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1. Money, Stability, and Free Societies

Author:
Steve H. Hanke
Publication Date:
06-2020
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Monetary instability poses a threat to free societies. Indeed, currency instability, banking crises, soaring inflation, sovereign debt defaults, and economic booms and busts all have a common source: monetary instability. Furthermore, all these ills induced by monetary instability bring with them calls for policy changes, many of which threaten free societies. One who understood this simple fact was Karl Schiller, who was the German Finance Minister from 1966 until 1972. Schiller’s mantra was clear and uncompromising: “Stability is not everything, but without stability, everything is nothing” (Marsh 1992: 30). Well, Schiller’s mantra is my mantra. I offer three regime changes that would enhance the stability in what Jacques de Larosière (2014) has asserted is an international monetary “anti-system.” First, the U.S. dollar and the euro should be formally, loosely linked together. Second, most central banks in developing countries should be mothballed and replaced by currency boards. Third, private currency boards should be permitted to enter the international monetary sphere.
Topic:
Debt, Foreign Exchange, Monetary Policy, Developing World, Inflation, and Currency
Political Geography:
Europe, United States of America, and European Union

2. Tariffs and Monetary Policy: A Toxic Mix

Author:
Michael D Bordo and Mickey D. Levy
Publication Date:
01-2020
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The ratcheting up of tariffs and the Fed’s discretionary conduct of monetary policy are a toxic mix for economic performance. Escalating tariffs and President Trump’s erratic and unpredictable trade policy and threats are harming global economic performance, distorting monetary policy, and undermining the Fed’s credibility and independence. President Trump’s objectives to force China to open access to its markets for international trade, reduce capital controls, modify unfair treatment of intellectual property, and address cybersecurity issues and other U.S. national security issues are laudable goals with sizable benefits. However, the costs of escalating tariffs are mounting, and the tactic of relying exclusively on barriers to trade and protectionism is misguided and potentially dangerous. The economic costs to the United States so far have been relatively modest, dampening exports, industrial production, and business investment. However, the tariffs and policy uncertainties have had a significantly larger impact on China, accentuating its structural economic slowdown, and are disrupting and distorting global supply chains. This is harming other nations that have significant exposure to international trade and investment overseas, particularly Japan, South Korea, and Germany. As a result, global trade volumes and industrial production are falling. Weaker global growth is reflected in a combination of a reduction in aggregate demand and constraints on aggregate supply.
Topic:
International Trade and Finance, Monetary Policy, Economic growth, Tariffs, and Industry
Political Geography:
Japan, China, Europe, Asia, South Korea, Germany, North America, and United States of America

3. The 1948 German Currency and Economic Reform: Lessons for European Monetary Policy

Author:
Gunther Schnabl
Publication Date:
10-2019
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Twenty years after the introduction of the euro, the European Monetary Union (EMU) is at its crossroads. Following the outbreak of the European financial and debt crisis in 2008, the European Central Bank (ECB) took comprehensive measures to stabilize the common currency. Interest rates were cut to and below zero and several asset purchase programs have inflated the ECB balance sheet (Riet 2018). Within the European System of Central Banks, large imbalances have emerged via the TARGET2 payments system, which can be seen as quasi-unconditional credit in favor of the southern euro area countries (Sinn 2018). While the ECB terminated its asset purchase program at the end of 2018 and is expected to increase interest rates in late 2019, financial instability is reemerging. Growing uncertainty about the fiscal discipline of the Italian government has triggered a significant increase in risk premiums on Italian government bonds. In particular, in Italy and Greece, but also in Germany, bad loans and assets remain stuck in the banking systems. In the face of the upcoming downswing, European banks do not seem ready for new financial turmoil. In this fragile environment, the future path of the EMU is uncertain. To enhance the stability of the EMU, a group of German and French economists has called for a common euro area budget, for a strengthening of the European Stability Mechanism as lender of last resort for euro area countries and banks, as well as for a common European deposit insurance scheme (Bénassy-Quéré et al. 2018). In response, 154 German economists have warned against transforming the EMU into what they call a “liablity union,” which systematically undermines market principles and wealth (Mayer et al. 2018). In 2018, a French-German initative to introduce a common euro area budget faced strong opposition from a group of northern European countries as well as from Italy, symbolizing the political deadlock concerning reforms of the EMU. This article explains the different views on the institutional setting of monetary policymaking in Europe from a historical perspective. It begins with a description of the economic and monetary order in postwar Germany. It then discusses the positive implications for the European integration process and the economic consequences of the transformation of postwar German monetary order. The final section offers some economic policy recommendations.
Topic:
Economics, History, Monetary Policy, Reform, European Union, Banks, and Currency
Political Geography:
Europe and Germany

