Working Paper No. 764 | May 2013
Recent episodes of housing bubbles, which occurred in several economies after the burst of the United States housing market, suggest studying the evolution of housing prices from a global perspective. We utilize a theoretical model for the purposes of this contribution, which identifies the main drivers of housing price appreciation—for example, income, residential investment, financial elements, fiscal policy, and demographics. In the second stage of our analysis, we test our theoretical hypothesis by means of a sample of 18 Organisation for Economic Co-operation and Development (OECD) countries from 1970 to 2011. We employ the vector error correction econometric technique in terms of our empirical analysis. This allows us to model the long-run equilibrium relationship and the short-run dynamics, which also helps to account for endogeneity and reverse-causality problems.Download:Associated Program:Author(s):Philip Arestis Ana Rosa González
Working Paper No. 750 | January 2013
The relevant economic literature frequently focuses on the impact of credit shocks on housing prices. The doctrine of the “New Consensus Macroeconomics” completely ignores bank credit. The “Great Recession,” however, has highlighted the significance of bank credit. The purpose of this contribution is to revisit this important macroeconomic variable. We propose to endogenize the volume of bank credit by paying special attention to those variables that are related to the real estate market, which can be considered key to the evolution of bank credit. Our theoretical hypothesis is tested by means of a sample of 15 Organisation for Economic Co-operation and Development (OECD) economies from 1970 to 2011. We apply the cointegration technique for the latter purpose, which permits the modeling of the long-run equilibrium relationship and the dynamics of the short run, along with an error-correction term.Download:Associated Program:Author(s):Philip Arestis Ana Rosa GonzálezRelated Topic(s):
Working Paper No. 743 | December 2012
This paper provides a theoretical explanation of the accumulation process, which accounts for the developments in the financial markets over the recent past. Specifically, our approach is focused on the presence of correlations between physical and financial investment, and how the latter could affect the former. In order to achieve this objective, two assets are considered: equities and bonds. This choice permits us to account for two extreme alternative possibilities: taking risk in the short run with unknown profits, or undertaking a commitment to the long run with known yields. This proposal also accounts for the influence of the cost of external finance and the impact of financial uncertainty, as proxied by the interest rate in the former case and the exchange rate in the latter case; thereby utilizing the Keynesian notion of conventions in the determination of investment. The model thus formulated is subsequently estimated by applying the difference GMM and the system GMM in a panel of 14 OECD countries from 1970 to 2010.Download:Associated Program:Author(s):Philip Arestis Ana Rosa González Óscar DejuánRelated Topic(s):
Working Paper No. 564 | May 2009
This paper is concerned with the New Consensus Macroeconomics (NCM) in the case of an open economy. It outlines and explains briefly the main elements of and way of thinking about the macroeconomy from the standpoint of both its theoretical and its policy dimensions. There are a few problems with this particular theoretical framework. We focus here on two important aspects closely related to NCM: the absence of banks and monetary aggregates from this theoretical framework, and the way the notion of the “equilibrium real rate of interest” is utilized by the same framework. The analysis is critical of NCM from a Keynesian perspective.Download:Associated Program(s):Author(s):Related Topic(s):
Policy Note 2009/2 | March 2009
Central banks have an aversion to bailing out speculators when asset bubbles burst, but ultimately, as custodians of the financial system, they have to do exactly that. Their actions are justified by the goal of protecting the economy from the bursting of bubbles; while their intention may be different, the result is the same: speculators, careless investors, and banks are bailed out.
The authors of this new Policy Note say that a far better approach is for central banks to widen their scope and target the net wealth of the personal sector. Using interest rates in both the upswing and the downswing of a (business) cycle would avoid moral hazard. A net wealth target would not impede the free functioning of the financial system, as it deals with the economic consequences of the rise and fall of asset prices rather than with asset prices (equities or houses) per se. It would also help to control liquidity and avoid future crises. The current crisis has its roots in the excessive liquidity that, beginning in the mid 1990s, financed a series of asset bubbles. This liquidity was the outcome of “bad” financial engineering that spilled over to other banks and to the personal sector through securitization, in conjunction with overly accommodating monetary policy. Hence, targeting net wealth would also help control liquidity, the authors say, without interfering with the financial engineering of banks.Download:Associated Program:Author(s):
Working Paper No. 544 | September 2008
The monetary policy regime of inflation targeting (IT) has been adopted by a significant number of emerging economies. While the focus of this paper is on Brazil, which began inflation targeting in 1999, the authors also examine the experience of other countries, both for comparative purposes and for evidence of the extent of this “new” economic policy’s success. In addition, they compare the experience of Brazil with that of non-IT countries, and ask the question of whether adopting IT makes a difference in the fight against inflation.Download:Associated Program:Author(s):Philip Arestis Luiz Fernando de Paula Fernando Ferrari-Filho
In the Media | June 2007
Copyright 2007 The Financial Times Limited
Financial Times (London, England)
June 22, 2007 Friday; Asia Edition 1; Letters to the Editor
Sir, Kerin Hope is right to report on the seriousness of the bond deal in Greece, which “sparks calls for early Greek poll” (report, June 19). It is paramount, though, for the Greek government, before it concludes on a possible early poll, to investigate who the actual bearer of these structured bonds is.
If a large proportion were to be held by international investors, then there may be an argument that structured bonds may save the taxpayer some of the cost of servicing that debt. But, if a large proportion of these structured bonds ends up in the portfolios of the Greek pension funds, as it seems to be the case, the government may be accused of taking advantage of the unsophisticated boards of the pension funds to minimise its tax liabilities. The Greek Treasury is gaining at the expense of the pension funds. This is not just an ethical issue; it is a clear responsibility of the government itself, as it is the one that sets up the legal structure of the pension funds. This suggests that the whole structure requires overhauling and the government should proceed with extreme care and responsibility.
Some general guidelines on the overhauling process may be useful. The management of the portfolios of the pension funds should be placed with the private sector that has the requisite skills and expertise. The asset management companies that would run the portfolios would be directly accountable to the boards of the pension funds. The boards, on the other hand, should not be appointed by the government, but they should be elected by their members, to whom they should be accountable. The responsibility of the boards should be to set up the decision-making process of the portfolio management and not be responsible for the investment decisions, as it happens now. The government should avoid the finance of the budget deficit through private placements as this undermines transparency. The normal practice of issuing ordinary fixed income government bonds through auctions that involve primary dealers is the only way to ensure that the burden to the tax-payer is kept to a minimum. In such an auction the government would fetch the market price on the issue of its bonds, which incorporates the risk that the market attaches to such bonds.
