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Why the US will outstrip Europe by running a ‘hot’ economic recovery

15 Apr 2021 (Last Updated April 15th, 2021 16:29)

15 April

Professor Simon Wren-Lewis, an economist, shared an article on two types of recovery from the Covid recession, or how plutocratic populism cannot be fought by returning to the recent past.

According to Wren-Lewis, Biden is showing the European Union (EU) and the UK how to recover from the deep recession.

Forecasts reflect that the US has enacted a large stimulus package ($1.9tn mainly directed to individuals followed by at least $2bn on infrastructure), while Europe has been more modest in its expansionary measures with a 750bn recovery fund.

Wren-Lewis discusses the relative merits of undershooting and overshooting and thereby running the economy a little hot after the recovery.

He states that the downside risk is not a problem if you are trying to run the economy hot, because you will just be running it cooler.

However, the downside risk of undershooting are serious, as that means a more extended recession with interest rates unable to fall because they are stuck at their lower bound.

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