Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
November 25, 2013

"Washington's premier think tank on the global economy"
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FEATURED
 
  Policy Brief 13-28
Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis
[pdf]

Joseph E. Gagnon
   
  Joseph E. Gagnon Countries that employed inflation targeting and flexible exchange rates performed better during and after the global financial crisis than countries with a fixed exchange rate. Countries that maintained a hard fixed exchange rate throughout the past six years performed somewhat better than those that abandoned it—but abandoning a hard fix during a crisis is in itself evidence of the economic costs of fixed rates. In contrast, no inflation targeting country with a flexible exchange rate abandoned its regime during the crisis. Policymakers in many countries are said to have a "fear of floating." Gagnon's results, however, strongly suggest that the benefits of flexible rates are not limited to large countries and that fear of fixing should replace fear of floating.

>> Read full policy brief [pdf]
>> See also: Flexible Exchange Rates for a Stable World Economy

  Working Paper 13-10
Why Growth in Emerging Economies Is Likely to Fall
[pdf]

Anders Åslund
   
  Anders Åslund Emerging-market growth from 2000 to 2012 was extraordinarily high. Åslund cites several factors to explain why emerging-economy growth is likely to be lower in the future. Having caught up with advanced economies in many respects, these countries face limitations on their future catch-up potential. Additionally, the extraordinary credit and commodity booms are over, and many large emerging economies are now financially fragile. They have governance problems and need to carry out structural reforms. The advanced economies, by contrast, have undertaken fiscal consolidation and structural reforms following the recent financial crisis and should experience higher growth rates.

>> Read full working paper [pdf]

  Working Paper 13-11
AGOA Rules: The Intended and Unintended Consequences of Special Fabric Provisions
[pdf]

Lawrence Edwards and Robert Z. Lawrence
   
  Robert Z. Lawrence African exports of clothing to the United States in response to the preferences granted under the African Growth and Opportunity Act (AGOA) have been impressive and the program should be renewed, but by itself the program is not sufficient. Its success has not brought the more dynamic development benefits that were hoped for. Beneficiary countries still do not have viable internationally competitive industries that could survive without the preferences. Neither have they diversified into new products and markets or added greater domestic value. Edwards and Lawrence demonstrate that Multi-Fiber Arrangement (MFA) quotas, for example, encouraged exports of low quality and low value added products by AGOA countries and higher quality and higher value added products by quota-constrained countries. AGOA preferences further encourage use of more expensive imported fabrics, deterring the use of the cheaper fabrics more likely to be produced in the countries receiving the preferences.

>> Read full working paper [pdf]
>> See also: Renew AGOA, but Address its Limitations

  Op-ed
China's State-Owned Enterprises: Transformation of State Firms' Role Likely to Accelerate

Nicholas R. Lardy
Published in Bloomberg Brief: China's Reform Plan
   
  Nicholas R. Lardy At first blush China's Third Plenum of the Communist Party leadership appears to offer substantial support for state-owned firms, but managers of such firms have little to cheer. The plenum document suggests that the government plans to rely more on market signals and hints that the regulatory barriers protecting state firms will be dismantled, repeating language from ten years ago on the primacy of state firms in the economy. The reality is that the footprint of state firms in the economy has been shrinking. The current plenum document foreshadows an acceleration of this transformation.

>> Read full op-ed

  Op-ed
The Reserve Bank's Mission Impossible?

Arvind Subramanian
Published in the Business Standard, New Delhi
   
  Arvind Subramanian India's unprecedented high inflation may be the key cause of the recent rupee crisis, but taming it may prove difficult because the social consensus in favor of moderating inflation has eroded. The Reserve Bank of India (RBI) once had the political and social support to deliver on its mandate of low inflation. But with the growth boom of the 2000s, pursuing growth now trumps slaying high inflation. It will take courage on the part of the RBI to deliver low inflation.

>> Read full op-ed

  Op-ed
Paul Krugman's Blind Spot

Anders Åslund
Published in Foreign Policy
   
  Few have written more about the European financial crisis since 2008 than the Nobel laureate, New York Times columnist, and Princeton economics professor Paul Krugman. After five years, it is clear that the euro area has survived contrary to his predictions. The countries that pursued fiscal discipline, contrary to Krugman's advice, have done better economically and politically than those that did not. He advocated fiscal stimulus, ignoring that all EU countries had excessive public expenditures and needed structural reforms. By contrast, the successful EU countries recovered thanks to rapid fiscal adjustment, which turned out to be the best cure for both public finances and economic growth. Voters favored fiscally-responsible governments.

>> Read full op-ed

  Op-ed
Unconventional Monetary Policy: Don't Shoot the Messenger

Joseph E. Gagnon
Published in the Economist
   
  The McKinsey report on the distributional effects of ultra-low interest rates makes some fascinating observations about who gains and who loses from the decline in interest rates over the past five years. But many readers may falsely infer that central banks are free to choose between different levels of market interest rates and that the politics of winners and losers can or should be a factor in central banks' choices. Central banks are not responsible for ultra-low interest rates; they are only the messengers of the spending and saving decisions of myriads of households, firms, and governments. The gains and losses highlighted by McKinsey are the outcomes of these underlying forces, not a chosen target.

>> Read full op-ed

  Testimony
Ukraine, Moldova, the European Union, and US Interests
[pdf]

Anders Åslund
   
  On November 28–29, 2013, the European Union plans to sign the long-concluded Association Agreement with Ukraine and initial deep and comprehensive free trade agreements with Moldova and Georgia at its Eastern Partnership summit in Vilnius. No political event in Europe this year is more important than this summit. It would indicate a substantial European integration of Ukraine, Moldova, and Georgia. Yet, it is doubtful whether the European Union will agree to sign the Association Agreement with Ukraine, because Ukraine's president, Viktor Yanukovych is resisting European demands for political freedom and rule of law. For the European Union, the Moldovan case is much simpler. Moldova is more democratic, freer, and less corrupt than Ukraine. Both countries are subject to severe Russian threats and need international support.

>> Read full testimony [pdf]
>> See also: Ukraine's President Viktor Yanukovych Opts for Robber Capitalism


Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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More Wrong than Right: Senator Baucus's Foreign Tax Provisions

Renew AGOA, but Address its Limitations

Ukraine's President Viktor Yanukovych Opts for Robber Capitalism

The ECB Is Less Hindered by Euro Area Politics

Do Multinationals That Expand Abroad Invest Less at Home?
  Economic Reform in the Third Plenum: Balancing State and Market

Interest Rate Liberalization – A Stepping Stone to Financial Reform in China

Third Plenum: Transformation of State Firms' Role Likely to Accelerate

The Third Plenum and State-owned Enterprises: A Step Backward or Forward?

Will the Third Plenum Redefine the Role of Local Governments in China?
  The Echo Chamber: The Kim Jong-Un Assassination Attempt

Biking Into Rason

The State Department Travel Advisory

Liberal Pessimism

More Breaking Bad: The DEA Meth Indictments
 
 
In This Issue
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Event
Balance: The Economics of Great Powers from Ancient Rome to Modern America

R. Glenn Hubbard discusses lessons from the history of powerful nations and civilizations breaking down under the weight of economic imbalances.
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Featured Book
Flexible Exchange Rates for a Stable World Economy Flexible Exchange Rates for a Stable World Economy

Joseph E. Gagnon
Marc Hinterschweiger
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