Call for Papers: 2017 SDAE Meetings (Deadline: April 1, 2017)

The annual meeting of the Society for the Development of Austrian Economics will be held during the Southern Economics Association meetings in Tampa, FL at the Tampa Marriott Waterside Hotel and Marina, November 17-19, 2017 (Friday to Sunday; more information can be found here:

Members interested in presenting papers, serving as chairs/discussants, or proposing entire panels should submit proposals by Saturday, April 1, 2017. Continue reading

Beware of Financial Repression

by Andreas Hoffmann

Government debt levels in many advanced economies, especially in Southern Europe, in the US and in Japan, have reached peacetime records. People are worried and rightly so: C. Reinhart and K. Rogoff have provided evidence that elevated debt-to-GDP ratios may contribute to stagnation or even debt crises. As austerity policies are unpopular with voters and growth remains rather sluggish, Reinhart and Rogoff suggest that governments might have to consider other options to reduce debt-to-GDP ratios. Debt should be liquidated via financial repression. It’s how governments typically dealt with high levels of debt in history, they say. This time is not different.

Continue reading

The Revival of State Banking in Europe

by Alexander Fink[1] and Andreas Hoffmann[2]

Since 2009, the role of government in banking has increased substantially in Europe. This is, first, a consequence of capital injections or bailouts of private banks (for instance Dexia in Belgium, Royal Bank of Scotland in the UK, Hypo Real Estate and Commerzbank in Germany, Fortis in the Benelux, ABN Amro in the Netherlands, or Allied Irish Bank in Ireland). Second, the ECB has taken on a more dominant role in financial markets. And third, low-interest rates and mounting EU regulation seem to discourage private bank lending. Whereas private banks de-leverage and roll back their portfolios in the absence of great opportunities, so-called development banks substantially gain market share. This is odd and worrisome at the same time.

Continue reading

The Germans Have Learned Nothing

by Andreas Hoffmann

Ever since the beginning of the EMU crisis, politicians, journalists and economists have blamed Germany’s “fiscal austerity” for the prolonged troubles in Europe’s periphery. If only the Germans spent more on goods and services, so the idea, the people in the periphery countries of Europe could sell more stuff. Exports would help their economies recover.

The German government, however, is found to engage in fiscal austerity. The recent budget surpluses even seem to annoy people. B. Setzer wrote (mischievously): “Germany has fiscal space even by German standards!”, and she should use it for the good of Europe. But she won’t. P. Krugman adds that Germany’s restrictive fiscal policy was a “drag” on growth in Europe. The Germans seem to have learned nothing from the crisis!

Continue reading

The Euro: a Step Toward the Gold Standard?

by Andreas Hoffmann (University of Leipzig)

In a recent piece Jesus Huerta de Soto (2012) argues that the euro is a proxy for the gold standard. He draws several analogies between the euro and the classical gold standard (1880-1912). Like when “going on gold” European governments gave up monetary sovereignty by introducing the euro. Like the classical gold standard the common currency forces reforms upon countries that are in crisis because governments cannot manipulate the exchange rate and inflate away debt. Therefore, to limit state power and to encourage e.g. labor market reforms he views the euro as second best to the gold standard from a free market perspective. Therefore, we should defend it. He finds that it is a step toward the re-establishment of the classical gold standard.

There has been much criticism of the piece that mainly addresses the inflationary bias of the ECB. I actually agree with much of it. In particular, imperfect currency areas have the potential to restrict monetary nationalism. This can be welcomed just as customs unions that allow for free trade (at least in restricted areas). But I have some trouble with De Soto’s conclusions and the view that adhering to the euro (as did adhering to gold) gives an extra impetus for market reform – in spite of the mentioned e.g. labor market reforms in Spain. Continue reading

Government Revenues from Low-Interest Rate Policies

by Andreas Hoffmann and Holger Zemanek*

Over the last two years Carmen Reinhart and Belen Sbrancia have published a series of papers on financial repression and its historical role in financing government debt. They show that throughout the Bretton Woods period governments in many advanced economies repressed financial markets to liquidate the high levels of debt that had been accumulated by the end of World War II.

