European Monetary Union or competing currencies: which way for monetary integration in Europe?

In theAntibes in September, Mr. Laws on perplexed and irritated his fellow European finance ministers by proposing a scheme for allowing currencies to compete one against the other in Europe. It perplexed them because it was presented as a basis for proceeding towards monetary union within the European Community in accordance with the resolve of European Heads of State at the Madrid Summit, whereas it appeared as a recipe for monetary confusion, not fusion. It irritated them because it appeared to them to be yet another British manoeuvre to derail agreed progress towards greater economic and monetary integration in Europe. It especially annoyed the potential allies of the UK on this issue who regard the French and Commission attempts to push rapidly towards monetary union as ill-advised, and who saw the Chancellor's ill-thought out proposal as playing into their hands. Some political commentators have suggested that Mr. Lawson was seeking to play a clever hand. He is known to favour UK entry to the Exchange Rate Mechanism of the European Monetary System, and on this is at odds with Mrs. Thatcher. Professor Alan Walters, adviser to the Prime Minister, is said to favour the idea of competing currencies in Europe. It may be that the Chancellor was not displeased to have this idea knocked down in the Antibes, leaving a strengthened EMS as the only realistic alternative to full monetary union in Europe. Whatever the truth of this, it seems inevitable that UK opposition to ambitious proposals for European Monetary Union will be met with less sympathy in future as a result of the Antibes meeting. This is a pity. For as we suggested in the June Economic Viewpoint, there is a serious case yet to be made in favour of the idea of competing currencies. This idea need not be in conflict with the objective of exchange rate stability, so that it is not incompatible with the EMS. Competition between currencies need not mean exchange rate instability. Rather it may mean competition over responsible monetary policies, encouraging their spread within Europe. An implication is that full monetary union may not be desirable. If the UK advanced this position in Europe, it may well carry the day. In this Viewpoint, we develop this argument about the direction for further monetary integration in Europe.     

Monetary Ratios in a Modern Regime: Why the Monetary Base still Matters

A recent paper Bank of England paper cast doubt on the ‘textbook’ model of the money multiplier. However, this criticism is inconsistent and misleading. It understates the importance of the central bank's control over the monetary base, and how this influences the money supply. The confusion suggests that it would be more fruitful to conduct analysis using the currency‐deposit ratio and reserve‐deposit ratio rather than the money multiplier, and evidence from 1998–2013 is provided. This article explains how these ratios depend on the monetary regime, and the distinction between inside and outside money. Although a modern regime alters the way that money creation occurs, the monetary base still matters.     

Monetary Union or International Monetary Order?

Is European Monetary Union desirable? Pascal Salin, of the Univeristy of Paris, argues that any system of fixed exchange rates such as the EMS Exchange Rate Mechanism, is likely to prove unsatisfactory.     

从货币政策规则看货币政策中介目标选择

本文从货币政策最优规则和有效规则的角度出发，分析中央银行的福利损失情况，进而对不同的货币政策中介目标作出福利评判。     

Monetary convergence to the Euro

This special issue of Economic Systems includes seven papers about various aspects of monetary convergence to the Euro. It includes both policy discussion papers examining a wide range of issues and empirical studies evaluating specific areas of monetary convergence. From a policy strategy view, the selected papers examine the ways of combining the two key objectives of monetary convergence, i.e., price stability and exchange rate stability. In addition, the papers analyze the interplay between monetary policies and financial market stability. The findings provide new insights on monetary policy transmission channels, market equilibrium exchange rates, interest rates pass through effects, the importance of real relative to nominal convergence, and other intricacies encountered on the passage toward the Euro.     

Evaluating the Monetary Policy Committee

The Bank of England’s Monetary Policy Committee has now been in operation for two years. How can one judge whether it is performing its tasks successfully? In this article Alan Budd considers some of the difficulties in answering what might appear to be a straightforward question.     

