"Dollarization: A Dead End"

When economies "dollarize," their exchange rate and monetary policy, both considered to be sources of instability, are simultaneously discarded. Often, dollarization becomes an attractive option for developing countries that have experienced successive failures of exchange rate and monetary management. This paper makes use of a theoretical model that shows, contrary to the commonly accepted view, that a dollarized economy would experience financial instability in the event of external shocks should it attempt to operate discretionary fiscal policies. Shocks not simultaneously contained by adjustments to spending would lead to ever-increasing fiscal and current account deficits because public sector borrowing requirements can only be financed by selling bonds in the open market at constantly rising rates of interest. Hence, such a path cannot be an option. Alternatively, if fiscal spending were curbed at par with the shock, external and current account balances would converge to equilibrium, but trigger a recession and increased unemployment. Since this, too, is unacceptable, dollarization turns out to be a "dead end."

Dollarization: A Dead End

When economies "dollarize," their exchange rate and monetary policy, both considered to be sources of instability, are simultaneously discarded. Often, dollarization becomes an attractive option for developing countries that have experienced successive failures of exchange rate and monetary management. This paper makes use of a theoretical model that shows, contrary to the commonly accepted view, that a dollarized economy would experience financial instability in the event of external shocks should it attempt to operate discretionary fiscal policies. Shocks not simultaneously contained by adjustments to spending would lead to ever-increasing fiscal and current account deficits because public sector borrowing requirements can only be financed by selling bonds in the open market at constantly rising rates of interest. Hence, such a path cannot be an option. Alternatively, if fiscal spending were curbed at par with the shock, external and current account balances would converge to equilibrium, but trigger a recession and increased unemployment. Since this, too, is unacceptable, dollarization turns out to be a "dead end."Dollarization, exchange rate, monetary policy

"Can Countries under A Common Currency Conduct Their Own Fiscal Policies?"

The debate about balance of payment problems is generally linked with adjustments in the fiscal sector, especially since the views of Bretton Woods institutions became predominant. For the majority of theoretical models that currently inform policy, it is becoming common thought that in a world of free trade and free movement of capital, a floating rate of exchange may clear the market for financial assets. In these models, the persistence of balance of payment problems can be attributed to rigidities either in the fiscal sector (that is, the inability of the public sector to run a balanced budget), or the labor market (that is, trade union pressures and welfare protective measures leading to uncompetitive salaries). This approach, which makes the fiscal stance the culprit of macroeconomic imbalances in countries with floating exchange rates, is, however, also applied to countries that have adopted other, more rigid forms of exchange rate policy, such as currency boards, dollarization, and common currency agreements. It seems to be overlooked that systems of common currency pose problems of an entirely different kind because two major mechanisms of macroeconomic adjustment? exchange rate flexibility and money issuing? are obviously removed. Thus, theoretical and policy-oriented propositions need to take into account this new set of restrictions.

Can Countries under A Common Currency Conduct Their Own Fiscal Policies?

The debate about balance of payment problems is generally linked with adjustments in the fiscal sector, especially since the views of Bretton Woods institutions became predominant. For the majority of theoretical models that currently inform policy, it is becoming common thought that in a world of free trade and free movement of capital, a floating rate of exchange may clear the market for financial assets. In these models, the persistence of balance of payment problems can be attributed to rigidities either in the fiscal sector (that is, the inability of the public sector to run a balanced budget), or the labor market (that is, trade union pressures and welfare protective measures leading to uncompetitive salaries). This approach, which makes the fiscal stance the culprit of macroeconomic imbalances in countries with floating exchange rates, is, however, also applied to countries that have adopted other, more rigid forms of exchange rate policy, such as currency boards, dollarization, and common currency agreements. It seems to be overlooked that systems of common currency pose problems of an entirely different kind because two major mechanisms of macroeconomic adjustment ¾ exchange rate flexibility and money issuing ¾ are obviously removed. Thus, theoretical and policy-oriented propositions need to take into account this new set of restrictions.

