Friday, 24 March 2017: 17:00-18:30
Chair:
Robert Z. Aliber, University of Chicago—USA
Organizer:
Robert Z. Aliber, University of Chicago—USA
Speakers:
Gylfi Zoega, University of Iceland—Iceland
Presentation Title: NORDIC LESSONS FROM THREE EXCHANGE RATE REGIMES: The three Nordic countries of Denmark, Finland and Sweden are small, open economies with homogeneous populations; each of these countries trades mostly with other European countries. Each of these countries has a different currency arrangement. Finland was a founding member of the euro. Denmark pegged its krona to the German mark in 1982, and then to the euro in 1989. The Swedish krona floats. This paper explores the evolution of macroeconomic aggregates; output growth, employment, and the real exchange rate, since 1999. Has the choice of an exchange rate regime made a significant difference to the increase in employment and to the growth of gross domestic product (GDP)? Why has Denmark been able to maintain a fixed price for its currency for 34 years? Has the commitment to a fixed price slowed the growth of GDP? How was each of these countries able to escape the problems of inflation in the 1970s and the frequent declines in the prices of other European currencies? Each of these countries has achieved a higher rate of growth of GDP than those achieved by larger countries in Europe; does their success reflect the quality of their economic institutions rather than their choice of a currency arrangement? Has the relatively small size of each of these countries been significant in enabling them to achieve a higher level of economic performance? What insights can be learned from the success of these smaller countries for the larger countries in Europe?
Robert McCauley, Bank for International Settlements—Switzerland
Presentation Title: A CRITICAL SHORTAGE OF SAFE ASSETS: A NEW TRIFFIN DILEMMA? A number of researchers have claimed that the international monetary and financial system faces a Triffin dilemma in a new fiscal form. In particular, it is asserted that, on one horn of the dilemma, something akin to global deflation threatens if not enough safe assets are issued by highly creditworthy sovereigns (like the US Treasury) to satisfy global demand emanating from emerging market countries. On the other horn of the dilemma is the potential loss of the creditworthiness of such sovereigns if they supply enough safe assets to meet the global demand. This paper, co-authored with Dr. Michael Bordo of Rutgers University, casts doubt on the claim that such a dilemma exists, pointing to historic precedents for safe assets that are produced without fiscal deficits. The authors also suggest that, taken on its own terms, the safe assets dilemma does not share the critical features of the original Triffin story.
Brendan Brown, Mitsubishi UFJ Financial Group—United Kingdom
Presentation Title: GOODS INFLATION, ASSET INFLATION, AND IRRATIONALITY: The Great Monetary Experiment of the present cycle has significantly expanded the laboratory for testing hypotheses about asset price inflation. The dominant feature of the 1970s was goods price inflation in virtually every country; even those countries that had prided themselves on their ability to manage their monetary aggregates were unable to insulate their economies from the inflation that pervaded most of their trading partners. The dominant feature since then has been asset price inflation. Japan experienced a massive increase in the prices of real estate and stocks in the 1980s; at the end of the 1980s, these prices were five to six times higher than at the end of the 1970s. There was very little goods price inflation in Japan, despite the sharp increase in household wealth. The United States and Britain experienced very sharp increases in real estate prices in the middle years of the first decade of the twenty first century. In this article, the author explores both recent and older history to determine how monetary disorder empowers irrational forces in asset markets, drawing on behavioural finance theory. A key related issue examined is how asset price inflation and goods inflation are related to each other – and why the relationship between these two types of inflation has varied extensively from one country to another and over time across countries. A final section of the paper analyses the nature of “disinflation” on a hypothetical journey to sound money.
Robert Z. Aliber, University of Chicago—USA
Presentation Title: PATHS TO INTERNATIONAL MONETARY STABILITY: The objective of international monetary reform is to develop an institutional arrangement that provides the optimal combination of stability and flexibility. The stability objective is to minimize the changes in the real prices of currencies that result from temporary monetary shocks. The flexibility objective is to accommodate changes in the competitive positions of individual countries that occur because of the differences in inflation rates and because of structural changes like the discovery of new resources and surges in productivity. The arrangement should provide speed bumps that deter short term cross border investment inflows by carry trade investors. The International Monetary Fund (IMF) arrangement of adjustable parities was not sufficiently flexible; the political authorities were reluctant to change the parities for many months after the need for these changes was highly probable. The floating currency arrangement has failed to live up to the promises of its proponents; the deviations of the market prices of currencies from the long run average prices have been much larger than when currencies were attached to parities. The long swings in the prices of currencies have provided investors with massive scope for exceptional trading profits. The four waves of banking crises since the early 1970s have resulted from the sharp variability in cross border investment inflows. There is abundant evidence of market failure; investors have failed to ask where the borrowers will obtain the money to pay interest if the money is not available from new loans.
