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  • Author: Robert L. Hertzel
  • Publication Date: 10-2013
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Any effort to avoid future recessions must rest on an organized way to learn from the past. However, the absence of such efforts within central banks renders such learning problematic and makes likely the recurrence of episodes of recession and financial market turmoil. Critical to learning is the use by policymakers of models to evaluate the past performance of monetary policy. These models should not be the complicated, multiequation models favored by the forecasting departments of central banks. Rather, they should be simple models that require policymakers to take a stand on the basic issues in monetary economics: the nature of the price level (monetary or real) and how well the price system works to maintain output at potential (full employment). They should serve as a safeguard to the understandable tendency of central bankers to attribute economic disturbances exclusively to real shocks rather than monetary shocks.
  • Topic: Economics
  • Author: Harris Dellas
  • Publication Date: 10-2013
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The entry of Greece into the euro zone in 2001 was widely expected to mark a transformation in the country's economic destiny. During the decade of the 1980s, and for much of the 1990s, the economy had been saddled with double-digit inflation rates, double-digit fiscal deficits (as a percentage of GDP), large current-account imbalances, very low growth rates, and a series of exchange rate crises. Adoption of the euro—the value of which was underpinned by the monetary policy of the European Central Bank (ECB)—was expected to produce a low-inflation environment, contributing to lower nominal interest rates and longer economic horizons, thereby encouraging private investment and economic growth. The elimination of nominal exchange-rate fluctuations among the former currencies of members of the euro zone was expected to reduce exchange rate uncertainty and risk premia, lowering the costs of servicing the public sector debt, facilitating fiscal adjustment, and freeing resources for other uses.
  • Topic: Economics
  • Political Geography: Europe
  • Author: Wolfgang Munchau
  • Publication Date: 10-2013
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: It was one of the author's predictions in 1998 that the euro zone would end up teaching us more about economics compared to what economics could teach us about the euro zone. While many of the author's predictions of that year did not hold, including the forecast that the euro would challenge the dollar as the world's foremost reserve currency, this particular prediction ultimately turned out to be correct. A monetary union is a hybrid between a fixed exchange rate system and a unitary state, one that is fully captured neither with closed-economy macro models nor classical international macro models of fixed exchange rates.
  • Topic: Economics
  • Political Geography: Europe
  • Author: Yukong Huang, Clare Lynch
  • Publication Date: 10-2013
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The last time a Chinese currency was used as an international medium of exchange was four centuries ago, when China's share of global GDP in PPP terms was nearly 30 percent (about twice its current level), the country was a major global trading power, and Chinese copper coins circulated throughout East Asia to India and even beyond (Horesh 2011). In the following centuries, silver dollars and paper bills replaced copper coins and China's share of external trade declined. Now, with China's return to the position of largest global trader and second-largest economy in the world, it is not surprising that discussion of internationalizing China's currency has resumed.
  • Topic: Economics
  • Political Geography: China, East Asia
  • Author: Zhiwu Chen
  • Publication Date: 10-2013
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Since reforms started in 1978, China has made commendable progress in achieving capital freedom and individual liberty. Prior to 1978, private enterprises with more than eight employees were prohibited and there were no capital markets. Private entrepreneurs were labeled “Capitalist tails,” and political movements were launched frequently to “cut the capitalist tails.” For several decades, Chinese citizens could only obtain employment and economic means from government organizations and state-owned enterprises, which strictly limited individual liberty. Today there are more than 10 million privately owned enterprises, making up more than 80 percent of each year's employment growth. As a result of less regulation and more room for entrepreneurship, it is relatively easy to register and start a business. Public equity offering opportunities and bank financing are also increasingly available to private firms as well. Chinese, young and old, can choose among jobs provided by government organizations, SOEs, private businesses, and foreign-owned firms. As capital freedom has increased, the rise of the individual and liberty is one of the highlights achieved in China's development over the past 35 years.
