Never reason from a trade balance

Tyler Cowen recently quoted the following study:

Currency depreciation is said to stimulate aggregate demand by increasing its net export component. On the other hand, it is said to discourage aggregate supply by increasing cost of imported inputs. The ultimate impact is ambiguous on theoretical grounds. A recent review article reveals that in developing countries, devaluation or real depreciation is indeed contractionary in the short run. In the long run, however, devaluation is neutral in most countries. Emerging economies have received no attention and we try to fill this gap in this paper.

In this paper we consider the experience of nine emerging countries of Belarus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Russia, and Slovak Republic with currency depreciation. Using the bounds testing approach to cointegration and error-correction modeling that distinguishes the short-run effects from the long-run effects, the results turn out to be country specific.  In the short run we find that real depreciation is expansionary in Belarus, Latvia, Poland, and Slovak Republic; contractionary in Czech Republic, Estonia, Hungary, and Russia; and has no effect in Lithuania. In almost none of the countries, the short-run effects lasted into the long run.

The first three sentences are completely wrong.  Currency devaluation doesn’t work by boosting the trade balance, it works by boosting domestic nominal value added, i.e. NGDP, which is unambiguously positive.  The huge US depreciation of 1933 initially made the trade balance “worse” even as output soared in response.  There’s a whole literature on the income effect.  Lars Christensen has a new post discussing other examples.

I’ve never trusted cointegration, partly because the results often seem so implausible.  Consider Latvia and Estonia, two very similar Baltic economies.  Both failed to devalue in this crisis.  Both went for a real depreciation via internal devaluation.  Both had severe slumps.  And one difference; Estonia is recovering faster than Latvia.  And what does “cointegration” tell us?  That Latvia’s internal devaluation was “expansionary” and Estonia’s internal devaluation was “contractionary.”  Does anyone believe that?

FWIW, I’m 100% with Krugman about Spain and Greece needing a devaluation.  I’m 100% with him that Iceland was helped by devaluation.  I’m 50% with him on Estonia and Latvia.  As I read the evidence those two are doing considerably better than Krugman suggests, but considerably worse than their fans claim.  On that Iceland dust-up, has anyone noticed that that CFR article claimed Iceland’s RGDP fell 5% in 2007:4, and yet their graph shows a much smaller decline?

[Update:  Tyler Cowen has a new post which allows me to explain my "50%" comment.  A good AD policy doesn't necessarily keep output stable, rather it keeps it close to the natural rate.  For big countries the natural rate tends to grow fairly smoothly over time.  So if comparing the US and France I'd be much more than 50% in agreement with Krugman.  But for very small economies the path of RGDP tends to be much less stable.  Tyler mentions the possibility of a "bubble" in the pre-crash Baltic states output.  That's one issue, although I 'd rather call it "output above the natural rate," as I'd hate to see the dubious 'bubble' concept migrate from finance into macro.  In addition, an AD shock for the global economy becomes a real shock for small countries, which they can't overcome with easy money.  Thus if Latvia focuses on making wood flooring for European house construction, it will be hit hard even with an optimal AD policy.  That's a real shock for Latvia, even if the  broader eurozone crash was a nominal problem.  I'm 100% with Krugman on Iceland, as they had no agenda to eventually join the euro (as Estonia just did) and hence the cost/benefit of devaluation  tipped massively in favor of devaluation.]

On the other hand I’m less impressed with Krugman’s transition from a 1990s defender of economic orthodoxy (the whole point of trade is to destroy jobs by boosting productivity) to a 21st century supporter of the lump of labor fallacy:

In any case, however, Romney wasn’t that kind of businessman. He didn’t build businesses, he bought and sold them – sometimes restructuring them in ways that added jobs, often in ways that preserved profits but destroyed jobs

And don’t anyone write in and claim he meant to say; ”Not that there’s anything wrong with preserving profits and destroying jobs.”


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40 Responses to “Never reason from a trade balance”

  1. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    4. July 2012 at 18:55

    Krugman sees himself first of all as a Democratic Party supported, and only after that an economist.

    If you understand that, everything Krugman says immediately makes far more sense.

  2. Gravatar of John Papola John Papola
    4. July 2012 at 19:25

    Scott, don’t you think you’re pulling punches just a wee bit to be merely “less impressed” with Krugman pushing the worst defunct fallacies in the history of economics on a regular basis? His technocratic macro has far less impact (right or wrong), in my opinion, than his horrendous pandering and demagoguery (and misrepresentation, and self-contradiction) on basic economic concepts which are repeated by the body politic at large.

