Re: PEN-PKT Challenge

["Per Gunnar Berglund" <pgb@xxxxxxxxxxxxxxxxxx>]

Basil,
Thanks for your brief comment. You are again, as far as I am able to judge,
perfectly right. But the main reason for the EMU is still a very weak one
compared to the vast amount of weighty arguments against it. Indeed, the
EMU plan, as currently designed, is a "recipe for disaster" -- to
paraphrase Vickrey. It will effectively leave Europe without any State at
all, in the economic sense. The member states will be reduced to the
economic status of municipalities, and there is no federal, central state
there to fill the void. I am not, in principle, against a European federal
state -- "The United States of Europe". But one must realise that the
peoples of Europe are nowhere near any readiness to accept such a federal
state. The lingual, cultural, social and economic differences are still far
too large, and will remain so for decades to come. The EMU project is a
deceitful and dangerous attempt by Brussels Eurocrats to erect a federal
state without first asking the consent of the European people. I am quite
convinced that if it is carried through, it will end up in a political,
social and economic disaster.

As to the question of monetary management under free cross-border financial
capital flows, I think it is very important indeed to scrutinise the
conditions under which small countries operate. The cross-border
speculative transactions have grown to such enormous volumes that not even
mid-sized countries like Britain, France, Italy and Spain seem to be able
to effectively deal with them. In all probability, the next step of this
rapid development will be that even the largest economies, like Germany,
Japan and the United States loose their grip. Thus, the studies of
small-country experience might be a good way of discerning possible future
trends in the larger nations.

The lesson to be learned from Sweden, and maybe from other European
countries during the 1992--93 turmoil, is that the good old rules of thumb
for monetary management must be reconsidered to some extent. For instance,
it no longer seems to hold true that the central bank can easily operate in
order to control the medium- and long-term rates of interest. The complex
interactions between short-term rates, long-term rates, and the external
currency exchange rates need re-examination in order to enhance the
efficiency of monetary management. This, I would think, is an urgent task
for monetary experts -- even the humble ones :) -- to take on.

Best wishes,
Per


Per Gunnar Berglund
Lilla Sallskapets vag 60
127 61  SKARHOLMEN
SWEDEN

Voice/fax +46-(0)8-883065

----------
> Per
> you are quite correct, I have a large economy model at the back of my
> mind. But in my humble view, this is perhaps the main economic reason
> for a ECB.
>
>
> Date:          Thu, 24 Jul 1997 18:16:21 +0200
> Reply-to:      pkt@xxxxxxxxxxxxxxxx
> From:          "Per Gunnar Berglund" <pgb@xxxxxxxxxxxxxxxxxx>
> To:            POST-KEYNESIAN THOUGHT   <pkt@xxxxxxxxxxxxxxxx>
> Subject:       PEN-PKT Challenge
> X-To:          <pkt@xxxxxxxxxxxxxxxx>
>
> Basil,
> Some comments are interspersed below,
>
> Best, Per
>
> ----------
> Prof BJ Moore, Ekonomie, wrote:
>
> > So if it is conceded
> > that the CB can set the ST rate, and persuade the markets that it
> > will keep them at this low level in the future, so long rates also
> > fall,
>
> PGB
> This might still be very true for the largest economies, that is US and
> Japan (and maybe also Germany), but the CB of smaller countries face
> serious obstacles, due to the impact on the currency exchange rate and
> cross-border financial transactions.
> Yesterday, I wrote a note on the Swedish bond market depression in 1994.
My
> prime hypothesis is that the crisis was set off by the Swedish Riksbank
> (the CB) trying to "peg" the repo rate at 6.92% instead of managing the
> exchange rate (the Krona has been floating since the 1992 collapse). The
> Riksbank reasoned along the lines you set out here, namely: "if we keep
the
> short rate at 6.92, sooner or later the markets will adapt the long rates
> to this level". Now, what actually happened was that the bondholders lost
> confidence in the 6.92% level, and started selling off bonds. Long rates
> started climbing in February--March 1994. The Riksbank obviously
> interpreted the first climb as a temporary phenomenon, and failed to
react.
> Economist after economist assured that "no upward trend is discernible"
in
> long rates, and that there was "no need for action". This unanimous choir
> silenced in June, when long rates were reaching 9 percent (the yield
curve
> had been virtually flat in February). In July, panic was near, with long
> rates passing 10%, and in early August, the chief executive of one of the
> largest insurance companies declared that he would boycott government
bonds
> until order was restaured on the market. Long rates immediately hiked
> another 100 points, going well over 11 percent. At this stage, the
Riksbank
> just couldn't sit their and do nothing. The repo rate was raised by 28
> points, causing even more turbulence and disruptions.
>
> This story is not a very encouraging example to those who think that
> central banks can easily control the long-term rates. In fact, there
seems
> to be rather little that a small country can do when facing the huge
> international and domestic speculative forces. Trying to liquidise might
> end up in a currency weakening, feeding back even worse on the long-term
> rates, via inflation expectations spurred by higher import prices. The
task
> of monetary management is not an easy one nowadays.
>
> BJM
> > low interest rates must be very powerful as a stimulus to
> > consumption and investment spending.
>
> PGB
> To consumption, maybe. I think the empirical evidence on this one is
> somewhat mixed. Intuitively, one would think that the wealth effect
should
> be positive, but on the other hand higher rates will cause savings to
grow
> faster, thus causing higher income flows in the future. All this is
> standard analysis, and I am not convinced that the one effect is much
> stronger than the other, countervailing one.
> As to investment, yes rates are pretty powerful, I think, as a tool to
halt
> a boom. But they are certainly not very powerful as a stimulative measure
> in a slump. I think nearly all empirical evidence, and in particular the
> work of such a distinguished Keynesian investment expert as Robert
Eisner,
> points to the "accelerator" effect of high capacity utilisation far
> outweighs the interest rate impact on business investment spending.
>
>
> Per Gunnar Berglund
> Lilla Sallskapets vag 60
> 127 61  SKARHOLMEN
> SWEDEN
>
> Voice/fax +46-(0)8-883065
>
>
>
>
>