The Venezuelan Crisis and the Political Costs of Reforms

by Pablo Duarte*

Venezuela is in deep political and economic crisis. According to Reuters – quoting a leaked document from the Venezuelan Central Bank – output fell 19% and prices increased 800% during 2016. Even though the “Socialism of the 21st Century”, the political program initiated by former President Hugo Chavez, has been losing support in other countries, in Venezuela it is still alive. The government has responded to people’s discontent with violence rather than with economic reforms. One reason for the reluctance to reform can be that the government would have to assume high political costs if it wanted to solve the current economic crisis.

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

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

A Keynesian in China

by Mario Rizzo

Paul Krugman is complaining about China’s exchange rate policy. Its government is maintaining an artificially cheap renmimbi (yuan) against the US dollar. This has stimulated the purchase of Chinese exports by US companies and individuals. It has expanded the Chinese trade surplus with the US.

The relatively rich (compared to their Chinese counterparts) American workers are suffering from depressed industries that might be stimulated if Chinese policy were to change. Specifically, if the Chinese were to allow their exchange rates to float, the US dollars would be worth less and the US would export more to China. This would stimulate the employment of resources here.

But wait a minute. Continue reading