Suchergebnisse

Yesterday, I posted a reply to John Cochrane's Sept 4 post on the national debt. John alerted me to his Sept 6 update, which I somehow missed. Given this update (together with some personal correspondence), let me offer my own update. John begins with an equation describing the flow of government revenue and expenditure. With a debt/GDP ratio of one, the sustainable (primary) deficit/GDP ratio is given by g - r, where g = growth rate of NGDP and r = nominal interest rate on government debt (I include Federal Reserve liabilities and currency in this measure). John assumed g - r = 1% (so about $200B). In a post I published last year, I assumed g - r = 3% (so about $600B); see here: Is the U.S. Budget Deficit Sustainable? Two things to take away from these calculations. First, this arithmetic suggests that the U.S. federal government can easily run persistent primary budget deficits in the range of 1-3% of GDP. Not only does the debt not need to be paid off, but it can grow forever. Second, primary budget deficits are presently far in excess of this range. What does this imply?Let's step back and think about John's equation. The arithmetic of the government "budget constraint" basically says this:Deficit/GDP = [1 - (1+r)/(1+g)] x Debt/GDPNote that a sustainable primary deficit is only possible if r < g. If r > g, then a primary surplus is needed to service the interest expense of the debt. Students of monetary theory may recognize the expression above as a Laffer curve for inflation finance. That is, in the case of currency we have r = 0. Let g represent the growth rate of the supply of currency and assume a constant RGDP (so that g also measures the growth rate of NGDP). Finally, replace debt with currency, so that Seigniorage revenue = [1 - 1/(1+g)] x Money/GDP Again, this is just arithmetic. Economic theory comes in through the assumption that the demand for money is decreasing in the rate of inflation, g. If this is true, then an increase in g has two opposing effects: it increases seigniorage revenue by increasing the inflation tax rate, but it lowers seigniorage revenue because it decreases the inflation tax base. There is a maximum amount of seigniorage revenue the government can collect by printing money. That is, there are limits to inflation finance. (See also my post here.)Now, I know John is fond of saying that Federal Reserve liabilities and U.S. Treasury securities are essentially the same thing (especially if the former exist mainly as interest-bearing reserve accounts). I happen to agree with this view. But then we can use exactly the same logic to characterize the limits to bond finance, recognizing that U.S. Treasury securities are essentially money. To this end, assume that the Debt/GDP ratio is an increasing function of (r - g). To make things a little simpler, let me continue to assume zero RGDP growth, so that g represents both inflation and NGDP growth. Finally, let me assume that r is a monetary policy choice (just as setting r = 0 for currency is a policy choice). Next, we need a theory of inflation. In the models I work with, the rate of inflation in a steady state is determined by the growth rate of the nominal debt, g, which I also treat as a policy parameter. So, the magnitude r - g is policy-determined, at least, within some limits. By lowering r and increasing g, the government is making its securities less attractive for people to hold. But this just tells us that the demand for debt is lower than it otherwise might be--it does not tell us how large this demand is in the first place, or how it is likely to evolve over time owing to factors unrelated to r or g (e.g., regulatory demand, foreign demand, etc.).So, with this apparatus in place, my interpretation of what worries John is the question of what happens if [1] the federal government finds itself near the top of the bond-seigniorage Laffer curve; and [2] a shock occurs that requires a large fiscal stimulus. Barring alternative forms of securing resources (e.g., through direct command/conscription), the government will not have the fiscal capacity to lay claim against the resources it needs. Printing more money/bonds here is not going to help even with zero interest rates. The ensuing inflation would simply put us on the right-hand-side of the Laffer curve -- the government's ability to secure resources would only diminish. Assuming I have captured at least a part of John's concern accurately, let me go on to critique it. To begin, there's nothing wrong with the logic I spelled out (I don't think). But I want to make a couple of points nevertheless.First, the demand for U.S. government securities (D/Y) seems to be growing very rapidly and for a very long time now. We know, anecdotally, that the UST is used widely as collateral in credit derivatives markets and repo, that foreign countries view it as a safe asset, that investors value its safety, and that recent changes to Dodd-Frank and Basel III have contributed to the regulatory demand for USTs. The global demand for the U.S. dollar is, if anything, growing more rapidly than ever (re: the recent "dollar shortages" that resulted in the Fed opening its central bank swap lines). We don't know where this limit is, but judging by how low U.S. inflation is (together with low UST yields), it seems fair to day that there's still plenty of fiscal capacity. (And I want to stress that this has nothing to do with the ability of a country to pay back its debt -- I'm not sure why John keeps mentioning this while at the same time understanding that this debt is money). I suspect that John is likely to agree with what I just said. Sure, there may be more room now, but how much more? With bipartisan concern for debt absent in Congress, with no sign of inflation in sight, with interest rates so low, how can we not hit this limit at some point?My own view is that we are bound to hit this limit (though, economists like Simon Wren-Lewis have warned me not to discount the forces of austerity). The question is what happens once we hit that limit? I say we get USD depreciation and some inflation (not hyperinflation). John seems to be worried about hyperinflation after all, which he likens to a debt rollover crisis. I just don't see it. (Of course, if John is simply suggesting that the fiscal authority will continue to run persistently large deficits in the face of high inflation, then I agree with him. While I don't see this happening, who can say for sure?)Finally, what happens if we're near the debt limit and there's a shock. Well, what type of shock exactly? The type of shock that hit us in 2008 is likely to increase the demand for debt, expanding fiscal capacity. So, here too, I'm not sure what form the debt crisis is supposed to take. It would be great to appeal to a model (but please, not one of Greece). 