During this period, low policy rates reduced debt servicing costs. Financial repression raised the attractiveness of government bonds relative to other investments. Inflation liquidated government debt. The authors report an annual debt liquidation effect for, e.g., the US and UK government debt of about 3 – 4 percent of GDP (Reinhart and Sbrancia 2011).

Today government debt levels in many countries are comparable to those after the Second World War II! After all, good politicians do not need a World War. There are plenty of other ways to spend. But in the light of the European debt crisis, governments are feeling the need to correct the spending-revenue misalignments in order to make debt-service sustainable. Continue reading

Thomas Mayer: “I am an Austrian in Economics”

by Andreas Hoffmann

In today’s publication Thomas Mayer writes that he is “an Austrian in economics.” Mayer is the chief economist of Deutsche Bank Group and head of Deutsche Bank Research. Mayer argues that Austrian theory fits recent events well.  He suggests that

“Failure of the liquidationists to overcome the Great Depression of the early 1930s prepared the ground for an era of interventionist economic policies. Modern macroeconomics and finance nourished the belief that we can successfully plan for the future. But the present crisis teaches us that we live in a world of Knightian uncertainty, where the ―unknown unknowns dominate and our plans for the future are regularly thwarted by unforeseen and unforeseeable events. Continue reading

No Way to Escape for the Swiss National Bank

by Andreas Hoffmann and Gunther Schnabl

It came as a surprise to many: the Swiss National Bank announced an exchange rate target. Accordingly, the Swiss franc will be held above the level of 1.20 francs per euro. Switzerland gives up a part of its sovereignty, when the ECB makes bad press in buying trash-rated euro area government bonds to support unsustainable national budgets.

But, particularly in an environment of global excess liquidity originating in too-easy monetary policies in major advanced economies, small open economies have incentives to stabilize exchange rates. Continue reading

Stark quits ECB

by Andreas Hoffmann

This is good news for inflationists.

I am shocked that Jürgen Stark quit his job at the European Central Bank. Usually it is a good thing when central bankers quit their job – or at least it does not make a difference. But Jürgen Stark is known as an inflation hawk. Jürgen Stark – like the Mark writes Die Welt.

In my opinion, the main difference between the ECB and the Fed is that the ECB has people like Stark. Unfortunately, there are only a few.

He is opposed to cheap money policies. A while ago, he openly warned of rolling bubbles caused by too low interest rates in the media. Thus, he suggested a timely turn-around in interest rate policy. Recently he voted against further bond purchases of the ECB. More on this recent event can be found here.

Coming shortly after Axel Weber resigned due to his disagreement with Trichet’s policies, Europe’s anti-inflation block is now shattered. Something terrible must be going on at the ECB. I wonder where the ECB is heading?

The Role of the Perverse Elasticity of Credit Money

by Andreas Hoffmann

I want to bring a recent comment by Sornette and von der Backe to the attention of the reader (in Nature 471, p. 166, May 2011). Sornette and von der Backe remind us to pay more attention to disequilibria caused by the fractional reserve banking system to explain the emergence of crises. They particularly recommend a reconsideration of the Austrian School of Economics to derive short-term policy solutions. “We should relearn and expand some of the old economic wisdom about the specific role of banks.Continue reading

Are market rates below the natural rate again?

by Andreas Hoffmann and Mario Rizzo

We know from Wicksell’s (1898) Interest and Prices, there is something important about the interest rate that balances saving and investment in an economy over time. This equilibrium interest rate is called the “natural rate of interest”. When market interest rates are below the natural rate, an unsustainable credit boom which distorts the production structure in the economy and inflation are the result.

