Comments on: Never reason from a trade balance

By: Currency Wars, What Are They Good For? Absolutely Ending Depressions - American Solution

Wed, 06 Feb 2013 13:21:37 +0000

[...] trade to steal? Well, it’s not entirely, or even mostly, about stealing trade. Indeed, as Scott Sumner points out, the U.S. trade balance actually worsened in 1933 after FDR took us off gold, even as [...]

By: Big bad currency wars actually end depressions – Quartz

Big bad currency wars actually end depressions – Quartz — Tue, 05 Feb 2013 15:39:05 +0000

By: ssumner

ssumner — Mon, 09 Jul 2012 20:25:44 +0000

123, You may believe that, but as I said the Baltic experience has nothing to say about that hypothesis.

By: 123

123 — Sat, 07 Jul 2012 20:48:43 +0000

Scott, NGDP growth was not stable in the Baltics, as there was no NGDP peg. There was an euro peg instead, and the problem was that the asset prices got seriously out of the range that was compatible with the peg itself. I believe this problem of asset prices getting incompatible with the peg would not dissapear if the peg itself was changed to the NGDPLT.

By: ssumner

ssumner — Sat, 07 Jul 2012 15:51:24 +0000

123, I’ve never denied that asset prices can move around if NGDP was stable. But of course NGDP growth in the Baltics was as far from stable as you can imagine.

By: 123

123 — Sat, 07 Jul 2012 10:03:11 +0000

Scott,
This episode in Baltic States illustrated how asset markets can decouple from the central bank peg. Asset prices have decoupled from the euro peg, they can do the same and decouple from the NGDP futures peg. That’s why I think that TIPS spread targeting would not work as well as the targeting of the spread of BBB inflation linked bonds would.

By: ssumner

ssumner — Sat, 07 Jul 2012 01:46:43 +0000

mbk, There are strong advantages to joining the EU single market, there are no strong advantages to joining the single currency. Having said that, obviously the smaller the country the stronger argument for currency union.

dwb, Thanks, so I take it no one borrows from the ECB, because it’s cheaper to borrow from other banks? (unless they are so weak no one will lend to them.)

123 and indrek, Yes, I was under the impression that overheating had occurred. I would not use the term ‘bubble.’

By: indrek

indrek — Fri, 06 Jul 2012 16:12:31 +0000

The bubble (or lets say output above natural rate) was indeed very real in the Baltics by any account during at least during 2005-2007 (it actually busted shortly before international financial crisis, creating a perfect storm). Quick credit growth (50 to 70% points as % of GDP in 5 years), huge CA deficits (we are talking 20%+), high wage growth, real estate boom. All the bells and whistles. I think Lars Christensen was describing it as a setup for an Asian style crisis during this time, worrying about contagion effects starting from the Baltics. So we are not talking about only reacting to an external shock here. More like having an strong negative external shock at the moment of economies entering a recession by their own.

The question whether the Baltics had any other policy options, whether they made the right choice, is a different one (either way the case may be viewed as a natural experiment). We would first need to answer whether the strong currency peg was a good policy instrument and for this we should look at the long run performance (including recovery from the Russian crisis which was very quick but would have definitely ended up with huge currency fluctuations otherwise – there was actually discussions to devalue at the time).

By: dwb

dwb — Fri, 06 Jul 2012 14:53:07 +0000

bloomberg ticker for EUREPO

http://www.bloomberg.com/quote/EBFREUTN:IND

for 1 week: EBFREU1W:IND

for the overnight average calculated by the ECB: EONIA:IND

By: dwb

dwb — Fri, 06 Jul 2012 13:51:35 +0000

@ssumner.
” Does anyone know what the eurozone overnight interbank loan rate is? Surely it must be less than 0.75%.”

the ECB deposit rate on funds parked with the ECB overnight is officially zero. but in the interbank market repo is more like 10 bps or less (depending on term, banks are holding on to collateral so the overnight rate is higher than the term rate). unsecured is somewhat higher, 25-30 bps.