Publications
Jörg Bibow
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Working Paper No. 1038 | January 2024This paper revisits Keynes’s (1930) essay titled “The economic possibilities for our grandchildren.” We discuss the three broader trends identified by Keynes that he expected would come to characterize the socio-economic evolution of advanced countries under individualistic capitalism: first, continued technological progress and capital accumulation as the main drivers of exponential growth in economic possibilities; second, a gradual general rebalancing of life choices away from work; and third, a change in the code of morals in societies approaching an envisioned stationary state of zero net capital accumulation in which mankind has solved its economic problem and enjoys a lifestyle predominantly framed by leisure rather than disutility-yielding work. We assess actual outcomes by 2023 and attempt to peek into the future economic possibilities for this generation’s grandchildren.Download:Associated Program:Author(s):Related Topic(s):
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Working Paper No. 974 | October 2020
Financial Instability and Crises in Keynes’s Monetary Thought
This paper revisits Keynes’s writings from Indian Currency and Finance (1913) to The General Theory (1936) with a focus on financial instability. The analysis reveals Keynes’s astute concerns about the stability/fragility of the banking system, especially under deflationary conditions. Keynes’s writings during the Great Depression uncover insights into how the Great Depression may have informed his General Theory. Exploring the connection between the experience of the Great Depression and the theoretical framework Keynes presents in The General Theory, the assumption of a constant money stock featuring in that work is central. The analysis underscores the case that The General Theory is not a special case of the (neo-)classical theory that is relevant only to “depression economics”—refuting the interpretation offered by J. R. Hicks (1937) in his seminal paper “Mr. Keynes and the Classics: A Suggested Interpretation.” As a scholar of the Great Depression and Federal Reserve chairman at the time of the modern crisis, Ben Bernanke provides an important intellectual bridge between the historical crisis of the 1930s and the modern crisis of 2007–9. The paper concludes that, while policy practice has changed, the “classical” theory Keynes attacked in 1936 remains hegemonic today. The common (mis-)interpretation of The General Theory as depression economics continues to describe the mainstream’s failure to engage in relevant monetary economics.Download:Associated Program(s):Author(s):Related Topic(s): -
Working Paper No. 935 | August 2019
Evolving International Monetary and Financial Architecture and the Development Challenge
View More View LessA Liquidity Preference Theoretical Perspective
This paper investigates the peculiar macroeconomic policy challenges faced by emerging economies in today’s monetary (non)order and globalized finance. It reviews the evolution of the international monetary and financial architecture against the background of Keynes’s original Bretton Woods vision, highlighting the US dollar’s hegemonic status. Keynes’s liquidity preference theory informs the analysis of the loss of policy space and widespread instabilities in emerging economies that are the consequence of financial hyperglobalization. While any benefits promised by mainstream promoters remain elusive, heightened vulnerabilities have emerged in the aftermath of the global crisis.Download:Associated Program(s):Author(s):Related Topic(s): -
Working Paper No. 916 | October 2018
Seigniorage as Fiscal Revenue in the Aftermath of the Global Financial Crisis
This study investigates the evolution of central bank profits as fiscal revenue (or: seigniorage) before and in the aftermath of the global financial crisis of 2008–9, focusing on a select group of central banks—namely the Bank of England, the United States Federal Reserve System, the Bank of Japan, the Swiss National Bank, the European Central Bank, and the Eurosystem (specifically Deutsche Bundesbank, Banca d’Italia, and Banco de España)—and the impact of experimental monetary policies on central bank profits, profit distributions, and financial buffers, and the outlook for these measures going forward as monetary policies are seeing their gradual “normalization.”
Seigniorage exposes the connections between currency issuance and public finances, and between monetary and fiscal policies. Central banks’ financial independence rests on seigniorage, and in normal times seigniorage largely derives from the note issue supplemented by “own” resources. Essentially, the central bank’s income-earning assets represent fiscal wealth, a national treasure hoard that supports its central banking functionality. This analysis sheds new light on the interdependencies between monetary and fiscal policies.
Just as the size and composition of central bank balance sheets experienced huge changes in the context of experimental monetary policies, this study’s findings also indicate significant changes regarding central banks’ profits, profit distributions, and financial buffers in the aftermath of the crisis, with considerable cross-country variation.Download:Associated Program:Author(s):Related Topic(s): -
Working Paper No. 911 | August 2018This paper reviews the performance of the euro area since the euro’s launch 20 years ago. It argues that the euro crisis has exposed existential flaws in the euro regime. Intra-area divergences and the corresponding buildup of imbalances had remained unchecked prior to the crisis. As those imbalances eventually imploded, member states were found to be extremely vulnerable to systemic banking problems and abruptly deteriorating public finances. Debt legacies and high unemployment continue to plague euro crisis countries. Its huge current account surplus highlights that the euro currency union, toiling under the German euro and trying to emulate the German model, has become very vulnerable to global developments. The euro regime is flawed and dysfunctional. Europe has to overcome the German euro. Three reforms are essential to turn the euro into a viable European currency. First, divergences in competitiveness positions must be prevented in future. Second, market integration must go hand in hand with policy integration. Third, the euro is lacking a safe footing for as long as the ECB is missing a federal treasury partner. Therefore, establishing the vital treasury–central bank axis that stands at the center of power in sovereign states is essential.Download:Associated Program(s):Author(s):Related Topic(s):
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Working Paper No. 886 | March 2017
This paper investigates the (lack of any lasting) impact of John Maynard Keynes’s General Theory on economic policymaking in Germany. The analysis highlights the interplay between economic history and the history of ideas in shaping policymaking in postwar (West) Germany. The paper argues that Germany learned the wrong lessons from its own history and misread the true sources of its postwar success. Monetary mythology and the Bundesbank, with its distinctive anti-inflationary bias, feature prominently in this collective odyssey. The analysis shows that the crisis of the euro today is largely the consequence of Germany’s peculiar anti-Keynesianism.
