Thursday, October 29, 2015

Growth slowsdown in the third quarter

BEA released the advanced estimate for GDP growth in the third quarter, 1.5%, well below the 3.9% growth of the second quarter. One can see that the recent recovery is slow even when compared to the Clinton and Bush II recoveries.

So, nothing new, the slow recovery continues. If the budget deal gives some hope that at least we're not going to shutdown the government, and as a result avoid an even worse slowdown, there is very little reason to hope for the kind of fiscal stimulus we need.

Wednesday, October 21, 2015

On the Way to the Great Depression: The Demand Regime of the US Economy (1900-1929)

New Working Paper by Ahmad Borazan. From the abstract:
It has become commonplace to raise the analogy between the recent experience of the dynamics of income distribution and growth, and that of the era before the Great Depression. However, no study of the demand regime has been done for the early twentieth century period; this study attempts to fill that gap in the literature. Based on a Kaldorian model, I estimate whether the demand regime of the pre-Great Depression era for private domestic output was wage-led or debt-led. The results of the study show the demand regime was wage-led with a considerable role of private debt in driving aggregate demand. Furthermore, I discuss the Roaring Twenties period and argue that increased income inequality led to the rise of destabilizing channels that propped up demand which contributed to increasing economic fragility on the way to the Great Depression.
Read paper here.

Tuesday, October 20, 2015

Amit Bhaduri and Diane Elson win the 2016 Leontief Prize

Tufts Global Development and Environment (GDAE) Institute announced the Leontief winners for next year. From the press release:
GDAE will award its 2016 Leontief Prize for Advancing the Frontiers of Economic Thought to Diane Elson and Amit Bhaduri. This year's award, titled "Development and Equity," recognizes the contributions that these researchers have made to economic understandings of development, power, gender, and human rights.

“As the free market and waves of globalization have left some peoples behind, Diane Elson and Amit Bhaduri demonstrate why the current theories of development have excluded the poor and disenfranchised from the growth process,” said GDAE Co-Director Neva Goodwin. “Their cross-disciplinary work and profound understanding of economic development is appropriately recognized in an award that bears Leontief's name.”
Read announcement here.

Monday, October 19, 2015

Causality and the new World Economic Outlook (WEO)

I often say that causality is the main, but not the only, difference between mainstream and heterodox approaches in macroeconomics. It's true for differences between Say's Law versus the Principle of Effective Demand, for discussions of exogenous/endogenous money, and also for interpretations of the relation between growth and productivity.

The new WEO is out (here). This one the first under Maurice Obstfeld, who substituted Oliver Blanchard. The explanation for lower growth in Obstfeld's intro says the following:
What underpins forecasts of moderating growth? First, the ongoing experience of slow productivity growth suggests that long-run potential output growth may have fallen broadly across economies. Persistently low investment helps explain limited labor productivity and wage gains, although the joint productivity of all factors of production, not just labor, has also been slow.*
So low productivity growth causes low output and employment growth, rather than vice versa. Further, lower investment is what causes low labor productivity, which is actually a plausible mechanism. No new machines, no increase in labor productivity.

But as the IMF has recently noticed, the accelerator is the mechanism that explains investment behavior (see here on the previous WEO rediscovery of the accelerator, and also Obstfeld says in the following line: "low aggregate demand... discourages investment"), and that implies that growth is what determines investment and, as a result, labor productivity. So low growth is caused by low growth. Good job!

* I'll leave out the problems with total factor productivity, which have been extensively discussed in the blog before.

Sunday, October 18, 2015

On the blogs

Economics textbooks: when the model becomes the message -- Lars Syll on mainstream textbooks' use of consumption Euler equation models and the problems with that

Monetary Conspiracy Theories -- Paul Krugman explains why he thinks that Taylor and Ryan's claim that QE was an attempt to “bail out fiscal policy” is crazy. That's how Eccles justified it in the 1930s (to support fiscal expansion), actually, and I don't think there is anything wrong with that. Of course you need to use fiscal policy, if the Fed maintains the long-term rates low, for it to make sense

Understanding 'Secular Stagnation' -- Jayati Ghosh and C.P. Chandrasekhar on why inadequacy of domestic demand resulting from worsening functional distribution of income maybe the most important cause of long-term 'secular stagnation'

Saturday, October 17, 2015

A Post-Keynesian Interpretation of the Spanish Crisis

New paper with Esteban Pérez published by the Levy Economics Institute.