  • Topic: Economics
  • Political Geography: China
  • Author: Raúl Hinojosa-Ojeda
  • Publication Date: 01-2012
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The U.S. government has attempted for more than two decades to put a stop to unauthorized immigration from and through Mexico by implementing "enforcement-only" measures along the U.S.-Mexico border and at work sites across the country. These measures have failed to end unauthorized immigration and have placed downward pressure on wages in a broad swath of industries.
  • Topic: Economics, Immigration
  • Political Geography: United States, Mexico
  • Author: Anthony de Jasay
  • Publication Date: 06-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Rational choice presupposes that people do what they like better than any available alternative. If, however, we mistrust what they declare to like or what psychology is supposed to tell us about it (a pardonable enough mistrust), we can only infer what they like from observing what they do. We must be content with revealed preference. The theory of choice is locked into the tautology of “they do what they like because they like what they do,” and requiring their preferences to be orderly and consistent is of little practical help. In its elegance, modern choice theory, as represented in neoclassical economics, is too smooth and slippery to be very useful.
  • Topic: Economics
  • Author: Leo Melamed
  • Publication Date: 09-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The story is fairly well known. In 1971, as chairman of the Chicago Mercantile Exchange, I had an idea: a futures market in foreign currency. It may sound so obvious today, but at the time the idea was revolutionary. I was acutely aware that futures markets until then were primarily the province of agriculture and—as many claimed—might not be applicable to instruments of finance. Not being an economist, the idea was in need of validation. There was only one person in the world that could satisfy this requisite for me. We went to Milton Friedman. We met for breakfast at the Waldorf Astoria in New York. By then he was already a living legend and I was quite nervous. I asked the great man not to laugh and to tell me whether the idea was “off the wall.” Upon hearing him emphatically respond that the idea was “wonderful,” I had the temerity to ask that he put his answer in writing. He agreed to write a feasibility paper on “The Need for Futures Markets in Currencies,” for the modest stipend of $7,500. It turned out to be a helluva trade.
  • Topic: Economics
  • Political Geography: New York, Chicago
  • Author: J. Daniel Hammond
  • Publication Date: 09-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Chicago School economists have come in for criticism since the financial crisis and so-called Great Recession began in 2007. Commentators have blamed recent problems on a laissez-faire faith in the efficacy of markets and simple rules for business-cycle policy—ideas associated with economics as taught and practiced at the University of Chicago. Events over the past four years, we are told, demonstrate the need for a restoration of Keynesian thinking about business cycles and activist government policies to keep markets from failing. However, there is another aspect of Chicago School economics that is commonly overlooked. This is the conviction that economists' understanding of the business cycle is meager in light of the knowledge necessary for activist countercyclical policy to be effective. From this comes the Chicago School concern that economists and policymakers not attempt to do something beyond their capability. Overreaching can make the problems worse.
  • Topic: Economics, Financial Crisis
  • Political Geography: Chicago
  • Author: Daniel Griswold
  • Publication Date: 09-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Let me preface this review with a confession: As an advocate of free trade, I love to link the 1930 Smoot-Hawley tariff bill with the Great Depression at every opportunity. More than 80 years after its passage, the bill still evokes negative feelings about protectionism. After reading Douglas Irwin's Peddling Protectionism: Smoot- Hawley and the Great Depression, I can see I need to curb my enthusiasm. Irwin does not defend the bill, far from it. He concludes that it failed to achieve its objectives and that it did, in an incremental way, make the Great Depression worse. But in the careful language of the professional economist and historian that he is, Irwin documents in rich and often colorful detail that the most infamous trade bill in American history had less impact than either its advocates or its opponents understood at the time or understand today. Even so, the story of Smoot-Hawley offers valuable lessons for today as our politicians seek to craft U.S. trade policy in the 21st century. Irwin is superbly qualified to write the definitive history of what was officially the Trade Act of 1930. A professor of economics at Dartmouth College, he has authored Against the Tide: An Intellectual History of Free Trade (1996), and Free Trade under Fire (3rd ed., 2009).
  • Topic: Economics
  • Political Geography: United States