It is widely believed that increase in money supply increases inflation rates in the long run. Dissenting evidences have later emerged to show that the inflation-money growth link has weakened over time. This study provides a political interpretation of inflation rates dynamics by investigating corruption as a potential risk factor associated with high inflation in the Economic Community of West African States (ECOWAS) using panel logit model. All 15 ECOWAS members were selected and studied between 1995 and 2019. Estimates revealed that, in the long run, ECOWAS inflation was significantly determined by past inflation shocks, level of corruption, real GDP and exchange rates; the link between inflation and money supply growth had indeed weakened over time. In particular, results showed that, other things given, a unit increase in the level of corruption increased the risk of high inflation by 82.6%. Results also indicated that seigniorage was not enough to explain the link between inflation and corruption, suggesting that some other channels exist through which corruption affects inflation. In addition, taking 0.5 as the benchmark for forecast probabilities, the logit model reconstructed all the high inflation episodes experienced in ECOWAS in spite of the outlying observations of Liberia and Guinea. The study therefore concludes that other things given, the more corrupt ECOWAS members are, the higher the likelihood to experience high inflation.

The multiple currency phenomenon (MCP) in Lao PDR takes the form of the use of foreign currencies such as dollars and baht in the presence of a domestically issued currency. The MCP has both costs and benefits. The costs include the social loss associated with seigniorage, the inability to conduct an independent monetary policy and the relative ineffectiveness of the exchange rate as an adjustment mechanism. The benefits of the MCP include the discipline imposed on the government by limiting its capacity to finance spending through inflation tax, and the stability and certainty induced by an effectively fixed exchange rate. Since the costs appear to exceed the benefits, how should the Government of Lao PDR respond? Enforcing the use of the kip is not the answer, and may well be counter-productive. This is because the MCP is not the problem, but is merely a symptom. The problem is a lack of confidence in the kip, whilst the symptom is the use of another currency such as the dollar or baht. The causes of the problem emanate from an underdeveloped monetary system, macroeconomic instability, and weak legal and institutional systems. These are the problems that need to be addressed directly. When these problems are addressed, then the symptom, which is the MCP, will also cease to be a constraint.

This paper deals with the interaction of fiscal and monetary policy when the central bank is pursuing a price stability-oriented monetary policy.In particular, we study the durability of the price stability regime when public debt accumulates as a result of ultimately unsustainable deficits.The growth of indebtedness causes the collapse of the price stability regime after a period of rising deficits.The budget deficit is endogenously determined in the model, as a result of government's decisions on how to finance its expenditure.The alternative methods of finance are taxes, debt, and seigniorage.Under the price stability regime, only the first two methods are available, but in the long run taxes and seigniorage are the only alternatives.The price stability regime collapses when the public debt reaches an edogenously determined threshold, which makes reneging on price stability as attractive as accumulating more tax burden for the future.We are able to solve for the critical level of debt, the timing of the collapse, and the reaction of taxes to the collapse of the price stability regime. The critical level of debt depends, inter alia, on the level of government consumption, the real interest rate, the velocity of money, and the efficiency-effects of taxation.The results are illustrated by several numerical simulations.