From the abstract:
The Spanish crisis is generally portrayed as resulting from excessive spending by households, associated with a housing bubble and/or excessive welfare spending beyond the economic possibilities of the country. We put forward a different hypothesis. We argue that the Spanish crisis resulted, in the main, from a widening deficit position in the nonfinancial corporate sector—the most important explanatory factor behind the country’s rising external imbalance— and a declining trend in profitability under a regime of financial liberalization and loose and unregulated lending practices. This paper argues that the central cause of the crisis is related to the nonfinancial corporate sector’s increasingly fragile financial position, which originated from the financial convergence that followed adoption of the euro.
Read it here.

On inequality and the Democratic debate at the Rick Smith Show

Friday, October 16, 2015

Centro Sraffa Lectures

Franklin Serrano will deliver the Pierangelo Garegnani Lecture 2015 titled "Notes on Garegnani, Kalecki and effective demand." Paper not yet available. Also, Christian Gehrke will deliver
three lectures in the Phd programme in Economics of Roma Tre University. For those not in Rome, the papers on which the lectures are based are available here.

Thursday, October 15, 2015

The plutonomy is doing fine

Double posting on the Credit Suisse Global Wealth Report (2015) (other post here). I had discussed the previous issue here. Below the Global Wealth Pyramid.

Not much difference with previous one, but a bit worse. Now 71% of the population holds 3% of the wealth (before it was the 67% at the bottom held 3.3% approximately). And the top 0.7% of the population holds slightly more than 45% of total wealth.

By the way, the US has added more people at the top, while Japan and Europe have lost a few. If you are interested on how many really wealthy people there are (not the 34 million people at the top of the figure above, which are the ones worth more than 1 million), here is what the report says:
We estimate that there are 123,800 UHNW individuals worldwide, defined as those whose net worth exceeds USD 50 million. Of these, 44,900 are worth at least USD 100 million and 4,500 have assets above USD 500 million.
UHNW means Ultra-High Net Worth (or what a decade ago Citigroup analysts called the plutonomy). So about 4,500 with a net worth above 500 million dollars.

Read full report here.

Wednesday, October 14, 2015

Branko Milanovic on Global Inequality

You can hear the podcast of this interview at Bloomberg's Taking Stock here. You can also read this interview from last year. Graph below is from the latter.
As he explains:
The graph (for year 2008) shows on the horizontal axis a person’s position in their own country’s income distribution, and on the vertical axis, a person’s position in global income distribution. Thus, the poorest Americans (points 1 or 2 on the horizontal axis have incomes that put them above the 50th percentile worldwide). Note that 12% of the richest Americans belong to the global top 1%. 
It turns out that—depending on the year and how detailed your data are—some 50 to 60 percent of income differences between individuals in the world is due simply to the mean income differences between the countries where people live. In other words, if you want to be rich, you’d better be born in a rich country (or emigrate there).
It's always good to remember that those that suggest that globalization has been good for income inequality are ultimately relying on the fact that fast growth in China and India (among others) in the last two decades or so, has lifted the mean income in these countries, and narrowed the distance with advanced economies, even if income inequality within the countries did not improve. There are other issues with comparisons of income inequality between countries, like what exchange rate should be used, but I'll leave those for another post.

Tuesday, October 13, 2015

Wealth Concentration, Income Distribution, and Alternatives for the USA

New paper by Lance Taylor, Özlem Ömer and Armon Rezai. From the abstract:
US household wealth concentration is not likely to decline in response to fiscal interventions alone. Creation of an independent public wealth fund could lead to greater equality. Similarly, once-off tax/transfer packages or wage increases will not reduce income inequality significantly; on-going wage increases in excess of productivity growth would be needed. These results come from the accounting in a simulation model based on national income and financial data. The theory behind the model borrows from ideas that originated in Cambridge UK (especially from Luigi Pasinetti and Richard Goodwin).
Download paper here.