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Working Paper No. 868 | June 2016
The ECB’s Belated Conversion?
This paper investigates the European Central Bank’s (ECB) monetary policies. It identifies an antigrowth bias in the bank’s monetary policy approach: the ECB is quick to hike, but slow to ease. Similarly, while other players and institutional deficiencies share responsibility for the euro’s failure, the bank has generally done “too little, too late” with regard to managing the euro crisis, preventing protracted stagnation, and containing deflation threats. The bank remains attached to the euro area’s official competitive wage–repression strategy, which is in conflict with the ECB’s price stability mandate and undermines its more recent, unconventional monetary policy initiatives designed to restore price stability. The ECB needs a “Euro Treasury” partner to overcome the euro regime’s most serious flaw: the divorce between central bank and treasury institutions.
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Working Paper No. 845 | September 2015
Assessing the ECB’s Crisis Management Performance and Potential for Crisis Resolution
This study assesses the European Central Bank’s (ECB) crisis management performance and potential for crisis resolution. The study investigates the institutional and functional constraints that delineate the ECB’s scope for policy action under crisis conditions, and how the bank has actually used its leeway since 2007—or might do so in the future. The study finds that the ECB may well stand out positively when compared to other important euro-area or national authorities involved in managing the euro crisis, but that in general the bank did “too little, too late” to prevent the euro area from slipping into recession and protracted stagnation. The study also finds that expectations regarding the ECB’s latest policy initiatives may be excessively optimistic, and that proposals featuring the central bank as the euro’s savior through even more radical employment of its balance sheet are misplaced hopes. Ultimately, the euro’s travails can only be ended and the euro crisis resolved by shifting the emphasis toward fiscal policy; specifically, by partnering the ECB with a “Euro Treasury” that would serve as a vehicle for the central funding of public investment through the issuance of common Euro Treasury debt securities.Download:Associated Program(s):Author(s):Related Topic(s): -
Working Paper No. 842 | July 2015
The Euro Treasury Plan
The euro crisis remains unresolved and the euro currency union incomplete and extraordinarily vulnerable. The euro regime’s essential flaw and ultimate source of vulnerability is the decoupling of central bank and treasury institutions in the euro currency union. We propose a “Euro Treasury” scheme to properly fix the regime and resolve the euro crisis. This scheme would establish a rudimentary fiscal union that is not a transfer union. The core idea is to create a Euro Treasury as a vehicle to pool future eurozone public investment spending and to have it funded by proper eurozone treasury securities. The Euro Treasury could fulfill a number of additional purposes while operating mainly on the basis of a strict rule. The plan would also provide a much-needed fiscal boost to recovery and foster a more benign intra-area rebalancing.
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In the Media | June 2015
Jörg Bibow
The Conversation, June 10, 2015. All Rights Reserved.
It was never going to be easy. That much was known from the outset.
Greece’s newly elected government and the country’s creditors started from too far apart to quickly settle on anything that would be easily sellable to their respective constituencies....
Read more: https://theconversation.com/time-to-end-europes-disgrace-of-holding-greek-people-hostage-42939
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Public Policy Brief No. 135 | August 2014Contrary to German chancellor Angela Merkel’s recent claim, the euro crisis is not nearly over but remains unresolved, leaving the eurozone extraordinarily vulnerable to renewed stresses. In fact, as the reforms agreed to so far have failed to turn the flawed and dysfunctional euro regime into a viable one, the current calm in financial markets is deceiving, and unlikely to last.The euro regime’s essential flaw and ultimate source of vulnerability is the decoupling of central bank and treasury institutions in the euro currency union. In this public policy brief, Research Associate Jörg Bibow proposes a Euro Treasury scheme to properly fix the regime and resolve the euro crisis. The Euro Treasury would establish the treasury–central bank axis of power that exists at the center of control in sovereign states. Since the eurozone is not actually a sovereign state, the proposed treasury is specifically designed not to be a transfer union; no mutualization of existing national public debts is involved either. The Euro Treasury would be the means to pool future eurozone public investment spending, funded by proper eurozone treasury securities, and benefits and contributions would be shared across the currency union based on members’ GDP shares. The Euro Treasury would not only heal the euro’s potentially fatal birth defects but also provide the needed stimulus to end the crisis in the eurozone.Download:Associated Program:Author(s):Related Topic(s):
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Working Paper No. 780 | November 2013
The Euro Needs a Euro Treasury
The euro crisis remains unresolved even as financial markets may seem calm for now. The current euro regime is inherently flawed, and recent reforms have failed to turn this dysfunctional regime into a viable one. Our investigation is informed by the “cartalist” critique of traditional “optimum currency area” theory (Goodhart 1998). Various proposals to rescue the euro are assessed and found lacking. A “Euro Treasury” scheme operating on a strict rule and specifically designed not to be a transfer union is proposed here as a condition sine qua non for healing the euro’s potentially fatal birth defects. The Euro Treasury proposed here is the missing element that will mend the current fiscal regime, which is unworkable without it. The proposed scheme would end the currently unfolding euro calamity by switching policy from a public thrift campaign that can only impoverish Europe to a public investment campaign designed to secure Europe’s future. No mutualization of existing national public debts is involved. Instead, the Euro Treasury is established as a means to pool eurozone public investment spending and have it funded by proper eurozone treasury securities.
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In the Media | November 2013
By Jörg Bibow
Investors Chronicle, November 4, 2013. All Rights Reserved.In this sense, low inflation in the euro area isn’t merely a problem in itself, but is a symptom of a deeper structural malaise.