University Director of Research,
Cambridge Centre for Economic and Public Policy,
University of Cambridge, UK
Chairman, Global Economic Research,
Associate Member, Cambridge Centre for Economic and Public Policy,
University of Cambridge, UKAuthor(s):
Working Paper No. 411 | July 2004
Channels of Influence
Financial development and its effects on the economic development of a country has recently been one of the most prolific areas of research in the fields of development, finance, and international economics. So far, however, very little work has been done to analyze comprehensively the relationship between financial liberalization and poverty. There is still controversy about the exact role and the effectiveness of financial liberalization on improving economic conditions in developing countries. This paper aims to contribute to this debate by critically reviewing the relevant literature and looking closely at the channels through which financial liberalization can affect poverty.Download:Associated Program:Author(s):Philip Arestis Asena Caner
Public Policy Brief No. 77 | June 2004
The Risks to Consumption and Investment
A rebound of consumption, investment, and consumer confidence in the second half of 2003 has raised hopes that the United States' recovery from the 2001 recession is on a sustainable course. According to this brief by Philip Arestis and Elias Karakitsos, however, the trend in the short-term factors affecting the economy has changed for the better, but long-term factors remain at risk. Slow, rather than rapid, economic growth is better in 2004, the authors say, as rapid growth would result in higher long-term interest rates, which would threaten the property market boom and weaken investment in 2005 and beyond. The authors are sure, however, that the current administration will find it difficult to refrain from additional procyclical fiscal stimulus in light of the upcoming presidential election. The result could lead to a rapidly declining US economic growth rate following the election in November.Download:Associated Program:Author(s):
In the Media | March 2004
Copyright 1992 The Financial Times Limited (London, England)
Tuesday, March 2, 2004; Financial Times USA Edition 2; Letters to the Editor; Pg. 12
Sir, Nicholas Garganas may be right to suggest that European Central Bank monetary policy is appropriate (“ECB official gives blunt rebuff to rate cut call,” February 27). Your editorial in the same issue (“Currencies cause Schroder pain”) may also be right to suggest that although one may sympathise with the German chancellor’s plea for an interest rate cut, “the ECB in Frankfurt has to take account of conditions in the euro area as a whole.” The argument, however, is more complex.
The buoyancy of the US economy since the end of the Iraq war and the spectacular recovery of exports in the US, and that of the euro area and Japan to a lesser extent, have raised hopes of a US-led world recovery. However, the euro area has suffered significant losses in competitiveness because of the strong appreciation of the euro in the past three years and its slow adjustment of competitiveness to changes in the nominal exchange rate. These developments in (G-3) competitiveness augur well for a rise in US and Japan exports from a world recovery, but they cast doubts on whether the euro area can benefit from it.
Despite these concerns we would suggest that if the US economy were to grow as fast as potential output in the next two years, then the world economy would recover. Such growth would be sufficient to offset previous. losses in competitiveness and allow the euro area to enjoy an export-led recovery. But, a rate cut by the ECB would not have the desired effect of restraining the euro rise, as its business cycle is synchronised with that of the US Since the burst of the bubble in 2000 both players are struggling to recover and a weak currency is desirable by both.
In the absence of intervention the only stable outcome is the one that favours dollar weakness and this is the one that markets impose. Investors, in trying to protect the value of their portfolios, usually enforce a stable outcome, because it would lead to a US-led world recovery. Whereas a dollar rise (and consequently a euro fall) would not help the rest of the world and, perhaps, not even the euro area itself.
In this respect, the experience of France in the early 1980s is pertinent. Similarly, in the period between the end of the Asian-Russian crisis (1998) and the burst of the equity bubble (2000) the ECB, and before it the Bundesbank, was again unable to stem the euro plight, in spite of tight monetary policy because its business cycle was again synchronised with that of the US
By contrast, whenever the US business cycle is not synchronised with that of the euro area, the resulting equilibrium is stable, simply because there is no conflict—one player’s interest dictates a strong currency, while the other’s dictates a weak currency. This was the case between 1994 and 1998, when the US was overheated but the euro area was operating with spare capacity.
George Garganas and your editorial may be right in their conclusions but the justification of the argument is far deeper and more complex.Published by:
The Financial TimesAuthor(s):
Working Paper No. 399 | January 2004
We address the issue of whether financial structure influences economic growth. Three competing views of financial structure exist in the literature: the bank-based, the market-based and the financial services view. Recent empirical studies examine their relevance by utilizing panel and cross-section approaches. This paper, for the first time ever, utilizes time series data and methods, along with the Dynamic Heterogeneous Panel approach, on developing countries. We find significant cross-country heterogeneity in the dynamics of financial structure and economic growth, and conclude that it is invalid to pool data across our sample countries. We find significant effects of financial structure on real per capita output, which is in sharp contrast to some recent findings. Panel estimates, in most cases, do not correspond to country-specific estimates, and hence may proffer incorrect inferences for several countries of the panel.Download:Associated Program:Author(s):Philip Arestis Ambika D. Luintel Kul B. Luintel
Public Policy Brief Highlights No. 75A | December 2003
New Institutions for an Inclusive Capital MarketIn 2002 more than $1 trillion worth of new bonds was sold across international boundaries. The total stock of cross-border bond holdings was more than $9 trillion. Such lending, together with sales of equities, is regarded as one of the chief benefits of globalization. But financial investment does not always flow where it is needed most. While it appears that the world cannot be satiated with US securities, issues of emerging economies account for less than 6 percent of total international holdings of debt securities (D’Arista 2003). And, as Argentina discovered recently, international lenders can be fickle, selling enough foreign currency and securities to cause a currency crisis.Download:Associated Program:Author(s):
Working Paper No. 397 | December 2003
This paper attempts to define financial globalization as a process whereby financial markets internationally are integrated so closely that they can be considered as a single market. The process, viewed as a by-product of financial liberalization, is only a necessary condition for financial globalization, however. The sufficient condition is the creation of world-wide single currency, managed and regulated by a single international monetary authority. The system itself needs to be managed carefully to avoid the kind of crises countries have experienced over the last 30 years or so. This sufficient condition has not yet been met.Download:Associated Program:Author(s):
Public Policy Brief No. 75 | December 2003
New Institutions for an Inclusive Capital Market
In 2002 more than $1 trillion worth of new bonds was sold across international boundaries. The total stock of cross-border bond holdings was more than $9 trillion. Such lending, together with sales of equities, is regarded as one of the chief benefits of globalization. But financial investment does not always flow where it is needed most. While it appears that the world cannot be satiated with US securities, issues of emerging economies account for less than 6 percent of total international holdings of debt securities (D’Arista 2003). And, as Argentina discovered recently, international lenders can be fickle, selling enough foreign currency and securities to cause a currency crisis.Download:Associated Program:Author(s):
In the Media | September 2003
Copyright 2003 The Financial Times Limited (London, England)
Monday, September 8, 2003; Financial Times; USA Edition; Letters to the Editor
Sir, Ed Crooks and Tony Major (Comment & Analysis, September 1) are right to question the ability of the eurozone economy to catch up with the US economy. Indeed, they are right to argue that the eurozone economy “will struggle to improve potential growth,” and thereby “will leave the world on course for an unbalanced and potentially unstable recovery.”
