Year: 2012

Simon has an interesting post that challenges arguments against unconditional bond-buying (QE) by the ECB.   He makes a convincing case that such bond-buying for specific countries to avoid a “bad equilibrium” would not violate the ECB’s price stability mandate.   

But I think his analysis misses another key (if implicit) aspect of the ECB’s mandate: in a highly incomplete political union, the ECB must minimise the risk of redistributions between members through its monetary policy (see this earlier post).   Losses on bonds will be shared across the monetary union.   Concerns that monetary union is a vehicle for such redistributions could doom the entire project.   Of course, there is risk of such losses even on normal monetary policy operations.   But this is why these operations take place within a strict risk control framework.   For bond-buying, fiscal conditionality can be viewed as an effort to reduce the risk of losses, and ultimately redistributions between monetary union members.  

Now it could be argued that fiscal conditionality actually increases the risk of losses.   This would be the case if fiscal conditionality is self-defeating — that is, slows the economy so much that the fiscal situation actually deteriorates.   Opinions differ on whether this is the case.   However, if influential members believe that the ECB’s actions would unacceptably increase the risks of losses without conditionality, then the ECB would find it difficult to proceed with bond-buying, and find it particularly difficult to make the strong commitment necessary to keep yields low enough to credibly remove the danger of the bad equilibrium (see here).

The bottom line that redistributive politics within the monetary union mean that the kind of strong commitment needed to keep yields low is near impossible without conditionality.   The choice may be for the ECB to act with conditionality or not to act at all. 

Proposals are still being accepted for the DEW conference in Galway on October 12-14 next. Topics in any area of economic policy will be considered and proposals should be emailed to colm.mccarthy@ucd.ie

Daivid Laidler (University of Western Ontario) will be the keynote speaker and the programme, with booking details, will be issued early in September.

In a series of informative comments across recent threads, Michael Hennigan has raised important questions relating to the reliability of the recorded growth in key macroeconomic aggregates, and also the employment performance of internationally traded sector in general and the foreign-sector in particular. (See here for a useful summary from his Finfacts website).  Although Michael watches these figures much more closely than I do, and so I hesitate to contradict him, I find it hard to share some of his concerns.  

First a point of agreement:  At roughly 100 percent of GDP, Irish exports are strongly influenced by the activities of multinationals operating in Ireland, and the numbers tell us little about value added and incomes in Ireland.   Where I have difficulty following Michael is in his concerns about the reliability of Irish GNP and GDP figures.   GNP excludes the profits of multinationals (and not just repatriated profits), and so should be immune from concerns over tax-driven transfer pricing.    GDP excludes imports (including intermediate imports and royalties).    Michael says the Irish exports are overstated by one third.   If he has a chance, he might explain this in more detail, and also how he sees it affecting measured GNP and GDP given the exclusions just noted. 

Michael also notes that employment in the foreign-owned sector has fallen from 166,000 in 2000 to 144,000 in 2011.   This fall is certainly very regrettable.   But it occurred during a massive bubble-driven, structural mal-adjustment of the economy.   Given the extent to which the bubble affected the allocation of resources, I am surprised the damage done to the traded sector was not much greater.  Part of the answer would appear to be the highly elastic labour supply response – notably through immigration – which allowed the construction and other non-internationally traded sectors to expand, while limiting the damage to the traded sector. 

I do share Michael’s concern over risks around the projected return to robust growth after 2013.  But my main concern is a prolonged “balance-sheet recession”—and not just in Ireland.    While Michael’s description of the nature of much multinational activity in Ireland seems accurate, I find it hard to share his concerns about its implications for measured Irish growth performance.   I am ready to be corrected. 

Jerry Caprio makes a TED-style presentation here.

Have the Troika’s 2014 targets on jobs numbers have already been met? This new working paper by UCD’s Niamh Hardiman and the IPA’s Muiris MacCarthaigh seems to suggest it has. The 2014 target is here on page 64 of the national recovery plan.

From a recent Dail question:

The numbers working in the public service have continued to fall, with the provisional outturn for the end of last year now standing at 296,900, which means we are now at close to the 2005 staffing levels. This is a year-on-year reduction from the end of 2010 of more than 8,500. The employment control framework ceiling for the public service in 2011 was 301,000. To exceed this target by more than 4,000 is impressive.

The authors make good use of the new department of public expenditure and reform’s databank in their work, and it produces this figure.