The news that euro area inflation fell to a four-year low of 0.7 per cent last month raises a paradox.
On the one hand, it’s widely agreed that such a rate is, as Societe Generale’s Michala Marcussen says, “uncomfortably low”. This is because it poses the risk of deflation - falling prices. And this could be a big problem. It would tighten monetary policy because falling prices mean a higher real interest rate. And if consumers expect deflation to last, they might postpone spending in the hope of picking up bargains later, and in doing so kill off the fragile recovery. Many economists therefore expect the ECB to react by cutting interest rates, possibly as soon as this week.
However, for the most stricken countries in the euro area, deflation is supposed to be a solution, not a problem. The reason for this is simple. The euro area’s crisis was due in large part to current account imbalances within the region, with the south borrowing heavily from the north. These occurred because southern economies lost price competitiveness against the north and so sucked in imports whilst exports faltered. For example, between 2000 and 2010 Germany’s relative unit labour costs fell by 11.7 per cent, whilst Portugal’s rose by 9.2 per cent and Greece’s by 22.5 per cent. As Jorg Bibow of New York’s Levy Economics Institute put it: “At the heart of today’s euro debt crisis is an intra-area balance of payments crisis caused by seriously unbalanced intra-area competitiveness positions.”
The official solution to these imbalances is for the south to cut wages relative to the north to restore competitiveness. The IMF is calling on Portugal to “reduce production costs” and Greece to use “wage adjustment” (a euphemism for cuts) to close the “competitiveness gap” with Germany. And – thanks to mass unemployment - they are doing just this. David Owen at Jefferies Fixed Income points out that hourly labour costs are falling in Greece and Portugal. And falling wages mean falling prices. In September, Greek consumer price inflation was minus one per cent, Portugal’s was 0.3 per cent and Spain’s 0.5 per cent.
This poses the question. How can deflation be a danger for the euro area as a whole, when it is supposed to be a solution for the south?
One could argue that the export and import sectors are a bigger fraction of GDP in individual countries than they are for the eurozone as a whole, and so improved competitiveness would do more to boost growth in Greece or Portugal than it would for the euro area as a whole. And one might add that investment is more sensitive to costs within the eurozone than it is between the eurozone and rest of the world, and so improved competitiveness would do more to attract inward investment into Greece or Portugal than it would into the euro area.
These, though, aren’t the whole story. As I argue elsewhere, it’s not at all certain that falling wages will be sufficient to turn around Greece and Portugal.
Instead, this paradox highlights a flaw within the euro area - that it contains a bias towards unemployment and deflation. In theory, Greek and Portuguese competitiveness could be improved not just by wage cuts there but by inflation (and higher demand) in the north. But this isn’t happening. Yes, German wages are rising. But only slowly. And it is still running a big external surplus which is, as the US Treasury recently said, creating “a deflationary bias for the euro area.” -
Working Paper No. 767 | June 2013
The Making of a Vulnerable Haven
This paper investigates Germany’s vulnerability to the ongoing Euroland crisis. In 2010–11, Germany experienced a strong rebound from the global financial crisis of 2008–09. The Euroland crisis then meant record low interest rates and a depressed euro that boosted German extra-area exports. But the crisis that started in Euroland’s so-called periphery has meanwhile reached the core. With pro-euro sentiments dwindling fast across the European Union (EU), the future of the euro remains uncertain no matter what European Central Bank President Mario Draghi may promise. Germany’s “safe haven” status may turn out to be a double-edged sword. In case of a euro breakup, swift appreciation of the new deutschmark would abruptly worsen German competitiveness and the German economy would crater as a result. Additional wealth losses on Germany’s international investment position would also loom. Appreciating Germany’s own vulnerability to the euro crisis should help the German authorities to understand that their policy prescriptions are anything but in Germany’s own best interest, which is also good for the authorities in euro partner countries to recognize. Germany is bound to catch up with the reality that it is very vulnerable to the enormous wreckage and unnecessary hardship German-style policies are causing across Europe. The EU, most likely under French leadership, will have to convince Germany to embark on a fundamental policy course change, or else call an ugly end to the euro disaster.
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Working Paper No. 762 | April 2013
Highlighting that France and Germany held largely contradicting hopes and aspirations for Europe’s common currency, this paper analyzes how the resulting euro contradiction conditioned the ongoing euro crisis as well as current strategies to resolve it. While Germany generally prevailed in hammering out the design of the euro policy regime, the German authorities have failed to see the inconsistency in their policy endeavors: the creation of a model whose workability presupposes that others behave differently cannot be made to work by forcing everyone to behave like Germany. This fundamental misunderstanding has made Germany the main culprit in the euro crisis, but it has yet to face the full consequences of its actions. Germany had sought every protection against the much-dreaded euro “transfer union,” but its own conduct has made that very outcome inevitable. Conversely, having been disappointed in its own hopes for the euro, France is now facing the prospect of a lost generation—a prospect, shared with other debtor nations in the union, that has undermined the Franco-German alliance and may soon turn it into the ultimate euro battleground.
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Working Paper No. 738 | November 2012
Research Associate Jörg Bibow investigates the role of the European Central Bank (ECB) in the (mal)functioning of Europe’s Economic and Monetary Union (EMU), focusing on the German intellectual and historical traditions behind the euro policy regime and its central bank guardian. His analysis contrasts Keynes’s chartalist conception of money and central banking with the postwar traditions nourished by the Bundesbank and based on a fear of fiscal dominance. Keynes viewed the central bank as an instrument of the state, controlling the financial system and wider economy but ultimately an integral part of, and controlled by, the state. By contrast, the “Maastricht (EMU) regime” (of German design) positions the central bank as controlling the state. Essentially, Bibow observes, the national success of the Bundesbank model in pre-EMU times has left Europe stuck with a policy regime that is wholly unsuitable for the area as a whole. But regime reform is complicated by severely unbalanced competitiveness positions and debt overhang legacies. Refocusing the ECB on growth and price stability would have to be a part of any solution, as would refocusing area-wide fiscal policy on growth and investment.
