Some thoughts on macroeconomic models

By: Paul De Grauwe, K.U. Leuven and CEPS

The limits of DSGE models as tools of analysis for central banks.

Time to stop forecasting, and to start thinking

By: Wolfgang Münchau

Forecasts that Obama will win the presidency, and that inflation is falling have in common that they mean nothing at all.

Hedge funds caught by volatility

The extreme rise in the yen, and the share price of Volkswagen, are likely to have a devastating effect on some hedge funds; Trichet preannounces rate increase for Nov. 6, and sees inflationary pressures easing; the German Ifo index falls to recession levels; the Greek PM is considering a snap election as his government in drowing in scandal; Belgium, meanwhile, has bailed out another bank.

The credit markets are worsening again

iTraxx breaks through 900bp, as risk aversion becomes extreme; money market indicators are worsening again, and there are indications that government rescue packages are crowding out private activitity in the credit market; a design flaw of the German recapitalisation plan means that private sector banks are not taking part, infuriating the government; the IMF, meanwhile, bails out some countries, plus its MD, Dominique Strauss-Kahn.

Sarkozy launches French sovereign wealth fund

Goal is to prevent French companies falling into foreign hands; France also elminates local business tax for one year; the ECB yesterday preannounced a rate cut, after Sweden cuts its repo rate 50bp; the euroibor continued to improve at snail’s pace, but the trend is now starting to reverse again in the US; the Baltic Dry Index is down 90%; Spain, meanwhile, is pushing for invitation to next months’ global financial summit as a matter of national pride.

COUP D’ETAT!!!! Sarkozy to renew his European presidency for another year

French president wants to be semi-permanent head of the euro area heads of state and government; Paris sees this as a possible way out of the Lisbon Treaty gridlock; European Parliament votes 499 to 130 in favour of a proposal to strength euro area governance; the financial crisis deteriorated again yesterday, as equity markets fell 4-6% and credit spreads reached new records; the euro is now at $1.28; evidence is emerging, meanwhile, that the staff in the rating agencies had known all along what was going on.

Credit crunched in 2009

IMF’s latest projections see a sharp economic downturn for 2009, driven by a credit crunch; Draghi pledges total support for economy as credit crunch bites; US launches a special fund to stabilise the money markets as money market conditions improve moderately; the euro fell to $1.31; in Strasbourg, meanwhile, Nicholas Sarkozy proposes gouvernement economique, immediately rejected, of course, by Germany.