The Conduct of Monetary Policy Without Monetary Aggregates

A central dilemma for the monetary authorities is how to determine monetary policy. The increasing unreliability of monetary aggregates has led over the past few years to less concern for monetary targeting, both in the UK and elsewhere, and a greater influence for the exchange rate on monetary policy. But in the UK, most recently, there has been a move away from setting monetary policy in relation to the exchange rate and external considerations in favour of setting monetary policy in relation to domestic demand. Not surprisingly, this shift has occurred at a time of rising concern about domestic overheating. It illustrates the dilemma of whether monetary policy should be driven by domestic demand considerations or by external, exchange rate considerations. This dilemma is not just confined to the UK for it is a real source of conflict underlying the Louvre Accord and its successors that seek to determine G7 exchange rates in a cooperative manner. In what follows, we argue that exchange rate developments should have an appreciable influence on monetary policy, since this is helpful in attaining stable inflation. But we also suggest that this influence should not go too far, since this stability of inflation may be at the expense of stability of domestic demand and output. Targeting of exchange rates within narrow bands is unlikely to be desirable, unless fiscal policy can be used more flexibly to stabilize domestic demand. This suggests that, in the period up to the spring, the use of monetary policy to hold the £/JDM exchange rate within narrow limits may have been overdone. More seriously, international exchange rate agreements among the G7 countries are likely to founder under adverse market pressures, unless current imbalances in fiscal policy are adjusted. In the absence of greater flexibility in fiscal policy, policy makers will have to trade off domestic and exchange rate considerations in determining monetary policy. An important outstanding issue that needs further consideration is what indicators should be used for monetary policy, in a world in which monetary aggregates provide unreliable signals.     

Monetary policy

The MPC set out ‘phase two’ of forward guidance in February. The strength of the recovery and the sharp fall in unemployment towards the 7% threshold used for the MPC's first phase of forward guidance had led investors to bring forward their expectations for the timing of the first rate hike…     

Monetary policy

The Monetary Policy Committee (MPC) had been split over the first half of the year, with one camp of three members unconvinced by evidence of strengthening activity and consistently voting for further QE, and the remaining six members content to maintain the current policy stance…     

Monetary Policy

We are fast approaching the point at which the Monetary Policy Committee (MPC) will have to make a decision about the future of its forward guidance policy. The policy had been intended to reassure households, firms and markets that Bank Rate would remain at 0.5% for a prolonged period. However, the economy and, in particular the labour market, have improved so quickly that unemployment will reach the 7% threshold within the next few months, more than two years earlier than the Bank had forecast when it introduced forward guidance…     

Monetary policy

The past three months have seen market interest rates rise sharply across the yield curve. At the shorter end, overnight index swap (OIS) rates, which the Bank of England uses to calculate market expectations of the path of Bank Rate, imply that markets now expect the first increase in rates to come within the next eighteen months. At the same time the longer end of the yield curve has also risen, with the yield on 10‐year government bonds briefly rising above 3% in early September, the first time that this has happened since July 2011…     

不确定情况下的关税、货币政策

关税问题是国际经济学研究中的一个重要领域，无论在理论分析，还是在实际操作中都具有相当重要的意义。本文在“新开放经济宏观经济学”的随机模型中，分析了关税的不确定性对两国间期望汇率和期望消费水平的影响，重点研究了关税变动的福利效应；并在此基础上，比较分析了不同的关税、货币政策组合对福利水平的影响。     

Monetary policy and the term premium

The term premium has become increasingly important in discussions of monetary policy formulation. This paper reviews two approaches to embedding a variable term premium into an otherwise standard modern DSGE model. The first approach maintains frictionless asset trade but alters preferences so that agents are more averse to the risk in long bonds. The second approach uses traditional preferences, but segments asset trade between long and short bonds. Policy issues are also discussed.     