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Working Paper No. 721 | May 2012
This paper investigates the causes behind the euro debt crisis, particularly Germany’s role in it. It is argued that the crisis is not primarily a “sovereign debt crisis” but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage deflation on Germany’s part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all —perpetual export surpluses, a no transfer / no bailout monetary union, and a “clean,” independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro’s survival. The crisis in Euroland poses a global “too big to fail” threat, and presents a moral hazard of perhaps unprecedented scale to the global community.
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Working Paper No. 683 | September 2011
Permanent and Selective Capital Account Management Regimes as an Alternative to Self-Insurance Strategies in Emerging-market Economies
View More View LessCurrency market intervention–cum–reserve accumulation has emerged as the favored “self-insurance” strategy in recipient countries of excessive private capital inflows. This paper argues that capital account management represents a less costly alternative line of defense deserving renewed consideration, especially in the absence of fundamental reform of the global monetary and financial order. Mainstream arguments in favor of financial globalization are found unconvincing; any indirect benefits allegedly obtainable through hot money inflows are equally obtainable without actually tolerating such inflows. The paper investigates the experiences of Brazil, Russia, India, and China (the BRICs) in the global crisis and subsequent recovery, focusing on their respective policies regarding capital flows.
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Working Paper No. 660 | March 2011
This paper provides a brief exposition of financial markets in Post Keynesian economics. Inspired by John Maynard Keynes’s path-breaking insights into the role of liquidity and finance in “monetary production economies,” Post Keynesian economics offers a refreshing alternative to mainstream (mis)conceptions in this area. We highlight the importance of liquidity—as provided by the financial system—to the proper functioning of real world economies under fundamental uncertainty, contrasting starkly with the fictitious modeling world of neo-Walrasian exchange economies. The mainstream vision of well-behaved financial markets, channeling saving flows from savers to investors while anchored by fundamentals, complements a notion of money as an arbitrary numéraire and mere convenience, facilitating exchange but otherwise “neutral.” From a Post Keynesian perspective, money and finance are nonneutral but condition and shape real economic performance. It takes public policy to anchor asset prices and secure financial stability, with the central bank as the key public policy tool.
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Working Paper No. 625 | October 2010
A Dubious Success Story in Monetary Economics
This paper critically assesses the rise of central bank independence (CBI) as an apparent success story in modern monetary economics. As to the observed rise in CBI since the late 1980s, we single out the role of peculiar German traditions in spreading CBI across continental Europe, while its global spread may be largely attributable to the rise of neoliberalism. As to the empirical evidence alleged to support CBI, we are struck by the nonexistence of any compelling evidence for such a case. The theoretical support for CBI ostensibly provided by modeling exercises on the so-called time-inconsistency problem in monetary policy is found equally wanting. Ironically, New Classical modelers promoting the idea of maximum CBI unwittingly reinstalled a (New Classical) “benevolent dictator” fiction in disguise. Post Keynesian critiques of CBI focus on the money neutrality postulate as well as potential conflicts between CBI and fundamental democratic values. John Maynard Keynes’s own contributions on the issue of CBI are found worth revisiting.
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Working Paper No. 617 | September 2010
The Risk of Unraveling the Global Rebalancing
This paper investigates China’s role in creating global imbalances, and the related call for a massive renminbi revaluation as a (supposed) panacea to forestall their reemergence as the world economy recovers from severe crisis. We reject the prominence widely attributed to China as a cause of global imbalances and the exclusive focus on the renminbi-dollar exchange rate as misguided. And we emphasize that China's response to the global crisis has been exemplary. Apart from acting as a growth leader in the global recovery by boosting domestic demand to offset the slump in exports, China has in the process successfully completed the first stage in rebalancing its economy, which is in stark contrast to other leading trading nations that have simply resumed previous policy patterns. The second stage in China’s rebalancing will consist of further strengthening private consumption. We argue that this will be best supported by continued reliance on renminbi stability and capital account management, so as to assure that macroeconomic policies can be framed in line with domestic development requirements.
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Working Paper No. 597 | May 2010This paper sets out to investigate the forces and conditions that led to the emergence of global imbalances preceding the worldwide crisis of 2007–09, and both the likelihood and the potential sustainability of reemerging global imbalances as the world economy recovers from that crisis. The “Bretton Woods 2” hypothesis of sustainable global imbalances featuring a quasi-permanent US current account deficit overlooked that the domestic counterpart to the United States’ external deficit—soaring household indebtedness—was based not on safe debts but rather toxic ones. We critique the “global saving glut” hypothesis, and propose the “global dollar glut” hypothesis in its stead. With the US private sector in retrenchment mode, the question arises whether fiscal expansion might not only succeed in filling the gap in US domestic demand but also restart global arrangements along BW2 lines, albeit this time based on public debt—call it “Bretton Woods 3.” This paper explores the chances of a BW3 regime, highlighting the role of “dollar leveraging” in sustaining US trade deficits. Longer-term prospects for a postdollar standard are discussed in the light of John Maynard Keynes’s “bancor” plan.Download:Associated Program(s):Author(s):Related Topic(s):
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Working Paper No. 591 | March 2010
Global Imbalances, the US Dollar, and How the Crisis at the Core of Global Finance Spread to “Self-Insuring” Emerging Market Economies
View More View LessThis paper investigates the spread of what started as a crisis at the core of the global financial system to emerging economies. While emerging economies had exhibited some resilience through the early stages of the financial turmoil that began in the summer of 2007, they have been hit hard since mid-2008. Their deteriorating fortunes are only partly attributable to the collapse in world trade and sharp drop in commodity prices. Things were made worse by emerging markets’ exposure to the turmoil in global finance itself. As “innocent bystanders,” even countries that had taken out “self-insurance” proved vulnerable to the global “sudden stop” in capital flows. We critique loanable funds theoretical interpretations of global imbalances and offer an alternative explanation that emphasizes the special status of the US dollar. Instead of taking out even more self-insurance, developing countries should pursue capital account management to enlarge their policy space and reduce external vulnerabilities.
