Re: Dollarization

[Colin Danby <danbyc@xxxxxxx>]

Hello Barkley:

Thanks for your comments.  I'd distinguish 3 notions of politicization.
Apologies for length and perhaps belaboring the obvious.


1. Critiques of neocolonialism: Currency boards are colonial institutions by
origin.  Either a dollar-tied currency board or full dollarization gives the
USA influence over your domestic economy through financial market channels.
There are the further points about banking structure that you note; these
were important during the colonial histories of currency boards, since they
favored metropolitan financial institutions over local ones.  These issues
remain germane but they're not my main worry.

I don?t think, for example, that the argument one sometimes hears that
dollarization lets the Fed set your monetary policy holds much water.  Indeed
if you really could magically import U.S. inflation and U.S. interest rates
via dollarization, it might not be such a terrible result.  (As Alan likes to
point out, sometimes the alternative to a bad thing is an even worse thing.)
But the point is you can?t because these things are properties of a national
economy, not things you can just sort of let in through an open window, like
the outdoor temperature -- both Atilio and Moreno have touched on this
point.  Thanks to Henry and Warren for making papers available which explore
the reasons that you are not likely to import U.S. interest rates via this
mechanism.  John L?s initial post on this matter also noted the simplistic
assumptions about veil-money that sometimes come into play.

One can reconstitute the neocolonial argument via (3) below, noting the IMF?s
role as an international rentier lobby.


2. Neoliberal: This is the IMF Polak-model approach: we start in equilibrium
with distribution, presumably, explained by marginal products.  We have no
politics.  Next, a wicked "populist" government introduces politics into this
little Eden by spending too much with accommodating credit creation (or just
lending too much ? the difference is not too important at this level of
generality).  The problem shows up in inflation and/or the BoP.  The
"credibility" literature has been mainly about ways governments could tie
their hands to frustrate their latent wickedness.  Such measures include
central bank independence, fixed exchange rates, and more extreme
institutional versions of fixed exchange rates like currency boards and
dollarization.  In any case we have here implicit neoclassical assumptions
about distribution and about money.  Ilene Grabel has a nice CJE piece a year
or two back about the politics of "credibility."


3. Kaleckian/Keynesian: Keynes emphasized in the _Tract_ that distribution is
an historically-rooted social pact; Kaleckian analyses tend to see such pacts
as frayed or nonexistent so that desired shares of national income sum to
more than one.  One result is the competing-claims literature, which Alan has
contributed to.  In this approach distribution is always a live, political
question. The Lerner quote that Mat posted was also a useful clue to
structural differences between economies.

My argument is in this framework:

a. A fixed exchange rate plus capital mobility sharply limits government
control over short term interest rates.  Currency board rules further prevent
any effort to accommodate capital movements via changes in the monetary base
? you can?t sterilize inflows, you can?t counteract the effect of outflows.
Some of the burden may be taken up by controlling how the monetary base
translates into the total money stock, through regulatory restraints on
banking.

b. In periods of capital inflows (which you typically get in the period
immediately after adopting the peg, as the literature on exchange rate-based
stabilization (ERBS) shows) the result is usually rising nontradeable prices,
especially property.  Government seldom tries to restrain this ? indeed it
happily interprets the boom as evidence of the immense wisdom of its policies
and new-found credibility and the IMF chants amen.  Employed workers
typically benefit at this point because of cheap imports (relative to their
money wage).  An interesting question at this point in the cycle is how much
consumer credit there is, which takes us back to the financial regulation
question.

c. Then comes the slump, as predicted in the ERBS literature.  Typically
capital flows reverse and there is a financial crisis that destroys the peg;
the devaluation and resolution of the crisis typically make a real transfer
away from workers.  What makes Argentina?s experience unusual is that it
traversed the slump with the peg intact.  It did this by forcing money wages
down.  Governments in these cases seldom aim to lower profits.   What's
really important, therefore, is the relationship between monetary
institutions and government wage/price policy.

Argentina faces a big debt overhang and a massive transfer problem -- this
was the context in which the 1991 policy was put into place and is the
context for the country's current troubles.  The IMF is about to become one
of its biggest creditors.  What Keynes sought to avoid with the IMF is
happening again: transfers are made by lowering workers? consumption;
recessionary bias is imparted to the world economy.

Best, Colin