Central Planning and Monetarism: Fellow Travelers?

We discuss the monetary institutions and macroeconomics of centrally planned economies (CPEs) ; objectives and techniques of monetary control; the relevance to CPEs of the neutrality property, the natural rate hypothesis, and the quantity theory; the roles of stock .and flow variables and the stability of asset demand and expenditure functions; the relation between monetary policy, fiscal policy and incomes policy in CPEs; the CPE equivalent of a floating exchange rate and its implications for monetary policy; and "super crowding out." Many considerations suggest that monetarism as theory and policy might be more applicable under central planning than it is in market economies.

The Theory and Measurement of Macroeconomic Disequilibrium in Centrally Planned Economies

The paper considers issues in recent research on macroeconomic equilibrium in centrally planned economies. I defend the explicit aggregative , macroeconomic approach in theory, institutional relationships and measurement. It has offered a fresh, coherent framework for analysis of many CPE phenomena, opened up a range of possibilities for empirical investigation, and generated several important spinoffs: work of planners' behavior, insights into CPE policy problems of the 1970s and early 1980s, which centred on macroeconomic equilibrium and threats to it; and some developments in market economy macro theory and econometrics. The quantity-rationing macro model and disequilibrium econometrics give a more useful as well as a more nuanced view of macroeconomic reality in CPEs than the conventional wisdom characterizing them as perpetual "shortage economies".

Costs and benefits of running an international currency

This report discusses the cost and benefits of running an international currency. It starts by discussing the effect of the euro's internationalization on financial markets, and presents data on the impact of the single currency on private credit. It considers recent work on the effect of the euro on financial integration and the implications of the euro's rising internationalization on the liquidity premium. Then it turns to the vehicle currency role of the euro and presents some results using new data from the latest BIS Triennial Survey on the foreign exchange market. Concerning the direct benefits of running an international currency, the report first offers estimates on the likely gains from international seigniorage and discuss work on the effects of the internationalization of the euro on the terms of trade and invoicing patterns in international trade. The implications of the international role of the euro for portfolio returns and the so-called “exorbitant privilege†are analysed in detail. The effects of the single currency on exchange rate volatility are also considered. It summarizes recent research on the impact of the euro on global bond and equity and analyzes the potential implications of the euro's international status for central banks' reserve holdings. Finally, it turns to the effects of the euro on the stability of domestic money demand and the problems posed for monetary policy, and the implications for international financial stability.euro, international currency, international role of the euro, Papaioannou , Portes , Costs and benefits of running an international currency

The Anatomy of Financial Crises

A financial crisis is a disturbance to financial markets. associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the market’s capacity to allocate capital. In this paper we analyze the generation and propagation of financial crises in an international setting. We provide a perspective on the danger of a serious disruption to the global financial system by comparing the last full-fledged financial crisis - that of the 1930s - with conditions prevailing today. Our definition of a financial crisis implies a distinction between generalized financial crises on the one hand and isolated bank failures, debt defaults and foreign-exchange market disturbances on the other. We represent this distinction in three sets of linkages: between debt defaults; and between exchange-market disturbances and bank failures. In both the 1930s and 1980s, the institutional environment was drastically altered by rapid change in foreign exchange markets, in international capital markets, and in the structure of domestic banking systems. Our comparative analysis underscores the critical role played by institutional arrangements in financial markets as a determinant of the system's vulnerability to destabilizing shocks.

Sovereign CDS and Bond Pricing Dynamics in the Euro-area

This analysis tests the price discovery relationship between sovereign CDS premia and bond yield spreads on the same reference entity. The theoretical no-arbitrage relationship between the two credit spreads is confronted with daily data from six Euro-area countries over the period 2004-2011. As a first step, the supposed non stationarity of the two series is verified. Then, we examine whether the non-stationary CDS and bond spreads series are bound by a cointegration relationship. Overall the cointegration analysis confirms that the two prices should be equal to each other in equilibrium, as theory predicts. Nonetheless the theoretical value [1, -1] for the cointegrating vector is rejected, meaning that in the short run the cash and synthetic market's valuation of credit risk differ to various degrees. The VECM analysis suggests that the CDS market moves ahead of the bond market in terms of price discovery. These findings are further supported by the Granger Causality Test: for most sovereigns in the sample, past values of CDS spreads help to forecast bond yield spreads. Short-run deviations from the equilibrium persist longer than it would take for participants in one market to observe the price in the other. That is consistent with the hypothesis of imperfections in the arbitrage relationship between the two markets.