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Working Paper No. 584 | February 2010
This paper investigates the United States dollar’s role as the international currency of choice as a key contributing factor in critical global developments that led to the crisis of 2007–09, and considers the future role of the dollar as the global economy emerges from that crisis. It is argued that the dollar is likely to retain its hegemonic status for a few more decades, but that United States spending powered by public rather than private debt would provide a more sustainable motor for global growth. In the process, the “Bretton Woods II” regime depicted by Dooley, Folkerts-Landau, and Garber (2003) as sustainable despite featuring persistent US current account deficits may turn into a “Bretton Woods III” regime that sees US fiscal policy and public debt as “minding the store” in maintaining US and global growth.
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Working Paper No. 583 | November 2009
The Fiction and Reality of the 10th Anniversary Blast
This paper investigates why Europe fared particularly poorly in the global economic crisis that began in August 2007. It questions the self-portrait of Europe as the victim of external shocks, pushed off track by reckless policies pursued elsewhere. It argues instead that Europe had not only contributed handsomely to the buildup of global imbalances since the 1990s and experienced their implosive unwinding as an internal crisis from the beginning, but that it had also nourished its own homemade intra-Euroland and intra-EU imbalances, the simultaneous implosion of which has further aggravated Europe's predicament. To keep its own house in order in the future, Euroland must shun the outdated “stability oriented” policy wisdom inherited from Germany’s mercantilist past and Bundesbank mythology. Steps toward a fiscal union to back the euro are also warranted.
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Working Paper No. 553 | December 2008
Is It Worth the Premium? What Are the Alternatives?
Following an analysis of the forces behind the “global capital flows paradox” observed in the era of advancing financial globalization, this paper sets out to investigate the opportunity costs of self-insurance through precautionary reserve holdings. We reject the idea of reserves as low-cost protection against the vagaries of global finance. We also deny that arrangements giving rise to their rapid accumulation might be sustainable in the first place. Alternative policy options open to developing countries are explored, designed to limit both the risks of financial globalization and the costs of insurance-type responses. We propose comprehensive capital account management as an alternative to full capital account liberalization. The aims of a permanent regulatory regime of capital controls, with respect to both the aggregate size and the composition of capital flows, are twofold: first, to maintain sufficient macro policy space; second, to assure a good micro fit of external expertise incorporated in foreign direct investment as part of a country’s development strategy.
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Working Paper No. 531 | April 2008
This paper sets out to investigate the forces behind the so-called “global capital flows paradox” and related “dollar glut” observed in the era of advancing financial globalization. The supposed paradox is that the developing world has increasingly come to pursue policies that result in current account surpluses and thus net capital exports—destined primarily for the capital-rich United States. The hypothesis put forward here is that systemic deficiencies in the international monetary and financial order have been the root cause behind today’s situation. Furthermore, it is argued that the United States’ position as issuer of the world’s premiere reserve currency and supremacy in global finance explain the related conundrum of a positive investment income balance despite a negative international investment position. The assessment is carried out in light of John Maynard Keynes’s views on a sound international monetary and financial order.
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Working Paper No. 486 | December 2006
Approaching the issue of mounting global imbalances from the perspective of the "Bretton Woods II hypothesis," this paper argues that the popular preoccupation with China's supposed export-led development strategy is misplaced. It also suggests, similar to Japan's depression, subdued growth in Euroland for most of the time since the Maastricht Treaty has been of first-order importance in these developments. Germany is identified as being at the heart of the European trouble. Globally, there is an ongoing clash between two approches to macroeconomic policy making: a highly dogmatic German approach, and a very pragmatic Anglo-Saxon one. The low levels of interest at which global demand imbalances have been smoothed out financially reflect deficient global demand in an environment of vast supply-side opportunities. After contributing greatly to the build-up of imbalances, Euroland is unlikely to play any constructive part in their unwinding. Hampered by an exchange-rate policy vacuum, a small-country mindset, and soaring intra-area imbalances, Euroland is also illpositioned to cope with fading external growth stimuli.
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Working Paper No. 460 | July 2006
This paper investigates the phenomenon of persistent macroeconomic divergence that has occurred across the eurozone in recent years. Optimal currency area theory would point toward asymmetric shocks and structural factors as the foremost candidate causes. The alternative hypothesis pursued here focuses on the working of the Maastricht regime itself, making it clear that the regime features powerful built-in destabilizers that foster divergence as well as fragility. Supposed adjustment mechanisms actually have turned out to undermine the operation of the currency union by making it less "optimal," that is, less subject to a "one-size-fits-all" monetary policy and common nominal exchange rate, in view of the resulting business cycle desynchronization and related build-up of financial imbalances. The threats of fragility and divergence reinforce each other. Without regime reform these developments could potentially spiral out of control, threatening the long-term survival of EMU.