Monday, October 12, 2015

Angus Deaton wins the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

For his work on "consumption, poverty and welfare" according to the press release. It wasn't Atkinson, for inequality, as I suggested it was possible, but given the other possibilities cited this is quite good. Deaton had received last year the Leontief prize, which usually goes to heterodox economists (the other Nobel to win the Leontief was Sen), together with Jamie Galbraith.

I should say, I recently read his The Great Escape. An interesting book, full of relevant data. But it does maintain the conventional neoclassical view on growth. Supply side constrained, and dependent on investment in education (aka human capital), and the institutions to guarantee investment (e.g. property rights, rule of law). The Douglas North New Institutionalist view. In his words:
“possession of common knowledge does not imply that all countries should have the same living standards. To be able to use rich-country methods of production requires rich-country infrastructure—roads, railways, telecommunications, factories, and machines—not to mention rich-country educational levels, all of which take time and money to achieve. Yet the gaps between rich and poor provide plenty of incentives to make the investment in that infrastructure and equipment, and, as Robert Solow showed in one of the most famous papers in all of economics, average living standards should draw closer over time. Why this has not happened is a central question in economics. Perhaps the best answer is that poor countries lack the institutions—government capacity, a functioning legal and tax system, security of property rights, and traditions of trust—that are a necessary background for growth to take place.”
It does say something about investment in infrastructure, and one can read the need for money as an acknowledgment that the balance of payments is an important restriction (but that might be reading too much). So as most mainstream economists he seems to think that lack of convergence is somewhat of a mystery. He says: “puzzling is the failure of the poor countries to catch up.”

There are interesting things in his book anyway. He does say, for example, that:
“One key to African growth is what happens to commodity prices. Many African countries have long been and are still dependent on exports of 'primary' commodities, mostly unprocessed minerals or agricultural crops. Botswana exports diamonds; South Africa, gold and diamonds; Nigeria and Angola, oil; Niger, uranium; Kenya, coffee; Côte d’Ivoire and Ghana, cocoa; Senegal, groundnuts; and so on. The world prices of primary commodities are notoriously volatile, with huge price increases in response to crop failures or increases in world demand and equally dramatic price collapses, none of which are easily predictable."
The preoccupation with commodity price volatility has a long history in economic development, but probably Raúl Prebisch and the economists at the Economic Commission for Latin America and the Caribbean (ECLAC) have been the pioneers and the most persistent in emphasizing its relevance. That tradition, of course, emphasizes demand as the engine of growth, and the balance of payments as its main constraint in peripheral countries.

More importantly, Deaton seems to take the profession and even the Nobel prize with humor and skepticism. Again from the book: “The great economist and Nobel laureate James Meade used to complain that the three great disasters of the twentieth century were the 'infernal' combustion engine, the population explosion, and the Nobel Prize in economics.”

Brazil´s Sudden Neoliberal U-Turn

By Franklin Serrano

A sharp slowdown in the Brazilian economy presents a critical challenge for the Workers’ Party (PT) government led by Dilma Rousseff. Between 2011 and 2014, economic growth averaged only 2.1 percent annually, compared with 4.4 percent in the 2004-2010 period.

The recent downturn can be squarely blamed on economic policies implemented by Rousseff’s first administration (2010-14). This policy change sought to reduce the state’s role of directly promoting the expansion of aggregate demand through fiscal stimulus and promoting supply side structural change through public investment, a strategy that had been done quite successfully until 2010. Meanwhile, inclusionary social policies concerned with decreasing inequality remained in place.

Read rest here.

Sunday, October 11, 2015

On the blogs

The Trans Pacific Trade charade -- Joseph Stiglitz and Adam Hersh on TPP too (I posted quite a bit the week on this). I should note that even if TPP was only about free trade in goods in services it might not be good either.

Why choose this course? Steve Keen and some students explain why learning economics with critical perspective is the way to go. Kingston in that sense is not that different from Bucknell.

