Is Germany Turning Japanese?

After the recent IT bubble, Germany alone among OECD countries is beginning to share Japan's political-economic profile: too many banks with too little capital, macroeconomic policy division and deflationary bias, and financially and politically passive households. Germany has been spared Japan's fate of persistent stagnation so far because of its long-standing openness and commitment to international economic integration. But this commitment is newly in jeopardy, as Germany backs an approach to the European Union's enlargement that would elevate the power and interests of larger incumbent nations - a shift from Germany's traditional support for EU federalism. The change in the German approach to EU enlargement could well tip the country into a full-fledged Japan syndrome.Germany, Japan, economy, banks, banking, macroeconomic, international economic integration

The Looming Japanese Crisis

After more than a decade of economic stagnation and minimal structural change, Japan stands on the brink of outright financial crisis--the only debate is whether the Japanese government can dodge its imminent economic threats for another six months at most, or ride the wave of global expansion to throw still more money at these problems with decreasing effectiveness until the public debt becomes unsustainable (which should be no later than 2005). Either way, volatility in Japanese asset markets will be extremely high for the next 36 months, with significant declines on average in asset prices and the yen.

Finance and Changing US-Japan Relations: Convergence Without Leverage--Until Now

In the postwar era, US-Japan economic relations have been characterized by substantial tensions, yet this has not damaged the underlying security relationship or critically harmed the multilateral economic framework. In fact, these two economies have become more integrated over time even as these tensions played out. These tensions, however, have required an enormous expenditure of political capital and officials' time on both sides of the Pacific and have led to foregone opportunities for institution building and policy coordination. They have deepened since Japan "caught up" with the United States around 1980, and Japanese and US firms began increasingly to compete for profits and market share in the same sectors. Moreover, as both the US and Japanese economies continue to mature - both in terms of the age of their populations and their industrial mix - they will likely face even greater tensions between them over allocating the management and costs of industrial adjustment. Financial liberalization and integration could change all this. At present, US and Japanese corporate governance and investment behavior appear to be converging towards the arms-length, market-based, US approach to financial markets. If this trend continues, it will not only reduce tensions in the near term by facilitating the resolution of specific disputes, but it could also forge common interests between domestic interest groups across the Pacific while giving those groups more power relative to their respective governments. Over the longer-term, convergence would also produce common US and Japanese policy goals in relation to international capital flows and investment. Finally, for a transitional period, convergence should simultaneously increase US influence and improve Japanese economic performance, a combination that has been difficult to attain since the first oil shock. Convergence between the US and Japanese financial systems, however, is not a foregone conclusion. The general question of whether the decline of national models is inevitable remains open - and the specific outcome of the interaction between Japanese political economy (arguably the most distinctive among industrial democracies) and financial liberalization (arguably the most transformative aspect of globalization) already is unfolding as a critical case study. Even if most would agree that some form of liberalization has taken place in Japanese as well as American financial markets, scholars disagree over whether the Japanese form of liberalization is distinct from the American, whether this liberalization is likely to be the victim of political backlash (in either country), or whether financial sector change is likely to transform the rest of Japan's economy. This essay is focused on a related but more policy-oriented question: If we assume that the current trends toward liberalization in and convergence between the United States and Japanese financial system persist, how will this affect US-Japan relations? I will present evidence of convergence toward the increasingly deregulated US system over the past 15 years, and I will argue that this trend is likely to persist and probably accelerate. I assume as well that the case need not be made here on the pure economics why the more liberal model is likely to confer efficiency gains (at least in the short-run). I do not presume that the ongoing academic discussion of globalization and its effects has been settled. For purposes of policymaking, however, if this convergence assumption proves incorrect in the coming years, it almost certainly would mean that financial factors would be only a very minor factor in US-Japan relations (as it was until recently), or simply one of many sectoral disputes with dynamics with which we are familiar, having no special implications. Several hundred billion dollars have already been bet by Japanese and American investors on the belief that financial liberalization and convergence will occur, so it seems worth exploring the implications of this, I would argue, likely possibility.

Does it pay to be transparent? international evidence form central bank forecasts - commentary

Banks and banking, Central ; Forecasting

The United States Needs German Economic Leadership

Only together can the United States and Germany keep the global economy integrated--by removing agricultural roadblocks to a WTO deal, coordinating on relations with China, and securing the flow of international investment. The new German chancellor, Angela Merkel, could save the Doha Round by reinterpreting the budget deal just made on agricultural support funds at the EU summit, something US pleas and attempts to shame France cannot achieve. Both countries have an interest in making a common front toward China. If the United States continues to face China alone, the Chinese government is unlikely to move the yuan peg meaningfully. Chancellor Merkel should take advantage of the American bad cop role to play good cop. In particular, under German urging, the eurozone can offer to shift several percent of its shares in the IMF and World Bank to China and other Asians in return for a revaluation of the yuan and a eurozone seat at the institutions. Both President Bush and Chancellor Merkel could also cooperate to defuse mounting economic nationalism that hampers cross-border investment. Merkel should secure opportunities for the export-dependent German economy and advance European integration, and the Bush administration should welcome German leadership and thus validate European partnership in international policy.

