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1. Money, Stability, and Free Societies

Author:
Steve H. Hanke
Publication Date:
06-2020
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Monetary instability poses a threat to free societies. Indeed, currency instability, banking crises, soaring inflation, sovereign debt defaults, and economic booms and busts all have a common source: monetary instability. Furthermore, all these ills induced by monetary instability bring with them calls for policy changes, many of which threaten free societies. One who understood this simple fact was Karl Schiller, who was the German Finance Minister from 1966 until 1972. Schiller’s mantra was clear and uncompromising: “Stability is not everything, but without stability, everything is nothing” (Marsh 1992: 30). Well, Schiller’s mantra is my mantra. I offer three regime changes that would enhance the stability in what Jacques de Larosière (2014) has asserted is an international monetary “anti-system.” First, the U.S. dollar and the euro should be formally, loosely linked together. Second, most central banks in developing countries should be mothballed and replaced by currency boards. Third, private currency boards should be permitted to enter the international monetary sphere.
Topic:
Debt, Foreign Exchange, Monetary Policy, Developing World, Inflation, and Currency
Political Geography:
Europe, United States of America, and European Union

2. The Influence of RMB Internationalization on the Chinese Economy: Theory and Policy

Author:
Fan He and Qiyuan Xu
Publication Date:
02-2015
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
With a balance between radicalism and gradualism, renminbi (RMB) cross-border settlement covers all of the items in China's balance of payments (BoP), including financial accounts, although some of these accounts are still controlled by means of quotas and administrative approval. By the end of the first quarter in 2014, the amount of RMB trade settlement had reached ¥11 trillion since the pilot scheme was launched in July 2009. RMB cross-border settlement has become increasingly important for monetary authorities in terms of macroeconomic policy frameworks. This is especially the case with the more sophisticated conditions in global monetary markets, which result not only from the nontraditional monetary policies employed by the European Central Bank and the Bank of Japan, but also the ongoing quantitative easing (QE) tapering by the US Federal Reserve and the spillover effects on emerging economies. It is increasingly important to evaluate the potential influence of RMB internationalization on China's macroeconomy. A framework, which includes monetary supply and demand, was created to analyze the influences of RMB cross-border settlement on China's domestic interest rate, asset price and foreign exchange (forex) reserves. RMB settlement behaves in different ways with the various items in BoP, such as imports, exports, foreign direct investment (FDI), overseas direct investment (ODI), RMB Qualified Foreign Institutional Investor (RQFII), RMB Qualified Domestic Institutional Investor (RQDII) and cross-border loans. It was found that RMB settlement in different items leads to different effects on China's economy. For RMB export settlement, RMB overseas direct investment (RODI) and RQFII at the initial stage, RMB settlement does not affect China's interest rate and asset price. In addition, more favourable to the People's Bank of China (PBoC), foreign exchange reserves increase less with these reforms; therefore, they should be promoted with priority. However, it is necessary to stress that all settlements should be based on real transactions in order to prevent fake exports. For RMB import settlement, RODI and RQDII at the initial stage, these pilot schemes exert influences on China's economy through interest rate changes, causing an additional increase of forex reserves. Although other short-term items in the financial account could also impact the interest rate, the items in this group are either based on real business such as trade and investment or on financial transactions at the initial stage on a small scale. Therefore, this group has a relatively moderate influence on the interest rate. It is important to remember that this negative by-product is a result of the assumption that the PBoC targets exchange rate stability. If the PBoC sets the exchange rate system to be flexible enough, then such pilot schemes will not cause an increase of forex reserves. It is thus essential to advance exchange rate regime reforms to keep up with the steps of RMB internationalization. With the progress in RQDII and RQFII, the endorsement of issuing dim sum bonds for capital backflows and with the increase in lending from the offshore to the onshore market, these types of RMB cross-border settlements will not exert pressure on forex reserves; however, they do have an impact on the money market. If the amount of RMB flowing through these items is large enough, the interest rate and asset price will be significantly affected, and could be in conflict with the intended monetary policy. These types of transactions are the most risky to monetary authorities; therefore, they should be cautious regarding these items. In the short term, RMB settlements in these kinds of items should be regulated with quotas. In the medium to the longer term, these items should be opened in a gradual way.
Topic:
Foreign Exchange and Monetary Policy
Political Geography:
Japan, China, and Europe

3. The Weightless Marketplace: Coming to Terms with Innovative Payment Systems, Digital Currencies and Online Labor Markets

