Calomiris In Addition To Gummy Prices
Jumat, 20 Desember 2019
Commentary,
Economists,
European Debt Crisis,
Macro,
Monetary Policy,
Thesis topics
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Charles Calomiris has a really interesting Forbes oped on Greece, amongst a much deeper insight.
"an across-the-board redenomination would lower prices throughout the economy"? Not necessarily. Why would whatever store lower prices only because it gets to lower reward too rent? Prices are non a "contract."
Thus, the redenomination should in all probability come upwardly amongst a (say) 1 calendar week cost control. Every cost must live lowered 30% over what it was the previous day, for a week, Just long plenty for each store to run into that its competitors too suppliers has too actually lowered prices. Then stores tin arrive at what they want.
The deeper number hither is only what is the cost too wage stickiness that so infects macroeconomic thinking. Why is "internal devaluation" yesteryear cost too wage adjustment so much harder than "external devaluation" yesteryear telephone commutation charge per unit of measurement adjustment? Our formal models receive got costs of changing prices. Yet the actual costs of changing prices are tiny.
I recollect a "coordination problem" is to a greater extent than likely. The bakery doesn't desire to lower his cost because he soundless pays the same cost for wheat too yeast; the farmer doesn't desire to lower his cost because he pays the same cost for fuel, too so forth. This spider web of prices is of course of teaching thousands of times to a greater extent than complex than that story. That's why it takes so long for everyone to handgrip on lower prices together.
At times, however, prices too reward arrive at change, overnight, amongst no cost at all. When countries bring together the euro, every store changes cost -- too the symbol side yesteryear side to it -- overnight. That fact lonely should enjoin us that carte du jour costs, though a prissy formalism, are non the existent microeconomic foundation of cost too wage stickiness. And in that place is a potential piece of work for a regime to coordinate cost changes.
What Charles is proposing, then, is just the same form of overnight cost too wage alter that happened on admission to the euro. If you lot recollect prices too reward are "overvalued" inwards Greece, too a "devaluation" is all it takes for Thessaloniki to firstly exporting Porsches to Stuttgart, too so an overnight, coordinated, cost too wage alter is a really prissy option policy that nosotros mightiness firstly taking to a greater extent than seriously.
This is a fleck of a "thesis topic" suggestion. I recollect nosotros postulate a model of cost stickiness equally a coordination failure that is equally elementary too tractable equally the standard, but false, Calvo fairy or carte du jour cost models. Coordination failure models mightiness too resultant inwards the form of backward-looking stickiness that Phillips curves inwards the information seem to show.
Why only a week? Well, the macroeconomic presumption hither is that Hellenic Republic is suffering approximately form of "imbalance" or "overvaluation" or "sticky wage." If that's right, 1 calendar week at the correct prices too reward should stick. Each private store or individual would too so live reluctant to heighten prices without the others going along. If prices saltation correct dorsum upwardly 1 time again afterwards a week, however, without the assistance of regime coordination, too so nosotros weren't so imbalanced to get with, too the occupation is actually structural non monetary.
I rather suspect that tourist prices are laid yesteryear contest amongst Sicily, non local wage stickiness, but it would live interesting to see. Prices of imported goods volition too probable saltation correct dorsum up. Fine.
Charles doesn't cite prices, but he does cite debts. This is a lot harder, equally a debt "redenomination" is non only a method to solve a coordination occupation too lower all prices too reward relative to German linguistic communication ones going forward, it is a huge transfer of wealth too a technical default.
If you lot run a java store too charged ii euros for a cappuccino yesterday, having all the java shops alter to 1.5 euros overnight (for a week) is 1 thing. But changing the mortgage payment is another. One is a price. The other is a default.
Charles sneaks off into the economical passive vocalization hither "By applying redenomination.." which is ever a sign of problem ahead. Most lenders, specially international ones, volition become forthwith to courtroom on that one.
I too arrive at non follow how "applying redenomination to deposits too loans, banks’ wellness would live revived – their loans would at nowadays live payable too thus to a greater extent than valuable, too their cyberspace worth would consequently rise." Before redenomination: Assets: fifty euros mortgages, fifty euros greek regime bonds. Liabilities: 99 euros deposits, 1 euro equity. After redenomination: all numbers cutting yesteryear 1/3. How is the banking concern whatever healthier? All ratios (capital, leverage) are the same.
So I recollect the proposal has the correct spirit but a slightly incorrect focus.
Charles continues
But that Greece's alone hope to avoid becoming the side yesteryear side Venezuela is "major reforms to project laws too contest policies, too to wage a credible state of war on corruption" is topographic point on. In or out of the euro, inwards our out of the EU, inwards the halt coin too merchandise liberty are small-scale parts of economical growth.
My proposal begins amongst regime activity to write downwards the value of all euro-denominated contracts enforced inside Greece. This “redenomination” would brand all existing contracts – wages, pensions, deposits, too loans – legally worth only, say, 70% of their electrical flow nominal value. This policy would kill several birds amongst 1 stone. It would significantly trim pensions, relieving financial pull per unit of measurement area too satisfying troika demands for financial sustainability. It would arrive at so inwards a way that would too mitigate the purchasing powerfulness consequences for pensioners, because an across-the-board redenomination would lower prices throughout the economy, making the reduction inwards nominal pensions to a greater extent than bearable. By applying redenomination to deposits too loans, banks’ wellness would live revived – their loans would at nowadays live payable too thus to a greater extent than valuable, too their cyberspace worth would consequently rise. The 30% wage reduction would farther trim financial problems too brand Greek producers competitive, too operate equally an “internal devaluation” to heighten need for Greek products too tourism. Most importantly, this internal devaluation – yesteryear solving the problems of financial deficits, non-competitiveness too banking concern insolvency – would inspire confidence inwards Athens’ powerfulness to rest inside the eurozone, which should convey deposits dorsum into the banking arrangement to fuel a rebirth of lending.I recollect this is nearly one-half right, but a really practiced persuasion lies inwards here.