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Working Paper No. 429 | November 2005
The ECB's Record
This paper assesses the contribution of the European Central Bank (ECB) to Germany’s ongoing economic crisis, a vicious circle of decline in which the country has become stuck since the early 1990s. It is argued that the ECB continues the Bundesbank tradition of asymmetric policymaking: the bank is quick to hike, but slow to ease. It thereby acts as a brake on growth. This approach has worked for the Bundesbank in the past because other banks behaved differently. Exporting the Bundesbank “success story” to Euroland has undermined its working, however; given its sheer size, Euroland simply cannot freeload on external stimuli forever. While Euroland cannot do without proper demand management, the Maastricht regime and especially the ECB are firmly geared against it. The ECB’s monetary policies have been biased against growth and have thus proved bad for Euroland as a whole. Meanwhile, the German disease of protracted domestic demand weakness has spread across much of Euroland. Yet, by pursuing its peculiar traditions of wage restraint and procyclical public thrift, the ECB’s policies have had even worse results for Germany. Fragility and divergence undermine the euro’s long-term survival.
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Working Paper No. 428 | August 2005
Central Banking Gone Astray
This paper provides an overview of central banking arrangements in those European countries that have adopted the euro. Issues addressed include the structure of the “Eurosystem” and its central banking functions, the kind of independence granted to the system and the role of monetary policy that central bankers have adopted for themselves, the “two-pillar policy framework,” operating procedures, and actual performance since the euro’s launch in 1999. The analysis concludes that, given the current macroeconomic policy regime, trends, and practices, the euro is on track for failure.
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Working Paper No. 427 | August 2005
To Ditch or to Build on It?
This paper revisits Keynes’s liquidity preference theory as it evolved from the Treatise on Money to The General Theory and after, with a view of assessing the theory’s ongoing relevance and applicability to issues of both monetary theory and policy. Contrary to the neoclassical “special case” interpretation, Keynes considered his liquidity preference theory of interest as a replacement for flawed saving or loanable funds theories of interest emphasizing the real forces of productivity and thrift. His point was that it is money, not saving, which is the necessary prerequisite for economic activity in monetary production economies. Accordingly, turning neoclassical wisdom on its head, it is the terms of finance as determined within the financial system that “rule the roost” to which the real economy must adapt itself. The key practical matter is how deliberate monetary control can be applied to attain acceptable real performance. In this regard, it is argued that Keynes’s analysis offers insights into practical issues, such as policy credibility and expectations management, that reach well beyond both heterodox endogenous money approaches and modern Wicksellian orthodoxy, which remains trapped in the illusion of money neutrality.
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Working Paper No. 425 | July 2005
Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?
View More View LessChallenging the conventional wisdom that structural problems are to blame for the euro area’s protracted domestic demand stagnation, this paper sets out to shed some fresh light on the role of the ECB in the ongoing EMU crisis. Contrary to the widely held interpretation of the ECB as an inflation targeter—and a rather soft one, too—it is argued that the key characteristic of the ECB is the pronounced asymmetry in its policy approach and mindset. Curiously, this asymmetry has not only given rise to an antigrowth bias, but to upward price pressures and distortions as well. There is a link between stagnation and inflation persistence that owes to the ECB’s failure to internalize the euro area’s fiscal regime. This raises the question as to whether inflation targeting would have led to better results, or could do so in future.
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Working Paper No. 409 | July 2004
A Structural Policy Bias Coming Home to Roost?
This paper assesses the ECB's performance, which the author finds to be seriously lacking but which is of paramount importance to understanding euroland's ongoing stagnation and fragility. A main finding is that the series of policy blunders which characterized the bank's conduct features a bias. Institutions as well as personalities appear to be behind the bank's tendency to err systematically in one direction. Curiously, this bias is adverse not only to growth, but to price stability. The author shows that viewing the ECB through inflation-targeting lenses is very misleading, since that view does not reflect the bank's perspective at all, and that standard Taylor rule exercises are superfluous. The ECB's words and deeds may be far more consistent than is widely held, without making them any less detrimental to economic performance.
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Working Paper No. 406 | May 2004
Investigating the Intellectual Origins of Euroland's Macroeconomic Policy Regime
View More View LessCentral Banking Institutions and Traditions in West Germany after the War
This paper investigates the (re-)establishment of central banking in West Germany after 1945 and the history of the Bundesbank Act of 1957. The main focus is on the early emphasis on the "independence" of the central bank, which, together with a "stability-orientation" in monetary policy, proved a lasting German peculiarity. The paper inquires whether contemporary German economic thought may have provided a theoretical case for this peculiar tradition and scrutinizes the political calculus that motivated some key actors in the play. Contrary to a widespread presumption, Ordoliberalism--the dominant contemporary force within the German economics profession widely held to have shaped the new economic order of West Germany called "Soziale Marktwirtschaft" (social market economy)--is found to have had no such impact on the country's emerging monetary order at all. In fact, important contradictions between the postulate of central bank independence and some key ideas underlying Ordoliberalism will be identified. Nor can an alternative (more Keynesian) policy regime and and its model of central bank independence that was developed in the mid 1950s by the Economic Advisory Council of Ludwig Erhard, West Germany's famous first economics minister, claim any credit for the eventual legal status of the central bank that became enshrined in the Bundesbank Act of 1957; that policy regime subsequently remained untouched despite the (Keynesian) Stability and Growth Act of 1967. It appears that, while contemporary economic theory had no decisive influence on the outcome, the central bank's role as a political actor in its own right and in carving public opinion should not be underestimated in explaining a peculiar German tradition that was finally exported to Europe in the 1990s.