Presentation Title: NORDIC LESSONS FROM THREE EXCHANGE RATE REGIMES: The three Nordic countries of Denmark, Finland and Sweden are small, open economies with homogeneous populations; each of these countries trades mostly with other European countries. Each of these countries has a different currency arrangement. Finland was a founding member of the euro. Denmark pegged its krona to the German mark in 1982, and then to the euro in 1989. The Swedish krona floats. This paper explores the evolution of macroeconomic aggregates; output growth, employment, and the real exchange rate, since 1999. Has the choice of an exchange rate regime made a significant difference to the increase in employment and to the growth of gross domestic product (GDP)? Why has Denmark been able to maintain a fixed price for its currency for 34 years? Has the commitment to a fixed price slowed the growth of GDP? How was each of these countries able to escape the problems of inflation in the 1970s and the frequent declines in the prices of other European currencies? Each of these countries has achieved a higher rate of growth of GDP than those achieved by larger countries in Europe; does their success reflect the quality of their economic institutions rather than their choice of a currency arrangement? Has the relatively small size of each of these countries been significant in enabling them to achieve a higher level of economic performance? What insights can be learned from the success of these smaller countries for the larger countries in Europe?
Robert McCauley, Bank for International Settlements—Switzerland
Presentation Title: A CRITICAL SHORTAGE OF SAFE ASSETS: A NEW TRIFFIN DILEMMA? A number of researchers have claimed that the international monetary and financial system faces a Triffin dilemma in a new fiscal form. In particular, it is asserted that, on one horn of the dilemma, something akin to global deflation threatens if not enough safe assets are issued by highly creditworthy sovereigns (like the US Treasury) to satisfy global demand emanating from emerging market countries. On the other horn of the dilemma is the potential loss of the creditworthiness of such sovereigns if they supply enough safe assets to meet the global demand. This paper, co-authored with Dr. Michael Bordo of Rutgers University, casts doubt on the claim that such a dilemma exists, pointing to historic precedents for safe assets that are produced without fiscal deficits. The authors also suggest that, taken on its own terms, the safe assets dilemma does not share the critical features of the original Triffin story.
Brendan Brown, Mitsubishi UFJ Financial Group—United Kingdom
Presentation Title: GOODS INFLATION, ASSET INFLATION, AND IRRATIONALITY: The Great Monetary Experiment of the present cycle has significantly expanded the laboratory for testing hypotheses about asset price inflation. The dominant feature of the 1970s was goods price inflation in virtually every country; even those countries that had prided themselves on their ability to manage their monetary aggregates were unable to insulate their economies from the inflation that pervaded most of their trading partners. The dominant feature since then has been asset price inflation. Japan experienced a massive increase in the prices of real estate and stocks in the 1980s; at the end of the 1980s, these prices were five to six times higher than at the end of the 1970s. There was very little goods price inflation in Japan, despite the sharp increase in household wealth. The United States and Britain experienced very sharp increases in real estate prices in the middle years of the first decade of the twenty first century. In this article, the author explores both recent and older history to determine how monetary disorder empowers irrational forces in asset markets, drawing on behavioural finance theory. A key related issue examined is how asset price inflation and goods inflation are related to each other – and why the relationship between these two types of inflation has varied extensively from one country to another and over time across countries. A final section of the paper analyses the nature of “disinflation” on a hypothetical journey to sound money.
Robert Z. Aliber, University of Chicago—USA
Presentation Title: PATHS TO INTERNATIONAL MONETARY STABILITY: The objective of international monetary reform is to develop an institutional arrangement that provides the optimal combination of stability and flexibility. The stability objective is to minimize the changes in the real prices of currencies that result from temporary monetary shocks. The flexibility objective is to accommodate changes in the competitive positions of individual countries that occur because of the differences in inflation rates and because of structural changes like the discovery of new resources and surges in productivity. The arrangement should provide speed bumps that deter short term cross border investment inflows by carry trade investors. The International Monetary Fund (IMF) arrangement of adjustable parities was not sufficiently flexible; the political authorities were reluctant to change the parities for many months after the need for these changes was highly probable. The floating currency arrangement has failed to live up to the promises of its proponents; the deviations of the market prices of currencies from the long run average prices have been much larger than when currencies were attached to parities. The long swings in the prices of currencies have provided investors with massive scope for exceptional trading profits. The four waves of banking crises since the early 1970s have resulted from the sharp variability in cross border investment inflows. There is abundant evidence of market failure; investors have failed to ask where the borrowers will obtain the money to pay interest if the money is not available from new loans.