Author:
David Bollier
Publication Date:
04-2014
Content Type:
Working Paper
Institution:
Aspen Institute
Abstract:
The structure and character of commerce has changed dramatically since the arrival of the World Wide Web and various digital technologies, particularly mobile phones and large, interconnected databases. Consumers now have much greater market power and choice. Markets can more easily scale, often globally. Co-production and fluid producer/consumer interactions are routine. Transactions themselves have become far cheaper and more easily consummated.
Topic:
Foreign Exchange, International Trade and Finance, Markets, Science and Technology, Communications, and Monetary Policy
Political Geography:
United States and Europe

4. ECB Policy and Eurozone Fragility: Was De Grauwe Right?

Author:
Ana-Maria Fuertes, Elena Kalotychou, and Orkun Saka
Publication Date:
06-2014
Content Type:
Working Paper
Institution:
Centre for European Policy Studies (CEPS)
Abstract:
Paul De Grauwe ' s fragility hypothesis states that member countries of a monetary union such as the eurozone are highly vulnerable to a self – fulfilling mechanism by which the efforts of investors to avoid losses from default can end up triggering the very default they fear. The authors test this hypothesis by applying an eclectic methodology to a time window around Mario Draghi ' s " whatever it takes " (to keep the eurozone on firm footing) pledge on 26 July 2012 . This pledge was soon followed by the announcement of the Outright Monetary Transactions (OMT) program me (the prospective and conditional purchase by the European Central Bank of sovereign bonds of eurozone countries having difficulty issuing debt) . The principal components of eurozone credit default swap spreads validate this choice of time frame . An event study reveals significant pre – announcement contagion emanating from Spain to Italy, Belgium, France and Austria. Furthermore, time – series regression confirms frequent clusters of large shocks affecting the credit default swap spreads of the four eurozone countries but solely during the pre – announcement period. The findings of this report support the fragility hypothesis for the eurozone and endorse the Outright Monetary Transactions programme.
Topic:
Economics, Foreign Exchange, International Trade and Finance, and Financial Crisis
Political Geography:
Europe, France, Belgium, and Italy

5. Stepping up Growth Policies

Author:
Stefano Micossi
Publication Date:
03-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies (CEPS)
Abstract:
The eurozone is in recession and will show negative growth in 2012; GDP will fall sharply in Greece and Portugal, and there is substantial risk that Spain and Italy will follow suit (the Commission's recent forecasts seem overly optimistic and complacent; the IMF is more downbeat). But fiscal policies are uniformly restrictive throughout the eurozone and much of the Union, and the hopes that fiscal consolidation could spur growth by improving household and business confidence are not materialising. In reality, domestic demand has been hit too hard by fiscal consolidation, and investment throughout the Union remains well below pre- crisis levels. Credit is tight due to the deteriorating quality of borrowers and the ongoing deleveraging in banking.
Topic:
Economics, Foreign Exchange, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
Europe and Greece

6. The challenge of measuring inflation...when business is not as usual

Author:
Cecilia Frale and Jørgen Mortensen
Publication Date:
10-2008
Content Type:
Working Paper
Institution:
Centre for European Policy Studies (CEPS)
Abstract:
The recent surge in commodity prices and the European Central Bank's decision in June to raise interest rates to combat inflation have ignited a debate about the appropriateness of raising interest rates during a phase of weakening activity. In addition, it is relevant to examine the approaches to measuring the rate of inflation, to consider the advantages and drawbacks of these methods, and finally to throw new light on the possible influence of monetary policy on the fundamental trends in prices.
Topic:
Economics and Foreign Exchange
Political Geography:
United States and Europe

7. Is the Euro Ready for 'Prime Time'?

Author:
Benjamin J Cohen and Paola Subacchi
Publication Date:
07-2008
Content Type:
Policy Brief
Institution:
Chatham House
Abstract:
When Europe's Economic and Monetary Union (EMU) became effective nearly a decade ago, the euro was seen as having the potential to be the second pillar of the international monetary system. It was expected to share leadership in monetary affairs with the United States. Ten years later, however, the story looks quite different. Although the euro has firmly established itself as an international currency, the degree of change has been considerably less than expected. Europe's joint money remains at a distinct disadvantage in relation to America's greenback, limiting the role it can play in global monetary governance. The euro is not yet ready for 'prime time' and can at best play only a subordinate role to the dollar in the global system. This can be described as a one-and-a-half currency system – certainly not a two-pillar world. The problem lies in the governance structure of EMU. Because the euro is a currency without a country, based on an inter-state agreement, participating members find it difficult to speak with a single voice. The solution lies in a reform of EMU's governing rules and institutions that would put greater emphasis on the euro's external dimension. On the one hand this calls for more proactive management of the currency's exchange rate by the European Central Bank (ECB), together with an explicit commitment by the Eurogroup –the euro zone's informal committee of finance ministers – to undertake effective coordination of national fiscal policies. On the other hand it means designating a single representative of EMU with real authority to speak on behalf of members in international councils. Unless the euro zone can learn how to project power more successfully than it has until now, dual leadership of monetary affairs at the global level will remain out of reach.
Topic:
Foreign Exchange
Political Geography:
United States and Europe

