andrea, thanks for coming.

Andrea Ferrero: Thank you for having me.

Richard Jacobs: What got you to studying economics in the first place?

Andrea Ferrero: Yes.  I am from Italy and in Italy, you don’t study typically economics in high school.  So, my choice to embark on my degree was a little bit by exclusion.  I knew that there were certain things that I didn’t want to study.  So, economics and management, which was my degree, is a kind of attractive perhaps because I didn’t know much about it.  But I went in thinking I would do management and I think after maybe a semester or two, I realized that I actually did not like management at all.  So, again, the choice of going into economics was kind of more of a negative one.

  And also, when I started doing more economics, I never thought of I would become an academic, I thought maybe I would work in finance or consulting and things like that.  And it was only towards the end when, first of all, I took more advanced courses but I also I started doing a little research because you have to do a thesis for your undergrad that I got really excited about more academic approach to some of the [inaudible – 0:02:16.5] that I was looking into and so I decided to pursue it as a career.

Richard Jacobs: And what’s your research for that?

Andrea Ferrero: So, I work on several topics but all are sort of related to macro-economics and monetary policy.  I started off more on the international side so I was looking out of credit school at US current account deficit and what were the main determinants.  So, I graduated in 2006, that was a big debate at that time.  And then, later on, I started working on topics related to financial crises, my first job [inaudible – 0:03:05.8] Federal Reserve in New York.  So, it was an obvious choice, I mean it was basically starting in 2007 but especially after 2008, it was what we were talking about every day.  So, since then, I kept a little bit of both interests like some topics that I work on more on the international side and some more on the monetary policy and macro side.

Richard Jacobs: So, what [inaudible – 0:03:41.7] for you in the past 3 or 4 months during the coronavirus [inaudible] it must be very interesting.

Andrea Ferrero: Well, yes.  So, it’s interesting to reading news and trying to make sense of the current situation but it’s also extremely boring but I haven’t left my house like many people.  No, I think this crisis is very different from the other type of crisis that we’ve seen and studied in the past.  With the 2008 crisis that’s started in the US and then became global but also with the European type crisis a couple of years later, we’ve focused a lot on the financial system and on the implications for the real economy.  Whereas this one is a crisis that although some people I’ve mentioned before that we could be in a pandemic situation weren’t really thinking so much about.  So, there is a whole new set of questions that we’re facing as economists and as the policy-makers.

  And so, it is quite interesting but it’s also very, very challenging.

Richard Jacobs: What are some of the important trades or waves or activity that’s going on that you’ve noticed?  Where do you think we’re heading over the next 6 months?

Andrea Ferrero: Yes.  Well, I mean I guess there’s a big difference compared to the financial crisis of 2008 and 2010-2011 in Europe is that pretty much everywhere, I would say, governments have been extremely aggressive with fiscal policy.  I think this reflects two main reasons.  One is that monetary policy didn’t have a lot of room to respond to the current situation.  Interest rates were low everywhere with few countries that have a little bit of room to cut interest rates, they’ve cut right away like in the US but some other countries like in Europe, they didn’t have any room to cut interest rates.  So, I mean central banks did other things, other types of interventions but the room for an aggressive monetary policy response was somewhat limited.  So, then, fiscal policy became the obvious instrument to respond to the crisis.  You could also argue that this is a little bit more controversial, it’s not quite clear what the right response to this kind of episode is because it has features though there was supply shock because some sectors completely shut down but also the demand shock because people lost their jobs and so they lost their income and so it’s the objective of both monetary and fiscal policy to provide support to people in this situation.

So, I think overall, it suggests that the policy responses are extremely challenging, I think this is one of the main topics that are currently on the table for debate pretty much everywhere in the world.  Where are we heading?  I think it’s anybody’s guess.  I think a lot of it would depend on how their health situation would look like over the next couple of months and whether there is going to be a second wave, so that’s obviously one factor.  There’s been a lot of discussion about the kind of recovery that we see.  I was just looking today at the expectations that members of the federal reserves have [inaudible – 0:08:08.1] for the recoveries, so they are seeing a deep recession followed by a quite strong rebound next year and also somewhat more moderate but still solid for 2022.