    I realize you’re being a bit sarcastic, and that your readership is not representative of the “general public”. But I don’t see how a good economist should be anything but horrified and disgusted by Krugman’s trashing of the most basic and vitally important ideas in the discipline.

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. July 2012 at 19:44

    “Currency depreciation is said to stimulate aggregate demand by increasing its net export component. On the other hand, it is said to discourage aggregate supply by increasing cost of imported inputs. The ultimate impact is ambiguous on theoretical grounds.”

    Someone today made the claim to me that monetary stimulus would increase the trade deficit because of increased domestic demand. I pointed out that the resulting currency devaluation made the effect on the trade balance ambiguous. Some people seem determined to argue that monetary stimulus is always bad no matter how preposterous their arguments sound.

    “I’m 50% with him on Estonia and Latvia. As I read the evidence those two are doing considerably better than Krugman suggests, but considerably worse than their fans claim.”

    I think all of the BELLs are paying a very steep price for their refusal to devalue with respect to the euro (Estonia is of course on the euro now). Estonia and Latvia’s last peak in RGDP was in 2007 and Bulgaria and Lithuania’s was in 2008. Bulgaria, Estonia, Latvia and Lithuania will not surpass their previous peaks until 2014, 2015, 2017 and 2015 respectively according to current IMF forecasts:

    http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weorept.aspx?sy=2007&ey=2017&scsm=1&ssd=1&sort=country&ds=.&br=1&c=941%2C946%2C918%2C939&s=NGDP_R&grp=0&a=&pr.x=46&pr.y=7

    And that sounds about right to me. Ten years without real growth, as Latvia is seemingly looking forward to, is a depression by any measure.

  4. Gravatar of Lars Christensen Lars Christensen
    4. July 2012 at 21:04

    Mark, you are right – the recovery in the Baltic economies are in general hugely overrated. Yes, 2011 brought nice growth rates in all three Baltic countries, but resource utilisation is still low and unemployment remains very high in all three countries. Furthermore, if growth was to continue at the pace we saw in 2011 then all three countries soon would run into current account problems and given the international funding situation that would seriously curb growth given the pegged exchange rate regimes.

  5. Gravatar of Lars Christensen Lars Christensen
    4. July 2012 at 21:11

    Scott, regarding Iceland you should notice that there is a massive difference between what happened to RGDP and to domestic demand in 2008-9 – due to the collapse in domestic demand imports also collapsed. That explains the relatively modest drop in Icelandic RGDP.

  6. Gravatar of Kevin Donoghue Kevin Donoghue
    5. July 2012 at 00:36

    Scott: And don’t anyone write in and claim he meant to say; ”Not that there’s anything wrong with preserving profits and destroying jobs.”

    Far be it from me to tell you what he meant to say. But I’ll draw attention to what he actually did say:

    Arguably, that’s just business – but it’s not the kind of business that makes you especially want to see Romney as president.

    The issue isn’t whether Romney’s work was a net positive for the economy, but whether it was the kind of work experience which fits a man for the presidency. You could argue that either way. Maybe ruthlessness is a good quality. But those who say it’s not what you want don’t need to fall into any economic fallacies.

  7. Gravatar of Steve Steve
    5. July 2012 at 01:00

    I’m in the Avent camp; I wish we would simply stop talking about the Baltic countries.

    That said, it’s interesting trying to truly understand those economies and the predicaments they face.

    For example, the “metalworking” industry output declined 39% in 2009 and employment declined 23%. Exports are 70% of “metalworking”, and the biggest export partners are Lithuanian and Estonia.

    Meanwhile, “Forestry and Woodworking” is one of the largest cash export businesses in each of Latvia, Estonia, and Lithuania. One of the biggest sources of final demand for these products: IKEA. Exports to UK declined 52% and to Sweden declined 19%. The Baltics are dependent on the housing market.

    Here’s some interesting stats for Latvia: http://www.exim.lv/?object_id=5256

  8. Gravatar of Mike Sax Mike Sax
    5. July 2012 at 01:44

    The point is it’s a campaign. I think Obama doesn’t get too far if he calls a play fron the Clinton playbook and talks about how Romney’s time at Bain was “sterling” and that he definitely meets the “qualification test” for President.

    The whole point of a campaign is to argue the other guy is less qualified than you. The fact is-as Krugman points out-is that Romney is largely running on his Bain experience-that you should elect him as his time at Bain makes him especially qualifed to be President. His time at Massachusetts he seems not to want to talk about-I remember it as I lived in Mass then as you still do so you were there for it. Romney seems to have forgotten it though expecially the part where he wrote the individual mandate.