Tightening the Fiscal and Monetary Controls

The Medium-Term Financial Strategy (MTFS) is a new departure in post-war policy-making. As David Smith's Briefing Paper shows the ideas behind it are well rooted in historical experience, but nevertheless it was inevitable that there would be a major element of trial and error in the early years of its use. The experience of 1980-81 however has produced some alarming results. The monetary limits have been drastically exceeded and the PSBR is likely to be far above the original target. There are two possible explanations. Either the control system is gravely defective or the government has deliberately followed the kind of short-term discretionary policies (and has indulged in the kind of ad hoc interventionism) which the strategy was expressly designed to avoid. We believe that both explanations are true. It is also probable that they reinforced each other. The first year of the strategy was likely to be the year of greatest strain. It involved a highly ambitious attempt to reduce inflation at a time when cost pressures from wages and higher energy prices were particularly strong. The strains rapidly revealed the defects in the control system. Since the government was alarmed at the short-term consequences of its policies, it chose to make a virtue of necessity and in effect suspended its commitment to the control of sterling M3. It is possible to look back at 1980 and to say that, in the event, the government's loss of control over its policies was justified as statesmanlike flexibility. But there always appear to be good reasons for sacrificing long-term objectives for short-term expediency. The MTFS was intended to avoid the chronic tendency to accept the easy option. It is essential that in 1981 the commitment to the MTFS should be re-established and that it should be reinforced, as appears to be necessary, by a system of indicators and controls to ensure that the errors of 1980 are not repeated. Otherwise there is a serious risk that the hard-won gains in the fight against inflation will be lost in the economic upturn. In the first part of this Viewpoint we examine what happened to fiscal and monetary policy in 1980 and discuss the general lines that policy should follow in 1981-82. We conclude that in order to get fiscal policy back on course the authorities should aim for a PSBR of £10 bn in 1981-82. In the second part we discuss in more detail the reasons why monetary policy went so badly astray in 1980, focusing particularly on the role of the Bank of England. We argue that just as ‘dirty floating’ (i.e. the pursuit of exchange rate objectives) may threaten the monetary targets, so ‘dirty monetarism’ (i.e. the pursuit of interest rate objectives) may prove an even greater threat. We conclude that the discretionary activities of the Bank of England contributed to the excessive monetary growth in 1980, and that it is necessary to ensure that in future the Bank should conduct its policy on a non-discretionary basis.     

Monetary Targets and the World Economy

The dominant obsessions to watchers of the world economy at the moment are the weakness of the US dollar and the fear that the world economy is stagnating. In this ‘Briefing Paper’ we seek to put both events into the same intellectual framework, and to show that they are the consequence of monetary policies which are not logically related to each other, nor to a common objective of bringing world inflation steadily down to an acceptable level. Specifically, the US - which for reasons outlined below can warrant monetary growth rather below the world average if it is to preserve some dollar stability - is showing an above average outturn in its monetary aggregates. Germany and Japan, which can accommodate increases well above the average, are in fact adopting monetary targets which are leading to exchange rate appreciation, arid a reduction in both countries' expectations for real growth. The dangers for the world economy in this situation are very serious, particularly at a time when further dollar devaluation could be risky both from the viewpoint of US inflation wide the dollar's role as the key reserve asset. It could lead at worst to US protectionism and a monetaryled recession, rein forcing the slow growth rates already being widely predicted in 1978 for many other industrial countries. However, we show in this ‘Briefing Paper’ that this is not a necessity outcome of the present situation, given three vital perceptions. The first, required by statesmen as much as by technicians. is that the recent stagnation in European & Japanese output and exchange rate instability are essentially a monetary phenomenon, requiring essentially monetary (rather than fiscal) remedies. The second is acceptance of the need and practicability of some monetary consignation, based on reasonably common objectives among the major countries regarding inflation, bands for exchange rate movement and red rates of growth. the third, at the most practical level, is agreement on the actual monetary numbers which broadly reconcile these objectives and also take account of the very different ‘unwanted’ rates of monetary growth between countries which reflect their different underlying conditions of output, productivity and demand for money. It is the (ambitious) aim of this ‘Briefing Paper’ to substantiate these perceptions and to provide the numbers mound which a consideration of monetary policies can be framed. The numbers are necessarily based on trends established over a number of years and need to be supplemented by detailed understanding of each country's financial status But the monetary targets provided do, in our judgement, embody trade-offs between inflation, growth and exchange rate movements which should broadly satisfy national ambitions, and reset the world economy on a worthwhile growth path during 1978 or 1979.     

The Monetary Multiplier

After modelling the circulation of money as a Markov chain, a special multiplier is set up, explained and investigated. It describes, in mathematical terms, the enlivening course of new money, or the propagation of a monetary injection into a given economy, which David Hume inspected in his famous essay. Some explanation is given to why he considered it, justly, as a transitory phenomenon.     

A Prescription for Monetary Policy in the Bush Administration

How should the Federal Reserve conduct monetary policy for stable growth and low inflation? Professor Anna Schwartz of the National Bureau of Economic Research in New York, argues that the American central bank should steadily reduce the rate of monetary growth.