German Economists Urge Gov’t To Ditch Debt Pledge, Boost Investment

BERLIN, Aug 5 (Reuters) – Germany’s fiscal guidelines to limit open public debts are absurd and injured national passions in light of record-low borrowing costs and a slowing economy, two of its leading economists said on Monday. The German economy, Europe’s largest, is widely likely to have at best stagnated in the next quarter, and sentiment indicators suggest it might shrink in the 3rd quarter.

Fratzscher pointed out that Germany had a huge, pent-up investment needs in infrastructure, innovation, and education, adding that it could not be wise to stick to the no-new-debt pledge after yields converted negative even for 30-year bonds. Which means that investors actually pay the German state reduced to lend it money over an extended period. 112 billion) for the next decade. Huether also argued that Berlin’s discussion that the next generation should not be burdened with more new debt had become invalid in light of the changed financing environment.

Then, if there are aggregate shocks in this overall economy, we can do with the central bank or investment company treatment than without it better. Shocks produce relative price distortions identical to tax distortions essentially, and central bank intervention can alter relative prices in beneficial ways, by reducing the distortions. Basically, it’s a fiscal tax-wedge theory of financial policy.

Why monetary policy can do this job much better than fiscal plan is not yet determined from the theory. Noah tells us, “Sticky-price models have become the dominating models used at central banks.” You might ask what “used” means. Certainly Alan Greenspan wasn’t “using” NK models. My best guess is that he wouldn’t even want to listen to about them, as he knows little about modern macroeconomics to begin with.

Ben Bernanke, of course, is a different story – he obviously learned modern macro, published papers with serious models in them, and knows what the working parts of an NK model are about exactly. Week Which brings us to a post of his from last. The pressing issue accessible is how central banks should think about financial stability. Is this the province of the financial regulators solely or should conventional monetary policy intervention take into account possible effects on private-sector risk-taking?

I think it’s well-recognized, if not blatantly obvious, that there have been regulatory failures that helped cause the financial meltdown. Whether legislated financial reforms were adequate or not, I don’t think any realistic person would question the need for new types of financial legislation in the wake of the financial meltdown. Also, most economists wouldn’t normally question the need for intervention by the central standard bank in an authentic financial crisis. But should a central bank or investment company to intervene to mitigate financial instability or pre-emptively, for example, to lessen the probability of a financial crisis? That’s an open up question, and I don’t believe we’ve much to go on at this time with time.

In any case, to think about this constructively, we would have to ask how alternate policy guidelines for the central bank jointly have an effect on financial stability, asset prices, GDP, work, etc., along with financial welfare, more generally. Bernanke provides us some proof from research which he promises informs us about the issue of financial balance and monetary plan.

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The paper he cites and summarizes is by Ajello et al. Board of Governors. Here’s what Bernanke discovered from that: As academics (and previous academics) prefer to say, more research on this pressing issue is needed. However, the early returns don’t favor the theory that central banks should significantly change their rate-setting policies to mitigate risks to financial stability. Effective financial oversight is not perfect at all, but it is probably the best tool we have for maintaining a stable financial system. Within their efforts to promote financial stability, central banks should focus their efforts on enhancing their supervisory, regulatory, and macroprudential policy tools.

I buy into the first word. But what about the rest from it, which is his takeaway from the Ajello et al. Maybe we should be sure out. So, the Ajello et al. NK model. For convenience, NK models – which in mind are well-articulated general equilibrium models – are sometimes (if not typically) subjected to a linear approximation, and reduced to two equations. One is an “IS curve,” which is basically a linearized Euler formula that prices a nominal government relationship, and the other is a “NK Phillips curve” which summarize the prices decisions of companies.

These two equations, given financial plan, determine the dynamic paths for the inflation rate and the result gap – the deviation of real result from its efficient level. Often, another equation is added: a Taylor guideline that summarizes the behavior of the central loan company. The basic idea is that this reduced form model is grounded in the optimizing fully, forward-looking behavior of companies and consumers, therefore conforms to how modern macroeconomists typically do things (for good reasons of course). If Ajello et al. There is some work on this, for example Gertler and Kiyotaki’s Handbook of Monetary Economics section, but that isn’t what Ajello et al.