Diane Coyle — Markets, states and humans

I was eager to read Paul De Grauwe’s The Limits of the Market because I profoundly agree with its premise that the false dichotomy between ‘the state’ and ‘the market’ has led to bad public policies and lower social welfare. The book is a short overview of the flaws of this dichotomous view of the world. It organises its discussion around two sets of reasons why a ‘free market’ is a meaningless abstraction: externalities and ‘internalities’…

Short and important. Deals with economic and non-economic factors that influence economic behavior that are not taken into account as information in market behavior.

The Enlightened Economist
Markets, states and humans
Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

Paul De Grauwe and Yuemei Ji — How to reboot the Eurozone and ensure its long-term survival

The Eurozone Crisis has abated but the question about the future of the euro remains on the agenda. This column discusses some of the design failure of the Eurozone and their possible solutions. The Eurozone in its current state is not an optimal currency area and is fragile. Ideally, a stabilisation fund and a budgetary union should be set up. Since this is politically unobtainable right now, small steps should be implemented to create some fiscal space at the level of the Eurozone, and to start with a limited programme of debt consolidation.

Vox.eu
How to reboot the Eurozone and ensure its long-term survival
Paul De Grauwe and Yuemei Ji

Dirk Ehnts — De Grauwe on QE@ECB – since when are we all monetarist?

I value Paul DeGrauwe as an economist, but here I would argue that he cannot be serious.…

econoblog 101
De Grauwe on QE@ECB – since when are we all monetarist?
Dirk Ehnts | Berlin School for Economics and Law

Paul De Grauwe — The sad consequences of the fear of QE

Since Milton Friedman we have all become monetarists. In order to raise inflation it will be necessary to increase the growth rate of the money stock. This requires that the ECB increase the money base. And to achieve the latter there is only one practical instrument, ie, an open-market purchase of government bonds. There is no other way to raise inflation than through an increase in the money base and a bond-buying programme is the time-tested way to achieve this.…

But as stressed by many observers, QE alone may not do the job. It is necessary but not sufficient. The fact that it is not sufficient, however, should not lead to the conclusion that it can be dispensed with. Even if little else is done, QE should have a significant effect on the exchange rate of the euro. By increasing the supply of money base the ECB will contribute to a further weakening of the euro vis-à-vis other currencies such as the dollar, the pound and the yuan, thereby increasing exports and boosting inflation.…

What about an EZ nation defaulting on it bonds.

 When the central bank writes down the … bonds, the value of its assets declines. The counterpart on the liabilities side of the central bank’s balance sheet is a decline in equity. A central bank, however, does not need equity. It can easily live with a negative equity. When the equity of the central bank declines there is no need to call upon taxpayers “to foot the bill”. There is no bill to be paid.

Unfortunately, the ECB (and many other central banks) keep this fiction of the need for equity alive, by asking the participating governments to “recapitalise” the bank. But such a recapitalisation is also a purely accounting convention without implications for taxpayers. It implies that governments place bonds on the ECB’s balance sheet. These bonds then create the same circular movement of interest payments, ie, the governments make interest payments to the ECB and the latter refunds these back to the same governments. No taxpayers are involved.

The Economist
The sad consequences of the fear of QE
Paul De Grauwe | John Paulson Chair in Political Economy, London School Of Economics