SMP: The IMF and Argentina: Same Dance, Same Results

Argentina is in trouble again. Even after a substantial aid package from the International Monetary Fund (IMF), it is struggling to service its sovereign debt. One should not be surprised: when you keep employing the same policies, you are likely to end up with similar outcomes. This, however, is not the lesson Harvard economist Ken Rogoff draws from Argentina’s experience. Instead, he calls for even more aid flows to Argentina.

Rogoff is right to criticize President Macri’s decision to cut the fiscal deficit gradually, rather than attacking the issue more forcefully early on. That strategy ultimately required Macri to seek help from the IMF. But he is wrong to characterize the Macri tax cuts and liberalization efforts as “Big Bang reforms.” The tax cut was marginal at best. And, while capital controls were lifted under Macri, more comprehensive measures of economic freedom show no significant improvements. 

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AIER: What Should MMT Learn from Argentina?

The last few weeks have seen a spike in commentaries surrounding modern monetary theory (MMT). A column by Prof. Stephanie Kelton, Andres Bernal, and Greg Carlock at Huffington Post and an endorsement from Representative Alexandria Ocasio-Cortez (D-N.Y.) have triggered negative responses by a number of reputable economists. George Selgin, Larry Summers, Paul Krugman, and Ken Rogoff (just to name a few) have all expressed concerns (to put it mildly) about the implications of applying MMT.

A common thread in these (and other) responses is that it is not clear what MMT really stands for. Advocates of MMT seem to use conventional terms in unconventional ways, and that creates confusion. On top of this, what exactly MMT means changes as time goes by, thereby adding frustration to confusion.

At its core, MMT maintains that a government cannot go broke as long as it can issue its own currency. Large fiscal deficits can be paid for by “printing money” (or, more technically, monetizing deficits). Standard monetary theory maintains that such a policy causes inflation. MMT, in contrast, holds that such a policy is not inflationary, because there are idle resources.

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AIER: That Magical Two Percent

Paul Volcker takes issue with the Federal Reserve’s two-percent inflation target. He wonders why Fed officials have become so focused at a level of decimal precision on a target that cannot be hit so precisely. It is an old point, but one worth making.

The issue with inflation targeting is not merely one of precision, however. Just as important is how such a target is interpreted for policy making. Is it a symmetric target, in which case the Fed will try its best to achieve two-percent inflation each period? Is it contingent on past performance, in which case the Fed might try to make up for over- or under-shooting its target and thereby achieve two-percent inflation on average? Or, is it not really a target at all, but rather a ceiling—an upper bound on the rate of inflation that the Fed deems acceptable?

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SMP Essay Contest

The Sound Money Project Essay Contest is designed to promote scholarship in monetary and macro- economics. More specifically, it aims to encourage those working at the cutting edge of the discipline to consider the monetary institutions that would reduce nominal disturbances and promote economic growth.

Prompt:
In 1971, President Richard Nixon ended convertibility, thereby eliminating the last vestiges of the gold standard. The classical gold standard, which prevailed from 1873 to 1914, had anchored inflation expectations, enabled longterm contracting, and promoted international trade. This historical experience has prompted several reconsiderations of resumption over the years, including the Gold Commission in 1980, the International Financial Institution Advisory Commission of 1998, and, more recently, calls for a Centennial Monetary Commission. What are the merits of returning to the gold standard? Is such a system feasible today?

Prizes:
First Prize $10,000
Second Prize $2,000
Third Prize $1,000

Winners will also be invited to participate in the Sound Money Project annual meeting in Great Barrington, Massachusetts.

Eligibility:
The contest is open to graduate students, post-graduates, untenured professors, and tenured professors from any discipline. Former winners and current AIER fellows are ineligible. Former entrants are eligible, but must submit new essays.

Rules:
Essays must be the sole and original work of the entrant and not previously published. They should be in the format of a scholarly article. Any standard citation format (e.g., MLA, APA, Chicago, Harvard, etc.) is acceptable. Essays may either be written specifically for the contest or arise from previous work (e.g., term papers, dissertations, research projects, etc.). Essays shorter than 4,000 words or longer than 12,000 words will not be considered. AIER-affiliated scholars are ineligible.