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Working Paper No. 400 | January 2004
Contrasting Strategies & Lessons from International Experiences
This paper analyzes the issues of public finance sustainability and suitability of strategies aimed at fiscal consolidation. Contrasting growth-based versus thrift-based consolidation strategies, it is argued that in the light of theory only the former promises success in large economies. Empirically, this study investigates the experiences with consolidation over the 1990s in the US, Japan, and the eurozone while scrutinizing disparities in economic performance and consolidation within Europe. It is argued that experiences of individual European Union (EU) member states may not be applicable to the eurozone as a whole and that the US may provide the only relevant example for guiding policymaking in the EMU. The US example features cooperative macroeconomic policies geared at steering domestic demand growth, with sustainable public finances as a consequence of their success. By contrast, the Maastricht regime features a counterproductive mix of thrift-based consolidation and inflation-obsessed monetary policy--ultimately a recipe for disaster. Reforms should focus on securing cooperation and proper growth orientation in macroeconomic policymaking, with discipline being imposed in a more balanced way on both finance ministers and central bankers.
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Policy Note 2003/4 | August 2003
Germany’s fiscal crisis cannot be attributed to unification per se; it arose as a consequence of ill-guided macroeconomic policies pursued in response to that event. Many structural problems that popped up along the way were mere symptoms of persistent macroeconomic mismanagement and protracted stagnation. Since Germany provided the blueprint for Europe's stability-oriented macroeconomic policy regime, the risk is that the “German disease” is spreading throughout the regime and, potentially, beyond Europe.
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Working Paper No. 379 | May 2003
An Analysis of the Current Crisis and Recommendations for Reforming Macroeconomic Policymaking in Euroland
This paper challenges the view that external shocks caused Euroland's 2001 slowdown and subsequent stagnation. Instead, the design of Euroland's macro policymaking arrangements is found lacking in looking after sufficient domestic demand growth. In the event the ECB has failed on its stabilization role--a rather vital role given that fiscal policy is severely constrained by the Stability and Growth Pact. As a result, Europe is in a precarious situation of stagnation today, and under the current regime there is even a risk of self-reinforcing destabilization. Hence, reforming the regime is urgent. A nominal GDP target to be pursued by fiscal and monetary policies in cooperation would provide Europe with the growth anchor that is currently missing.
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Working Paper No. 347 | June 2002
An Investigation into the Keynesian Roots of Milton Friedman's Monetary Thought and Its Apparent Monetarist Legacies
It is widely perceived that today's conventional monetary wisdom, and the common practice of monetary policy based thereupon, is essentially "monetarist" by nature, if not by name. One objective of this paper is to assess whether monetarism has had a lasting effect on the theory and practice of monetary policy; another is to scrutinize the key dividing lines between Milton Friedman's monetary thought and that of John Maynard Keynes. Among the paper's main theoretical findings are that the key issue is the theory of interest, which is at the root of differences in approach to money demand and liquidity preference. Similarities are more pronounced with respect to the supply of money and monetary policy control issues. However, while Keynes favored a stabilized wage unit combined with a flexible central bank to steer interest rates and aggregate demand, Friedman advocated a stabilized central bank combined with a free interest rate and employment determination in financial and labor markets, respectively. Additional differences arise at the practical and empirical levels: the dynamics of adjustment processes and expectation formation on the one hand, and the relative efficiency and riskiness of market-driven versus government-guided adjustments on the other. The puzzling fact is that, despite today's dominant market-enthusiast ideology, Friedman's idea of delegation—not to independent central bankers, but to the markets—enjoys remarkably little popularity.
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Public Policy Brief Highlights No. 67A | November 2001
The Impact of Misguided Macroeconomic Policies
Although the costs associated with moving an antiquated socialist economy toward its capitalist counterpart was anticipated to be significant, German industrial efficiency was expected to quickly overcome any challenges. Things turned out rather differently. Conventional wisdom blamed poor economic performance on unification. The government and the Bundesbank therefore put in place fiscal and monetary policies aimed at reducing borrowing and, in turn, containing the threat of inflation. The positive results (albeit in five years) supported this perception. The author of this brief, however, takes exception to the notion that these policies were effective in stabilizing the economy. His analysis shows that the country’s poor economic performance dramatically dampened economic activity and led to an extended period of sluggish growth. Blame for anemic growth and high unemployment, he believes, should be placed squarely on the country’s finance department and central bank rather than on unification.Download:Associated Program:Author(s): -
Public Policy Brief No. 67 | November 2001
The Impact of Misguided Macroeconomic Policies
Although the costs associated with moving an antiquated socialist economy toward its capitalist counterpart was anticipated to be significant, German industrial efficiency was expected to quickly overcome any challenges. Things turned out rather differently. Conventional wisdom blamed poor economic performance on unification. The government and the Bundesbank therefore put in place fiscal and monetary policies aimed at reducing borrowing and, in turn, containing the threat of inflation. The positive results (albeit in five years) supported this perception. The author of this brief, however, takes exception to the notion that these policies were effective in stabilizing the economy. His analysis shows that the country’s poor economic performance dramatically dampened economic activity and led to an extended period of sluggish growth. Blame for anemic growth and high unemployment, he believes, should be placed squarely on the country’s finance department and central bank rather than on unification.
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Working Paper No. 339 | October 2001
This paper addresses the problem of the conceptualization of social structure and its relationship to human agency in economic sociology. The background is provided by John Maynard Keynes's observations on the effects of uncertainty and conventional behavior on the stock market; the analysis consists of a comparison of the social ontologies of the French Intersubjectivist School and the Economics as Social Theory Project in the light of these observations. The theoretical argument is followed by concrete examples drawn from a prominent recent study of the stock market boom of the 1990s.
