Author: Kevin O’Rourke

Here we go…

If the Chinese have any sense, they will let their currency appreciate now.

Update: Willem Buiter is also concerned about the looming threat to world trade that this would seem to imply. He displays an extreme scepticism about whether nominal exchange rates ever matter for the trade balance, writing that

only the most bone-headed of ultra-Keynesians believes that a country can influence its effective real exchange rate in a lasting manner by managing/manipulating its effective nominal exchange rate, let alone some bilateral nominal exchange rate.

I guess the key phrase here is “in a lasting manner”, and I defer to Philip about what sort of time scale this implies empirically. I guess that not all economists will agree with Buiter on this particular point. But the broader point, which is critically important, is that we can’t take the maintenance of an open trading system for granted.

Deflationary spirals

It appears that the fear of a deflationary spiral is being used as a major argument against wage cuts. My impression is that the idea is gaining traction out there in the real world, and so it seems worthwhile restating the reasons why it is wrong.

‘The’ price level in the Irish context is the European price level, which is determined by policy in Frankfurt. Nothing that happens in Irish labour markets will move this price level by one iota in either direction, and so nothing that we do here will set off a deflationary spiral. What we can influence is a relative price, namely the relative cost of living and doing business here. This relative cost exploded during the bubble, and it will eventually come down. The only issue is whether this happens quickly, or whether relative Irish costs will be ground down by unemployment and stagnation over the course of many years.

David Begg is right to fear a deflationary spiral, but what will determine whether we get one or not is the relative supply of ideologues and pragmatists in the ECB, not anything that happens here. And the sort of intertemporal logic which explains why deflation is so damaging can be turned on its head in the Irish context: as Philip points out, it implies that wage cuts need to happen all at once, now.

The Government should announce that all public sector wages, which it controls, be cut by x%, where x is determined by real exchange rate considerations. It should strongly suggest that all private sector wages be cut by the same amount. Ideally we would all jump together, and so the wage cuts would come into effect simultaneously on a given date. St Brigid’s Day would seem appropriate.

So much for saving the world

I find this unbelievable.

Eichengreen on EMU

Barry has a nice piece on Vox today. He is clearly right: we need the ECB to move to zero interest rates now, and match London and DC when it comes to quantitative easing. On the latter point: is this easy to do in the Eurozone context, or does it require institutional reform? Can a banking expert set me straight here?

Buiter again

Buiter has a nice piece today comparing Iceland with the UK. It is implicitly a scathing criticism of Irish government policy to date.