    If you’re Obama you have to push back on that narrative. Basically we don’t know that Romney’s career was “sterling” after all he refuses to release the information he’s been asked for about his time there. He also keeeps increasing the number of jobs he says he created there-and if you want to talk job creation you do need to factor how many jobs he ended and downsized as well-and basically doesn’t talk about his real record in politics but talks Bain all day.

    The polls inidcate that contrary to clueless Dems like Clinton and Cory Booker-if they really disagreed with the strategy and aren’t trying to hurt Obama why not make this observation behind closed doors? That gives the lie to the idea that they meant this constructively. I hate the Clinton conspiracies but you wonder if maybe he is trying to tank Obama for his wife’s future-the Bain attacks are working.

    I know you say there is no such thing as public opinion but in an election it’s all that matters.

  9. Gravatar of Mike Sax Mike Sax
    5. July 2012 at 02:00

    Speaking of Romney I was just over at Politico to see his latest flip flop. Last week he was agreeing with the WH that the mandate is a penalty not a tax.

    Now the GOP has gotten to him and he’s calling it a tax. Look I really don’t care if you want to call it a penatly or a tax-I just call it the law of the land. But Romney as usual is so transparent.

    Does he really have no sense of irony in running on repeal and replace-with the real emphasis on repeal? How about the GOP base? They now are saying the only hope to defeat Obamacare is to elect Romney. So the guy who invented Obamacare-Obamacare=Rpmneycare-is now the only guy who can stop Romneycare-I mean Obamacare. It gets confusing.

  10. Gravatar of Dennis Dennis
    5. July 2012 at 04:51

    The thing about Romney is that he maintained profits and cut jobs in part by increasing efficiency, but mostly by tax arbitrage.

  11. Gravatar of Mike Sax Mike Sax
    5. July 2012 at 05:12

    My main problem is that he’s using this as the centerpiece of his campaign. Today the Wall Street Journal editorial page itself(The unofficial main Party Organ) admitted it’s not working:

    “Mr. Obama is being hurt by an economic recovery that is weakening for the third time in three years. But Mr. Romney hasn’t been able to take advantage, and if anything he is losing ground.”

    So this is as close to offical word that Romney’s losing as you’re going to get. And WSJ also admits that the attacks on Bain are entirely natural and understandable:

    “All of these attacks were predictable, in particular because they go to the heart of Mr. Romney’s main campaign theme—that he can create jobs as President because he is a successful businessman and manager. But candidates who live by biography typically lose by it. See President John Kerry.”

    http://online.wsj.com/article/SB10001424052702304141204577506652734793044.html?mod=WSJ_Opinion_LEADTop

    That’s the Romney narrative in a nutshell. If you’re running against him you have to question this narrative. Saying he’s got a stellar record and meets the qualifications test doesnt get it done.

  12. Gravatar of Mike Sax Mike Sax
    5. July 2012 at 05:16

    So let me get this straight: the ECB lowers rates to a record low, China lowers rates for the second time in a month, and US job claims fell more than expected and the market is down because of Draghii’s comments?

    I guess their looking at it in the glass half empty sense-sure they cut rates but they woudln’t have if things weren’t real bad.

    Still if I were a betting man-which I am but I’m broke so I can’t-I’d guess that the markets come back today.

  13. Gravatar of RPLong RPLong
    5. July 2012 at 05:23

    Never reason from anything other than NGDP. But not percentage changes in NGDP, because that’s a lot like reasoning from the price level, which is reasoning from a price change, which we should never do…

  14. Gravatar of ssumner ssumner
    5. July 2012 at 05:33

    Everyone, I’ll add an update soon on the Baltic economies.

    Tomasz and John, A good economist may be horrified but a good person should be polite.

    Mark and Lars, I agree their recovery is overrated, I’ll add an update on why I think Krugman overstates the negative side.

    Lars, Good point, and that difference between DD and RGDP is very appropriate.

    Kevin, We both know that 99.999% of his readers assumed he was claiming it hurt the general welfare of society, and we know that Krugman knows it was read that way.

    I think it makes society a happier place, and have no idea why you apply terms like “ruthless” to people doing that. Was Henry Ford ruthless because he developed a technique for making cars with fewer workers? How about Amazon.com for cutting jobs in the retail industry.

    Steve, That’s a good point that I’ve made before as well. For very small economies that are open to trade, an AD shock in the larger area seems like a real shock to them.

    Mike Sax, You said;

    “The point is it’s a campaign.”

    Exactly right. But reporters are supposed to report, not help with the campaign. If he’s a partisan hack (and I’m not saying he is), why should anyone believe anything he says about macro policy?

    I’ve completely stopped reading MR’s comments, and am about to do the same for lots of other commenters, who talk about issues unrelated to the post.