So, I guess that’s the baseline scenario that many people have in mind but again, I think that a lot is going to be depending on what’s going to happen in the next few months between now and say the end of the year; if we have a second wave, doesn’t that mean that we’ll have a second round of lockdowns, would there be [inaudible – 0:08:46.4] reasonable amount of time and so on, so I think all this — I guess maybe the bottom-line is that there is still a lot of insurgents around and we see this also through the response of financial markets that are still quite falling apart some days are responding, [inaudible – 0:09:03.4] somewhat days are worried about second wave and further lockdown.

Richard Jacobs: So, what interesting market behavior you’re seeing and now you could say you have some experience with an economy like this because it’s for a few months, so what are some things that happened that totally surprised you or something that didn’t surprise you but were important?

Andrea Ferrero: I don’t know if this was anything completely surprising, again, because this is a new type of episode, I wasn’t sure exactly what to expect to some extent but perhaps I was a bit surprised maybe that the rebound in the stock market was as fast as it has been. The market actually relatively few weeks to go back to the point it was before the news of the epidemic spread around.  I was expecting a rebound for sure and I was expecting the rebound to take place well before the real economy would recover but at the same time, I was surprised that it happened so fast.  Again, because of the [inaudible – 0:10:19.7] that is still around, maybe it’s too early to assume that the rebound will last and maybe there would be further losses down the road.

This is just one of a personal preference to take a little bit more of a long-run approach and avoid being affected too much by the day-by-day fluctuation in the financial market.  So, I take these movements a little bit with the grain of salt.  I mean the other feature but is not so much related to this crisis that is notable in financial markets is that long-term interest rates are historical lows and there was a discussion before the epidemic started that was going on basically since the financial crisis or started shortly after the financial crisis about where we’re going to live in a world of permanently longer interest rates and I think this crisis just bring the force that view that low-interest rates are here to stay for quite a long time.

Richard Jacobs: Do you think low-interest rates or negative interest rates, what is that experience from watching middle-east that begs negative interest rates, big offer to customers, and customers may be reacting in a different way than expected?

Andrea Ferrero: Yes, I don’t know.  I think the evidence is still not completely clear on the factor of negative interest rates.  I mean my impression is that negative interest rates are not as disruptive as some people had suggested they maybe but it’s also not quite clear to which extent they have the same effect and the same power that interest rate cuts have in positive territory.  So, I think that’s a little bit of overlook in questions. I mean there is some evidence that [inaudible – 0:12:39.6] pass-through of negative interest rates one way or another meaning that if you’re a corporation, you’re going to face negative interest rate if you’re an individual that may not face negative interest rate but you make a higher fee on your account or something of that sort, that basically is an effective negative rate.  So, that, on the one hand, suggests that unprofitability may not hurt as much as some critics of negative rates are suggesting but at the same time, there is going to be some level, 0 or below, where the 0 we thought was 0, the lower bound is going to kick in because central banks cannot go as negative as they can expect to keep effects from further cuts.

Richard Jacobs: Would it discourage saving [inaudible – 0:13:44.0] discourage to be anybody in the bank, feeling to keep savings and cash because of the negative rates?

Andrea Ferrero: Yes, that’s exactly right.  I mean that’s the so-called liquidity drop when further cuts in interest rates are not going to be effective because people would rather keep cash under their [inaudible – 0:14:05.9].  So, the point is that if you are a corporation, that saves sums in the order of millions of dollars, it’s going to take a while before you take all your cash out of the bank but at some point, you will.  So, that’s why, I guess, negative interest rates may have some effect but not [inaudible – 0:14:32.0].

Richard Jacobs: Why don’t they have to go to — Why that just is a zero, why negative?

Andrea Ferrero: Well, because they think that zero is not low enough that they would like to cut interest rates even further.  So, if the economy is really doing poorly, you would like to cut interest rates, and at some point, when you hit zero if they’re coming still doing poorly with lighter cuts and below zero, that’s the rationale.  The question is whether it works or not.  Now, central banks have used other ways of responding to this type of situation so they’ve done a lot of QAE, they’ve used communication about their intentions for the future trying to affect expectations and then, of course, fiscal policies now being [inaudible – 0:15:31.5] before quite extensively this current crisis as well.

Richard Jacobs: So, do you see any activity building, do you see people not going out accumulating a lot more in savings, and if so, will that cause a [inaudible – 0:15:46.9] pent-up demand that will also be spent at a large amount?  What dynamics are happening right now, do you think?

