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31. Toward a Rules‐​Based International Monetary System

Author:
John B. Taylor
Publication Date:
06-2018
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Over the past few years I have been making the case for moving toward a more rules-based international monetary system (e.g., Taylor 2013, 2014, 2015, 2016a, 2016b, 2017). In fact, I made the case over 30 years ago in Taylor (1985), and the ideas go back over 30 years before that to Milton Friedman (1953). However, the case for such a system is now much stronger because the monetary system drifted away from a rules-based approach in the past dozen years and, as Paul Volcker (2014) reminds us, the absence of a rulesbased monetary system “has not been a great success.” To bring recent experience to bear on the case, we must recognize that central banks have been using two separate monetary policy instruments in recent years: the policy interest rate and the size of the balance sheet, in which reserve balances play a key role. Any international monetary modeling framework used to assess or to make recommendations about international monetary policy must include both instruments in each country, the policy for changing the instruments, and the effect of these changes on exchange rates. Using such a framework, I show that both policy instruments have deviated from rules-based policy in recent years. I then draw the policy implications for the international monetary system and suggest a way forward to implement the policy.
Topic:
International Cooperation, International Trade and Finance, Monetary Policy, and Central Bank
Political Geography:
Global Focus

32. Monetary Policy in an Uncertain World: The Case for Rules

Author:
James A. Dorn
Publication Date:
01-2018
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
Since monetary policy operates in an uncertain world, discretionary policymaking relying on macroeconomic models of the economy is a weak reed upon which to base policy. The complexity of economic systems and constant changes in the underlying data mean errors may occur in a discretionary regime that can lead to monetary and financial instability.1 The 2008 financial crisis is a case in point: central bankers and their expert staffs failed to anticipate the crisis, and may have worsened it by keeping policy rates too low for too long (Taylor 2012). Moving to a rules‐​based regime would not eliminate radical uncertainty, but it could decrease institutional uncertainty—or what Robert Higgs (1997) has called “regime uncertainty”—and thus reduce the frequency of policy errors. Higgs focused on the uncertainty caused by fiscal and regulatory policies that attenuated private property rights by decreasing expected returns on capital. A discretionary monetary regime increases uncertainty about the future purchasing power of money and thereby undermines an important property right.
Topic:
Economics, Monetary Policy, Economic structure, and Macroeconomics
Political Geography:
Global Focus

33. Global Monetary Policy Divergence and the Reemergence of Global Imbalances

Author:
Daniel Gros
Publication Date:
06-2018
Content Type:
Working Paper
Institution:
Council on Foreign Relations
Abstract:
Developed economies are paying remarkably little attention to coordinating their monetary policies. This is an unavoidable consequence of the independence of central banks, which faithfully follow their purely domestic mandates except in times of crisis. As a result, global monetary policies have reached unprecedented levels of divergence. This divergence is set to widen—primarily due to differences in the relative strength of labor markets—while global current account imbalances return. Meanwhile, exchange rates have not reacted as economists expected; the dollar has weakened even as policy rates have increased. Economic tensions will likely become more disruptive the longer global imbalances go uncorrected. Likewise, the global economy will become more vulnerable to shocks. Yet by focusing on bilateral trade imbalances, the United States has mistakenly singled out China when the global imbalances between the United States and the eurozone is the more critical issue. The growing global imbalances are reflected more in the eurozone current account surplus and U.S. fiscal policy than in China’s shrinking surplus.
Topic:
International Trade and Finance, Monetary Policy, Exchange Rate Policy, and Economic Inequality
Political Geography:
Global Focus

34. British Geopolitics and the Internationalization of the Pound Sterling

Author:
Mauricio Metri
Publication Date:
06-2017
Content Type:
Journal Article
Journal:
AUSTRAL: Brazilian Journal of Strategy International Relations
Institution:
Postgraduate Program in International Strategic Studies, Universidade Federal do Rio Grande do Sul
Abstract:
The purpose of this paper is to analyze the historical process of ascent of the pound sterling to the condition of the international monetary standard in the late nineteenth century. It intends to show that England, led by its geostrategy, diplomacy and war, was able to build a colonial empire and negotiate favorable international treaties, at the same time that it constructed a monetary international territory based on its currency.
Topic:
Diplomacy, Military Strategy, Monetary Policy, and Empire
Political Geography:
United Kingdom, Europe, and England

35. Potential impact of financial innovation on financial services and monetary policy

Author:
Marek Dabrowski
Publication Date:
07-2017
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
The recent wave of financial innovation, particularly innovation related to the application of information and communication technologies, poses a serious challenge to the financial industry’s business model in both its banking and non-banking components. It has already revolutionised financial services and, most likely, will continue to do so in the future. If not responded to adequately and timely by regulators, it may create new risks to financial stability, as occurred before the global financial crisis of 2007-2009. However, financial innovation will not seriously affect the process of monetary policymaking and is unlikely to undermine the ability of central banks to perform their price stability mission.
Topic:
Energy Policy, Environment, Monetary Policy, Financial Crisis, Economic growth, Innovation, and Trade
Political Geography:
Europe, Global Focus, and European Union

