Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
February 6, 2014

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Flirting with Default: Issues Raised by Debt Confrontations in the United States
  Adam S. Posen The willful fiscal crackup of the last two years is going to cost the United States, dearly, unless US politicians' behavior markedly improves, according to Adam S. Posen, president of the Peterson Institute for International Economics, in an introductory essay to this volume. For decades, Americans could count on good fiscal governance—especially compared with the rest of the world. That is no longer true. The bad behavior of Congress in repeatedly failing to pass budget legislation, or to bring the debt ceiling into line with spending, and ultimately explicitly threatening default on US government debt, is a completely self-inflicted wound that has hampered economic recovery and damaged US standing in the world. Posen and six other PIIE experts examine the direct costs of the US fiscal follies, focusing on the toll to growth, interest rates, employment, investment, and confidence in the dollar and in US leadership.

>> Read full report [pdf]

See also:
>> Wall Street Journal coverage of the report
>> News release

  Policy Brief 14-5
Is the European Central Bank Failing Its Price Stability Mandate?

Angel Ubide
  Angel Ubide Inflation in the euro area is too low, and the European Central Bank (ECB) is at risk of missing its price stability mandate. With the market forecasting average inflation in the euro area over the next five years in the 1.25 to 1.5 percent range, the ECB must prepare to act forcefully to push inflation higher. The ECB should (1) update the definition of price stability as inflation at 2 percent over 2 to 3 years to eliminate the ambiguity over the inflation objective; (2) reduce risk premia in the yield curve via a program of quantitative easing, making clear that this is a monetary policy operation—and thus legal under the Maastricht Treaty; and (3) ease the quantitative credit shortages to small and medium enterprises (SMEs) via a well-designed lending program, offering long-term funds at the policy rate to banks who lend to SMEs. These actions would restore price stability and encourage sustainable growth.

>> Read full policy brief [pdf]

Emerging Markets' Victimhood Narrative

Dani Rodrik and Arvind Subramanian
Published in Bloomberg
  Arvind Subramanian Emerging markets allege that the policies of central banks in industrial countries, especially the US Federal Reserve, are wreaking havoc in their economies. This allegation is mostly unfair. Emerging markets are not hapless and undeserved victims; for the most part they are simply reaping what they sowed. Many consciously and enthusiastically embraced financial globalization and then proceeded to follow economic policies that were bound to create volatility. These countries lapped up foreign funds instead of tightening lending regulations and imposing prudential controls. Emerging markets need to wake up to what many should have long known: Financial globalization is a mixed blessing and a source of volatility. It exposes a country to the actions of others, especially the United States, a nation with no obligation to charity.

>> Read full op-ed
>> See also related testimony: International Impacts of the Federal Reserve's Quantitative Easing Program

Ben Bernanke's Global Legacy

Arvind Subramanian
Published in Project Syndicate
  Outgoing US Federal Reserve Chairman Ben Bernanke and the Fed played a crucial international role at a time when domestic economic weakness translated into relatively ineffective American global leadership. In these crisis-ridden years, the Fed affected the world economy positively through quantitative easing (QE) and by providing international liquidity. The first round of QE minimized, or even eliminated, the risk of a global depression after the collapse of Lehman Brothers in September 2008. In fact most emerging-market central banks preferred to borrow from the Fed rather than the International Monetary Fund. The explanation for the Fed's exceptional role is simple: Though the US economy is weak, the dollar is still in demand. Bernanke leveraged his role as controller of the mighty dollar-printing machine known as the US Federal Reserve.

>> Read full op-ed

Peterson Perspectives Interviews

audio  Ukraine on the Verge ... But of What?
Anders Åslund explains that a new government in Kiev should adopt an amnesty law and take other steps to win the confidence of the West, opening the possibility of a new aid channel.

audio  Has Harry Reid Killed Obama's Trade Agenda?
Gary Clyde Hufbauer says that the President will have to confront, or make some concessions to, the Senate Majority Leader to salvage his request for trade promotion authority.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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Just Another Week in the Land of Borgen

If Not Quantitative Easing, What Can the European Central Bank Do?

Has Monetary Cooperation Broken Down?

Yanukovych's Time Is Up in Ukraine; the West Must Prepare

The IMF Is Courting New Risks with a Change in Policy on Debt Restructuring
  Meet China's Biggest Shadow Bank

China Maintains its Allure for Foreign Firms

China Rebalancing Update - Q4 2013

Best House in a Bad Neighborhood: China's Holdings of US Assets

State-Owned Enterprise Reform: the Long Wait for a Chinese Temasek Continues...
  STTB: Hunter S. Thompson Never Met Dennis Rodman

Case Studies on Chinese Business in North Korea

North Korea and the Clean Development Mechanism

Robert Gates on the Koreas

All that Glitters is Collectable

PIIE Noted in the News and on the Web

Wall Street Journal
Six Ways Debt Ceiling Brinkmanship Can Hurt the US
The Wall Street Journal summarizes the Peterson Institute's new report, Flirting with Default: Issues Raised by Debt Confrontations in the United States [pdf].

France 24
Adam Posen at the World Economic Forum
While in Davos Adam S. Posen sits down with France 24 to discuss the World Economic Forum and the outlook for the global economy.

Marketplace Public Radio
As China Slows, Emerging Markets Stamp on the Brakes
Nicholas R. Lardy discusses some of the positive sides of China's slowing economic growth.
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