    RPLong, That’s right.

  15. Gravatar of JimP JimP
    5. July 2012 at 06:09

    This is, I think, an interesting paper. It clearly explains why, if the Fed wants to do something what they really ought to do is shock people – do something actually effective, rather than just messing around in the Treasury market.

    http://www.voxeu.org/article/central-bank-reserve-creation-era-negative-money-multipliers

  16. Gravatar of David Pearson David Pearson
    5. July 2012 at 06:19

    Scott,
    OT, but something that might interest you. The ECB today cut its Deposit Rate from .25% to 0. I can’t say for sure that the Deposit Rate is an exact analog to the IOR, but it seems to be the case from this FT article below. If this is the case, what impact do you think this will have in the UK?

    http://ftalphaville.ft.com/blog/2012/07/05/1072811/ecb-dances-in-the-dark/

  17. Gravatar of David Pearson David Pearson
    5. July 2012 at 06:26

    Another article on the importance of the ECB deposit rate/IOR:

    http://www.bloomberg.com/news/2012-06-26/draghi-may-enter-twilight-zone-where-bernanke-fears-to-tread.html

    Some questions:

    Do we have a test case of the elasticity of reserve demand to a 25 bp IOR cut to zero?

    Which is more important as an easing signal: QE (which the ECB downplayed), or a zero IOR (which the ECB adopted)?

    If the Fed cut the IOR to zero, would you expect the U.S. stock market to rise or fall?

    In the presence of trillions in excess reserves, should anyone care that the ECB Refinance (Fed Funds) rate is still 75bp when the Deposit (IOR) rate is zero?

  18. Gravatar of Y.Alekseyev Y.Alekseyev
    5. July 2012 at 06:45

    Completely unrelated, but just want to point to this lovely graphic at FT Alphaville which shows how it happened that the monetary tightness in 2008 is what caused the crisis.

    http://ftalphaville.ft.com/blog/2012/07/05/1071671/pariah-profits-in-an-age-of-negative-carry/

  19. Gravatar of Mike Sax Mike Sax
    5. July 2012 at 06:53

    Some good questions Dave. The BOE has done a lot of QE and plans 50 billion more pounds of it and this hasn’t seemed to help-you can always argue the counterfactual “it would have been worse otherwise.”

    Right now Euorpe is down despite the cut on deposit rates though today the market is in a glass half empty mood.

    Onlly bad news has any impact-Draghii’s bearish sentiment, thee drop in U.S. ISM.

    Maybe the bulls are waiting till tomorrow’s nonfarm payroll report-they don’t want to trust today’s good ADP numbers.

  20. Gravatar of D.Gibson D.Gibson
    5. July 2012 at 08:20

    But QE or rate cuts won’t help, if the central bank is committed to quelling inflation. Until the central banks commit to allowing more inflation, everybody knows they are keeping the brakes are on. Half measures are bad news.

  21. Gravatar of John Papola John Papola
    5. July 2012 at 08:50

    “Tomasz and John, A good economist may be horrified but a good person should be polite.”

    Obviously Mr. Krugman doesn’t adhere to point #2, which isn’t to say that we should all shrink to his level of discourse. But I don’t think being strongly critical of poor analysis means one isn’t a nice person. Krugman delivers terrible commentary all the time (shrill partisan tone aside) which contradicts his own prior writings and work. It’s not “impolite” to say that he’s wrong and point out that he appears to contradict himself and the core of economics.

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. July 2012 at 09:58

    “But for very small economies the path of RGDP tends to be much less stable. Tyler mentions the possibility of a “bubble” in the pre-crash Baltic states output. That’s one issue, although I ‘d rather call it “output above the natural rate,” as I’d hate to see the dubious ‘bubble’ concept migrate from finance into macro. In addition, an AD shock for the global economy becomes a real shock for small countries, which they can’t overcome with easy money. Thus if Latvia focuses on making wood flooring for European house construction, it will be hit hard even with an optimal AD policy. That’s a real shock for Latvia, even if the broader eurozone crash was a nominal problem.”

    I suppose this means the BELLs could improve their performance through flexible exchange rates but not by much. This is consistent with things you have said about smaller more open economies (e.g. Canada) in the past so I guess I shouldn’t be surprised. Nevertheless this is the single most depressing thing I have read in quite some time.

  23. Gravatar of Lucas Lucas
    5. July 2012 at 10:01

    “For very small economies that are open to trade, an AD shock in the larger area seems like a real shock to them.”
    Then what would be the optimal policy for such situations?

  24. Gravatar of Justin Irving Justin Irving
    5. July 2012 at 10:09

    To anyone,

    Why might a level target of a wage index be better than NGDPLT (#1 in Scott’s post)?