It is, however, regrettable that they have not taken the argument further. For it is important to ask why this may be the case.
We suggest that the answer to this question is not difficult to gauge. It is the implementation of the wrong set of policies introduced since the inauguration of the euro in January 1999, after general deflationary policies in the preceding years.
The stability and growth pact constrains national governments in the application of their fiscal policies, while monetary policy has not been expansionary, despite recent reductions in the “repo” rate, the official European Central Bank rate of interest. Furthermore, both policies have produced serious “divergence” among the member states of the economic and monetary union in view of the “one-size-fits-all” nature of both policies.
It is, thus, the case that the institutional arrangements that govern economic policy within the eurozone economy cannot deliver higher growth (it is expected to be negative in the second quarter of 2003) and lower unemployment (at 8.9 per cent currently, as compared to a 6.2 per cent US rate, not to mention the lower 5 per cent in the U.K.).
What is more disturbing is the highly unequal growth rates in the eurozone: the periphery enjoying rather “healthy” growth rates while the “core” economies, Germany, Italy, and the Netherlands, are now in recession, having experienced two consecutive quarters of negative growth rates, and France’s second quarter of 2003 having contracted.
An interesting, and related issue, is that productivity in some eurozone countries is about the same level as in the US, once it is measured on a “per hour” basis: the evidence corroborates the view that Americans work longer hours than many Europeans.
Inflexible labour markets cannot be the reason for the poor eurozone economic performance. Germany in the past, for example during the 1950s and 1960s, despite labour markets even more “inflexible” than currently, managed to deliver healthier growth rates than the US “The US” had “much more flexible markets” then and could “lay off workers” just as easily then as now. Germany did deliver a great deal more than the US, then! More recently, and as the authors also readily acknowledge, eurozone business investment in the second half of the 1990s rose more steeply than in the US Surely the eurozone was not more flexible then.
The eurozone can catch up with America, but sensible economic policies are desperately needed to enable it to do so. The authors recognise this in the case of the US. Why not for the eurozone economy as well? Such a combination will produce more long-lasting growth and high employment, not merely for the two countries but also for the world as a whole.Published by:
The Financial Times
Working Paper No. 391 | September 2003
The dominant view relating to unemployment and inflation is that inflation will be constant at a level of unemployment (the nonaccelerating inflation rate of unemployment, NAIRU) determined on the supply side of the economy (and in the labor market in particular). Further, the economy will tend to converge to (or oscillate around) that level of unemployment. Moreover, demand variables or economic policy changes are thought to have no influence whatsoever on NAIRU. An alternative perspective on inflation would indicate that there would be no automatic forces leading to a level of aggregate demand consistent with constant inflation. Inflationary pressures would arise from, inter alia, a role of conflict over income shares, and from cost elements, with the price of raw materials, especially oil, being the most important. Insofar as there are supply-side factors impinging on the inflationary process, these would arise from the level of productive capacity (relative to aggregate demand) and from conflict over income shares. This paper focuses on the arguments and the evidence that supply-side constraints should be viewed as arising from capacity constraints, rather than from the operation of the labor market.Download:Associated Program:Author(s):
Working Paper No. 388 | September 2003
A Critical Appraisal
Since the early 1990s, a number of countries have adopted Inflation Targeting (IT) in an effort to reduce inflation. Most literature has praised IT as a superior framework of monetary policy. We suggest that IT is a major policy prescription closely associated with the New Consensus Macroeconomics (NCM). Focusing mainly on the IT aspects of the NCM, we address and assess the theoretical foundations of IT, and then assess the empirical work on IT, distinguishing between work that utilizes structural macroeconomic models and work based on single-equation techniques. The IT theoretical framework and the available empirical evidence do not appear to support the views of IT proponents.Download:Associated Program:Author(s):
In the Media | August 2003View More View Less
Copyright 2003 The Financial Times Limited (London, England)
Friday, August 29, 2003; Financial Times; USA Edition; Letters to the Editor
Sir, Martin Feldstein (“Fiscal activism would speed a recovery,” August 26) is clearly correct to argue that fiscal activism should be used under current economic circumstances. He is, though, incorrect to suggest that monetary policy will be more effective as an economic stabiliser in the near future.
Fiscal policy, used prudently to manipulate aggregate demand to achieve high levels of employment, is very much in order. Monetary policy, on the other hand, is impotent when interest rates are rapidly approaching their floor of zero and inflation is practically non-existent.
The Americans, the Japanese and the eurozone economies are the primary examples of the ineffectiveness of central bank actions. Only fiscal policy can rescue economies that are either in recession, or growth recession, as the case may be.
The eurozone countries are experiencing unacceptable unemployment rates of 8.9 per cent, growth recession and inflation generally above the 2 per cent target of the European Central Bank. The European Commission now warns of further stagnation in the third quarter of 2003. This unenviable performance is the result of the stability and growth pact and its nature—along with that of monetary policy—of “one-size-fits-all,” an argument that has been well rehearsed in the Financial Times.
Fiscal policy has been severely constrained by the pact and it has not been allowed to support monetary policy, itself having become destabilising and contributing to the current eurozone recession.
France and Germany must be right when they justify their violation of the fiscal rules by saying the pact has brought “too much stability and not enough growth.”
Japan is emerging with some growth because of government commitment to fiscal deficit (currently at 7.5 per cent of gross domestic product—much higher than the pact’s 3 per cent). The US’s budget deficit will increase in the order of 6–7 per cent of GDP well into the future; it will not stabilise at the 2 per cent level as Mr. Feldstein argues. Indeed, the world is looking to the US with its changed fiscal stance, and not to the actions of the Federal Reserve, to become the motor of the global economyPublished by:
The Financial Times
In the Media | August 2003
The slowdown in economic growth and rising unemployment in the euro area, with major economies slipping into recession, have revealed serious faultlines in the stability and growth pact governing the euro area's macroeconomic policies. The pact dictates that budget deficits must not exceed 3% of GDP, with a requirement budgets are in balance or surplus on average. Countries that do not adhere to these limits are threatened with fines. It should come as no surprise that slowdown pushes up deficits and has taken some countries over the 3% limit, notably in Germany and France.
For now, penalties for countries exceeding the limit have not been imposed and countries are given up to four years to meet the budget deficit requirements. Although there has been some bending of them, the rules remain in place. Indeed, the European Central Bank and members of the commission are demanding strict adherence to the rules of the pact in future. They are supported by the small countries of the eurozone, which complain that it is unfair for them to have to adhere to the pact while its main architects, Germany and France, do not.