Cover -- Title Page -- Copyright Page -- CONTENTS -- PREFACE -- INTRODUCTORY NOTE -- PART I: BASIC ISSUES AND TOOLS OF ANALYSIS -- CHAPTER ONE What is a Political Economy? -- 1.1. Introduction -- 1.2. Politics and Economics -- 1.3. Types of Heterogeneity -- 1.4. An Illustration of Approaches -- 1.5. Plan of the Book -- CHAPTER TWO Economic Models for Political Analysis -- 2.1. Introduction -- 2.2. The Principal-Agent Problem -- 2.3. Discrete Time Dynamic Models-Dynamic Programming -- 2.4. The Overlapping Generations Model -- 2.5. Effects of Uncertain Future Policies -- 2.6. Conclusions -- CHAPTER THREE Decisionmaking Mechanisms -- 3.1. Introduction -- 3.2. How Much Political Detail? -- 3.3. Choosing Decisionmaking Mechanisms -- 3.4. Direct Democracy -- 3.5. Representative Democracy -- 3.6. Multiparty Systems -- 3.7. Interest Groups and Lobbying -- 3.8. Transaction Cost Politics -- 3.9. Conclusions -- PART II: COMMITMENT, CREDIBILITY, AND REPUTATION -- CHAPTER FOUR The Time-Consistency Problem -- 4.1. Introduction -- 4.2. Capital Taxation -- 4.3. Time Inconsistency as a Conflict of Interests -- 4.4. The Barro-Gordon Model -- 4.5. Seigniorage Revenue and the Optimum Quantity of Money -- 4.6. Commitment versus Flexibility -- 4.7. Conclusions -- CHAPTER FIVE Laws, Institutions, and Delegated Authority -- 5.1. Introduction -- 5.2. Laws, Constitutions, and Social Contracts -- 5.3. Delegation of Authority -- 5.4. Central Bank Independence -- 5.5. Fiscal Structures for Time Consistency -- 5.6. Conclusions -- CHAPTER SIX Credibility and Reputation -- 6.1. Introduction -- 6.2. Reputation -- 6.3. ''Reputation'' under Complete Information -- 6.4. Reputation under Incomplete Information-Mimicking -- 6.5. Does Reputation ''Solve'' the Time-Consistency Problem?-Three Caveats -- 6.6. Signaling -- 6.7. Reputation for Not Reneging on Commitments

Abstract
Central banks including the ECB have moved forward with plans concerning a central bank digital currency (CBDC) to be made available to the public at large. In particular, the announcement of a private stable coin by a consortium led by Facebook/Meta had served as a catalyst. Perhaps the fear of losing market share in terms of seigniorage or impairment of monetary policy played a role. By now, however, a widely-expressed criticism is that the CBDC constitutes a solution that is still in search of a problem to be solved. The argument put forth by the ECB that a CBDC is needed as a monetary anchor in the digital sphere carries little weight after closer inspection. Furthermore, potential advantages of a CBDC are partly reduced or precluded because of constraints imposed in order to minimise potential risks for the stability of the banking system and the business model of banks. For example, the model pursued by the ECB refrains from positive or negative interest rates paid on CBDC, imposes limits on transaction amounts and precludes a store of value function. At this point, the main potential benefit appears to be a possible reduction of transaction costs in digital payments and a possible contribution to keeping platform-based markets in digital ecosystems contestable. It remains an open question whether this is a task for central banks.

