The Euro as a Proxy for the Classical Gold Standard? Government Debt Financing and Political Commitment in Historical Perspective

[Introduction] In spite of the recent troubles in the euro area, Jesus Huerta de Soto (2012), a famous proponent of the gold standard, argues that the euro should be considered a 'second best to the gold standard' and is worth being preserved. From a classical liberal point of view, he sheds some light on the euro's similarities with the gold standard and on some important advantages of the currency union over its alternative, flexible exchange rates in Europe. According to Huerta de Soto (2012), the main advantage of the introduction of the common currency is that - like when 'going on gold' - European governments have given up monetary nationalism. Like the gold standard, the euro limits state power as it prevents national central banks from manipulating exchange rates and inflating away government debt. Currently, he argues, the common currency - like previously the gold standard - forces important reforms and/or spending cuts upon the countries of the euro area that face severe debt and structural problems. In this respect, the euro should be seen as 'a proxy for the gold standard'. In this policy paper, I attempt to address some similarities and differences in the institutional framework of the classical gold standard (1880 - 1912) and the European Monetary Union (EMU) (1999 - ) that affect government debt financing and the way in which countries react to crisis. I argue that - in line with Huerta de Soto (2012) - giving up monetary nationalism and committing to the rules of either the gold standard or EMU initially restricted the scope of state action. Therefore, the euro - like previously the gold standard - provided some (fiscal) policy credibility. Fiscal policy credibility was the main determinant of capital market integration and low government borrowing costs in Europe under both systems. But in contrast to Huerta de Soto (2012), I shall emphasize that neither the gold standard, nor the euro itself force reforms and spending cuts upon countries that face crisis and debt problems. The political commitment to the monetary systems determines the willingness to reform or cut spending and therewith fiscal policy credibility in crisis periods: (...

Remittances and Household Behavior in the Philippines

As one of the world's largest recipients of remittances, the Philippines received remittances roughly 12% of its gross domestic product in 2008. Remittances have become the single most important source of foreign exchange to the economy and a significant source of income for recipient families. Using the instrument variable estimation technique, this study examines the role of remittances in increasing household consumption and investment and thereby their potential for rebalancing economic growth and creating long-term human and capital investment. The results indicate that remittances negatively influence the share of food consumption in the total expenditure. However, unlike previous studies, the estimations show that remittances to the Philippines do not have a significant influence on other key items of consumption or investment such as spending on education and health care. A further analysis using logistical regression shows that remittances help to lift households out of poverty. Remittances thus may help in fighting poverty in the Philippines but not in rebalancing growth, especially in the long run

Maquiladoras and Informality: A Mixed Blessing

Mexico experienced a tremendous expansion of its export-processing maquila sector during the 1990s. At the same time, a large proportion of its labor force remains employed in the informal sector. Since one of the main objectives of the maquiladora program was to increase formal employment, we study how the rapid increase in maquiladora activity has affected labor market outcomes in Mexico. We develop a heterogeneous firm model with imperfect labor markets that captures salient features of the Mexican economy such as the differences between maquila and non-maquila manufacturing plants and the existence of an informal sector. We calibrate the model's parameters to match key cross-sectional moments characterizing the Mexican economy. Our quantitative model indicates that the expansion of the maquila sector during the 1990s produced an increase in informality of 0.9% and a reduction in the skill premium and overall welfare of 2.7% and 3.7%, respectively. A counterfactual experiment in which we shut down the informal sector completely results in a reduction of Mexican welfare of 33.5% relative to the equilibrium with an informal sector