Links for May 11

My dinner with Axel. Last fall, Arjun Jayadev and I had a series of conversations with Axel Leijonhufvud at his home in California; videos and transcript are now up at the INET site, along with a collection of his writings. I’m very grateful to have had this chance to talk with him; Leijonhufvud is one of two or three economists who’ve most influenced my thinking. He’s also a charming and delightful storyteller, which I hope comes through in the interviews. I’ll be writing something soon, I hope, about Axel’s work and its significance, but in the meantime, check out the interview.


The mind of Draghi. This speech by Mario Draghi offers a nice glimpse into the thinking of central bankers circa 2016. The fundamental point is the idea of a long run “real” or “natural” rate of interest, which policy cannot affect. This idea, and the corollary that the economic world we actually observe is in some sense a false, unreal, artificial or “distorted” sublunary version of the true ideal, is, I think, the central site of tension between economic ideology and economic reality today. But there are other particular points of interest in the speech. First, the frank acknowledgement that the big problem with zero rates is that they reduce the profitability of financial institutions. (By the same logic, Draghi should want to do away with public education since  it reduces the profitability of private schools, and with law enforcement since it reduces the profitability of private security firms.) And second, the claim that one reason for the problem of low interest rates is … excessive government debt!

A temporary period of policy rates being close to zero or even negative in real terms is not unprecedented by any means. Over the past decades, however, we have seen long-term yields trending down in real terms as well, independent of the cyclical stance of monetary policy.

The drivers behind this have been, among others, rising net savings as ageing populations plan for retirement, relatively less public capital expenditure in a context of high public indebtedness, and a slowdown in productivity growth reducing the profitability of investment.

Yes, for years we have been warned that excessive government debt is that interest rates will get too high, increasing borrowing costs for the government and crowding out of private investment. But now it turns out that excessive government debt is also responsible for rates that are too low. Truly, to be a central banker in these times one must be a Zen master.


Business cycle measurement ahead of theory … or heading in an entirely different direction. I’m very excited about a series of posts Merijn Knibbe is doing for the World Economics Association. They are on the incompatibility of the concepts used in the construction of national accounts and other macroeconomic data, with the concepts used in macroeconomic theory. I’ve wanted for a while to make the case for a consistent economic nominalism, meaning that we should treat the money payments we actually observe as fundamental or primitive, and not merely as manifestations of some deeper “real” economy. Knibbe is now doing it. The first installment is here.


Kaminska on “deglobalization”. Izabella Kaminska is always worth reading, but this piece from last week is even more worth reading than usual. I particularly like her point that the international role of the dollar means that the US is to the world as Germany is to the eurozone:

the dollarisation of the global economy … has created a sort of worldwide Eurozone effect, wherein every country whose own currency isn’t strong or reputable enough to be used for trade settlement with commodity producers is at the mercy of dollar flows into its own country. Just like Greece, they can’t print the currency that affords them purchasing power on the global market.

The logical corollary, which she doesn’t quite spell out, is that the US, thanks to its willingness to run trade deficits that supply dollars to the rest of the world, has fulfilled its international role much more responsibly than Germany has.

4 thoughts on “Links for May 11”

  1. About the Kamsinska piece, I am open to the argument that the U.S. to the rest of the world is like Germany to Greece. But I don’t fully understand it.

    Greece can’t print more Euros, which it could do if it left the Euro. The UK or Brazil can print more money.

    But according to your conception, the US must “supply” a certain amount of dollars via a trade deficit in order for the rest of the world to grow. How does that work and why can’t nations with their own currency boost demand via macro management?

    Germany doesn’t have to run a trade deficit with Greece. It could have a higher inflation target (or NGDP target) for its fiscal/monetary policy as many people have been arguing for. Economists say they should allow higher wage gains. This would make it easier for Greece to adjust.

    Is it that Kamisnka is talking about Emerging Market economies whose currencies are somewhat linked to the dollar?

  2. A large fraction of international debt and other financial contracts are denominated in dollars. A large fraction of trade is denominated in dollars, or in currencies that are effectively linked with the dollar. So countries that want to reliably make their international payments need reliable access to dollars. The alternative to accumulating reserves is to depend on private capital inflows. But these can reverse unexpectedly, leading to balance of payments crises.

    why can’t nations with their own currency boost demand via macro management?

    There’s a tight relationship between income and imports, so a country that tries to boost domestic demand is going to move toward a trade deficit. This is going to require external financing, which for most countries other than the US is risky and unreliable at best, expensive or simply unavailable. You could, of course, limit the trade deficit through import restrictions, or stabilize the financial account with capital controls, but both of those are strongly discouraged under the prevailing international consensus. (A consensus actively fostered and upheld by the US.) So most countries are in a situation of “balance of payments constrained growth” — they have to keep GDP low enough relative to their trade partners to be consistent with a non-negative current account balance.

    Developing countries that have tried to boost demand beyond this level and finance the resulting deficits with foreign-currency borrowing have repeatedly faced devastating crises when capital inflows abruptly reversed.

    Germany doesn’t have to run a trade deficit with Greece. It could have a higher inflation target (or NGDP target) for its fiscal/monetary policy as many people have been arguing for. Economists say they should allow higher wage gains. This would make it easier for Greece to adjust.

    That’s right. In other words, Germany could behave more like the US.

  3. SOrry, I misread that last paragraph. Right, Germany doesn’t have to run a trade deficit with Greece, no — actually there is not much direct trade between the two countries. But to make the adjustment easier, Germany has to run a trade deficit with someone, and someone has to run a trade deficit with Greece.

    IMO the importance of low German inflation is overstated — the real issue is slow income growth there. But that’s a second order issue — the analysis and policy implications are basically the same either way.

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