36. Domestic Cycles, Financial Cycles, and Policies. What Has Gone Wrong?

Author:
Daniel Daianu
Publication Date:
11-2017
Content Type:
Working Paper
Institution:
Center for Social and Economic Research - CASE
Abstract:
The financial crisis and its ensuing effects have brought back into the limelight the issue of cycles and of policies which fuel or mitigate crises. Cognitive and operational models in economics and business are questioned. There is a specter of much lower economic growth in the industrialized world. Central banks are over-burdened. This makes central bankers’ lives much more complicated and obfuscates the boundaries between monetary policy and fiscal policy, especially when financial stability gets to center stage. New systemic risks show up in capital markets. The eurozone has escaped collapse owing to the European Central Bank’s extraordinary operations and large macro-imbalance corrections in its periphery, but major threats persist. This paper focuses on economic cycles and policies in an international (European) context. Attention is paid to linkages between domestic cycles and the European financial cycle, drivers of financial cycles, finance deregulation and systemic risks, ultra-low interest rates, the international policy regime, and global stability. The experience of European emerging economies is taken into account.
Topic:
Debt, Monetary Policy, Financial Crisis, Economies, Economic growth, Interest Rates, and Fiscal Policy
Political Geography:
Europe and European Union

37. POLITICS SANS ECONOMICS: COMMENTARY ON THE POLITICAL ECONOMY OF DEMONETIZATION IN INDIA

Author:
Zaad Mahmood
Publication Date:
04-2017
Content Type:
Journal Article
Journal:
Conjuntura Austral: Journal of the Global South
Institution:
Conjuntura Austral: Journal of the Global South
Abstract:
Demonetisation has been the contentious issue in Indian politics ever since the Prime Minister Narendra Modi, declared that Rs 500 and Rs 1000 notes would cease to be legal tenders from midnight of 8thNov 2016. Demonetisation or the withdrawal of form of currency from circulation is nothing unique as many countries have done it. In 2002 the nations of the European Union began to use to common currency of Euro and demonetised the old national currenciessuch as mark, franc and lira. In 2015, Zimbabwe demonetized its currency in response to hyperinflation. The Indian exercise, however, stands distinct to other economies due to the suddenness of the decision as the declaration and its implementation occurred in a matter of hours. The abruptness was compounded by the volume of the exercise as 86 percent of all legal tender in the country was demonetised and cash transactions constituted nearly 80 percent of all economic transactions in the country (Ghosh 2016). Naturally the decision and its implications have dominated political and electoral discourse of the country (Express Web Desk 2016).
Topic:
Economics, Monetary Policy, Macroeconomics, and Currency
Political Geography:
India

38. Learning to Engage New Investors for Economic Diversification: PDIA in Action in Sri Lanka

Author:
Matt Andrews, Duminda Ariyasinghe, Krishantha Britto, Peter Harrington, Nelson Kumaratunga, M.K.D. Lawrance, Tim McNaught, Hemadree Naotunna, Ganga Palaketiya, Anisha Pooblan, Dilip Sanmarasinghe, and Prasanjith Wijayathilake
Publication Date:
10-2017
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
Many countries, like Sri Lanka, are trying to diversify their economies but often lack the capabilities to lead diversification programs. One of these capabilities relates to engaging new investors—in new sectors—to bring their FDI and know-how to a new country and kick-start new sources of activity. This paper narrates a recent (and ongoing) initiative to establish this kind of capability in Sri Lanka. The initiative adopted a Problem Driven Iterative Adaptation (PDIA) process, where a team of Sri Lankan officials worked with Harvard Center for International Development (CID) facilitators to build capabilities over a six-month period. The paper tells the story of this process, providing documented evidence of the progress over time (and describing thinking behind the PDIA process as well). It shows how an investment engagement approach can emerge in a reasonably limited period, when a committed team of public officials are effectively authorized and engaged. The paper will be of particular interest to those thinking about investor engagement challenges and to those interested in processes (like PDIA) focused on building state capability and fostering policy implementation in public contexts.
Topic:
Monetary Policy, Economies, Global Political Economy, and Investment
Political Geography:
South Asia and Sri Lanka

39. Assessment on Real Effective Exchange Rate in Azerbaijan: 2017 Outlook

Author:
Rashad Hasanov
Publication Date:
01-2017
Content Type:
Working Paper
Institution:
Center for Economic and Social Development (CESD)
Abstract:
The implementation of fixed exchange rate regime for 20 years (1994-2014) resulted in a formation of an insecure currency position for all interest groups, including the government and business. Although the pressures on manat have commenced to increase since the second half of 2014, the Central Bank and the government failed in comprehending the process. That is why, promising statements have been made to the general public. But the following events proved the underlying problem more severe and the implemented monetary, fiscal and exchange rate policies ineffective in the long-term. Business, citizens, as well as state-owned enterprises faced serious financial losses. The country experienced serious threats with regard to its financial sustainability.
Topic:
International Political Economy, Monetary Policy, and Finance
Political Geography:
Azerbaijan

40. Towards An Inflation Targeting Regime in Zambia

Author:
Caesar Cheelo and Thulani Banda
Publication Date:
06-2017
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
In this paper, I seek to discuss the conduct of monetary policy in an inflation targeting framework. The objective is to understand structural and institutional nuances in settings where this framework is successful in controlling inflation and challenges that emerge in the implementation of inflation targeting. I deal with the question: which institutional conditions should exist to support the successful implementation of inflation targeting in countries that use it? I find several institutional and legal elements which are common and can potentially explain much of the success in the implementation of inflation targeting among their monetary authorities. I benchmark these elements with the concepts of transparency and accountability of the central bank which are central tenets in the discussion of inflation targeting. I note that central bank credibility is a key outstanding element in explaining the success of inflation targeting. Components such as central bank independence and commitment to low stable inflation as the overriding objective of monetary policy represent critical preconditions for inflation targeting and can sustain the credibility of monetary policy.
Topic:
Monetary Policy, Inflation, Central Bank, Transparency, and Financial Institutions
Political Geography:
Africa and Zambia