In line with this idea, most economists agree – today – that the Fed held interest rates “too low for too long” following the burst of the dot-com bubble. As expected, this contributed to a credit boom in the US economy. With the emergence of the crisis, the Fed lowered interest rates to stabilize the price level, financial system and output. Yet, a year of recovery is over and interest rates are still low. What about the natural rate today? Continue reading

Does one size fit all?

by Andreas Hoffmann

In a recent article in the WSJ, David Wessel sees a “fundamental problem” in the euro zone’s one-size-fits-all policy.

We know from Mundell (1961) that a one-size-fits-all monetary policy cannot guarantee low inflation and unemployment in all members of a heterogeneous currency area, given e.g. labor markets are not fully flexible as in the euro area.

In general, capital market integration and free capital flows in two regions have the tendency to bring about convergence of real – not necessarily nominal – interest rates (assuming no risk premium) as capital is allocated to its best uses. But in a currency area, like the euro area, nominal interest rates are the same everywhere as they are set by a central authority. Thus, real interest rates can be zero or even negative in regions that experience higher inflation, while they are positive in regions with lower inflation. Then policy is too expansionary in some regions and too tight in others, while the average inflation rate may stay relatively stable at the target level. Continue reading

Easy Money, Emerging Market Miracles and the Revival of Industrial Policies

by Andreas Hoffmann and Gunther Schnabl

While most advanced economies continue to suffer from high unemployment and record debt levels, monetary expansions in the advanced economies feed a tsunami of carry trades, hiking asset and raw material prices and accelerating growth rates in emerging markets from Brazil over the Middle East to China. While capital inflows drive miraculous catch-ups in many corners of the world – having learnt the lesson for the recent mega-crisis – the monetary authorities in the emerging markets are aware of the risk of financial market exuberance. They aim to prevent inflation and bubbles by absorbing surplus liquidity and tightening credit growth.

Yet by doing so, they cause distortions in the real sectors of their economies, which are not on the radar screen of the now ballooning financial supervision bodies. Continue reading

Trouble ahead? Easy money vs. Turkey 1:0

by Andreas Hoffmann

While the US, Japan and Europe slashed interest rates to unprecedented low levels, growth remains sluggish. Dealing with debt problems and supporting the recovery, the ECB provided money to quasi-finance the euro area problem children. Similarly the Federal Reserve is trying to jump start the economy and has been flooding markets with money so that they have no idea about what to do with all the liquidity.

But – wait – there are emerging markets. They are booming from Brazil to Turkey. Hence, investors target emerging market asset markets until there is something to gain at home. As a consequence Poland and Brazil just raised interest rates to fight inflationary pressure in goods and asset markets. On the contrary, while inflation picks up (expected rate for 2011 is 5.9 percent), Turkey LOWERED interest rates and raised reserve requirements.

This might seem odd? Continue reading

Hayekian Credit Booms

by Andreas Hoffmann

Currently there is an interesting discussion in the blogosphere on how it is possible that in Hayek’s Prices and Production framework consumption and investment can increase at the same time.

In my opinion they cannot, or only very slightly, but this is not a problem! Continue reading

Reform the Monetary System?

by Andreas Hoffmann*

Most economists agree that the latest crisis was caused by risk-taking incentives (competition for profits, wrong ratings, false policies, moral hazard) along with financial innovations that allowed banks to lend excessively. While monetary policy prevented, for better or worse, a collapse of the financial system, an increasing number of economists also agree that it is not possible to safeguard the financial system over and over again. There are limits to intervention. Therefore we have to find a way to deal with the very causes of the crisis. Continue reading

Austerity in Germany – A Keynesian Case

by Andreas Hoffmann*

The positions about economic policies could not have been more divided between Germany and the US during the latest G-20 summit.

On the one side, Barack Obama pushed Keynesian arguments about the need for further stimulus and the danger of austerity measures for economic recovery. On the other side, Miss “No” is back. Merkel promoted consolidation measures to prevent future debt crises and regain markets’ trust in sustainable government finance. And this time Merkel did not cave into US pressure.