Dealing with debt : the 1930's and the 1980's

The debt crisis of the 1930's illustrated the difficulty of global plans for resolving the debt crisis and underscored the importance of market-based debt-reduction schemes. The crisis of the 1980's differed in fundamental ways from that of the 1930's, but the earlier crisis illuminated the current crisis in several ways. The authors conclude that: (a) economic variables alone do not explain the incidence and extent of default; (b) implications of different debt-management strategies for macroeconomic performance remain difficult to isolate; (c) there is little evidence that countries that defaulted in the 1930's suffered reduced access to capital markets after World War II; and (d) the readjustment of defaulted debts entailed a protracted negotiation process. They further conclude that: (e) Government intervention in the 1930's and 1980's differs less in extent than direction in terms of pressure placed on debtors and creditors to maintain service on their debt; (f) global schemes to short-circuit the protracted process of bilateral negotiations proved unavailing; and (g) unlike global plans, market based debt reduction helped to resolve the debt crisis of the 1930's by reducing the overhang and eliminating marginal creditors.Environmental Economics&Policies,Strategic Debt Management,Banks&Banking Reform,Economic Theory&Research,Public Sector Economics&Finance

Money and the Consumption Goods Market in China

This paper studies the relations between money and other macroeconomic variables as well as excess demand in the consumption goods market for the case of China, 1954-83. We explicitly recognize the endogeneity of money in the CPE and do not impose (but instead test) some common restrictive assumptions; we assess the extent of aggregate excess demand (supply) in a macroeconomic disequilibrium model; and we allow at the macro level for the possible coexistence of micro markets in different states of excess demand or supply (shortages or slacks). We find bidirectional causality between money and income; that M[sub0] behaves in a manner more suited to building simple, conventional models than does M[sub 2]; and that there has been a mixed pattern of excess supplies and demands over the three decades.

Dealing With Debt: The 1930s and the 1980s

This paper analyzes the sovereign defaults of the 1930s and their implications for the debt crisis of the 1980s. It reports nine major findings. There is little evidence that financial markets have grown more sophisticated' over time, or that banks have a comparative advantage over the bond market in processing information. (2) Debt default in the 1930s depended on a combination of factors,. including the magnitude of the external shocks, the level of debt, and: the: economic policy response , as well as on a range, of: noneconomic considerations. (3) Countries which interrupted service recovered more quickly from the Great Depression than countries which resisted default. This contrasts with the experience of the 1980s, when no clearcut relationship exists (4) There is little evidence that countries which defaulted in the 19305 suffered inferior capital market access subsequently. (S} The readjustment of defaulted debts was protracted: the analogy with Chapter 11 corporate bankruptcy proceedings is no more applicable to the 1930s than to the 1980s. (6) Although default led in some cases to a substantial reduction of transfers from debtors to creditors, on balance returns on sovereign loans compared favorably with returns on domestic investments. (7) Creditor-country governments did more in the 'thirties than in the 'eighties to accelerate the settlement process. (3) Global schemes analogous to the Baker Plan were widely proposed but never implemented. (9) In contrast, market-based debt reduction in the form G debt buybacks played a useful role in the resolution of the crisis.

Debt and Default in the 1930s: Causes and Consequences

This paper analyzes the "debt crisis" of the 1930s to see what light this historical experience sheds on recent difficulties in international capital markets. We first consider patterns of overseas lending and borrowing in the 1920s and 1930s, comparing the performance of standard models of foreign borrowing in this period to the 1970-80s. Next, we analyze the incidence and extent of defaulton sovereign debt, adapting models of debt capacity to the circumstances of the interwar years. We consider the choices available to investors in those foreign loans which lapsed into default in the 1930s, emphasizing the distinction between creditor banks and bond holders. Finally, we provide the first estimates of the realized rate of return on foreign loans floated between the wars, based on a sample of dollar andsterling bonds issued in the 1920s.