The Sraffian Supermultiplier as an Alternative Closure to Heterodox Growth Theory -- Circus has a link to an important paper by Franklin Serrano and Fabio Freitas

2 economists tried to replicate a bunch of published economic studies, & the results were disturbing -- Not a blog post, but essential reading

Friday, October 9, 2015

More on Trans Pacific Partnership (TPP)

So, a bit busy this week, but as promised here is a more specific, if short, discussion of the Trans Pacific Partnership. The agreement was reached this week, and now approval must be obtained in Congress, and my guess is that there is a decent chance that it will pass with bi-partisan support (after all fast track was approved and that is why the Obama administration could reach an agreement). My guess is that several people that seem less than supportive right now, will come around, like, for example, Orrin Hatch in the Republican camp, who has said he has reservations, or Hillary Clinton, whose PBS interview has been seen as a reversal of her pro-free trade views.

She actually does not say she is against, and only says after being prompted a second time that she is not in favor of TPP as it currently stands. She adds that she thinks the agreement might not live to her high standards, but she is very clearly for free trade agreements, the ones that bring high wages and more jobs to the US. Also known as unicorns. The fact is that on FTAs the establishment in both parties is basically in favor, as much as mainstream economists.

So, as I noted before (in my discussion of the Colombia FTA), FTAs are often not about 'free' movement of goods and services, but are also ways of protecting corporate interests. That's why what you should expect is not that one country wins and another looses with a trade agreement. Corporations and elites win, and workers (consumers) tend to be on the loosing end (that would be a better description of the effects of NAFTA, for example).

The two big issues being discussed are the protections for pharmaceutical patents, and the so-called currency manipulation, given the recent media comments. Note that the first issue is one of the main sticking points of the so far failed Doha Round of the World Trade Organization (WTO) negotiations, which include not only property rights, but also government procurement policies, and investment rules. All of these issues tend to limit the ability of developing countries to pursue the policies that promoted development in advanced economies. Basically FTAs reduce the policy space of developing countries, and the ability of governments in advanced economies to protect workers and consumers.In this specific case, TPP seems to extend the patent protection for pharmaceuticals, reducing the ability of governments to produce generic medications, with potentially large effects on public health.

On the second issue, the currency manipulation, which has been always tied to China (not in TPP, btw), which suggest that depreciation leads to a significant cost advantage, and that it should be banned. Here I'm not only skeptical about the supposedly fantastic price substitution effects of a devalued currency, but more importantly, as I have pointed out before, most developing countries in Asia (and certainly China) have had large increases in real wages, which means that their currencies have often appreciated in real terms. Besides, I can't see how a trade agreement would legislate on exchange rate policy.

Wednesday, October 7, 2015

The Bank of Sweden prize in memory of Alfred Nobel

Prize will be awarded soon (next Monday). Thomson-Reuters prediction, based on citations, below.

Sir Richard Blundell, CBE FBA
Ricardo Professor of Economics, Department of Economics, University College London and Research Director at Institute for Fiscal Studies, London UK
For microeconometric research on labor markets and consumer behavior
John A. List
Homer J. Livingston Professor of Economics, University of Chicago, Chicago, IL USA
For advancing field experiments in economics
Charles F. Manski
Board of Trustees Professor in Economics, Northwestern University, Evanston, IL USA
For his description of partial identification and economic analysis of social interactions
Full list of forecasts here. Other people high on the speculation list are Orley Ashenfelter, Robert Barro, David Card, Peter C. B. Phillips and Paul Romer. I've read someone suggesting Anthony Atkinson, for his work on inequality, since Piketty is a no-no.

PS: Given that the econ 'Nobel' is not a real one, and that we give it to people that say opposite things (e.g. Myrdal and Hayek, Fama and Shiller), there should be a shadow Nobel, with a contrarian for each one given out.

Tuesday, October 6, 2015

Trans Pacific Partnership and the argument for Free Trade

The final agreement on the Trans Pacific Partnership was reached yesterday. Now it must be approved in Congress. I had noticed before (here, here and here) the bi-partisan support for TPP (not all bipartisanship is good after all) and the limitations of the agreement itself. Will write something later this week on the specifics revealed by the agreement (no big surprise, btw).