"an across-the-board redenomination would lower prices throughout the economy"? Not necessarily. Why would whatever store lower prices only because it gets to lower reward too rent? Prices are non a "contract."
Thus, the redenomination should in all probability come upwardly amongst a (say) 1 calendar week cost control. Every cost must live lowered 30% over what it was the previous day, for a week, Just long plenty for each store to run into that its competitors too suppliers has too actually lowered prices. Then stores tin arrive at what they want.
The deeper number hither is only what is the cost too wage stickiness that so infects macroeconomic thinking. Why is "internal devaluation" yesteryear cost too wage adjustment so much harder than "external devaluation" yesteryear telephone commutation charge per unit of measurement adjustment? Our formal models receive got costs of changing prices. Yet the actual costs of changing prices are tiny.
I recollect a "coordination problem" is to a greater extent than likely. The bakery doesn't desire to lower his cost because he soundless pays the same cost for wheat too yeast; the farmer doesn't desire to lower his cost because he pays the same cost for fuel, too so forth. This spider web of prices is of course of teaching thousands of times to a greater extent than complex than that story. That's why it takes so long for everyone to handgrip on lower prices together.
At times, however, prices too reward arrive at change, overnight, amongst no cost at all. When countries bring together the euro, every store changes cost -- too the symbol side yesteryear side to it -- overnight. That fact lonely should enjoin us that carte du jour costs, though a prissy formalism, are non the existent microeconomic foundation of cost too wage stickiness. And in that place is a potential piece of work for a regime to coordinate cost changes.
What Charles is proposing, then, is just the same form of overnight cost too wage alter that happened on admission to the euro. If you lot recollect prices too reward are "overvalued" inwards Greece, too a "devaluation" is all it takes for Thessaloniki to firstly exporting Porsches to Stuttgart, too so an overnight, coordinated, cost too wage alter is a really prissy option policy that nosotros mightiness firstly taking to a greater extent than seriously.
This is a fleck of a "thesis topic" suggestion. I recollect nosotros postulate a model of cost stickiness equally a coordination failure that is equally elementary too tractable equally the standard, but false, Calvo fairy or carte du jour cost models. Coordination failure models mightiness too resultant inwards the form of backward-looking stickiness that Phillips curves inwards the information seem to show.
Why only a week? Well, the macroeconomic presumption hither is that Hellenic Republic is suffering approximately form of "imbalance" or "overvaluation" or "sticky wage." If that's right, 1 calendar week at the correct prices too reward should stick. Each private store or individual would too so live reluctant to heighten prices without the others going along. If prices saltation correct dorsum upwardly 1 time again afterwards a week, however, without the assistance of regime coordination, too so nosotros weren't so imbalanced to get with, too the occupation is actually structural non monetary.
I rather suspect that tourist prices are laid yesteryear contest amongst Sicily, non local wage stickiness, but it would live interesting to see. Prices of imported goods volition too probable saltation correct dorsum up. Fine.
Charles doesn't cite prices, but he does cite debts. This is a lot harder, equally a debt "redenomination" is non only a method to solve a coordination occupation too lower all prices too reward relative to German linguistic communication ones going forward, it is a huge transfer of wealth too a technical default.
If you lot run a java store too charged ii euros for a cappuccino yesterday, having all the java shops alter to 1.5 euros overnight (for a week) is 1 thing. But changing the mortgage payment is another. One is a price. The other is a default.
Charles sneaks off into the economical passive vocalization hither "By applying redenomination.." which is ever a sign of problem ahead. Most lenders, specially international ones, volition become forthwith to courtroom on that one.
I too arrive at non follow how "applying redenomination to deposits too loans, banks’ wellness would live revived – their loans would at nowadays live payable too thus to a greater extent than valuable, too their cyberspace worth would consequently rise." Before redenomination: Assets: fifty euros mortgages, fifty euros greek regime bonds. Liabilities: 99 euros deposits, 1 euro equity. After redenomination: all numbers cutting yesteryear 1/3. How is the banking concern whatever healthier? All ratios (capital, leverage) are the same.
So I recollect the proposal has the correct spirit but a slightly incorrect focus.
Charles continues
Although redenomination would achieve a swell deal, yesteryear itself it is non enough. As elementary economical theory (formally known equally the the Balassa-Samuelson Theorem) tells us Hellenic Republic volition alone live a feasible long-term fellow member of the eurozone if it tin tally the long-term productivity increment of FRG too other members. To arrive at so requires it to undertake major reforms to project laws too contest policies, too to wage a credible state of war on corruption.I disagree pretty strongly here. If "eurozone" agency a costless merchandise understanding too a mutual currency, that tin live on only fine amongst vastly dissimilar productivity levels (it already does) too consequently dissimilar productivity increment rates. Productivity across locations inwards the the United States varies enormously. Ricardo too absolute vs. comparative reward was all nearly costless merchandise nether the aureate measure (common currency) betwixt countries of dissimilar "competitiveness" or productivity levels. Perhaps he agency eurozone equally an expanse that promises financial transfers to arrive at an equal measure of living everywhere. If so, practiced luck.
But that Greece's alone hope to avoid becoming the side yesteryear side Venezuela is "major reforms to project laws too contest policies, too to wage a credible state of war on corruption" is topographic point on. In or out of the euro, inwards our out of the EU, inwards the halt coin too merchandise liberty are small-scale parts of economical growth.
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