Effectiveness of Monetary Policy Reconsidered

This paper inspects the standard policy rule that under a flexible exchange rate regime with perfectly elastic capital flows, monetary policy is effective and fiscal policy is not. The logical validity of the statement requires that the effect of an exchange rate change on the domestic price level be ignored. The price level effect is noted in some textbooks, but not formally analyzed. When it is subjected to a rigorous analysis, the interaction between changes in the exchange rate and the domestic price level significantly alters the standard policy rule. The logically correct statement would be, under a flexible exchange rate regime with perfectly elastic capital flows the effectiveness of monetary policy depends on the values of the import share and the sum of the trade elasticities. Inspection of data from developing countries indicates the effectiveness of monetary policy under flexible exchange rates can be quite low even if capital flows are perfectly elastic.

Inequality Trends in Some Developed OECD Countries

This paper argues that income inequality has increased in several, but not all, developed countries over the last twenty years. The increase in some countries supports the conclusion that the deregulation of markets, resulting in the concentration of economic power, is the fundamental cause as well as the gross manifestation of inequality of both income and wealth.income distribution, inequality, unemployment, developed countries

The Freetown Declaration: Countercyclical Policy for Africa

In August 2009 the African finance ministers issued the Freetown Declaration, in which they committed their governments to “implement fiscal stimulus measures” to counter the effects of the international financial crisis on their economies.� This paper analyzes the feasibility of realizing this commitment. It considers the availability of policy instruments in the sub-Saharan countries for countercyclical intervention.� On the basis of this, the paper proposes a fiscal stimulus tailored to the conditions and constrains of the countries of the region.� In a majority of the countries the fiscal expansion could be financed domestically, in other countries governments would require additional external funding, and only for a few countries would a stimulus not be appropriate. >> Watch an interview with John Weeks on the economic basis ofsocial democracy

The Theory and Empirical Credibility of the Commodity Money

The recent instability in financial markets demonstrated the inadequacy of the mainstream treatment of money and the underlying production base. This has stimulated interest in the possible role of a money commodity. I demonstrate that the fundamental function of monetary theory, an explanation of the general level of prices, is provided through only two analytical mechanisms, quantity-based valueless money or a money commodity. I show that the quantity-based explanation is unsound by its own logic. I then present the theoretical argument for commodity-based money, which is analytically consistent. Theoretical superiority of commodity-based monetary theory has little practical impact because the commodity money hypothesis is considered empirically absurd. The final section demonstrates prima facie credibility of a link between gold and aggregate prices in the United States since the end of World War II. This credibility should motivate Marxists and other critics of mainstream economics to treat seriously commodity-based monetary theory.

The Reduction of Fiscal Space in Zambia?Dutch Disease and Tight-Money Conditionalities

During 2005-2006, appreciation of the Kwacha, Zambia?s currency, had a significant negative impact on public income. This exchange-rate effect received little notice in the debate over macroeconomic policy. The appreciation reduced fiscal space largely because of binding IMF conditionalities on monetary polices. The fiscal effect had two major revenue components: a fall in the domestic-currency income equivalent of official development assistance and a fall in trade taxes. In 2005, the negative effect on the public budget of the Kwacha appreciation was largely balanced by the positive impact on reducing external debt service. This positive impact ended, however, with debt relief and was almost zero after 2005. Obviously, these revenue effects, though little noticed, had negative implications for Zambia?s ability to achieve the MDGs. The Zambia experience underscores some important general lessons. It indicates, for example, the necessity to coordinate fiscal, monetary and exchange-rate policy in order to achieve sustained growth, employment generation and poverty reduction. Most important, this experience is also a clear example of the dysfunctional consequences of having low-inflation targets rule monetary policy. In the context of currency appreciation, setting limits on the domestic money supply prevents effective exchange-rate management. This necessarily creates, as a by-product, larger fiscal deficits and, consequently, more public borrowing. And these negative fiscal consequences could significantly constrict the resources that some developing countries need to achieve the MDGs.The Reduction of Fiscal Space in Zambia?Dutch Disease and Tight-Money Conditionalities

Neoclassical Inflation: No theory there

The theoretical generalization that the price level is determined by the quantity of money is commonly employed as a teaching device, in abstract modeling, and as a guide to policy. It represents a profound misunderstanding of inflation. In specific, the famous parable, more money then more inflation, is logically wrong. Far from the strength of neoclassical economics, its theory of inflation encapsulates and epitomizes its most fatal analytical errors and contradictions. Prominent among these errors and contradictions are the failure to provide a convincing explanation for the existence of money, and the closely related inability to provide a definition of money that makes its supply analytically determinate. These basic problems require the creation of an imaginary economy, the analysis of which results in arbitrary conclusions that cannot be generalized beyond neoclassical Cloud-Cuckoo Land.

The Impact of the Global Financial Crisis on The Economy of Sierra Leone

GLOBAL CRISIS AND POVERTY PREVENTION Most recent statistics indicate that the global financial crisis will cause a fall in export earnings in Sierra Leone of approximately fifteen percent in 2009 compared to 2008. A regression-based model estimates that this decline in exports earnings could result in a fall in national income of almost ten percent. Based on the income distribution in the 2003 household survey, a ten percent decline in national income would increase poverty by twelve percent of the population, or about 600,000 people. A fiscal stimulus of two percent of GDP could stabilise the economy at the level of 2008, preventing this disastrous increase in poverty. A stimulus package consisting of employment intensive public works programmes could be designed to return the economy to its pre-shock level with a reduction in poverty. (...)The Impact of the Global Financial Crisis on The Economy of Sierra Leone