Fundamentals, International Role of Euro and 'Framing' of Expectations: What are the Determinants of the Dollar/Euro Exchange Rate?

The predictions made by economists of the value of the euro prior to its introduction were essentially based on the expected portfolio adjustment resulting from the role that it might play as an international currency. As a result, most analysts agreed that the euro would be a strong currency, appreciating against the US dollar. The first years of life of the ‘virtual’ euro contradicted such a forecast. Economists therefore abandoned predictions based on the euro as a ‘global’ money and directed their focus almost exclusively towards traditional, ‘fundamentals-based’ explanations. Among these explanations, several authors mentioned the unsatisfactory structural and institutional set up of the EMU. Nevertheless, later on, when the euro started appreciating, a different set of fundamentals had to be isolated in order to account for such behaviour. It is possible to argue, then, that the EMU economic structure and institutions are, or at least are currently perceived as, capable of supporting a strong euro, which plays the role of international money. ‘Framing’ of expectations, however, still keeps driving the behaviour of the exchange rate, so that the same structural and institutional set up may be subject to different evaluations, depending on the particular state of expectations of the international currency markets. Finally, since the available evidence suggests that the euro is starting to play an international role, I argue that the ‘international money’ and the ‘framing’ of expectations approaches explain the behaviour of the dollar/euro exchange rate better than the ‘fundamentals' one.Euro; Dollar; Fundamentals; International currency; Portfolio adjustment

Public debt monetisation and the credibility of the ECB

What stops public debt being monetised to avoid the pain of prolonged austerity after the pandemic? An obsolete economic theory of ‘credibility’

Central bank intervention, public debt and interest rate target zones

The euro area crisis has been characterized by speculative attacks reflecting the market fear that some high indebted countries could go bankrupt. What is puzzling, however, is that non-euro area countries with an equally large – and in some cases even larger - public debt-to-GDP ratios have not been subject to attacks. Both facts have been explained by observing that euro area countries could not rely on a lender of last resort, so as to make possible the occurrence of self-fulfilling speculative attacks. The model proposed in this article applies the target zones methodology relative to exchange rates, developed in the late 1980s-early 1990s, to the case of interest rates. Its novelty is that it endogenizes the determinants of the credibility of the interest rate target zone and, as a result, of public debt stability: the latter is shown to depend on the liquidity (that can be interpreted as the availability of reserves) that the central bank can create thanks to its role of lender of last resort: full/partial credibility is obtained when reserves are expected to be sufficient/insufficient to absorb completely the excess of supply of bonds resulting from a given demand shock. Moreover, the expected absence of reserves determines the non-credibility of the interest rate target, while the expectation of a public debt increase produces the convex interest rate nonlinearity that characterized the euro area crisis

Economic Inequality and Conflicts: an Overview

Questo articolo ricostruisce i principali punti del dibattito accademico sulla relazione tra disuguaglianza economica e conflitti. Dopo aver chiarito cosa si intende con l'espressione "disuguaglianza economica", l'autore richiama il modo con cui questa viene misurata e riferisce alcuni dati fondamentali in materia di reddito e distribuzione diseguale della ricchezza nei e tra i paesi, su scala globale, offrendo alcune possibili spiegazioni. Viene poi affrontata la questione centrale dell'articolo, ovvero la correlazione tra disuguaglianza economica e conflitti. In particolare, si esamina il possibile nesso tra disuguaglianze economiche nei paesi e conflitti interni, in connessione col ruolo svolto dal capitale sociale che può essere minacciato dalla disuguaglianza economica. In conclusione, l'autore analizza la correlazione tra disuguaglianze tra paesi e conflitti esterni o internazionali, inclusi i conflitti collegati con il fenomeno, oggi particolarmente rilevante, delle migrazioni

Self-Fulfilling and Fundamentals Based Speculative Attacks: A Theoretical Interpretation of the Euro Area Crisis