The ECB and some governments view the zone's slowdown as the result of structural factors—labour market rigidities above all—and the failure to tackle burgeoning budget deficits. The rigidities, though, have been around for a long time: during the 50s and 60s, when many European economies were booming, especially Germany's "economic miracle" of the 70s. It is adherence to the pact's rules to limit budget deficits, which thereby can require tax rises and expenditure cuts in the face of recession, that has promoted the present slowdown.
This has not been helped by the ECB's inability to take action to stimulate the zone's economies. The recession has raised severe questions about the appropriateness of the institutional and policy arrangements governing the single currency and their ability to deal with unemployment, recession and inflation.
The limit on budget deficits and the overall balanced budget requirement are severe, running counter to the experience of the past six decades, not allowing public capital investment to be funded by borrowing and more severe than necessary to maintain the 60% public debt to GDP ratio.
Seeking to enforce the requirements of the pact imposes a substantial deflationary thrust and calls for flexibility in the pact's terms do not deal with the underlying problem. It is often argued the budget position of each country has to be restrained because of externalities, or spillover effects. These sometimes take the form of a government's spending putting upward pressure on interest rates and raising the cost of borrowing for others. This may then spill over into other countries and may cause the ECB to raise rates to dampen inflation.
Without accepting that expenditure would necessarily have these effects, we would say the expansion of private sector spending could be expected to have similar effects to those resulting from public spending. Fluctuations in the overall level of expenditure come into play mostly because of fluctuations in private expenditure. The logic of imposing limits on public expenditure would also apply to the private sector. Perhaps there should be limits on private sector deficit or on the trade account.
The pact threatens to become an "instability and no growth pact", with the thrust of fiscal and monetary policies pushing the eurozone economies in a deflationary direction, with Germany, Italy, and the Netherlands now in recession.
No wonder the EC president, Romano Prodi, complains that current pact arrangements are "rigid" and "stupid", and it would not be an exaggeration to suggest they have also become a standing joke.
France and Germany's justification for violating the fiscal rules is that the pact has delivered too much stability and not enough growth. Changes at this juncture in global economic development are very pressing. The falling dollar provides an opportunity for expansion. For, without strong growth outside the US, the economic imbalances may undermine the rest of the world's prospects.
The euro countries should take a lead. What is needed is a fundamental change so a truly effective pact emerges. Coordination of monetary and fiscal policies is paramount but requires monetary authorities to enter into agreements with fiscal authorities and a removal of limits on national deficits. And those deficits should be used to ensure high levels of activity within the euro area.
Public Policy Brief No. 73 | August 2003
How Far Can Equity Prices Fall?
In an asset and debt deflation, the process of reducing debt by saving and curtailing spending takes a long time, say authors Philip Arestis and Elias Karakitsos. Current imbalances and poor prospects for spending in the private sector affect the balance sheets of the commercial banks. The downward spiral between the banks and the private sector induces a credit crunch that adversely affects the US economy, which is vulnerable to exogenous shocks and lacks the foundations for a new, long-lasting business cycle.Download:Associated Program:Author(s):
Working Paper No. 385 | July 2003
Theoretical Underpinnings and Challenges
This paper presents two issues: first, an effort to decipher the theoretical and policy framework of the Economic and Monetary Union (EMU); and second, an argument that the challenges to the EMU's macroeconomic policies lie in their potential to achieve full employment and low inflation in the euro area. We conclude that the institutional and policy arrangements surrounding the EMU and the euro are neither adequate for dealing with today's problems of unemployment and inflation nor promising for the future. We propose alternative policies, and institutional arrangements.
Working Paper No. 383 | July 2003View More View Less
Financial reforms, and financial liberalization in particular, have been at the root of many recent cases of financial and banking crises. In several countries financial reforms allowed real interest rates to reach levels exceeding 20 percent per annum in some cases; in other cases, banking and financial crises led to currency crises. National governments either abandoned attempts at implementing financial liberalization (some countries even reimposed controls) or were forced to intervene by nationalizing banks and guaranteeing deposits. This paper draws on this experience to show that the main cause of these crises is the application of a theoretical framework that is predicated on a number of assumptions that are problematic and based on weak empirical foundations. Consequently, it should be no surprise that the reforms were often unsuccessful and in many cases led to severe financial crises. We will also argue that the case of Egypt is particularly interesting in this regard, since although financial reforms have been enacted, the experience has been rather different: there has been no accompanying financial crisis.Download:Associated Program:Author(s):
Working Paper No. 382 | May 2003
This paper reconsiders the case for the use of fiscal policy based on a "functional finance" approach that advocates the use of fiscal policy to secure high levels of demand in the context of private aggregate demand, which would otherwise be too low. This "functional finance" view means that any budget deficit should be seen as a response to the perceived excess of private savings over investment at the desired level of economic activity. The paper outlines the "functional finance" approach and its relationship with fiscal policy. It then considers the three lines of argument that have been advanced against fiscal policy on the grounds of "crowding out." These lines are based on the response of interest rates, the supply-side equilibrium, and Ricardian equivalence. The paper advances the view that the arguments, which have been deployed against fiscal policy to the effect that it does not raise the level of economic activity, do not apply when a "functional finance" view of fiscal policy is adopted. A section on the intertermporal budget constraint considers whether this constraint rules out budget deficits, and concludes that in general it does not.Download:Associated Program:Author(s):
Working Paper No. 381 | May 2003
Recent developments in macroeconomic policy, in terms of both theory and practice, have elevated monetary policy while downgrading fiscal policy. Monetary policy has focused on the setting of interest rates as the key policy instrument, along with the adoption of inflation targets and the use of monetary policy to target inflation. Elsewhere, we have critically examined the significance of this shift, which led us to question the effectiveness of monetary policy. We have also explored the role of fiscal policy and argued that it should be reinstated. This contribution aims to consider further that conclusion. We consider at length fiscal policy within the current "new consensus" theoretical framework. We find the proposition of this thinking, that fiscal policy provides at best a limited role, unconvincing. We examine the possibility of crowding out and the Ricardian Equivalence Theorem. A short review of quantitative estimates of fiscal policy multipliers gives credence to our theoretical conclusions. Our overall conclusion is that, under specified conditions, fiscal policy is a powerful tool for macroeconomic policy.Download:Associated Program:Author(s):
Working Paper No. 380 | May 2003
The consumer has been on a tightrope since the bursting of the "new economy" bubble, as losses in equity markets have been partly offset by gains in real estate and fiscal support and mortgage refinancing have partly offset increased consumer cautiousness. The consumer will remain on a tightrope in the near future, but if the economy were to stumble, the fragile consumer might contribute to turning the downturn into a deep and protracted recession. There are two risks to the continuation of consumer resilience. The first arises from the fact that this has been a jobless recovery. The second arises from a growing personal sector imbalance that is fueled by the growing property bubble. Hence, the short-term outlook remains uncertain, but the long-term one is bleak.Download:Associated Program(s):Author(s):
