Barry Eichengreen: The Europeans Are Less Insane than I Feared...
Liveblogging World War II: April 29, 1943

Noted for April 29, 2013

  • Mervyn King (June 16, 2010): Monetary Policy Developments: "Monetary policy must be set in the light of the fiscal tightening over the coming years, the continuing fragility in financial markets and the state of the banking system. I know there are those who worry that too rapid a fiscal consolidation will endanger recovery. But the steady reduction in the very large structural deficit over a period of a parliament cannot credibly be postponed indefinitely. If prospects for growth were to weaken, the outlook for inflation would probably be lower and monetary policy could then respond. I do, therefore, Chancellor [Osborne], welcome your commitment to put the UK’s public finances on a sound footing. It is important that, in the medium term, national debt as a proportion of GDP returns to a declining path."

  • Mike Konczal: The great economic experiment of 2013: Ben Bernanke vs. austerity: "We rarely get to see a major, nationwide economic experiment at work, but so far 2013 has been one of those experiments — specifically, an experiment to try and do exactly what Beckworth and Ponnuru proposed. If you look at macroeconomic policy since last fall, there have been two big moves. The Federal Reserve has committed to much bolder action in adopting the Evans Rule and QE3. At the same time, the country has entered a period of fiscal austerity. Was the Fed action enough to offset the contraction? It’s still very early, and economists will probably debate this for a generation, but, especially after the stagnating GDP report yesterday, it looks as though fiscal policy is the winner…. [T]here is still more the Federal Reserve could do to try and balance out austerity in 2013, but those moves would require a big change from current policy. Minor tweaking is unlikely to help. Joseph Gagnon of the Peterson Institute for International Economics suggests that, instead of committing to mortgage purchases, the Fed could target the mortgage rate for a time. Other economists, such as Brad DeLong, suggest that an explicit higher inflation target would be important. Still others, ranging from Christina Romer to market monetarists, think the Fed should explicitly target a nominal GDP. Given that the Fed appears to be having trouble getting these new policies to move inflation expectations or interest rates, a dramatic change may be harder than originally thought."

Jérémie Cohen-Setton: The Reinhart and Rogoff debacle | A Look at Manufacturing over the Years, 1790-1982 |

  • Ryan Avent: Monetary policy: Can the Fed offset contractionary fiscal policy?: "MIKE KONCZAL writes that 2013 is shaping up to be a grand experiment, testing an important macroeconomic proposition: that expansionary monetary policy can offset fiscal cuts…. Mr Konczal reckons that recent data show that fiscal policy is "winning": The first is inflation expectations, as calculated by the Federal Reserve Bank of Cleveland. One-year inflation expectations initially bumped up for December 2012, which many commentators viewed as a positive sign for the new Fed policy. However, in 2013, it has fallen back down…. You can also look at long-term interest rates…. Here, too, there was an initial boost after the December announcement, but as 2013 has continued, interest rates have dropped back down. Growth in GDP, as noted from yesterday, has also come in below expectations, with government spending a main culprit…. It's worth emphasizing that while many of those who argued that the Fed could offset fiscal cuts were pleased by the Fed's evolution last fall, none, to my knowledge, thought that the Fed had obviously done enough. (You can read my initial comments on the announcement of the threshold policy here.) If the argument is that fiscal tightening undertaken against the backdrop of inadequate monetary policy is contractionary, well, that's not going to generate much disagreement from anyone."

  • Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff: Debt Overhangs: Past and Present: "Financial repression includes directed lending to the government by captive domestic audiences (such as pension funds or domestic banks), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and a tighter connection between government and banks, either explicitly through public ownership of some of the banks or through heavy “moral suasion”. It is often associated with relatively high reserve requirements (or liquidity requirements), securities transaction taxes, prohibition of gold purchases (as in the US from 1933 to 1974), or the placement of significant amounts of government debt that is nonmarketable. In principle, “macroprudential regulation” need not be the same as financial repression, but in practice, one can often be a prelude to the other."

  • Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff: Debt Overhangs: Past and Present: "In the days before fiat currency, inflation and/or financial repression were not as prevalent as after the end of World War II when it was institutionalized on a global basis under the Bretton Woods system. Thus, the “liquidation” of government debt via a steady stream of negative real interest rates was not as easily accomplished in the days of the gold standard and relatively free international capital mobility as in 1945-1979. This meant that it took a longer time to work down debt ratios in the 19th century."

  • Carmen Reinhart and Kenneth Rogoff: Growth in a Time of Debt: "The nonlinear effect of debt on growth is reminiscent of “debt intolerance” (Reinhart, Rogoff, and Miguel A. Savastano 2003) and presumably is related to a nonlinear response of market interest rates as countries reach debt tolerance limits. Sharply rising interest rates, in turn, force painful fiscal adjustment in the form of tax hikes and spending cuts, or, in some cases, outright default. As for inflation, an obvious connection stems from the fact that unanticipated high inflation can reduce the real cost of servicing the debt. Of course, the efficacy of the inflation channel is quite sensitive to the maturity structure of the debt. In principle, the manner in which debt builds up can be important. For example, war debts are arguably less problematic for future growth and inflation than large debts that are accumulated in peacetime. Postwar growth tends to be high as wartime allocation of manpower and resources funnels to the civilian economy. Moreover, high wartime government spending, typically the cause of the debt buildup, comes to a natural close as peace returns. In contrast, a peacetime debt explosion often reflects unstable political economy dynamics that can persist for very long periods."