If you need a crash course on the limitations of 'free' trade based on Ricardian or Heckscher-Ohlin-Samuelson (HOS) models see the posts below, which include also a response to Mankiw's defense of TPP and Free Trade and an older discussion of the Free Trade Agreement (FTA) with Colombia:

On 'free' and managed trade (Ricardian model)

The Colombia FTA: Only Corporations Win

You can also read my paper "What do undergrads really need to know about trade and finance." It was a response to Krugman's "What do undergrads need to know about trade." He used to say comparative advantage and specie-flow mechanism (which means the balance of payments is self-adjusting; so his argument is about trade and finance really). I suggest that absolute advantage and unstable capital flows might matter too. Krugman seems to have wised up on this, and is not for TPP (even if his reasons are weird; if I have time I'll discuss that too).

Sunday, October 4, 2015

On the blogs

The Blanchard Touch -- Krugman on WAPO's Blanchard profile. I've written on Blanchard's 'changes' at the IMF before (and herehere and here). Probably will have more on the myth of the reformed IMF later again

Kregel on the Vulture Funds -- Multiplier Effect (the Levy blog) transcribes the interview with the Buenos Aires Herald

Is the Devil in the Details? Estimating Global Poverty -- Sanjay Reddy on the pitfalls of the World Bank's measures of poverty

Friday, October 2, 2015

Austerity, class warfare and weak labor markets

Labor market still weak. New BLS report says that: "total nonfarm payroll employment increased by 142,000 in September, and the unemployment rate was unchanged at 5.1 percent." Also: "average hourly earnings of private-sector production and nonsupervisory employees were unchanged" and revisions meant that "employment gains in July and August combined were 59,000 less than previously reported." Not enough job creation, labor participation falling, and wages stagnant. Secretary of Labor said, correctly, that an infrastructure bill would be needed to get us out of the slow recovery. That used to be a bipartisan policy. Nobody was against fixing roads and bridges.

But the chances for expansionary fiscal policy are nil. The US has adopted, basically since 2011, a contractionary stance. This basically results from the politics of hostage taking in Congress, and while we narrowly avoided a government shutdown this week, it is very likely that the budget and the debt ceiling limit would lead to one before the end of the year. Class warfare, and attack on labor, is at the end of the day the basis for this irrational fiscal policy, as I discussed a couple years back after another shutdown was in the news.

PS: I'll be discussing some of these issues later today (4pm Eastern time) at the Rick Smith Show.

Thursday, October 1, 2015

Unlimited Targets? Some pointers

By Sergio Cesaratto (Guest Blogger)

In this short note I will not add anything of substantial to the debate with Marc Lavoie on the nature of the Eurozone (EZ) crisis in view of Target 2 (T2). Readers have numerous papers to look at (including Lavoie 2015a/b, Cesaratto 2013, 2015a/b) and posts (Vernengo 2015, Ramanan, 2015). However, although most of relevance has already been said, there is perhaps still some space for few qualifications.

1. Subject of the dispute is on whether the EZ crisis can be considered a balance of payment (BoP) crisis in view of the existence of T2 and of the Eurosystem semi-authomatic refinancing mechanism, or if it should be considered a crisis derived from flawed institutional mechanisms that led, in particular, to a belated intervention by the ECB to sustain peripheral sovereign debts.

Marc believes that given the existence of T2 and refinancing mechanisms, a BoP crisis cannot occur in a monetary union:
“The point that I have tried to make on a number of occasions at conferences is that outflows are not limited by the amount of foreign reserves in the Eurozone context, in contrast to a country on a fixed or managed exchange rate regime. If a Eurozone country is running a current account deficit that banks from other Eurozone members decline to finance, or if it is subjected to capital outflows, then all that happens is that the national central bank of that country will be accumulating TARGET2 debit balances at the ECB. There is no legal limit to these debit balances. The national central bank with the debit balances, which pay interest at the target interest rate, has as a counterpart in its assets the advances that it must make to its national commercial banks at that same target interest rate. And the commercial banks can obtain central bank advances as long as they show proper collateral. Why would the size of current account deficits or TARGET2 debit balances worry speculators?” (Lavoie 2015: 158)
Marc correctly points out the difference in our views:
“Cesaratto (2015°: 151) and I agree when he concludes that “there are no definite limits to T2 imbalances”; he seems to disagree when he adds that “a political limit has been set by the imposition of harsh austerity measures on peripheral countries in order to obtain positive CA balances”. (ibid)
So the difference is that I see policy limits (perhaps political was not the right word) to T2 imbalances in the sense that policy makers cannot see them growing indefinitely, reflecting growing flow and stock foreign indebtedness and, correspondingly, mounting indebtedness of peripheral private and sovereign debts.