Working Paper No. 378 | May 2003
The Role of Investment
The anemic US economic recovery and the threat of a double-dip recession stem from the weakness of investment, due to excess capacity created in the euphoric years of the "new economy" bubble. The current imbalances in the corporate sector (i.e., the all-time-high indebtedness in the face of falling asset prices) are preventing investment from picking up and are laying the foundations for a new, long-lasting expansion. Tax reductions may create a cyclical upturn in the short run, and may promote the anemic recovery, but such stimulus to demand is unsustainable in the long run. The root of the problem is the imbalance in the corporate sector, which will take time for correction.Download:Associated Program(s):Author(s):
Working Paper No. 377 | April 2003
Institutional and Policy Alternatives to Financial Liberalization
There are many recent worldwide examples of severe financial crises that are linked to periods of financial liberalization. Given the ubiquity of these crises, there is the legitimate question of why governments still pursue financial liberalization policies. Answers to this question range from the recent institutionalization of norms of "acceptable" financial policies and perceived potential gains of attracting private capital inflows to the implied gains arising from the economic logic embedded in the theory underlying financial liberalization. This paper will focus on the latter arguing that financial transformation along the lines proposed by McKinnon-Shaw has engendered widespread banking crises precisely because of the weak foundations of the theory. The financial liberalization theory is critically evaluated on both theoretical and empirical grounds. An alternative theoretical approach is presented that focuses on ways to effect financial and banking transformation that is more consistent with economic development that draws on an institutional-centric perspective.Download:Associated Program:Author(s):Philip Arestis Machiko Nissanke Howard Stein
Working Paper No. 374 | March 2003
This paper considers the nature and role of monetary policy when money is envisaged as credit money endogenously created within the private sector (by the banking system). Monetary policy is now based in many countries on the setting (or targeting) of a key interest rate, such as the Central Bank discount rate. The amount of money in existence then arises from the interaction of the private sector and the banks, based on the demand to hold money and the willingness of banks to provide loans. Monetary policy has become closely linked with the targeting of the rate of inflation. In this paper we consider whether monetary policy is well-equipped to act as a counter-inflation policy and discuss the more general role of monetary policy in the context of the treatment of money as endogenous. Currently, two schools of thought view money as endogenous. One school has been labeled the "new consensus" and the other the Keynesian endogenous (bank) money approach. Significant differences exist between the two approaches; the most important of these, for the purposes of this paper, is in the way in which the endogeneity of money is viewed. Although monetary policy—essentially interest rate policy—appears to be the same in both schools of thought, it is not. In this paper we investigate the differing roles of monetary policy in these two schools.Download:Associated Program:Author(s):
Policy Note 2003/2 | February 2003
The SGP has been the focus of growing controversy within the eurozone. The ECB continues to argue that reforming the SGP by relaxing its rules would damage the credibility of the euro. The opposite, however, may be closer to reality. Relaxing the rules according to the measures already taken by the European Commission has been inconsequential regarding the euro's credibility. In our view, many more fiscal policy reforms are needed so that the Eurozone can realize a true economic recovery and enhance the credibility of the euro.Download:Associated Program:Author(s):
Working Paper No. 371 | February 2003
A Markov Regime-switching Approach
The aim of this study is to estimate the credibility of monetary policy in four accession countries (the Czech Republic, Hungary, Poland, and the Slovak Republic), based on the Markov regime-switching (MRS) framework. We utilize the theoretical proposition that in the conduct of monetary policy, there is uncertainty in terms of the type of central bank. We measure this uncertainty as a deviation of monetary policy from a target level. We utilize for the target level the differential between the interest rates of the four individual accession countries and a "synthetic" interest rate of 11 EMU member countries.Download:Associated Program:Author(s):
Public Policy Brief No. 71 | January 2003
The Dubious Effectiveness of Interest Rate Policy
Central bankers and many economists have abandoned “activist” policies and monetarism and adopted in their place a new view of the role of monetary policy. This view draws on many of the tenets of more traditional theories of money—monetarism’s emphasis on inflation control and skepticism about the use of easy-money policies to permanently increase output, and the Keynesian view that the total stock of money is not an important driving force behind either inflation or unemployment—yet it also takes a dim view of democratic input to the policymaking process. This brief evaluates a premise subscribed to by most central bankers: that monetary policy can be effectively used to control inflation without any permanent sacrifice in the form of reduced income or job opportunities.Download:Associated Program:Author(s):
Public Policy Brief Highlights No. 71A | January 2003
The Dubious Effectiveness of Interest Rate PolicyCentral bankers and many economists have abandoned "activist" policies and monetarism and adopted in their place a new view of the role of monetary policy. This view draws on many of the tenets of more traditional theories of money—monetarism's emphasis on inflation control and skepticism about the use of easy-money policies to permanently increase output, and the Keynesian view that the total stock of money is not an important driving force behind either inflation or unemployment—yet it also takes a dim view of democratic input to the policymaking process. This brief evaluates a premise subscribed to by most central bankers: that monetary policy can be effectively used to control inflation without any permanent sacrifice in the form of reduced income or job opportunities.Download:Associated Program:Author(s):
Working Paper No. 370 | January 2003
Testing for Financial Contagion between Developed and Emerging Markets during the 1997 East Asian CrisisView More View Less
This paper examines whether, during the 1997 East Asian crisis, there was any contagion from the four largest economies in the region (Thailand, Indonesia, Korea, and Malaysia) to a number of developed countries (Japan, the United States, the United Kingdom, Germany, and France). Following Forbes and Rigobon (2002) and Rigobon (2003), we test for contagion as a positive significant shift in the degree of comovement between asset returns, taking into account heteroscedasticity and endogeneity bias. However, we improve on earlier empirical studies by taking the approach introduced by Caporale et al. (2002), and employ a full sample test of the stability of the system that relies on more plausible (over)identifying restrictions. The estimation results show that the impact of the East Asian crisis on developed financial markets was small (Japan being the only exception), while the drastic reduction in international lending to the region severely affected it.Download:Associated Program:Author(s):Philip Arestis Guglielmo Maria Caporale Andrea Cipollini
Working Paper No. 369 | January 2003
Within the framework of macroeconomic policy and theory over the past 20 years or so, a major shift has occurred regarding the relative importance given of monetary policy versus fiscal policy. The former has gained considerably in stature, while the latter is rarely mentioned. Further, monetary policy no longer focuses on attempts to control some monetary aggregate, as it did in the first half of the 1980s, but instead focuses on the setting of interest rates as the key policy instrument. There has also been a general shift toward the adoption of inflation targets and the use of monetary policy to target inflation. This paper considers the significance of this shift in the emphasis of monetary policy, questions its effectiveness, and explores the role of fiscal policy. We examine these subjects from the point of view of the "new consensus" in monetary economics and suggest that its analysis is rather limited. When the analysis is broadened to embrace empirical issues and evidence, the conclusion clearly emerges that monetary policy is relatively impotent. We argue that fiscal policy (under specified conditions) remains a powerful tool for macroeconomic policy, particularly under current economic conditions.Download:Associated Program:Author(s):