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Working Paper No. 338 | September 2001
The Monetary Policies of the European Central Bank and the Euro's (Mal)performance
View More View LessA Stability-oriented Assessment
The stability-oriented macroeconomic framework established in the Maastricht and Amsterdam Treaties on European Union (TEU), especially the unparalleled status of independence and peculiar mandate of the European Central Bank (ECB), were promised to virtually guarantee price stability and a "strong" euro. Actual developments have shattered these hopes in a rather drastic way. Despite the dismal monetary developments, conventional wisdom holds that neither the Maastricht regime nor the ECB might possibly be at fault. Yet, the euro's performance over 2000–01 is generally seen as a puzzle. This paper assesses the ECB's role in relation to the euro's (mal-) performance, explores the institutional setting and traditions behind the ECB's conduct, and scrutinizes the rationale that inspired its interest rate policies.
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Public Policy Brief Highlights No. 65A | August 2001
The Markets vs. the ECB
This brief assesses the experiences of Europe’s policy regime in the two years since the introduction of the euro in 1999, particularly the performance of the European Central Bank (ECB), the institution in charge of conducting monetary policy for the euro area. Conventional accounts of European growth, price, and labor market performance over recent years focus on labor market institutions and wage trends. By contrast, the interpretation offered here assigns a key role to demand-side factors as the driving force behind the recovery in output and employment growth. It is argued that the euro's plunge essentially resumed the trend of deutsche mark weakness that had started in 1996 and that currency depreciation amounted to a significant easing of monetary conditions.Download:Associated Program:Author(s): -
Public Policy Brief No. 65 | August 2001
The Markets vs. the ECB
This brief assesses the experiences of Europe’s policy regime in the two years since the introduction of the euro in 1999, particularly the performance of the European Central Bank (ECB), the institution in charge of conducting monetary policy for the euro area. Conventional accounts of European growth, price, and labor market performance over recent years focus on labor market institutions and wage trends. By contrast, the interpretation offered here assigns a key role to demand-side factors as the driving force behind the recovery in output and employment growth. It is argued that the euro's plunge essentially resumed the trend of deutsche mark weakness that had started in 1996 and that currency depreciation amounted to a significant easing of monetary conditions.
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Working Paper No. 334 | July 2001
This paper challenges the time-inconsistency case for central bank independence. It argues that the time-inconsistency literature not only seriously confuses the substance of the rules versus discretion debate, but also posits an implausible view of monetary policy. Most worrisome, the inflationary bias featured prominently in the time-inconsistency literature has encouraged the development of a dangerously one-sided approach to central bank independence that entirely ignores the potential risks involved in maximizing central bankers' latitude for discretion. The analysis shows that a more balanced and symmetric approach to central bank independence is urgently warranted. The views of John Maynard Keynes and Milton Friedman are shown to shed some illuminating and disconcerting light on a fashionable free-lunch promise that is based on rather shallow theoretical foundations.
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Working Paper No. 328 | May 2001
The Economic Consequences of Messrs. Waigel and Tietmeyer
This paper investigates the causes of western Germany's remarkably poor performance since 1992. The paper challenges the view that the poor record of the nineties, particularly the marked deterioration in public finances since unification, might be largely attributable to unification. Instead, the analysis highlights the role of ill-timed and overly ambitious fiscal consolidation in conjunction with tight monetary policies of an exceptional length and degree. The issue of fiscal sustainability and Germany's fiscal and monetary policies are assessed both in the light of economic theory and in comparison to the best practices of other more successful countries. The analysis concludes that Germany's dismal record of the nineties must not be seen as a direct and apparently inevitable result of unification. Rather, the record arose as a perfectly unnecessary consequence of unsound macro demand policies conducted under the Bundesbank's dictate in response to it, policies that caused the severe and protracted de-stabilization of western Germany in the first place.
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Working Paper No. 326 | March 2001
Some Lessons from the 1990s
This paper investigates the lessons learned from Europe's convergence process of the 1990s. The paper challenges the conventional focus on labour market institutions and "structural rigidities" as the root cause of Europe's poor employment record. Instead, it is argued that macroeconomic demand management, particularly monetary policy, played the key role. Concentrating on Germany, the analysis shows that fiscal consolidation was accompanied by monetary tightness of an extraordinary degree and duration. This finding is of interest for the past as well as the future, for the Maastricht regime much resembles the one that produced the unsound policy mix of the 1990s: a constrained fiscal authority paired with an independent monetary authority free to impose its will on the overall outcome. The analysis thus highlights a key asymmetry in the Maastricht regime that is not unlikely to continue to inflict a deflationary bias on the system. It is argued that this policy bias may be overcome only if the ECB deliberately assumes its real role of generating domestic demand-led growth, thereby resolving Euroland's key structural problem: asymmetric monetary policy. Concerning the conventional structuralist theme, the analysis debunks the "Dutch myth" of supply-led growth through structural reform. Depicting a popular fallacy of composition, we stress that the peculiar Dutch strategy of demand-led growth does not present itself as an option for Euroland.
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Working Paper No. 323 | March 2001
The Markets vs. the ECB
This paper assesses the performance of the European Central Bank (ECB) over the first two years of Europe's new policy regime. The verdict is that the ECB was not actually in charge, as the markets took over and imposed easy money on the euro zone. It is argued that the causes for the ECB's loss of effective control over the currency and monetary stance lie partly in the low-growth legacies of unsound macro policies inflicted upon Europe over the 1990s. The ECB made matters worse, though, first by failing to communicate effectively and coherently with financial market participants and, second, by playing against the markets' dominant theme: growth. This resulted in a time-inconsistency problem: attempts to prop up the euro through narrowing the current interest rate spread vis-a-vis the US dollar were perceived as risking the euro zone's growth prospects and hence the sustainability of tighter money in the future. Under such conditions, interest rate hikes might then weaken rather than strengthen the currency. A more balanced and proactive attitude toward growth, and medium-term orientation as regards inflation, might have both reduced inflation in the short run and improved growth in the longer run. The recent short run of impressive GDP and employment growth spurred by easy money embarrasses the structural myth, and underlines that the ECB was not actually in charge.
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