I collected some arguments of why this may be a good idea:   Continue reading

The European Central Bank Turns into the Fed?

by Andreas Hoffmann*

The European Central Bank (ECB) and the Fed differ in many aspects. First, the ECB is considered to be more hawkish on fighting inflationary tendencies. Its primary goal is price stability and it has continued to watch money growth. Output gaps below full-employment are only considered secondary as instrument to forecast inflation.

Secondly the ECB was constructed to be more independent than the Fed. Thus there has been less interaction with fiscal authorities. Less mobility from governments to the ECB (and vice versa) documents this independence. While in the US it is common to see central bank officials and the secretary of treasury plan the future of the economy, in Europe this is not the case. Central bank independence is considered an important aspect of credibility and stability of the currency (the German central bank model). However, the current crisis has made the ECB more “Anglo-Saxon.” Continue reading

The US is “Taking on China”

by Andreas Hoffmann and Gunther Schnabl*

In a recent New York Times column Paul Krugman is “Taking on China” again. He argues that the Chinese dollar peg contributes to global imbalances, depressing US and world growth perspectives. Bashing China’s fixed exchange rate is also fashionable in academics. Bernanke blames China’s dollar peg for contributing to a “savings glut” that contributed to the US pre-crisis excesses. Dooley argues that China and other East Asian economies engage in mercantilist trade strategies. Bergsten wants to label China a “currency manipulator.”

We find these arguments unbalanced. Continue reading

Fiscal Stimulus, Growth Perspectives and Mal-incentives for Future Policy

by Andreas Hoffmann*

There has been a long-lasting debate about the effects of fiscal stimulus in times of crisis. Proponents of government stimulus argue that the fiscal multiplier is quantitatively more significant than the possible negative effects. On the other hand, free market economists are in doubt of these effects and fear possible crowding-out, high future costs or malinvestment.

While Keynesians and free market economists discuss effects on welfare, allocation and sustainability of government investment or consumption, Chicago’s Harald Uhlig recently presented an interesting paper at NYU (“Fiscal Stimulus and Distortionary Taxation,” coauthored with Thorsten Drautzburg – an earlier version is here), in which he tries to quantify the fiscal multiplier and its growth effects in the short, medium and long-run.   Continue reading

Inflation as a Solution?

by Andreas Hoffmann*

The Wall Street Journal Online recently quoted an IMF paper (written by Oliver Blanchard), that a higher inflation may help to give leeway to monetary policy in times of crisis. What is this about?

Blanchard argues that if inflation rates are targeted at 4 percent rather than 2 percent, this would not make much difference. Following Blanchard, the ‘2 percent target’ is chosen ad hoc. Further, two additional percentage points of inflation would not do any/much damage (by e.g. increasing the volatility of an economy). On the other hand, as inflation adds to nominal interest rates, these would increase with higher inflation. Thus, the room for interest rate cuts will be larger potentially to stimulate the economy in times of crisis.   Continue reading

Estonia – The Return of a Baltic Tiger?

by Andreas Hoffmann*

The new member states of the EU were hit hard by the current crisis. Especially the former Baltic tigers (Estonia, Latvia, Lithuania) have seen a tremendous decline in GDP. While our economies face difficulties to cope with a decline of about five percent of the GDP, they lost 10 to 15 percent. In my opinion, Estonia is the most interesting of the three as it chose a distinct way to deal with the crisis. Continue reading

Greece as a Danger to Euro Stability

by Andreas Hoffmann*

Entering the Eurozone, Greece handed over monetary policy to the European Central Bank and introduced the euro. In a formerly unstable economy, without the danger of depreciation, the risk premium on Greek interest rates shrank to less than half a percent above that of Germany. This brought about convergence of the Greek interest rates. Thus investment and debt could be financed at lower rates. But the advantages from entering the eurozone also have a price. Continue reading