Working Paper No. 368 | January 2003
Equity prices have been falling since March 2000. How far can they fall before they reach bottom? The current bear market differs from the mid-1970s plunge in equity prices in terms of the causes and, consequently, the factors that should be monitored to test its progress. In the 1970s, the bear market was caused by soaring inflation resulting from a surge in the price of oil. It eroded households' real disposable income and corporate profits. That was a supply-led business cycle. Now, the bear market is caused by asset and debt deflation triggered by the burst of the "new economy" bubble. This working paper argues that on current economic fundamentals, the Standard & Poor's (S&P) index is fairly valued at 871, but the fair value may fall if the economy has a double-dip recession that triggers a property market crash. We suggest that the US economy is heading for such a recession, as the poor prospects of the corporate sector are affecting the real disposable income of the personal sector. The forces that drive the economy back to recession are related to imbalances in the corporate and personal sectors that have started infecting the balance sheet of the commercial banks. The final stage of the asset-and-debt-deflation process involves a spiral between banks and the nonbank private sector (personal and corporate). Banks cut lending to the nonbank private sector, creating a credit crunch that worsens the economic health of the latter, which is reflected subsequently as a further deterioration of banks' balance sheets.Download:Associated Program:Author(s):
Working Paper No. 364 | December 2002
In this paper we seek first to set out the economic analysis that underpins the ideas of what has been termed the “third way.” The explicit mention of the “third way” is much diminished since the early days of the Blair government in the UK and the Schroeder government in Germany. We argue that the ideas associated with the “third way” continue to influence these governments and, more broadly, other governments and the European Union, and that these ideas are firmly embedded in New Keynesian economics. Our paper then focuses on some particular aspects of New Keynesian economics and its emphasis on the role of monetary policy and the downgrading of fiscal policy. There has emerged a so-called “new consensus” on macroeconomic policy (specifically, monetary policy), which we regard as an outgrowth of New Keynesian economics. We review this “new consensus” and argue that the empirical evidence on the operation of monetary policy reveals that such a policy is rather impotent. Insofar as it does have an effect, it operates to influence the level of investment, which in turn affects the future level and distribution of productive capacity. Thus, contrary to the prevailing view, monetary policy is not an effective way to control inflation, but it can have effects on the real side of the economy. The lack of attention to fiscal policy and the overemphasis on monetary policy leaves the European Union and its member countries without the means to tackle any serious recession or upsurge of inflation.Download:Associated Program:Author(s):
Working Paper No. 363 | December 2002
Recent developments in macroeconomics, and in economic policy in general, have produced a "new consensus" economy-wide model. In this model, the stock of money does not play any causal role, but operates as a mere residual in the economic process. The absence of the stock of money in many current debates over monetary policy has prompted the deputy governor of the Bank of England to note the irony of the situation: as central banks became more and more concerned with price stability, less and less attention is paid to money. Indeed in several countries, the decline of interest in money appears to have coincided with low inflation. In turn, a number of contributions have attempted, wittingly or unwittingly, to "reinstate" a more substantial role for money in this "new" macroeconomics. In this paper we argue that these attempts to "reinstate" money in current macroeconomic thinking entail two important problems. First, they contradict an important theoretical property of the new "consensus" macroeconomic model, namely, that of dichotomy between the monetary and the real sector. Second, some of these attempts either fail in terms of their objective or merely reintroduce the problem rather than solve it. We conclude that if money is to be given a causal role in the "new" consensus model, more substantial research is needed.Download:Associated Program:Author(s):
Working Paper No. 362 | November 2002
Evidence from Developed and Developing Economies
We collect data on a number of financial restraints, including restrictions on interest rates and capital flows and reserve and liquidity requirements, and capital adequacy requirements from central banks of 14 countries. We estimate the effects of these policies on the aggregate productivity of the capital stock, controlling for the effects of inputs and financial development and using modern econometric techniques. We find that financial development has positive effects on productivity, while the effects of financial policies vary considerably across countries. Our findings demonstrate that financial liberalization is a much more complex process than has been assumed by earlier literature, and its effects on macroeconomic aggregates are ambiguous.Download:Associated Program:Author(s):Philip Arestis Panicos Demetriades Bassam Fattouh
Working Paper No. 361 | November 2002
A Markov Regime-switching Approach
The primary objective of this paper is to use the Markov regime-switching modeling framework to study the credibility of monetary policy in five member countries of the European Monetary System (EMS) during the period 1979 to 1998. The five countries examined for this purpose are Austria, Belgium, France, Italy, and the Netherlands. The major innovation of this paper is the use of a Markov regime-switching model with time-varying transition probabilities. The output-gap variability and the inflation variability variables are incorporated into the determination of the monetary policy preferences of individual member countries of the EMS. Empirical evidence is provided to show that although all the countries in our sample followed a credible monetary policy regarding price stability, they had different preferences regarding the trade-off between the stabilization of output-gap variability and inflation variability.Download:Associated Program:Author(s):
Working Paper No. 360 | October 2002
Some Conceptual Problems
In recent years free movement of financial capital following financial liberalization has given the impression that financial markets are truly globalized. In this paper we argue that free movement of financial capital alone does not constitute financial globalization. To achieve true financial globalization, an important requirement is the creation of a worldwide single currency, managed by a single international monetary authority. This condition, however, is not met under current institutional arrangements.Download:Associated Program:Author(s):
Working Paper No. 358 | October 2002
This paper contributes to the debate on whether the United States' large federal budget deficits are sustainable in the long run. The authors model the government deficit per capita as a threshold autoregressive process, finding evidence that the deficit is sustainable in the long run and that economic policymakers will intervene to reduce the per capita deficit only when it reaches a certain threshold.Download:Associated Program:Author(s):Philip Arestis Andrea Cipollini Bassam Fattouh
Working Paper No. 359 | October 2002View More View Less
This paper examines two issues. First, we compare, based on the ratio of output-gap variability to inflation variability, the monetary policy performance of eleven EMU countries for the whole period of the EMS. Second, we examine whether the introduction of an implicit inflation-targeting by the EMU member countries after the Maastricht Treaty changed the trade-off between inflation variability and output-gap variability. We employ a stochastic volatility model for the whole period of the EMS and for two sub-periods (i.e., before and after the Maastricht Treaty). We find that for the whole period the trade-off ratio varies among EMU countries, especially in the case where industrial production is utilized to construct the output-gap variable. The results also vary from the point of view of how the trade-off variabilities change for each country before and after the Maastricht Treaty. The implication of these findings is that asymmetries exist in the euro area as a result of either different monetary policy preferences or different economic structures among the EMU's member countries.Download:Associated Program:Author(s):
Working Paper No. 357 | October 2002
