Here’s Alex Tabarrok:
I just returned from a trip to South Korea. Today, to prepare for the next trip, I took my jacket to the dry cleaners. Turning the pockets out, I discovered a substantial number of South Korean won. The transaction costs of exchanging the won for dollars are now very high. I will keep the won as souvenirs.
Question: What are the consequences of my decision for the South Korean economy? Answer in the style of a well-known economist. What would Scott Sumner say? (almost too easy!) What about Keynes? Krugman? Cowen? Prescott?
I presume the South Korean central bank is targeting some set of macro variables, probably including interest rates, inflation and exchange rates. If so, Alex’s currency hoarding will have no impact on Korea’s NGDP, as the central bank will simply accommodate the extra demand for currency, just as the Fed accommodated the surge in foreign demand for US currency during recent decades.
If the currency is held for 10 or 20 years, then returned to Korea, it will represent an interest free loan to the Korean people. If it is handed down though generations, and eventually lost or made obsolete by new currency, then Alex’s hoarding would be a gift to the Korean people.
I’d like to think that the other 4 economists would answer this the same way, as I can’t imagine any other plausible answer. But perhaps I’m missing something.
PS. In the preceding post Tyler Cowen discusses a study of the British labor market:
2008 and after: -8.5%
That measure of wage decline is from John van Reenen (pdf, useful powerpoints on UK productivity), citing Martin and Rowthorn (2012).
Now I am all for the UK trying ngdp targeting, or for that matter well-targeted fiscal policy, or both. I never favored their *tax increases*, often misleadingly labeled “austerity” for political reasons.
I would, however, like to get a handle on Keynesian thinking here and thus the questionnaire aspect of this post. In the traditional Keynesian story, stimulus lowers real wages through nominal reflation. Is that the Keynesian view here? If so, why do Keynesians believe that British real wages need to fall more than 8.5% Why did they need to fall 8.5% to begin with?
The data provided in the study are weekly wages including bonuses (remember the City of London has highly volatile bonuses.) But the Keynesian sticky-wage model (a model I don’t accept) predicts that hourly real wages will rise in a demand-side recession. Because hours worked per week might fall in a recession, there is no prediction for weekly real wages. I don’t have the hours worked data in front of me, but I’ve read that part time work has recently soared in the UK. Perhaps someone can find the data. Certainly the 8.5% figure is fishy, as inflation is little more than 8.5% since 2008, and I’m sure British hourly wages have risen substantially since 2008.
One other point. A few days ago Tyler pointed to data showing a huge drop in the US employment to population ratio. I suggested that this data was unreliable. But let’s suppose that Tyler is right, and the ratio does tell us something about labor market health. It’s worth noting that this ratio has been pretty stable in Britain, falling only one percentage point since early 2007. And the paper Tyler cites here refers to the surprising health of the British labor market (which presumably relates to the same ratio.) So although I wouldn’t make this argument, I suppose it could be argued that (if British real hourly wages did fall) it helped keep the British employment to population ratio at a relatively lofty level.
I’d argue something slightly different. The increase in British part time work helps explain both mysteries; why real weekly wages did poorly, and why the employment to population ratio did well. And I’d add that the study also shows an absolutely abysmal productivity decline in Britain, which is much different from the US. Is that real or simply an artifact of measurement techniques? I have no idea. But either way it helps explain the GDP numbers. Either GDP is higher than measured, or the productivity has fallen enough to explain the decline in hourly real wages (assuming they did decline.) Hence there’s no mystery there.
PPS. Has British oil production declined in recent years? This might also play a tiny role in the mystery, as oil production is not very labor intensive, especially at the margin. Ditto for high finance.
PPPS. This is not to say that Tyler is wrong about Britain having structural issues. I’ve often made the argument that supply-side problems are part of the British RGDP mystery.