"Strategic Prospects and Policies for The U.S. Economy"

Notwithstanding the great achievements of the U.S. economy, the growth of aggregate demand during the past several years has been structured in a way that would eventually prove unsustainable. During the main period of economic expansion, the fiscal stance tightened at a much greater pace than in any period during the previous 40 years, and net export demand progressively deteriorated to record deficit levels. It follows that the expansion aggregate demand had been driven by a similarly unprecedented expansion of private expenditure relative to income, financed by growing injections of net credit, which caused the indebtedness of the nonfinancial private sector to escalate to unprecedented levels. The conclusion drawn was that this process must come to an end at some stage, and that when it did, the entire stance of fiscal policy would have to move in an expansionary direction, and that for economic growth to be sustained indefinitely, net export demand would have to recover as well.

"As The Implosion Begins . . .? A Rejoinder to Goldman Sachs's J. Hatzius Strategic Analysis"

A Rejoinder to Goldman Sach's J. Hatzius' "The Un-Godley Private Sector Deficit" in US Economic Analyst (27 July).

Does fast Growth in India and China harm U.S. Workers? Insights from Simulation Evidence

A major political and policy issue today is whether globalisation and rapid economic growth in India and China would have an adverse affect on labour markets in the U.S. and other advanced countries. Some leading economists have argued that even though the recent integration of India and China with the liberalised global economy has not so far had a serious negative impact on wages and employment in advanced countries, it is most likely to do so in the future in view of the growing technological and scientific capabilities in the two developing countries. This is also because it is suggested that this integration represents a sudden doubling of the world labour force without a concomitant increase in capital. The present paper argues against this plausible thesis, essentially on two grounds: (a) it does not take into account the demand side effects of fast growth in India and China; and (b) it abstracts from the dynamism of the U.S. real economy and its innovative large corporations. However, simulations of different scenarios on the CAM world econometric model indicate that at a disaggregated level there are severe supply side constraints on energy, raw materials and food which thwart the expansionary demand side effects of fast growth in India and China.Globalisation; China and India; Simulation; U.S. Workers; Economic integration

"As The Implosion Begins . . .? Prospects and Policies for the U.S. Economy: A Strategic View"

The U.S. economy is probably now in recession, and a prolonged period of subnormal growth and rising unemployment is likely unless there is another round of policy changes. A further relaxation of fiscal policy will probably be needed, but if a satisfactory rate of growth is to be sustained, this will have to be complemented by measures that raise U.S. exports relative to imports.

Addressing Global Imbalances: A Development-Oriented Policy Agenda

DRESSING GLOBAL IMBALANCES: A DEVELOPMENT-ORIENTED POLICY AGENDAThis working paper uses a revived ?world trade and income model? to examine three markedly different scenarios of the world economy. It presents criticisms of the first scenario, the ?Consensus Growth Forecast?, which is an optimistic scenario for future global growth utilized by U.S. policymakers and international financial institutions. This forecast assumes that the gross macroeconomic imbalances currently plaguing the world economy will be resolved, in due course, by market forces?without recourse to major policy interventions. The working paper maintains, instead, that a second scenario?namely, a recession in the U.S. economy (precipitated by a drop in unsustainable household spending) and a marked slowdown in global growth?is much more plausible. In order to avoid such an adverse outcome, the working paper examines the feasibility of a third scenario, a ?Coordinated Growth Scenario?. The paper maintains that this scenario could launch the U.S. economy on a more sustainable economic path, increase growth in other developed countries and enable developing countries to benefit disproportionately, i.e., achieve rapid ?catch-up? rates of growth. This third scenario is based on more expansionary macroeconomic policies, increased investment in manufacturing capacities in developing countries, greater trade integration among developing countries and greater reliance on measures to promote energy savings. While the third scenario is both feasible and desirable, it will entail major structural changes and increased policy coordination across countries.Globalization, Global imbalances, Development, Macroeconomic policies, Poverty