This paper explores the probable consequences for public expenditure in the United Kingdom if Britain were to join the euro. It focuses on the effects of sterling joining the euro (and the associated implications, such as monetary policy being governed by the European Central Bank). It does not consider any broader questions of the effects of membership in the European Union and the policies pursued by the EU and the European Commission. Since the fiscal stance of government influences the level of demand in the economy, there are also important implications for the level of employment more generally. While the general deflationary nature of the economic policy of the eurozone (an issue we have explored elsewhere on many occasions) should not be overlooked, the focus of this paper is on the implications for public expenditure of the eurozone and the UK's possible entry into the euro.Download:Associated Program:Author(s):
Working Paper No. 355 | October 2002
Current monetary policy involves the manipulation of the central bank interest rate (the repo rate), with the specific objective of achieving the goal(s) of monetary policy. The latter is normally the inflation rate, although in a number of instances this may include the level of economic activity (the monetary policy of the United States' Federal Reserve is a good example of this category). This raises two issues. The first is the theoretical underpinnings of this mode of monetary policy. The second is the channels of monetary policy or, more concretely, the channels through which changes in the rate of interest may affect the ultimate goal(s) of policy. Both aspects are investigated in this paper. Furthermore, we suggest that it is imperative to consider the empirical estimates of the effects of monetary policy. We summarise results drawn from the eurozone, the US and the UK and suggest that these empirical results point to a relatively weak effect of interest rate changes on inflation. We also suggest, on the basis of the evidence adduced in the paper, that monetary policy can have long-run effects on real magnitudes. This particular result does not fit comfortably with the theoretical basis of current thinking on monetary policy.Download:Associated Program:Author(s):
Working Paper No. 352 | September 2002
This paper is concerned with two issues. First, it discusses some of the main problems and inferences the methodological approach of critical realism raises for empirical work in economics, while considering an approach adopted to try to overcome these problems. Second, it provides a concrete illustration of these arguments, with reference to our recent research project analyzing the single European currency. It is argued that critical realism provides a method that is partially appropriate to concrete levels of analysis, as illustrated by the attempt to explain the falling value of the euro. It is concluded that the critical realist method is inappropriate to the most abstract and fundamental levels of theory.Download:Associated Program:Author(s):
Working Paper No. 345 | May 2002
In the United Kingdom the emergence of a “New Labour” has been closely associated with the development of the notion of the “third way.” Tony Blair, for example, stated that “New Labour is neither old left nor new right. . . . Instead we offer a new way ahead, that leads from the centre but is profoundly radical in the change it promises.” In a similar vein Giddens locates the "third way" by reference to two other “ways” of classical social democracy and neoliberalism. Although some notable contributions have been made on the subject of the “third way,” rather little has been written specifically on the economic analysis underpinning it. This paper infers such an analysis by working back from the policies and policy pronouncements of governments. To do so, the paper examines the types of economic analyses being used to underpin the ideas of the “third way”; the suggestion that the ideas surrounding the economic analysis of the economic and monetary union's (EMU's) theoretical and policy framework are firmly embedded in that of “third way”; and the argument that the challenge for EMU macropolicies lies in their potential to achieve full employment and low inflation in the euro system. On the last point, the author concludes that these policies, as they currently operate, are not very promising. Alternatives are therefore suggested.Download:Associated Program:Author(s):
Policy Note 2002/3 | March 2002
The introduction of the euro has been a significant step in the integration of the economies of the countries that form the European Union (EU) and the 12 countries that comprise the Economic and Monetary Union (EMU). Its adoption not only means that a single currency prevails across the Eurozone, with reduced transactions costs for trade between member countries; the currency also has become embedded in a particular set of institutional and policy arrangements that tell us about the nature of economic integration in the EU. In fact, the euro is a relatively small step along the path to further economic integration at the global level, and the neoliberal agenda of globalization can be clearly seen from the ways in which the euro has been introduced.Download:Associated Program:Author(s):
Public Policy Brief Highlights No. 63A | March 2001
Is There an Alternative to the Stability and Growth Pact?This brief provides a detailed description of the Stability and Growth Pact, an agreement entered into by the member states of the European Union that has far-reaching implications for the long-run value of the euro, and therefore, on the real economy in terms of output growth and employment. Yet despite the fact that the pact underpins the adoption of the single currency and has fundamentally redefined the scope and nature of economic policymaking in the member states, public discussion about it is relatively scant, especially on our side of the Atlantic, even though the economic health of the European Union does matter to the economic and strategic position of the United States. The authors provide propose a critique of the pact that focuses on the shortcomings induced by the its regime of mandatory fiscal austerity, the separation between fiscal and monetary policy, the undemocratic structure and lack of accountability of the European Central Bank, and the paramount importance attached to price stability at the expense of other policy objectives. According to the authors, these shortcomings will have serious negative effects on the current and future economic performance of the member states and the material well-being of its citizens.Download:Associated Program:Author(s):
Working Paper No. 324 | March 2001
This paper examines the causes of the general decline in the value of the euro. First, it assesses the various explanations proffered in existing literature, and then it offers a more satisfactory one. The argument prevalent in the literature that the decline in value of the euro is due to "US strength" rather than to any inherent difficulties with its imposition is viewed as somewhat undeveloped. We suggest that US strength is an important but only partial factor in the euro's decline; the other side of US strength is Eurozone weakness. We review the (poor) performance of the ECB and assess the level of macroeconomic convergence of Eurozone countries. We conclude that a combination of Eurozone weakness, endogenous to the inception of the euro, and US strength is the most plausible explanation for the euro's decline in value. We find that although the future value of the euro is uncertain, the prospects for the eurozone will remain bleak as long as the current institutions underpinning the euro, with their inherent tendencies to promote deflation, are in place.Download:Associated Program:Author(s):
Working Paper No. 322 | March 2001
It has been argued that the eurozone will face considerable economic difficulties. These will take a number of forms, two of which could qualify as "crises." First, the euro was launched at a time when unemployment levels were high (10 percent of the workforce) and disparities in the experience of unemployment and standards of living were particularly severe. These high levels of unemployment are likely to continue in the foreseeable future, and the policy arrangements that surround the operation of the euro, notably the objectives of the European Central Bank and the workings of the Stability and Growth Pact, will have a deflationary bias. These levels of and disparities in unemployment could be termed a crisis. Second, the introduction of the euro and the associated institutional setting could well serve to exacerbate tendencies toward financial crisis, including the volatility and subsequent collapse of asset prices and runs on the banking system. Some additional forces of instability may arise from the current trade imbalances and the relationship between the dollar and the euro as two major global currencies. Further, the operating arrangements of the European System of Central Banks can be seen as inadequate to cope with such financial crises.Download:Associated Program:Author(s):
Public Policy Brief No. 63 | March 2001
Is There an Alternative to the Stability and Growth Pact?
