We log-linearise the Dellas and Tavlas (DT) model of monetary union and solve it analytically. We find that the intuition of optimal currency analysis of DT's second generation open economy model is essentially the same as that of first generation models. Monetary union results in no welfare loss if its member states are symmetric. However, asymmetry causes loss in welfare both due to the failure of the union policy to deal suitably with a country's asymmetric shocks and due to an active monetary policy by union in pursuit of its distinct objectives. The asymmetry in DT is largely due to the differing wage rigidities across countries.
We investigate whether the Fiscal Theory of the Price Level (FTPL) can explain UK inflation in the 1970s. We confront the identification problem involved by setting up the FTPL as a structural model for the episode and pitting it against an alternative Orthodox model; the models have a reduced form that is common in form but, because each model is over-identified, numerically distinct. We use indirect inference to test which model could be generating the VECM approximation to the reduced form that we estimate on the data for the episode. Neither model is rejected, though the Orthodox model outperforms the FTPL. But the best account of the period assumes that expectations were a probability-weighted combination of the two regimes.
Journal Article Manias, Panics, and Crashes. A History of Financial Crises Get access Manias, Panics, and Crashes. A History of Financial Crises. By CHARLES P. KINDLEBERGER. (London: Macmillan, 1978. Pp. xii + 271. £8.95.) Patrick Minford Patrick Minford University of Liverpool Search for other works by this author on: Oxford Academic Google Scholar The Economic Journal, Volume 89, Issue 356, 1 December 1979, Pages 947–948, https://doi.org/10.2307/2231516 Published: 01 December 1979
We first explain how central banks have made a complete mess of monetary policy over the Financial Crisis. Their first major mistake was to stimulate a big credit boom in the 2000s, which was the main cause of the crisis situation, through over-leveraged banks. Second, they permitted the Lehman liquidity crisis, by allowing Lehman to go bust, instead of getting it taken over, with liquidity pumped into the banking system; it was this bust that precipitated the crisis proper. Third, they stymied bank credit growth post-crisis by draconian bank regulation just when credit growth was needed for recovery. Fourth, they flooded markets with Quantitative Easing (QE, the aggressive buying by central banks of bonds and other assets by printing money), which has created large distortions in financial markets. There is now evidence that this last episode, zero interest rates and QE, have damaged competition and new industrial entry by subsidising capital to large firms. This has created a market structure argument for ‘normalising monetary policy’ besides arguments from monetary policy itself, to the effect that we need to make it effective again. To restore monetary policy effectiveness we need interest rates to rise back to normal, well away from the zero lower bound where they still are. The only way for policy to deliver this is via a fiscal expansion. This can be Brexit-related, focused on using the much-improved public finance situation to deliver tax cuts and growth-supporting spending). We set out full fiscal and debt projections over the next two decades, which show that this can be done while debt remains under control in the long term.
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The theory of optimal currency areas, due to Mundell and McKinnon, has enjoyed a revival of interest in the wake of European discussions of monetary union. The basic theme of this old literature is that there are potential gains for stabilization policy in an independent exchange rate and money because rigidity of prices causes an inadequate response of relative prices to shocks. This theme has been taken up recently in empirical work on fixed versus floating exchange rates. This paper examines whether there is support for it in the microfoundations of linked open economies. It uses the cash-in-advance general equilibrium approach of Lucas, following along the lines of Canzoneri and Diba, but focuses on instability and its costs rather than optimal transformation ratios. It finds support for the insights of the optimal currency area literature. The result comes from the cash-in-advance constraint, which causes labour supply to respond to expected inflation (and so money growth) between this and the next period: the household faces an inevitable delay between working (receiving cash) and being able to spend the proceeds. This delay is the microfoundation analogue of the `nominal (price) rigidity' in the optimal currency area models. Though the direction of money supply responses is orthodox (counter-cyclical), however, it is not clear whether it stabilizes prices (though it probably stabilizes output). By contrast, in the empirical work stability has been gauged by the variance of output and prices. Hence this microfoundations model, though in a way supporting the optimal currency area literature, does not mimic what that literature regards as `the real world'.
We focus on the role of the government in the provision of investment in China, through the medium of a Dynamic Stochastic General Equilibrium model of the economy in which the form of the production function reflects this governmental role. Using indirect inference, we estimate and test for the elasticity of substitution between government and nongovernment capital in both Constant Elasticity of Substitution (CES) and Cobb–Douglas technologies. The results underscore the strong substitution relationship between government and nongovernment capital from 1949, supporting CES rather than the Cobb–Douglas technology. They also show that the orientation of public investment changed after the start of the 'Socialist Market Economy' in 1992: government capital became more complementary to nongovernment capital as it focused more on infrastructure and withdrew from industrial production, intervening only in times of crisis, for stabilization purposes, indirectly via the state banks.
The financial stability of the eurozone depends on its macroeconomic stability and vice versa. We construct a macro DSGE model of the eurozone and its two main regions, the North and the South, with the aim of matching the macro facts of these economies by indirect inference and using the resulting empirically-based model to assess possible new policy regimes that could maintain financial stability. The model we have found to fit the facts suggests that substantial gains in stability and consumer welfare are possible if the fiscal authority in each region is given the freedom to respond to its own economic situation. Further gains could come with the restoration of monetary independence to the two regions, in effect creating a second 'southern euro' bloc. Enhanced fiscal flexibility increases fluctuations in debt and deficit ratios to GDP while keeping average ratios stable, maintaining solvency. A reformed Stability and Growth Pact could be limited to monitoring solvency.
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