Erinç Yeldan

As the recession in Europe painfully proves all attempts at austerity to be dead-ends, the search for the miraculous “silver-bullet” continues. The European Central Bank (ECB) has initiated a negative “nominal” interest rate. That means the ECB, the first monetary authority to ever take such an action in a common currency zone, will be charging commercial banks for the funds they deposit (overnight) rather than paying them interest.

The ECB is pursuing an inflation target of 2% with a dogmatic belief that “this is he rate at which agents [read this as financial speculators and the rentiers] will not be affected in their economic decisions.” To this end, it utilizes three sets of interest rates: (1) the marginal overnight borrowing rate of the banks from the ECB; (2) the basic rate for their re-financing operations; and (3) the rate that is applied to the banks’ deposits at the ECB. In order for the monetary interventions of the ECB to have any effect, the rates on these interests ought to be differentiated. Until very recently, the ECB rate on deposits was set to zero, and the rate on the re-financing operations was 0.25%. The decision of the ECB has now been to reduce the latter rate to 0.15% and  the deposit to negative 0.10%. The textbook explanation for this unusual negative interest rate on money deposited by banks rests on the expectation that they should be now motivated to lend their funds instead of keeping them in reserves. Hopefully, this will restore eurozone economic growth by encouraging more lending for “real” investment.

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Philip Arestis and Malcolm Sawyer

Within two weeks in March, two publications came from the Bank of England which overturned the conventional wisdom of monetary policy and macroeconomic thinking of the past few decades. Yet the key elements of the contents of these two publications have been common knowledge in the post Keynesian community for many years.

The first came with the publication in the Bank of England Quarterly Bulletin of articles on the nature and endogeneity of money (and a video). The second came with the Mais Lecture delivered by the Governor of the Bank of England Mark Carney in which he argued that the narrow view of central banks as guardians of stable inflation as “fatally flawed,” as he unveiled a “transformative” overhaul of the Bank of England.

The endogeneity of money has been long known to post Keynesian economists and has formed the bedrock of their macroeconomic analyses for at least three decades. The practice of Central Banks has in effect similarly recognized endogeneity and the new consensus in macroeconomics did not mention money—money for this framework is a “residual.” The Bank of England was (not surprisingly) well aware of the endogeneity of money when it was instructed by the monetarist Thatcher government to pursue the task of controlling the money supply, which proved impossible since the money supply is endogenous!

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Bilge Erten and José Antonio Ocampo, Guest Bloggers

The ongoing financial volatility in emerging economies is fueling debate about whether the so-called “Fragile Five” – Brazil, India, Indonesia, South Africa, and Turkey – should be viewed as victims of advanced countries’ monetary policies or victims of their own excessive integration into global financial markets. To answer that question requires examining their different policy responses to monetary expansion – and the different levels of risk that these responses have created.

Although all of the Fragile Five – identified based on their twin fiscal and current-account deficits, which make them particularly vulnerable to capital-flow volatility – have adopted some macroprudential measures since the global financial crisis, the mix of such policies, and their outcomes, has varied substantially. Whereas Brazil, India, and Indonesia have responded to surging inflows with new capital-account regulations, South Africa and Turkey have allowed capital to flow freely across their borders.

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Philip Arestis and Malcolm Sawyer

The announcement by the European Central Bank (ECB) of its Outright Monetary Transactions (OMT) programme in July 2012, along with the prior statement by the ECB’s president that the bank would do “whatever it takes” to save the euro, restored the confidence of the markets. The interest rates on Italian and Spanish sovereign debt, for example, fell to more tolerable levels.

Further details of the OMT programme have emerged since September 2012, when it was announced that relevant candidate countries would receive help and be allowed access to OMT if they only had complete market access—that is, the ability to get credit from private sources. (The ECB, instead of publishing OMT’s legal documentation “soon” after September 2012, shifted its stance to “only publish when a country applies.”) The ECB shifted to the stricter condition of complete market access from the one of July 2012, under which the programme might help those countries that were simply regaining market access.

The German central bank, the Bundesbank, though, opposes OMT on the grounds that it is close to the monetary financing of budget deficits. In other words, OMT implies clear and direct borrowing by governments from their own central banks, which, it is stressed, is banned by the Maastricht Treaty. It is clear, though, that the treaty permits the ECB to buy public debt in the secondary markets.

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Erinç Yeldan

Over the last six months, many developing emerging market economies had witnessed large, unforeseen, and unpredictable swings in their exchange rates.  With rumors, and counter-rumors of likely tapering of the U.S. Federal Reserve’s Quantitative Easing (QE) programme, such swings resulted in abrupt depreciations by 16.7% in Indonesia, 7.3% in Thailand, 10.4% in Turkey, 9.3% in Brazil, 13.4% in India, and 8.8% in South Africa…

A recent policy brief by the Peterson Institute for International Economics provided Estimates of Fundamental Equilibrium Exchange Rates and revealed that many of these depreciations were, in fact, overshooting the fundamental equilibrium exchange rates that are consistent with the current account balances of these economies.  Now it is found that Indonesia needs its currency to appreciate by 3.9%; Thailand, by 2.4%; the Philippines, by 3.8%; Malaysia, by 4.3%. Meanwhile, Turkey has to let its currency depreciate by 18.1%; South Africa, by 6.8%; Poland, by 4%; Brazil, by 3.4%.  Table 1 below summarizes the relevant data.