Abstract
In the history of economic thought, monetary theories in the Germanspeaking world of the early modern era are considered backward compared to the approaches in other European countries. This backwardness can be illustrated by two authors from the mid-18th century who were not only contemporaries but also successively in the service of Frederick II ("the Great") of Prussia. The first is Johann Philipp Graumann, one of the 'projectors' of the 18th century. As master of the mints in Prussia, he developed a coin project, where he tried to implement a new monetary standard to promote trade, generate seigniorage income and implement the Prussian coins as a kind of a reserve currency. In his writings, he developed a typical mercantilistic monetary theory with a clear understanding of the mechanism in the balance of payments. But even when he tried to include credit instruments, he did not take banks or broader financial markets into account. The second thinker is Johann Heinrich Gottlob Justi, who took the opposite position concerning the coin project as well as in his theory. He defended a strictly metalistic monetary approach where the value of money is only based on the metal's value. While Graumann rejected the English coin system, Justi recommended its laws for countries without their own mines, because the sovereign should not misuse his right of coinage. For him, the monetary system had tobe reliable and stable to serve trade and economic development.

This paper evaluates Peter Gowan's musings on the topic of a U.S.-centered "capitalist world-empire." Gowan's heterodox concept of a "capitalist world-empire" is intellectually defensible. And his claim that U.S. hegemony is historically unique, because unlike previous dominant powers the U.S. has been able to distinctly mold the accumulation regimes and security environments of its would-be rivals in the core, is more than convincing. However, Gowan tends to overstate the degree to which the U.S. in the 1990's enjoyed a productive sector revival, rather than a mere super-inflation of dollar-denominated assets. This tendency prevents him from anticipating just how summarily the U.S. would ditch consensual approaches to managing the capitalistworld-economy once the Wall Street bubble collapsed, and hence from appreciating just how fed up Western European and East Asian elites would become with the predatory character of U.S. hegemony in decay. In conclusion the paper argues that while the U.S. may have neither the resources nor the credibility to politically control the global division of labor, something akin to a U.S.-East Asian geo-economic bloc may be in the process of forming. This is so because the Chinese and Japanese economic growth models remain wedded to the underwriting of the U.S.' seigniorage privileges', and because past and present frictions between China and Japan stand in the way of tighter Sino-Japanese political coordination.

This paper is an attempt at answering the somewhat counterfactual question: if monetary policy was to be decided in the arena of public voting (that is not by independent central banks), then what kind of monetary policies (specifically, inflation rates) would get elected? Alternatively, if central banks cannot turn off the "political pressure valve", what kind of monetary policies are they likely to implement? We employ a standard overlapping generations model with heterogenous young-age endowments, and a government that funds an exogenous spending via a combination of lump-sum income taxes and the inflation tax. In the baseline model with money as the sole asset, we find that elected reliance on seigniorage increases (at a decreasing rate) as the extent of income inequality increases. When the baseline model is augmented to allow for costly access to a fixed real return asset, we find that the relationship between elected reliance on the inflation tax and income inequality becomes non-monotonic; in particular, the reliance inseigniorage may actually decrease as income inequality rises. We find strong impirical backing for this hypothesis from a cross-section of countries. We also find that the likelihood of non-existence of majority voting equilibria is high in economies with a sufficiently high degree of income inequality. These economies would resumably benefit the most from a truly independent central bank.

Cover -- Half Title -- Title -- Copyright -- Contents -- Acknowledgements -- 1 The European Union: Evolution, Institutional and Legislative Structure and Enlargement -- Introduction -- Historical Background: A Path of Increasing Economic Links -- EU Institutions and Organizational Structure of theEuropean Union -- EU Legislation and Law-making Process -- The Challenge of the Enlargement -- 2 Trade Flows and Economic Integration -- Introduction -- Equilibrium Under Free Trade and the Effects of Tariffs -- Customs Unions or Universally Free Trade? -- Static Reallocative Effects of Customs Unions -- Terms-of-Trade Effects of Customs Unions -- Dynamic Effects of Customs Unions -- Summary and Conclusions -- 3 Factor- and Product-Market Integration and Europe's Single Market -- Introduction -- Effects of Factor-Market Integration -- Non-Tariff Barriers to Trade -- Europe's Single Market and the 1992 Internal Market Programme -- Strengthening the European Internal Market: Recent Developments and Performance -- Summary and Conclusions -- 4 Macroeconomic Interdependence, Cooperation and Currency Unions -- Introduction -- Optimum Currency Areas and Similarity of Structures and Shocks -- Phillips-Curve Theory and the Effects of Monetary Integration -- The Game-Theoretic Approach to Monetary Integration: Macroeconomic and Strategic Interdependence, Nashand Cooperative Outcomes -- Seigniorage -- Summary and Conclusions -- 5 Performance of the EMS, the ERM-II and the New EU Member States -- Introduction -- Early Attempts at Monetary-Policy Cooperation in Europeand the EMS -- Growth, Employment and Inflation in the EMS Years -- The Game-Theoretic Approach to the EMS: Impact on Inflation Outcomes -- The Crisis in the Currency Markets of 1990-92 -- ERM-II and the New EU Member States -- Summary and Conclusions -- 6 EMU: Benefits, Costs and Real Convergence.

