Archive for January, 2013

End of The Tunnel?

January 30, 2013 3 comments

There are signs of optimism around. Cautiously, policy makers and commentators start discussing the shape (and the fragility) of the future recovery.  Martin Wolf on the Financial Times already speculates on the timing of reversal to a normal state of affairs. Wolf is rightly worried by the temptation to reverse policies too fast, a mistake we made already at the end of 2009, when stimulus plans were reversed into consolidation far too soon.

As a rule of thumb, I’d argue that exceptional involvement of governments in the economy should stop when the private sector is ready to take the witness. Stimulus plans and monetary easing should be rolled back once private spending resumes (or is ready to resume), and when the credit market is sufficiently loose. So the question is, how does private sector behaviour fit, within this moderate optimistic mood? Not too well I am afraid… Read More

One Austerity (Should Not) Fit All

January 28, 2013 2 comments

The run up to the Italian elections in February is a welcome occasion to come back to the issue of austerity. The debate in Italy was fired by the widely discussed Wolfgang Munchau editorial, blaming Mario Monti for not opposing austerity. In the heat of electoral competition, this unsurprisingly stirred harsh discussions on whether Italy has room for reversing the austerity that ravaged the country. Some commentators got slightly carried away, accusing those opposing austerity of “silliness and falsehood”. I wonder whether they include the IMF chief economist in the bunch… Whatever, this is a minor issue; the way I see it, these discussions totally miss the point.

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Does Central Bank Independence Need Inflation Targeting?

January 22, 2013 1 comment

Two articles on today’s Financial Times  puzzle me. The first (Weidmann warns of currency war risk) offers yet another example of how economic analysis sometimes leaves the way to ideological beliefs. The Bundesbank’s president argues (as he already did in the past) that giving up inflation targeting hampers central bank independence. How? Why? He does not bother explaining.

What I think he has in mind is that once the objective of the central bank goes beyond strict inflation targeting, monetary policy needs an arbitrage between often conflicting objectives (typically unemployment and inflation). It is the essence of the dual mandate. This of course moves monetary policy out of the realm of technocratic choice, and makes it a political institution (Stephen King explains it nicely). I would argue that this is normal once we abandon the ideal-type of frictionless neoclassical economics, and we accept that we may have a tradeoff between inflation and unemployment.  But this is not the issue here. The issue, and the puzzle, is why transforming the choice from technocratic to political, should necessarily lead to giving up independence. Read more

Austerity and Ideology

January 8, 2013 3 comments

Wolfgang Munchau has another interesting editorial on austerity, in yesterday’s Financial Times. He argues that the US may become the next paying member of the austerity club, thus making the perspective of another lost decade certain.

Munchau’s article could be the n-th plea against austerity, as one can by now read everywhere (except in Berlin or in Brussels; but this is another story). What caught my attention are two paragraphs in particular.

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