Submission Instructions:
Please submit your paper here.

Deadline: March 1, 2019

Go to the SMP Essay Contest websiste.

SMP: The Problem with Stable Coins

To illustrate the problem, Eichengreen offers three scenarios. In the first scenario, a cryptocurrency issuer maintains 100 percent dollar backing for coins in circulation. This is similar to how a currency board works. Since such an arrangement requires the issuer attract and hold dollars in order to expand the supply of coins, the cryptocurrency will not be subject to a speculative attack. However, this also means the issuer cannot invest those dollars since it must hold all of them to back the cryptocurrency.

Price volatility is a big problem in the crypto world. Widespread adoption is unlikely without a good monetary rule that reduces volatility. But, as Barry Eichengreen notes in a recent Project Syndicate article, stable coins like Tether, Sagacoin, and Basis have their own issues.

Unable to earn interest on the float, a cryptocurrency issuer would find it challenging to profit while holding 100 percent dollar reserves. It would also struggle to offer a competitive return and, hence, attract customers. Why would one exchange a widely used dollar for an illiquid cryptocurrency, which is harder to use and does not offer a competitive interest rate?

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AIER:Elastic Cryptocurrency Supplies: A Step in the Right Direction

A major shortcoming of bitcoin and most other cryptocurrencies is the way in which their supplies are governed. With a perfectly inelastic supply over the relevant time horizon, a change in demand is entirely reflected by a change in the cryptocurrency’s price. Since demand shocks are relatively common, this means that cryptocurrencies are subject to high price volatility.

Volatility can be a desirable feature for a financial investment that tries to capture capital gains. But it is a major impediment to cryptocurrencies becoming more widely accepted as a medium of exchange. Hence, the observation that bitcoin and other cryptocurrencies have become financial assets does not mean they are necessarily on the path to becoming new monies.

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SMP: Gunther Schnabl on Exit Strategies from Unconventional Monetary Policy

In a recent paper, Gunther Schnabl discusses the environment that ultra-low interest rates have produced and the challenges of exiting such an environment. Schnabl brings up a number of interesting issues, including how low interest rate policies keep zombie banks alive and distort labor markets. The policies come at the expense of investment in capital goods and research and development, which fuels growth in rich countries.

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SMP: The Over-Codification of Financial Regulation

Thomas M. Hoenig, vice chairman of the Federal Deposit Insurance Corporation from November 30, 2012 to April 30, 2018, recently participated in an interesting discussion at Metropolitan State University–Denver.

I was pleasantly surprised to hear Hoenig’s concerns about one way to approach financial regulation. Financial regulation is approached as a very long and detailed list of “if … then …” propositions. These propositions are intended to cover all potential scenarios and contingencies.

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SMP: Not All Crisis are Due to Unexpected Shocks

Only a few weeks ago, a number of emerging economies suffered currency crises. Argentina stands as an outstanding case that was covered in several media outlets. For instance, in a recent piece at Project Syndicate, Martin Guzman and Joseph Stiglitz argue that the crisis there was a surprise.

In economics, in particular in the study of business cycles, the claim of unexpected shocks has become almost an excuse to defend any policy carried out by government institutions. These unexpected events, sometimes referred to as black swans, by their nature cannot be predicted. Therefore there is nothing a government entity such as a central bank could have done to avoid the costly shock. Crises are not the result of bad policies, they are just a matter of bad luck. Good luck is to have policy makers in place to minimize the damage from these unexpected shocks.

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SMP: Economists are not like doctors

In a recent paper, Ricardo Reis offers an interesting insight in the debate on dynamic stochastic general equilibrium that has taken place in macroeconomics since the 2008 financial crisis. While some economists argue that DSGE modeling is fundamentally flawed, others maintain that because the crisis was unexpected, it is inappropriate to blame such modeling.

Reis admits that DSGE modeling is not perfect and that there is certainly room for improvement. However, he argues, macroeconomics is much more than DSGE modeling. Even if critiques of DSGE modeling are correct, those critiques do not extend to macroeconomics as a field. Reis pushes further the defense of macroeconomics by arguing that it is not the job of macroeconomists to predict crises.

Continue reading at SMP.