This brief provides a detailed description of the Stability and Growth Pact, an agreement entered into by the member states of the European Union that has far-reaching implications for the long-run value of the euro, and therefore, on the real economy in terms of output growth and employment. Yet despite the fact that the pact underpins the adoption of the single currency and has fundamentally redefined the scope and nature of economic policymaking in the member states, public discussion about it is relatively scant, especially on our side of the Atlantic, even though the economic health of the European Union does matter to the economic and strategic position of the United States. The authors provide propose a critique of the pact that focuses on the shortcomings induced by the its regime of mandatory fiscal austerity, the separation between fiscal and monetary policy, the undemocratic structure and lack of accountability of the European Central Bank, and the paramount importance attached to price stability at the expense of other policy objectives. According to the authors, these shortcomings will have serious negative effects on the current and future economic performance of the member states and the material well-being of its citizens.Download:Associated Program:Author(s):
Working Paper No. 296 | March 2000
This paper proposes an alternative stability and growth pact among European Union (EU) governments that would underpin the introduction of a single currency and a "single market" within the EU. The alternative pact embraces a number of new aspects of integration within the EU that are based on a different monetary analysis (different from that of "new monetarism"), new objectives for economic policy (such as employment and growth), and new institutions to reduce various kinds of disparities across the EU. The paper begins by critically examining the Stability and Growth Pact, which accompanied the introduction of the euro in January 1999, but which has not received as much attention in the policy debates on the euro as some other aspects of it. This is followed by a discussion of the institutional underpinnings of the euro, with the argument made that the institutional arrangements have a number of weaknesses. An alternative pact governing monetary and fiscal policy, which contains the promotion of the objective of full employment and that requires the creation of new institutions, is proposed.Download:Associated Program:Author(s):
Working Paper No. 282 | October 1999
Current and Future Prospects
The euro was adopted as legal tender, albeit in a virtual form, by 11 countries of the European Union on January 1, 1999. The intention was that notes and coins denominated in euros would be introduced and the national currencies phased out during the first six months of that year, and that the euro would be fully operational by 2002. This paper first reviews the current position of the EMU member states in relation to the convergence criteria under the Maastricht Treaty and finds that there must have been a considerable degree of "fudge" for the criteria to have been met. The paper next looks at the central role of aggregate demand in the EMU and at concerns about unemployment. It then examines the prospects of the current EMU arrangements, concluding that they are highly deflationary. To overcome the deflationary bias of current proposals and as a means to alleviate the serious unemployment problem, the authors recommend that the European Central Bank be enhanced by (1) the development of a new institution, the European Union Development Bank, and (2) a modification of the Stability and Growth Pact.Download:Associated Program:Author(s):
Working Paper No. 274 | July 1999
In this paper, Visiting Senior Scholar Philip Arestis questions the assumptions underlying the economic case for the independent European Central Bank (ECB). Arestis argues that although a European Clearing Agency (ECA) of the type Keynes envisaged for the international economy is not a panacea for the economic problems of the European Union (EU), it is nonetheless a better way forward and far superior to the ECB. The paper (1) outlines the theoretical basis of Keynesian monetary and financial theory; (2) aims to ascertain the extent to which credit availability is affected by the creation of an ECB and, on that basis, to offer a critical analysis of current proposals for an ECB; (3) looks closely at the case for the ECA, seen as performing a range of functions rather than having a remit defined simply in terms of strict monetary control, including a commitment to providing the necessary finance for full employment and a responsibility for ensuring that the burden of balance-of-payments adjustment falls upon both deficit and surplus countries.Download:Associated Program:Author(s):
Working Paper No. 263 | February 1999
A Historical Perspective of European Economic and Monetary Integration
This paper traces the history and the institutional background of European integration to the establishment of the economic and monetary union in the European Union (EU). After the establishment of the European Economic Community (EEC) in the late 1950s, attempts at monetary integration, and ultimately monetary union, tended to assume importance only as a result of financial crisis and then returned to being a vague objective as soon as the crisis recedes. In recent years, however, monetary integration has assumed greater urgency. Economic union, on the other hand, has followed a smoother transition.
Economic integration was used after the Second World War to realize political goals, chiefly to anchor West Germany within the western European alliance. Since that time the economies of member states have slowly integrated. The economic environment of the 1950s is a far cry from the integrated community of today. In the 1950s European currencies were not convertible and domestic trade was highly protected. Intra-European trade was based on bilateral clearing arrangements institutionalized by the European Payments Union. Today EU currencies are fully convertible; capital controls, intra-EU tariffs, and quotas have been eliminated; and the single market has been completed.
Monetary union has gone through a number of stages. The Werner Plan of the early 1970s, which set the goal of economic and monetary union by the end of the decade, was only partially implemented. Its failure can be put down to unfavorable international economic conditions and poor institutional structures. In the early 1980s a new monetary initiative, the European Monetary System (EMS), was launched. It struggled through its initial phase until it was replaced by the current euro arrangements. These successive stages ultimately culminated in the Maastricht Treaty, which laid out a precise path and timetable for economic and monetary union.Download:Associated Program(s):Author(s):
Working Paper No. 238 | June 1998
This paper explores some of the links between macroeconomic policy and industrial strategy. The perspective of the present paper is to emphasize the role of the output and investment activities of enterprises rather than the general focus on the labor market in the determination of economic performance. We have explored this aspect in some detail in connection with the inflation barrier, and argue that such a barrier should be viewed in terms of a lack of capacity. We briefly review the balance of trade constraint on growth and employment. The overall implications of those two sets of analyses is that macroeconomic performance would be enhanced by appropriate industrial strategy, and that inappropriate macroeconomic policies will damage industrial performance. Policies designed to restrain inflation by lowering the level of aggregate demand will tend to depress investment and harm capacity. Improved industrial performance requires a climate conducive to investment and research and development, which in turn depends on, inter alia, high and stable levels of aggregate demand.Download:Associated Program:Author(s):
Working Paper No. 207 | August 1997
In this paper, Philip Arestis, of the University of East London, and Visiting Scholar Malcolm Sawyer, of the University of Leeds, assert the need for revived and revised Keynesian policies to secure full employment. They do not support "fine tuning," but argue for a medium-term approach that includes both demand-side and supply-side strategies. Their approach is Keynesian in two ways. First, they contend that a laissez-faire market economy does not ensure full employment. Second, they believe that a more equal distribution of market power, income, and wealth is both a desirable goal in itself and a vehicle for increasing prosperity. They discuss the constraints that prevent full employment and policies to deal with them.Download:Associated Program:Author(s):