Fiscal Policy Links

Some comments on a couple of few good recent articles on financial policy.

Simon Wren-Lewis: Government Debt And Dead Parrots

Professor Simon Wren-Lewis' article "Government debt, financial markets too dead parrots" covers similar Earth to my final article on the JGB market, but alongside a European perspective.

He discussed the possibility of "rollover risk":

Second, you lot involve to worry virtually forced default, where the regime is unable to ‘roll over’ (refinance) its existing debt, because the marketplace position volition no longer lend to it. ... The 2nd run a peril [rollover run a peril - BR] admits the possibility of a self-fulfilling crisis: default occurs because the marketplace position believes default volition happen, fifty-fifty if the regime genuinely has no intention to default too tin move past times away on to pay the involvement on its debt.
This is where your ain key banking corporation is really useful. It eliminates this 2nd type of risk, because it acts similar a lender of final resort, buying whatever debt the regime cannot refinance through the markets. This is what the ECB [European Central Bank - BR] refused to practice until its OMT programme inwards September 2012.

In my article, I said that 'rollover risk' only represents incompetence past times the key bank, too has piffling to practice alongside regime finances. In the illustration of the ECB, it is hard to tell whether their inaction was incompetence, malevolence, or bureaucrats next treaty rules to the letter. I am non an skillful on European law, too therefore I accept no respond to that question. To an external observer, an incompetent ECB is indistinguishable from an ECB hamstrung past times incompetently drafted treaty documents.

I should banking corporation complaint that I believe that I disagree alongside Wren-Lewis' framework for analysing financial policy (I accept discussed 1 of his contributions on 'optimal financial policy' here). In my view, his modelling is a stride inwards a to a greater extent than realistic direction, but it however embeds questionable assumptions from criterion DSGE modelling frameworks. I accept my doubts virtually how he defines "sustainability" for regime finances. Despite these theoretical differences, I retrieve nosotros accept similar policy views.

And yes, the dead parrot referred to is from the Monty Python "Dead Parrot Sketch".

JW Mason: 4 Questions About Fiscal Policy

In the article "Four Questions About Fiscal Policy", J.W. Mason summarises what he presented at a circular tabular array give-and-take on Functional Finance at the twelfth Post-Keynesian Conference inwards Kansas City.

His remarks [NOTE: I accept formatted the questions hither inwards dot shape to brand the text easier to follow.]:

It’s non productive to repeat points on which nosotros all agree. So instead, I wishing to pose 4 questions virtually functional finance on which at that spot is non a consensus. These aren’t questions I necessarily accept (or await to hear) goodness answers to at the moment, but ones that I promise volition move the focus of hereafter work.

• First, the political economic scheme question. Why does the thought of a regime financial constraint accept such a tenacious handgrip on both the policy conversation too the economic science profession? What function, what interest, does this thought serve? 

• Second, how confident are nosotros virtually the bird of aggregate expenditure that policy should target? Is at that spot a well-defined bird of potential output that corresponds to both total work too cost stability? 

• Third, what is the job that nosotros imagine financial policy to move solving? Is it stabilizing of output inwards the confront of “shocks” of closed to kind, or is it adjusting the long term trend? And what are the sources for the variation inwards someone demand to which policy must respond? 

• Finally, if functional finance way that financial policy replaces monetary policy equally the principal tool for managing aggregate expenditure, what role does that move out for the involvement rate?

I practice non accept the answers to these questions. My bias is that it is really hard for policy to polish out the delineate concern cycle (which is a way of dodging the questions). The delineate concern cycle is driven mainly past times someone investment, too someone investment depends on volatile expectations too bubbles ('animal spirits'). If you lot wishing to stabilise activity, you lot accept to fourth dimension the shifts inwards expectations accurately. (If you lot could practice that, investing would move quite easy. Although investors tin oftentimes diagnose bubbles, they typically accept to hold off a long fourth dimension earlier they are vindicated.) Policymakers could travail to dampen volatility inwards someone sector investment. Although an interesting possibility, how this would move structured inwards the electrical flow political environs is non clear to me.

Instead, my preference is for a robust welfare set down to protect workers from the delineate concern cycle (with something similar the Modern Monetary Theory 'Job Guarantee'). Businesses would however autumn victim to recessions. Policymakers are gratuitous to travail to farther attenuate the delineate concern cycle alongside active financial too monetary policy, but realistically, the policies would most probable institute a lagged reaction to events (such equally what happened afterwards the financial crisis).

Alex Little: Smaller State ≠ Smaller Deficit

[Update: Added this.] Alex Little points out that at that spot is piffling human relationship betwixt the size of regime too the size of deficits inwards "as discussed here). Net savings desires inwards the someone sector are non theme upon the size of the government, too deficits are related to those savings desires.

However, at that spot are limits to the argument. If you lot accept an extremely modest regime (such equally the USA earlier the Great Depression) where the regime is virtually 5% of GDP, it is hard to achieve a deficit of 8% of gross domestic product (which was mutual afterwards the recent financial crisis). But equally Hyman Minsky argued, such a modest regime has a hard fourth dimension to stabilise economical activity. He argued that the regime needs to move at to the lowest degree 20% of gross domestic product inwards lodge to dampen the delineate concern cycle..

(c) Brian Romanchuk 2014