Andrea Ferrero: We don’t have data yet, not even of this quarter just the one which was — so this quarter, I guess, was the biggest effect of the — the big negative effect of the pandemic.  And then, before seeing anything to restart, we’ll need to wait even a little bit more.  I mean we’ve seen some stronger bound in expenditure in the US and there is quite some evidence that again, that people are really eager to go out and sort of makeup for the [inaudible – 0:16:35.4].  I guess the holiday season is also one where people are encouraged to spend a bit more.  At the same time, we need to balance this with the fact that there are several people who’ve lost their jobs and so, their spending capacity may not be as strong as would have been otherwise.

But one thing that I thought is likely to happen is purchases of durable goods, for example, if you were applying to buy a car or if you were applying to buy a new house, for example, those must have been postponed for sure.  So, if you still have the spending capacity, then there is likely to be a rebound in the next few months assuming that the house …

Richard Jacobs: That’s a good way to put it.  So, if assuming there is no second wave, what are things going to look like in a few months, and assuming there is a second wave, then what are they going to look like?

Andrea Ferrero: Yes, absolutely.  I think this is really very contingent on the developments in the house situation.  I think again, if there is no second wave and the situation stabilizes progressively, as we’ve seen happening in most countries, then I think there could be a strong rebound I would say that a lot of people lost their job may be able to find a new hopefully and so, it’s likely to be a strong recovery again.  If we see a second wave, then it could be really tricky partly because there’s been quite a huge effort in terms of fiscal support to avoid the worst consequences for both families and businesses and it’s not clear that countries will have the same fiscal capacity to support the deep second wave.  So, I guess the intensity of the second wave is going to matter a lot.  But if we see something like we see in the spring, again in October, November, December next year, it’s unclear to me that the government will be able to go out and provide some kind of [inaudible – 0:18:58.7] I think that’s kind of perhaps the bad scenario that we’re facing.  And again, depending on how you place your probabilities on those two is going to inform your views going forward.

Richard Jacobs: And you think governments have the capacity to withstand more lockdown, so you think people do or you think they’re going to have big pressure that people will have to learn to live with the coronavirus and have a [inaudible – 0:19:27.8]?

Andrea Ferrero: Yes.  So, I think it’s a very tough question.  So, instinctively, I would say, the main concern that most people have is their health.  So, you would expect to see a response that is cautious if the health situation does not improve significantly.  I’ll be very worried about going out and getting infected if there is a second wave.  But I think it’s not so easy.  I mean we’ve seen many instances which people somewhat are defined this type of view and so it’s unclear on how the pressure comes from the different groups in the population are going to affect political distance in terms of the response of potential.  So, I don’t honestly know, I mean this doesn’t necessarily have to do a lot with economics; it has to do more with health policy and the political process, I mean …

Richard Jacobs: Economics is a big factor if you can …

Andrea Ferrero: Yes, absolutely.  But what I’m saying is that I guess there is one dimension in which if we can fix the house, if we can control the epidemic, if we have the appropriate ICU capacity, if we have the resources to deal with the epidemic, then as a byproduct, we’re also able to mitigate the effects of the economy.  The main problem occurs when you are facing the tradeoff between saving lives and thanking the economy, which I guess is the [inaudible – 0:21:35.8] but I think you really want to build that capacity when you have the opportunity.  So, I think that would be my instinctive reaction to this current situation; use the time that we have now to make sure that if the second wave hits, we are prepared.

Richard Jacobs: Do you think any nations are taking that way of listening or are they just really too scared, they’re just caught in a day-to-day and that’s all they can think about?

Andrea Ferrero: Yes, I’m a little worried about that.  I’m a little worried that the day-to-day crisis management is taking the eyes away from the longer-term objective, which is to be able to face a similar crisis, to learn from the past wave, the one in the spring, and to be able to cope with the potential, I’m a little worried about that.

Richard Jacobs: Very good.  Andrea, what’s the best way to find out more about your work and any ideas on what they should keep tabs on economically to keep them ahead of the economy?

Andrea Ferrero: I think we’re going to get some data, some more data soon coming out and I think that will give us a good sense of how the labor market is responding.  We’ve seen a good labor market report last month, so hopefully, the good news will continue.  So, my hope is that the data will support a little bit of opportunities going forward, and obviously on the health side that the measures have been put in place would be enough to avoid a second wave.  But it’s really that interaction between the health scenarios and how the economy is going to be crucial for the next 6 months or so until we get a cure and don’t have to worry about virus.

Richard Jacobs: Very good, Andrea.  Thanks for coming.

Andrea Ferrero: Thanks a lot for having me.