4. Modern Monetary Theory: Cautionary Tales from Latin America

Author:
Sebastian Edwards
Publication Date:
10-2019
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
dea has emerged in economic policy circles in the United States: “Modern Monetary Theory” (MMT). The central tenet of this view is that it is possible to use expansive monetary policy—money creation by the central bank (i.e., the Federal Reserve)—to finance large fiscal deficits, and create a “jobs guarantee” program that will ensure full employment and good jobs for everyone. This view is related to Abba Lerner’s (1943) “functional finance” idea, and has become very popular in progressive spheres. According to MMT supporters, this policy would not result in crowding out of private investment, nor would it generate a public debt crisis or inflation outbursts.
Topic:
Debt, Monetary Policy, Populism, Banks, Economic Policy, and Inflation
Political Geography:
Latin America

5. Some Thoughts on International Monetary Policy Coordination

Author:
Charles I. Plosser
Publication Date:
06-2018
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
It is a pleasure to be back here at Cato and to be invited to speak once again at this annual conference. This is one of the premier ongoing monetary policy conferences, and the participants, both at the podium and in the audience, attest to its prominence. This is a session on international monetary arrangements, and there has already been an interesting discussion. I find myself in substantial agreement with the comments of John Taylor, so I do not wish to repeat his points. What I will try to do is put the rules-based approach to international monetary policy coordination in a context that I hope will help us understand some of the past failures so we might avoid them in the future. In many ways, I will simply be reminding us of some principles we all have known for some time, yet which we seem to forget all too frequently.
Topic:
International Cooperation, Monetary Policy, and Banks
Political Geography:
Global Focus

6. The Case for a New International Monetary System

Author:
Judy Shelton
Publication Date:
06-2018
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
How often do we hear references to the notion that we live in a rules-based global trading system? Addressing the World Economic Forum at Davos in January 2017, British Prime Minister Theresa May praised liberalism, free trade, and globalization as “the forces that underpin the rules-based international system that is key to our global prosperity and security” (Martin 2017). Chinese President Xi Jinping likewise extolled the virtues of a rules-based economic order at Davos, winning widespread praise for defending free trade and globalization (Fidler, Chen, and Wei 2017). But could someone please explain: What exactly are those rules? Because if we are going to invoke the sentimentality of Bretton Woods by suggesting that the world has remained true to its precepts, we are ignoring geopolitical reality. Moreover, we are denying the warped economic consequences of global trade conducted in the absence of orderly currency arrangements. We have not had a rules-based international monetary system since President Nixon ended the Bretton Woods agreement in August 1971. Today there are compelling reasons—political, economic, and strategic—for President Trump to initiate the establishment of a new international monetary system.
Topic:
Economics, International Cooperation, and Monetary Policy
Political Geography:
Global Focus

7. 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

8. 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

9. Rethinking the International Monetary System

Author:
John B. Taylor
Publication Date:
06-2016
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
In previous articles in the annual monetary issue of the Cato Journal, I drew on historical facts and economic theory to explain the benefits of rules-based monetary policy and why legislation could help the United States reap those benefits (Taylor 2011, 2013a). In this article, I discuss the international aspects of monetary policy, a subject often glossed over in modern debates about rules-based policy, at least compared with discussions about the classic rulesbased gold standard.
Topic:
Economics, International Cooperation, and Monetary Policy
Political Geography:
North America, Global Focus, and United States of America

10. The Supply of Transaction Assets, Nominal Income, and Monetary Policy Transmission

Author:
Joshua R. Hendrickson and David Beckworth
Publication Date:
06-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
Over the last few years, the Federal Reserve has conducted a series of large scale asset purchases. Given the Federal Reserve’s dual mandate, the objective of this policy has been to generate an increase in real economic activity while maintaining a low, stable rate of inflation. The effectiveness of large scale asset purchases and the ability of the central bank to achieve a particular target has been subject to debate. The monetary transmission mechanism is of primary importance for understanding the effects of both the recent large scale asset purchases and of monetary policy more generally. The purpose of this paper is to propose a monetary transmission mechanism and to present empirical support for this mechanism. In particular, this paper suggests that monetary policy is transmitted through changes in the growth rate of transaction assets through both a direct and indirect effect. First, an increase in the growth rate of the monetary base, whether through lump sum transfers or open market operations, generates a real balance effect that increases real economic activity. Second, the indirect effect is through bank lending. Since bank loans are often a function of nominal income, expansionary monetary policy increases bank lending. Since economics agents are forward-looking and the the effects of monetary policy are persistent, monetary policy is transmitted through the expected future time path of the growth of transaction assets and nominal income. This characteristic is especially important in light of the policy recommendations of Sumner (2011, 2012) and Woodford (2012), in which the central bank attaches an explicit target for the level of nominal income to large-scale asset purchases.1
Topic:
Economics, Markets, Monetary Policy, and Federal Reserve
Political Geography:
Global Focus