The recent euro area crisis shows some similarities with the fixed exchange rate crisis that affected the European Monetary System in 1992–93. I argue that the theoretical framework to be used in order to analyze them should also be similar. As a matter of fact, in both cases, the point of view of the government (that compares costs and benefits of its action) should be considered together with the point of view of speculators, who look at the state of the economic fundamentals in order to decide whether to launch an attack or not. This allows to represent and to interpret, among other things, both the initial “honeymoon” years of EMU and the recent euro area crisis

Strategic interactions between monetary and fiscal authorities in a monetary union

In this paper we extend Nordhaus’ (1994) results to an environment which may represent the current European situation, characterised by a single monetary authority and several fiscal bodies. We show that: a) co-operation among national fiscal authorities is welfare improving only if they also co-operate with the central bank; b) when this condition is not satisfied, fiscal rules, as those envisaged in the Maastricht Treaty and in the Stability and Growth Pact, may work as co-ordination devices that improve welfare; c) the relationship between several treasuries and a single central bank makes the fiscal leadership solution collapse to the Nash one, so that, contrary to Nordhaus (1994) and Dixit and Luisa Lambertini (2001), when moving from the Nash to the Stackelberg solution, fiscal discipline no longer obtains. Also in this case we thus argue in favour of fiscal rules in a monetary union.Fiscal and monetary policy co-ordination; monetary union;international fiscal issues

L’helicopter money e la credibilità della Banca centrale europea

Pompeo Della Posta discute l’affermazione secondo la quale monetizzare il debito rischierebbe di minare la credibilità anti-inflazionistica della Banca Centrale Europea sostenendo che non sarebbe questo il caso. Non è possibile, infatti, perdere credibilità attuando una politica, come sarebbe la monetizzazione della spesa, che porterebbe con sé meno rischi e che risulterebbe meno costosa dell’alternativa rappresentata dal ricorso all’indebitamento

Povertà e disuguaglianza

The actual number of poor people has increased over the last 30 years. The percentage of poor and extremely poor people, over the total population, however, has decreased. This is often assigned to the virtues of globalization, although such an improvement is mainly due to the performance of China and India, two countries that have not followed the standard prescriptions of globalization. Moreover, poverty increased in percentage terms in Sub-Saharian Africa. Moreover, if we look at inequality (a variable that even the Millennium Development Goals has ignored), we see that it has increased dramatically between developed and less developed countries. Increasing inequality undermines the social capital of a country and produces negative effects also in economic terms

Nuovi e vecchi paradigmi economici alla luce della crisi finanziaria ed economica

La recente crisi finanziaria ed economica ha aumentato il numero di coloro che ritengono che le distorsioni prodotte dal “mercato” non siano meno severe di quelle prodotte (potenzialmente) dall’intervento statale, una osservazione che solo alcuni anni fa avrebbe trovato pochi sostenitori. Tale conclusione tuttavia, non vale solo per quanto riguarda il dilemma stato-mercato (un dilemma inappropriato e mal posto secondo molti autori), ma anche per quanto riguarda il confronto fra approcci economici basati sul paradigma dell’homo oeconomicus, comunemente adottati nella teoria economica prevalente, e quelli basati sull’homo reciprocans o animal civile. Questi ultimi, che fino ad ora venivano sostanzialmente ignorati a causa del loro presunto velleitarismo e la loro presunta naiveté “buonista”, possono essere sintetizzati dalle diverse espressioni dell’”economia civile”, alle quali il mondo accademico sta dedicando attenzione crescente. In effetti, né il mercato né lo stato possono operare efficientemente e correttamente nell’assenza di codici etici e morali comunemente accettati e condivisi. Società civile, associazioni di volontariato, ONG, gruppi di acquisto solidale, associazioni religiose, possono fare molto in questa direzione.

Globalizzazione dell’economia e AIDS

The percentage of poor and absolute poor people has decreased worldwide, with the exception of some Sub-Saharan African countries, including Zambia. In those countries, also life expectancy has decreased, because of AIDS. In this short note I argue that it is inappropriate to ignore AIDS epidemics when evaluating the effects of globalization on life expectancy, as some authors have done recently