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Gene Ellis

PORTFOLIO.HU | Blanchard: Eurozone integration needs to go forward or go back, but it c... - 0 views

www.portfolio.hu/...it_cant_stay_here.24931-2.html

shared by Gene Ellis on 04 Oct 12 - No Cached
  • There is no question that, when it was introduced, inflation targeting represented progress. But we have learnt that it has serious limitations. You can have an economy in which inflation is stable and low, but behind the scenes the composition of the output is wrong, and the financial system accumulates risks. It’s very clear that, to deal with all these issues, just using the policy rate is not enough.
  • The way to think about monetary policy in the future is that the central bank has in effect two sets of tools. One is a traditional one, the policy interest rate. The other is the set of macro prudential tools, from loan to value ratios, to cyclical capital ratios, etc. If there is a housing boom, you do not want to kill it through an increase in the policy rate which would affect the whole economy. You want to use measures that will limit mortgage lending to households.
  • I think that it has either to go forward or to go back, but it cannot stay where it is. I think nobody really wants to go back, so it has to go forward.
  • ...2 more annotations...
  • I suspect that, in order to limit country specific shocks, euro members may have to actively use macro prudential tools such as rules on the amount of liquidity that banks should hold, or upper limit to loans to value ratios, much more so that they have in the past.
  • If the U.S. and a number of other advanced countries are going to decrease their current account deficits, then some countries will have to decrease their current account surpluses. And for this to happen, there has to be, among other changes, an adjustment of the exchange rates. Put more bluntly, most emerging markets have to accept an appreciation.
Gene Ellis

PORTFOLIO.HU | Blanchard: Eurozone integration needs to go forward or go back, but it c... - 0 views

www.portfolio.hu/...t_it_cant_stay_here.24931.html

shared by Gene Ellis on 04 Oct 12 - No Cached
  • And, while lower investment since the beginning of the crisis has led to a smaller capital stock, again the effect appears quantitatively small. It is also difficult to see why the crisis would have led to a large decrease in total factor productivity. This being said, I would have expected a large output gap to lead to more downward pressure on inflation than we have seen. I see the fact that inflation is roughly stable is a puzzle. We are doing more research on this issue at the IMF.
  • O.B.:There is no question internal devaluations are tougher to achieve than when you can adjust the nominal exchange rate. That’s well understood. A number of European countries have a competitiveness problem, which shows up in a large current account deficit.
  • olve it. And there is no alternative for them than to become more competitive, to decrease the real exchange rate. Is it happening? I think it’s starting to happen, but it’s happening slowly, and it’s going to take a long time.
  • ...3 more annotations...
  • They have to
  • Many countries have a tough adjustment to achieve. In doing so, they indeed have to be careful about their social implications. When adjustment requires a decrease in the real wage (or at least a decrease relative to productivity), it is essential that the decrease be fairly shared. You have to make sure that there is a safety net in place. If the pension system has to be made less generous, which is the case in a number of countries, you have to make sure the lowest pensions are protected.
  • It is clear that adjustment in the Euro zone requires a decrease in the relative price of periphery countries and an increase in the relative price of core countries. If the ECB wants to maintain two percent inflation for the Euro zone as a whole, this implies, arithmetically, that core countries have to have inflation higher than two percent, periphery countries have to have inflation lower than two percent, until the adjustment has taken place.
Gene Ellis

Economist Sinn Rattles Merkel Laboring to Save Euro - Businessweek - 0 views

www.businessweek.com/...s-merkel-laboring-to-save-euro

shared by Gene Ellis on 11 Sep 12 - No Cached
  • Gene Ellis on 11 Sep 12
     
    clear article on Sinn's analysis of TARGET2
Gene Ellis

The Tragedy of the European Union and How to Resolve It by George Soros | The New York ... - 0 views

www.nybooks.com/...opean-union-and-how-resolve-it

shared by Gene Ellis on 10 Sep 12 - No Cached
  • It took financial markets more than a year to realize the implications of Chancellor Merkel’s declaration, demonstrating that they operate with far-from-perfect knowledge
  • the financial markets began to realize that government bonds, which had been considered riskless, carried significant risks and could actually default. When they finally discovered it, risk premiums in the form of higher yields that governments had to offer so as to sell their bonds rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent.
  • That created both a sovereign debt problem and a banking problem,
  • ...4 more annotations...
  • The creditors are in effect shifting the whole burden of adjustment onto the debtor countries and avoiding their own responsibility for the imbalances.
  • In this context the German word Schuld is revealing: it means both debt and guilt. German public opinion blames the heavily indebted countries for their misfortune.
  • The Maastricht Treaty took it for granted that only the public sector can produce chronic deficits. It assumed that financial markets would always correct their own excesses
  • For instance, they treated the euro crisis as if it were a purely fiscal, i.e., budgetary, problem. But only Greece qualified as a genuine fiscal crisis. The rest of Europe suffered largely from banking problems and a divergence in competitiveness, which gave rise to balance of payments problems.
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