Does talk matter after all? Inflation targeting and central bank behavior

Since 1990, a number of countries have adopted inflation targeting as their declared monetary strategy. Interpretations of the significance of this movement, however, have differed widely. To some, inflation targeting mandates the single-minded, rule-like pursuit of price stability without regard for other policy objectives; to others, inflation targeting represents nothing more than the latest version of cheap talk by central banks unable to sustain monetary commitments. Advocates of inflation targeting, including the adopting central banks themselves, have expressed the view that the efforts at transparency and communication in the inflation targeting framework grant the central bank greater short-run flexibility in pursuit of its long-run inflation goal. This paper assesses whether the talk that inflation targeting central banks engage in matters to central bank behavior, and which interpretation of the strategy is consistent with that assessment. We identify five distinct interpretations of inflation targeting, consistent with various strands of the current literature, and identify those interpretations as movements between various strategies in a conventional model of time-inconsistency in monetary policy. The empirical implications of these interpretations are then compared to the response of central banks to movements in inflation of three countries that adopted inflation targets in the early 1990s: The United Kingdom, Canada, and New Zealand. For all three, the evidence shows a break in the behavior of inflation consistent with a strengthened commitment to price stability. In no case, however, is there evidence that the strategy entails a single-minded pursuit of the inflation target. For the U.K., the results are consistent with the successful implementation the optimal state-contingent rule, thereby combining flexibility and credibility; similarly, New Zealand's improved inflation performance was achieved without a discernable increase in counter-inflationary conservatism. The results for Canada are less clear, perhaps reflecting the broader fiscal and international developments affecting the Canadian economy during this period

A Solution for Europe's Banking Problem

The European Union's aggressive response to the global financial crisis has prevented financial meltdown, but the continent's banking industry remains very fragile. Experts estimate coming losses in excess of $500 billion, with very little written down so far. These losses plus the problems in Eastern Europe portend widespread cross-border bank insolvencies. Traditional banking (in corporate finance and household savings) remains predominant in the European economies, so healing the banking system is crucial for sustained recovery in Europe. Lingering banking fragility would result in constant disruption or misallocation of bank credit and hinder returns to savers, thus depressing investment and consumption. Ongoing fragility will also harm European trend productivity growth by skipping some investment and R&D cycles, misallocating capital to lower-return projects, and wasting human capital by consigning some workers to long-term unemployment. It will take time and political will to create an EU banking supervisory architecture, but Europe cannot afford to wait. Posen and Véron recommend that Europe engage in system-wide "triage" of major banks on the continent by capital position, leading to public restructuring of the weakest ones. They propose that relevant countries jointly create a temporary supranational agency or Treuhand to implement the triage process, catalyze recapitalizations, and manage any distressed assets that would fall into public ownership. Such a trustee would avoid both harmful races to the bottom within Europe by national supervisors and fiscal transfers between European states for bailouts.

Inflation Targeting: Lessons from Four Countries

In recent years, a number of central banks have announced numerical inflation targets as the basis for their monetary strategies. After outlining the reasons why such strategies might be adopted in the pursuit of price stability, this study examines the adoption, operational design, and experience of inflation targeting as a framework for monetary policy in the first three countries to undertake such strategies New Zealand, Canada, and the United Kingdom. It also analyzes the operation of the long-standing German monetary targeting regime, which incorporated many of the same features as later inflation-targeting regimes. The key challenge for all these monetary" frameworks has been the appropriate balancing of transparency and flexibility in policymaking. The study finds that all of the targeting countries examined have maintained low rates of inflation and increased the transparency of monetary policymaking without harming the real economy through policy rigidity in the face of economic developments. A convergence of design choices on the part of targeting countries with regard to operational questions emerges from this comparative study, suggesting some lines of best practice for inflation-targeting frameworks.

Beyond Bipolar: A Three-Dimensional Assessment of Monetary Frameworks

Recently, great attention has been focused on the impact of exchange rate regimes, just as previous empirical research examined central bank autonomy and announced targets for domestic monetary policy. To date, however, these three elements of monetary frameworks have been assessed in isolation from one another, and all have been viewed in terms of a unidimensional spectrum of fixity versus flexibility. Using a newly-constructed dataset, this paper jointly analyzes and compares all three elements' effects on inflation and exchange rate behavior. The results show that each of the three elements has independent and distinct effects on nominal outcomes. Key findings include: (1) although hard pegs do tend to reduce inflation and attenuate exchange rate fluctuations within some range, they are clearly characterized by large devaluations; (2) central bank autonomy is associated with a more stable exchange rate and lower inflation; and (3) explicit inflation targeting reduces both inflation and its persistence, consistent with the view that inflation targeting increases flexibility through transparency. These results raise the possibility that a combination of central bank autonomy, inflation targeting, and a free float might offer the same benefits as any intermediate exchange rate regime on its own, without the proclivity to occasional large depreciations.monetary policy, exchange rates, central bank independence