Purpose
The purpose of this paper is to introduce the factor of emotional intelligence (EI) into the calculus of neoclassical analysis under precautionary saving aiming at stabilizing consumption in the case of an exogenous output shock.


Design/methodology/approach
The introduction of EI differentiates individual firms in handling production uncertainty and individual consumers in coping with consumption uncertainty, but the source of uncertainty is exogenous and affects all the same; there are no idiosyncratic risks and uncertainties. This in conjunction with the median-voter-theory like approach to agent heterogeneity prompted by EI, replicates the result that aggregates quantitative predictions are almost indistinguishable from their representative agent counterpart in life cycle models of precautionary saving.


Findings
EI corroborates stabilization greatly but only the introduction of a monetary authority would fully stabilize the system by injecting or withdrawing money depending on the state of the economy. Money becomes centrally issued and it would be destabilizing if it was accompanied by central and/or commercial bank seigniorage. Median EI is found to coincide with homo economicus' rationality. These results point to the importance of preserving the institutional character of capitalism as a free enterprise but also a competitive system under a government in the service of the private sector.


Originality/value
Methodologically, this paper acknowledges the mutual interdependence between human action and social structure in the liberal setting in which free enterprise is a socioeconomic process that identifies value through exchange under the sociopolitical process of democracy.

In the history of economic thought, monetary theories in the German-speaking world of the early modern era are considered backward compared to the approaches in other European countries. This backwardness can be shown by two authors from the middle of the 18th century, who were not only contemporaries but also successively in the service of Frederick II ("the Great") of Prussia. The first is Johann Philipp Graumann, one of the 'projectors' of the 18th century. As master of the mints in Prussia, he developed a coin project, where he tried to implement a new monetary standard to promote trade, generate seigniorage income and implement the Prussian coins as a kind of a reserve currency. In his writings, he developed a typical mercantilistic monetary theory with a clear understanding of the mechanism in the balance of payments. But even when he tried to include credit instruments, he did not take banks or broader financial markets into account. The second thinker is Johann Heinrich Gottlob Justi, who took the opposite position concerning the coin project as well as in his theory. He defended a strictly metalistic monetary approach where the value of money should only be based on the metal's value. While Graumann rejected the English coin system, Justi recommended its laws for countries without their own mines, because the sovereign should not misuse his right of coinage. For him, the monetary system had to be reliable and stable to serve trade and economic development.

This paper studies the interdependence between fiscal and monetary policy in a DSGE model with sticky prices and non-zero trend inflation. We characterize the fiscal and monetary policies by a rule whereby a given fraction k of the government debt must be backed by the discounted value of current and future primary surpluses. The remaining fraction of debt is backed by seigniorage revenues. When k = 1, there is no fiscal dominance, since the fiscal authority backs all debt and accommodates (independent) monetary policy, by adjusting current or future primary surpluses to satisfy the government's intertemporal budget constraint. If k = 0, all debt is backed by the monetary authority and there is complete fiscal dominance. A continuum of possibilities lies between these two polar cases. We numerically show that: 1) the degree of fiscal dominance, as measured by (1 k), is positively related to trend inflation, and 2) when prices are sticky, k has significant effects on the business cycle dynamics. The model is estimated using Bayesian techniques. Estimates of k imply a high degree of fiscal dominance in both Mexico and South Korea, but almost no fiscal dominance in Canada and the U.S. The country-specific estimates of the structural parameters are used in a second-order approximation of the equilibrium around the deterministic steady-state to evaluate the welfare costs of fiscal dominance. Results suggest significant welfare losses for countries with high degrees of fiscal dominance.