Category Archives: monetary policy

Dispatches from the Currency Wars

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The value of the yen has fallen sharply since November, owing to the monetary component of Japan’s efforts to jump-start its economy (“Abenomics”).  Thus the issue of currency wars is expected to feature on the agenda at the G-8’s upcoming summit in Enniskillen, UK, June 17-18.

The phrase “currency wars” is catchy.  But does it have genuine analytical content?   It is another way of saying “competitive devaluation.”  To use the language of IMF Article IV(1) iii, it is what happens when countries are “manipulating exchange rates…to gain an unfair competitive advantage over other members…” To use the language of the 1930s, this manipulation would be a kind of beggar-thy-neighbor policy, with each country seeking to shift net exports toward its own goods at the expense of its neighbors. read more

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Nominal GDP Targeting is Left, Right?

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The recent surge in interest in Nominal GDP Targeting, as an alternative to money targeting or inflation targeting if the central bank is to commit to a nominal target of some sort, has prompted some pushback.   This is not surprising.  But one of the responses is most peculiar.  This is the allegation (1) that the surge comes from liberals opportunistically adopting an idea that was originally proposed by conservatives, and (2) that they will not stick with this “fad” in the longer run because it is only designed to fit current circumstances of high unemployment and low output.   Remarkably, every component of this argument is wrong. read more

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Monetary Alchemy, Fiscal Science

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          The year 2013 marks the 100th anniversaries of two separate major institutional innovations in American economic policy:  the Constitutional Amendment enacting the federal income tax, ratified on February 3, 1913, and the law establishing the Federal Reserve, passed in December 1913.  
           It took some time before the two new institutions became associated with the explicit concepts of fiscal policy and monetary policy, respectively.   It wasn’t until after the experience of the 1930s that they came to be viewed as potential instruments for managing the macro-economy.  John Maynard Keynes, of course, pointed out the advantages of expansionary fiscal policy in circumstances like the Great Depression.   Milton Friedman blamed the Depression on the Fed for allowing the money supply to fall.    [Tools of fiscal policy used by governments, in addition to tax rates and tax deductions, are spending and transfers.  Tools of monetary policy used by central banks include interest rates, quantities of money and credit, and instruments such as reserve requirements and foreign exchange intervention used in various (non-US) countries.] read more

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