    Mankiw wrote his famous paper where he uses a NK model to show that targeting wages is optimal, did he cover all the advantages there?

    Does targeting wages guaranteeing that the vast preponderance of workers have a steady framework through which to optimize debt levels?
    This is the biggest advantage I see.

  25. Gravatar of Major_Freedom Major_Freedom
    5. July 2012 at 13:35

    Never reason from a change in NGDP.

    ——-

    A good AD policy doesn’t necessarily keep output stable, rather it keeps it close to the natural rate.

    If the context is output, then what is the growth rate of output:

    Year 1: 100 computers of type A, and 1000 cars of type X

    Year 2: 105 computers of type B, and 1050 cars of type Y.

    ???

    You can’t look at the prices, because the prices are a function of the supply of money, which is related to AD, not AS.

    There is no such thing as a natural growth rate of output that can be measured as a single “rate”. Goods and services across time are incommensurate.

    This is precisely one of the reasons why NGDP targeting is flawed. Past spending on past goods (past NGDP) should have no bearing on CURRENT spending on CURRENT goods (current NGDP), that justifies something like “We need to increase spending by 5% this year as compared to last year.”

    NGDP each year, indeed, NGDP each month, day, and hour, are completely independent. There is no reason why inflation has to be used to raise today’s NGDP by [1.05^(1/365) - 1] % as compared to yesterday’s NGDP, or this month’s NGDP to rise by [1.05^(1/12) - 1] as compared to last month’s NGDP, or this century’s NGDP to rise by [1.05^(1/{1/100}) - 1] % as compared to last century’s NGDP.

    The constancy assumption in NGDP targeting violates the non-constant nature of human action.

  26. Gravatar of Mike Sax Mike Sax
    5. July 2012 at 13:49

    John you’re over the top hatred of Krugman suggest you should read Stephen Willaimson some time-you surely will find it a real treat.

  27. Gravatar of ssumner ssumner
    5. July 2012 at 17:56

    Thanks JimP.

    David, I wish I knew. Does anyone know what the eurozone overnight interbank loan rate is? Surely it must be less than 0.75%.

    John, I think I did point out he contradicts the core of economics.

    Mark, Reality is depressing. (Hence mushrooms?)

    Lucas, I’d try to keep wage growth fairly stable.

    Justin, I published a paper on that a decade before Mankiw. The basic idea is to keep actual wages near their equilibrium level.

  28. Gravatar of ssumner ssumner
    5. July 2012 at 18:13

    Y. Alekseyev, I had trouble following that—but then banking is not my area of expertise.

  29. Gravatar of mbk mbk
    5. July 2012 at 19:44

    Scott, by the logic of your update, e.g. “In addition, an AD shock for the global economy becomes a real shock for small countries, which they can’t overcome with easy money.” is it then not perfectly good policy and advisable for a small open economy, say Estonia, to be part of a market and currency area as large as possible (e.g., EU and Euro)? Which is what I kept arguing in my previous comments, that these countries have good reason for their sticking with EU/Euro?Euro peg? except that I suppose you would add to it, “assuming an optimal AD policy by the ECB”?

    In essence there is a real advantage to be large, hence the drive towards EU and Euro and further European integration in spite of the current problems due in part to an incomplete integration.

  30. Gravatar of 123 123
    6. July 2012 at 03:48

    Scott, as I live in one of the Baltic states, I can confirm that there was a bubble in Baltic states in the sense of low degree of market efficiency. NGDP growth in Lithuania was approximately 20% in 2007, this was way too high in the context of euro peg that was completely credible. This confirms that the output level was unsustainable, and the longer term growth chart is essential for understanding these countries.
    Second unanticipated problem was sharp monetary tightening in the US and the eurozone. The performance of Baltic states look good if you take these two shocks ( pre crisis NGDP expectations bubble and global recession ) into account.
    None of this is good news for Greece as the bubble was much larger in Greece.

  31. Gravatar of dwb dwb
    6. July 2012 at 05:51

    @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.

  32. Gravatar of dwb dwb
    6. July 2012 at 06:53

    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

  33. Gravatar of indrek indrek
    6. July 2012 at 08:12

    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).

  34. Gravatar of ssumner ssumner
    6. July 2012 at 17:46

    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.’

  35. Gravatar of 123 123
    7. July 2012 at 02:03

    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.

  36. Gravatar of ssumner ssumner
    7. July 2012 at 07:51

    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.

  37. Gravatar of 123 123
    7. July 2012 at 12:48

    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.

  38. Gravatar of ssumner ssumner
    9. July 2012 at 12:25

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

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