2. To give an example, would a central government with a sovereign central bank (CB) let one region (say Calabria) to expand its expenditure issuing regional bonds by letting its CB to guarantee an unlimited issuance? Notably this behaviour would let this region to accumulate an unlimited balance of payment deficit and foreign debt with the rest of the country and the rest of the world. At the minimum the other regions would like to imitate this (electorally) convenient behaviour. The reader can derive by herself the economic consequences of this behaviour.

If this does not complicate the life of readers, a reference to a view that cannot be suspected of fiscal timidity, that is to MMT, is useful here. Wray and Nersisyan (2010: 16) argue that although there are not “financial constraints [to sovereign debt and deficit] inherent in the fiat system”, nonetheless some arbitrary fiscal constraint, e.g. a balanced budget of the cycle, is necessary to avoid that the government “might spend ‘out of control,’ taking too large a percent of the nation’s resources”.

Would any national government let its CB to back a single region to behave this way? And should we expect the EU sustaining a single member, let alone a group of members, to behave this way? Or could we expect the U.S. printing dollars to check the Argentinian foreign debt crisis in 2001?

On a similar vein Ramanan (2015, italics added) pointed out:
“Let’s consider what happens if there is no federal government and if the ECB is the main supranational authority (ignoring other supranational institutions which have limited powers). Suppose the ECB were to guarantee the debt of governments of all Euro Area nations. There’s nothing to prevent, say, the government of Finland to increase the compensation of its employees every year by a huge percentage and thereby affecting Finnish corporations’ compensation of its employees. This will result in a reduction of competitiveness of Finnish producers and Finnish resident economic units will rely more on goods and services produced abroad. This will raise Finland’s net indebtedness to the rest of the Euro Area and the world. If someone believes that this debt is not a problem, how about the inflationary impact of this rise in demand on the rest of the Euro Area?... 
To summarize, the Euro Area problem wouldn’t have been a balance-of-payments problem had the official sector promised to act as a lender of the last resort to national Euro Area governments without any condition. As long as there are conditions, it is a balance-of-payments problem. One cannot pretend that the European Central Bank has or can be given such powers to lend without any condition. And hence the Euro Area crisis is a balance-of-payments problem.”

3. In this sense I do not agree with the ecumenical view taken by Matias Vernengo (2015) according to which:
“Cesaratto and Lavoie hypotheses are one and the same. The balance of payments and the monetary sovereignty views of the European crisis are two sides of the same coin. The fact that overdraft facilities involved in the TARGET2 system could be used to create credit to finance euro imbalances, or that the ECB could buy government bonds in the secondary market does not preclude the fact that the actual crisis is, in the absence of these policies, the result of the inability to manage a CA deficit.”
It can be noted that Matias eventually endorses the argument (that I refrain to attribute to Lavoie but that, perhaps, he might approve) that the absence of an unlimited credit by the ECB is the ultimate cause of the BoP crisis. My view is that it is unthinkable to believe in an open ended support by the ECB (or by the EU governance) of unlimited Target 2 imbalances. And this is, in my view, the ultimate cause of the imposition of austerity policies on the periphery. The ECB “whatever it takes” (threatened) intervention, finalised to alleviate the austerity costs by reassuring financial markets, was indeed subordinate to the adoption of austerity measures - so that no German court could protest, inspired by Werner Sinn, that the ECB was sustaining unlimited peripheral foreign debts.

In Lavoie’s and Paul De Grauwe (e.g. 2013)’s views austerity was functional to reassure the financial markets about the fiscal sustainability of peripheral debts given the absence of the ECB as lender of last resort (see Cesaratto 2015b for a review). Note that this view is exposed to a fiscal interpretation of the crisis (one that Lavoie and De Grauwe firmly oppose). And, indeed, the reader may wander what is the cause of the crisis, given that Lavoie and De Grauwe tend to neglect Robert Frankel’s and others’ story about the similarities of the EZ crisis with the typical financial crisis of emerging economies (see Cesaratto 2015b for a review)

The next are minor points.