Table 1

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Erinc Yeldan

In the episode The Apple, of the classic TV series Star Trek, our heroes, led by Captain Kirk and Mr. Spock, land on a paradise planet inhabited by seemingly peaceful and immortal humanoids. At first, the bounties of the planet dazzle the Enterprise crew, but they soon discover that the planet is actually trying to kill them. Eventually, their investigations lead them to the discovery of an all-controlling artificial “god.”

Witness the reaction of the global “markets,” the artificial gods of global capitalism, to the Fed’s reassuring announcements that it will postpone the withdrawal (or “taper”) of the so-called quantitative easing (QE) packages. It mirrors, in many ways, the drama that played out on that unknown planet, where no one has gone before.

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Malcolm Sawyer and Philip Arestis

The general response to the financial crisis of 2007 onwards by central banks included large cuts to the policy interest rate and then adoption of ‘quantitative easing’ alongside many other policies of bail-outs. The low interest rate regime aided the government’s budget position by enabling borrowing at low rates. But they did little to aid recovery as economies continued to dip into and out of recession. Central Banks started to engage in ‘quantitative easing’.

‘Quantitative easing’ has been an unorthodox piece of policy comprising of two elements: the ‘conventional unconventional’ measures: whereby central banks purchase financial assets, such as government securities or gilts, that boosts the stock of money in the form of M0; and ‘unconventional unconventional’ measures: in this way central banks buy high-quality, but illiquid corporate bonds and commercial paper. In this way the stock of money is expected to increase.

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Alejandro Nadal

It must hurt when you show your hand without anybody calling your final bet. After all, why do you have to give free information to your opponents? This is what the infamous troika must feel right now after revealing its “rescue” plan for Cyprus. The parliament in Nicosia has flatly rejected the strategy, but the troika’s game plan has been unveiled at great political (and possibly financial) costs.

The little island in the eastern Mediterranean is responsible for only 0.2 per cent of the European Union’s GDP. But the architecture of the rescue plan has resuscitated primal fears about the future of the euro. Why is this so?

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James Heintz, Guest Blogger

The Group of 20 (G20) has declared itself the “premier global economic forum” and was created to tackle the most pressing challenges confronting the world economy today, including reducing instability and preventing future financial crises. The G20 has committed itself to a goal of shared and inclusive growth. Given this commitment, it is striking how little attention has been paid to issues of gender equality in its policy frameworks, summits, and declarations.

This report examines the G20’s strategies and their effects on gender equality. It finds that the G20 has not seriously considered the consequences for women and men when formulating policies and setting its agenda. There are indications that this situation has changed somewhat, with a commitment to gender equality made at the 2012 Los Cabos Summit in Mexico. Nevertheless, questions remain over whether gender equality will be taken seriously. Representation within the G20 is unbalanced – only 25 percent of the heads of state of the G20 member countries are currently women. The figure for the official government representatives, the “sherpas,” is lower – just 15 percent are women.

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Sunanda Sen, Guest Blogger

Concerns have been rising, in recent months, over the current state of China’s external balance and the future of the RMB. Apprehensions relate to the negative balances, which have been visible in China’s financial balance since the last quarter of 2011. The negative sums were respectively (-) $ 3.02 and  (-)$ 4.21 billion during the second and third quarters of 2012, preceded by an even larger sum at (-)$ 29.0 billion in Q4 2011. Such deficits contrast with the surpluses in the financial account usually maintained, which were as much as $13.20 billion during Q4 of 2010.  These changes have been matched by tendencies for its official reserves to slide downwards. For instance, there was a $ 6 trillion drop in official reserves between March and June 2012. Pressures on the RMB rate even led to its depreciation, from 6.30 per dollar in April 2012 to 6.41 by August 2012. The currency, however, reverted to its earlier phase of appreciation, with the rate moving up from RMB 6.38 to RMB 6.31 between 24th July 2012 and 18th January 2013.

Differences relating to the exchange rate have continued to prevail across officials and think tanks in China and the US, with the latter holding China’s exchange rate management responsible for the continuing global account imbalances between the two countries. With pressures on China to appreciate the currency, the US Treasury even came to the point on in April 2010 of deciding whether China can be treated as a currency manipulator. The on-going dynamics of China’s foreign exchange transactions can be better understood by tracking the following major breaks in China’s exchange rate policy:

First, an end to the prevailing fixed RMB-dollar rate in 2005, which came largely with pressures from the US. Despite the twin surpluses between the current and the capital account, China was maintaining, since 1997, a fixed exchange rate at around 8.27 RMB per dollar. The change to managed floating, still supported by direct purchases of foreign currency which were flowing in abundance with the twin surpluses, led the RMB to rise immediately to 8.11 per dollar, with gradual appreciations since then. With appreciations continuing, the change to a floating RMB did not, however, lead to currency speculation till the third quarter of 2011.

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