Condoleeza Rice on German Reunification

« German Foreign Minister Hans-Dietrich Genscher, (…) seemed to think of the unification process as more of a merger. I preferred to see it as an acquisition. »

Read the complete interview in Spiegel Online.

Milton Friedman and the Interest-rate Fallacy

David Beckworth and William Ruger wonder what Friedman would say about Fed policy under Bernanke. Excerpt:

“First, low interest rates do not necessarily mean monetary policy is loose.

Friedman criticized the policies of the Fed in the 1930s and the Bank of Japan in the 1990s on this very point. Both central banks claimed to be highly accommodative at these times, pointing to low interest rates as evidence of easy monetary policy. Friedman countered, however, that low interest rates may reflect a weak economy rather than easy monetary policy.

Back in 1997, in fact, he called the idea of identifying low interest rates with easy monetary policy an interest-rate fallacy. The only time low interest rates do indicate loose monetary policy is when they are below the neutral interest-rate level, which is the interest-rate level where monetary policy is neither too simulative nor too contractionary and is pushing the economy toward its full potential.

The implication for today's Fed is that although its target federal funds rate is low, its stance still may not be very stimulative given that the neutral interest rate is also low. The Fed should not rely on the level of the federal funds rate to measure the stance of monetary policy to determine whether its actions are supporting or hindering the economy.”

Read their article in Investors.com.

ECB versus IMF

The Stelzer column in the Wall Street Journal .

A Few Reasons Why Economists Disagree (Mostly About Policies)

Solow's, Becker's and Mankiw's explanations: problems are especially complex, effects uncertain, and distributive outcomes contestable.

Read the New York Times column here .

Competitive Devaluations Could Be Good for Individual Countries and for the World Economy.

“Currency depreciation in the 1930s is almost universally dismissed or condemned. This paper advances a different interpretation of these policies. It documents first that depreciation benefited the initiating countries. It shows next that there can be no presumption that depreciation was beggar-thy-neighbor. While empirical analysis indicates that the foreign repercussions of individual devaluations were in fact negative, it does not imply that competitive devaluations taken by a group of countries were without mutual benefit. To the contrary, similar policies, had they been even more widely adopted and coordinated internationally, would have hastened recovery from the Great Depression.”

This quote is from Barry Eichengreen and Jeffrey Sachs, “Exchange Rates and Economic Recovery in the 1930s”, The Journal of Economic History, December 1985.


My comments: 1. The countries that exited the Gold Standard first got the strongest and most rapid economic recovery, while late floaters like France or Switzerland paid a heavy price in the form of a lengthier bout of depression and unemployment. Today the problem is to exit from the "Bretton Woods 2" regime of partly fixed exchange rates.

2. What we call “currency wars” or “chaos” can be seen as a simple “tâtonnement” of the governments towards and equilibrium vector of exchange rate prices. It is due to the fact that nobody knows exactly in advance the precise (and fluctuating) equilibrium price of the national currency, and especially not the other governments.

It follows that, while many economists claim that currency wars are a zero sum game (what one country gains another must loose) they nevertheless have a real utility: the production of new information about what the adequate equilibrium exchange rates should be. It is a positive sum game and a process of discovery, as useful as competition in other markets. Planners everywhere generally consider competition to be a pure waste. But they are wrong as the collapse of planned economies demonstrated.

Roubini on Currency War

"The first salvos in this war came in the form foreign-exchange intervention. To diversify away from US dollar assets while maintaining its effective dollar peg, China started to buy Japanese yen and South Korean won, hurting their competitiveness. So the Japanese started to intervene to weaken the yen.
This intervention upset the EU, as it has put upward pressure on the euro at a time when the European Central Bank has placed interest rates on hold while the Bank of Japan (BoJ) and the US Federal Reserve are easing monetary policy further. The euro’s rise will soon cause massive pain to the PIIGS, whose recessions will deepen, causing their sovereign risk to rise. The Europeans have thus already started verbal currency intervention and may soon be forced to make it formal."

Read the paper, here.

Job Search and Unemployment

Edward Glaeser explains the work of the new Nobel Laureates and its source in George Stigler’s economics of information here.