8. Exploiting Europe's Strong Potential: Governance, Institutions and Policies

Author:
Paola Subacchi, Benedicta Marzinotto, and Vanessa Rossi
Publication Date:
01-2008
Content Type:
Policy Brief
Institution:
Chatham House
Abstract:
With the euro approaching the tenth anniversary of its establishment, this is a timely as well as critical moment to review policies and performance. Enough experience of the convergence and adjustment processes has been gained to better understand how they work and what problems have been created rather than solved. As the strengths – and the success – of the euro become more visible, so too do its weaknesses and the conflicts it creates. Are the appropriate mechanisms and governance in place to help manage Europe's economy so that it can realize its potential? Governance is critical because of the institutional complexity of the monetary union. Independent policy targets and policy instruments not only have to be consistent with each other, but also need to be integrated in a nonconflicting framework. There are two threads to this debate: convergence and adjustments across the euro area, and how the region as a whole is performing with regard to the rest of the world. Both imply a new approach to governance. When EMU was established, the euro area comprised 11 founding members. Now it comprises 15 and is slowly expanding. Ten years ago the emergence of China was more a possibility than a reality, while the 'Asian Tigers' were coming to terms with a devastating financial crisis. Now the rise of the emerging market economies and the enlargement of the global economy's playing field pose significant challenges to the competitiveness of the euro area. With the euro now becoming the second pillar of the international monetary system, EMU's external dimension has become very relevant. The way forward needs to blend the traditional concerns for macroeconomic stability and competitiveness with the more recent concern about the role of Europe in the global economy. All these dimensions need to be organized into a coherent agenda. The right policy should be implemented at the right time.
Topic:
Economics and Foreign Exchange
Political Geography:
Europe

9. Outside the European Economic and Monetary Union: Consequences for the United Kingdom

Author:
Anna Konarzewska
Publication Date:
03-2008
Content Type:
Journal Article
Journal:
Connections
Institution:
Partnership for Peace Consortium of Defense Academies and Security Studies Institutes
Abstract:
The consequences of staying outside the European Economic and Monetary Union can be divided into three categories: political, economic, and social. For the United Kingdom, most attention has been concentrated on the issue of economic gains and losses. The potential gains include a possibility for the British government to conduct its own national economic and monetary policy, the elimination of so-called social dumping, preserving the British mortgage and housing markets, and promoting London as a worldwide financial center. Moreover, approving the Euro could enlarge British foreign trade and enhance inflows of foreign direct investment. On the other hand, the negative economic consequences focus on lack of transparency of prices, no elimination of transaction costs, and the risk of disrupting the exchange rate of the pound sterling. The political and social consequences of staying outside the Euro zone must also be taken into account when analyzing the British case. Without participating in the common currency, the United Kingdom could preserve her national sovereignty and independence, although this remains questionable in the current world, which is characterized by high levels of interdependence. Likewise, the British stand to lose their influence in the European Union and in the world by not participating in the third stage of the EMU.
Topic:
Foreign Exchange
Political Geography:
United Kingdom, Europe, and London

10. At What Cost Price Stability? New evidence about the Phillips Curve in Europe and the United States

Author:
Daniel Gros and Andrea Beccarini
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Centre for European Policy Studies (CEPS)
Abstract:
With inflation increasing all over the world, central banks have to consider with some care how quickly to re-establish price stability. A key issue in this context is the short-run cost in terms of foregone output and higher unemployment. The aim of this paper is to determine the 'sacrifice ratio' for the Euro Area and for the United States. The main findings are: the cost of reducing inflation is in most cases higher in the US than in the EA. For example, reducing (headline) inflation by 1% point requires a decline of output of 1.4% in the EU, but 2.3% for the US. Considering core inflation, the sacrifice ratio in terms of output is somewhat higher for the Euro Area (around 4) compared to 3.2 for the US. However, the sacrifice ratios in terms of unemployment are always much larger for the US. Reducing headline inflation by 1% requires an increase in unemployment of little more than 1% in the EA, compared to 8% in the US.
Topic:
Economics and Foreign Exchange
Political Geography:
United States and Europe