4. Marc is correct when he argues that Roberto Frenkel does not reject the “unlimited Target 2 unbalances view”:
“Let me make a final point. Cesaratto (…) enlists Roberto Frenkel (2012) among the
economists who support his ‘balance-of-payments’ interpretation of the crisis. I got quite
a different impression when I read his paper. While Frenkel (2012: 13) agrees with Cesaratto that the adoption of the common currency was a mistake and that the crisis has its origin in ‘the conjunction of fixed exchange rates, full capital mobility and weak financial regulation,’Frenkel nevertheless believes that the size of TARGET2 balances is irrelevant and argues that the sovereign risk premiums observed with GIIPS countries were tied to the absence of a credible lender of last resort”
And indeed in my most recent paper (Cesaratto 2015b) I had already pointed out:
“A more nuanced position is taken by Frenkel (2014, pp. 13-14). On the one hand he regards the eurocrisis as a balance of payment crisis; on the other, he denies that there can be an “exchange rate risk” (the typical manifestation of a balance of payment crisis) in the euro zone presumably because of the combination of Target 2 and the ECB refinancing operations. The increasing sovereign default risk is then attributed to the absence of a lender of last resort. Notably, with OMT the ECB began to act as a lender of last resort but precisely to defuse what Draghi (2012) called in his most famous speech ‘convertibility risk’, that is the risk of a euro break-up.”
5. Finally, although this is less important, I’d like to point out, in Cesaratto (2015a) I was not so pretentious to claim that Lavoie (2015) was entirely devoted to discuss Cesaratto (2013). Unfortunately this is the impression that the reader may get from Lavoie’s incipit of his Reply. When I began my (2015) paper writing:
“In a general appreciation of my work on TARGET2 (T2) (Cesaratto 2013), Marc Lavoie (2015a) criticized my interpretation of the Eurozone (EZ) troubles as a balance of payments crisis”,
by ”general appreciation” I meant “positive reception” (see e.g. the Microsoft Window Word dictionary), but perhaps the way I expressed myself was ambiguous.


Cesaratto, S. 2013. “The Implications of TARGET2 in the European Balance of payments Crisis and Beyond.” European Journal of Economics and Economic Policy: Intervention 10, no. 3: 359–382. link

Cesaratto, S. 2015a. “Balance of Payments or Monetary Sovereignty?. In Search of the EMU’s Original Sin–Comments on Marc Lavoie’s The Eurozone: Similarities to and Differences from Keynes’s Plan.” International Journal of Political Economy 44, no. 2: 142–156. link

Cesaratto, S. 2015b. Alternative Interpretations of a Stateless Currency crisis, Asimmetrie, WP no.8. link

De Grauwe, P. (2013) Design Failures in the Euro zone - can they be fixed? London School of Economics, LEQS Paper No. 57/2013. Link

Frenkel, R. 2012. “What Have the Crises in Emerging Markets and the Euro Zone in Common and what Differentiates Them?”, link

Frenkel, R. (2014) What have the crises in emerging markets and the Euro Zone in common and what differentiates them? in Joseph E. Stiglitz, Daniel Heymann (eds), Life After Debt - The Origins and Resolutions of Debt Crisis, Palgrave Macmillan (quotations from the WP version link)

Lavoie, M. 2015a. “The Eurozone: Similarities to and Differences from Keynes’s Plan.” International Journal of Political Economy 44, no. 1 (Spring): 3–17. link

Lavoie, M. 2015b. “The Eurozone Crisis: A Balance-of-Payments Problem or a Crisis Due to a Flawed Monetary Design?” International Journal of Political Economy 44, no. 2: 157-160. (abstract)

Nersisyan, Y. and Wray, L.R. (2010) Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff, Levy Institute, WP No. 603

Ramanan (2015) Sergio Cesaratto’s Debate With Marc Lavoie on Whether the Euro Area Crisis Is a Balance-Of-Payments Crisis – II, The Case For Concerted Action

Vernengo, M. (2015) Greece on the verge, Nakedkeynesianism, June 30