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1. Tariffs and Monetary Policy: A Toxic Mix

Author:
Michael D Bordo and Mickey D. Levy
Publication Date:
01-2020
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The ratcheting up of tariffs and the Fed’s discretionary conduct of monetary policy are a toxic mix for economic performance. Escalating tariffs and President Trump’s erratic and unpredictable trade policy and threats are harming global economic performance, distorting monetary policy, and undermining the Fed’s credibility and independence. President Trump’s objectives to force China to open access to its markets for international trade, reduce capital controls, modify unfair treatment of intellectual property, and address cybersecurity issues and other U.S. national security issues are laudable goals with sizable benefits. However, the costs of escalating tariffs are mounting, and the tactic of relying exclusively on barriers to trade and protectionism is misguided and potentially dangerous. The economic costs to the United States so far have been relatively modest, dampening exports, industrial production, and business investment. However, the tariffs and policy uncertainties have had a significantly larger impact on China, accentuating its structural economic slowdown, and are disrupting and distorting global supply chains. This is harming other nations that have significant exposure to international trade and investment overseas, particularly Japan, South Korea, and Germany. As a result, global trade volumes and industrial production are falling. Weaker global growth is reflected in a combination of a reduction in aggregate demand and constraints on aggregate supply.
Topic:
International Trade and Finance, Monetary Policy, Economic Growth, Tariffs, and Industry
Political Geography:
Japan, China, Europe, Asia, South Korea, Germany, North America, and United States of America

2. The 1948 German Currency and Economic Reform: Lessons for European Monetary Policy

Author:
Gunther Schnabl
Publication Date:
10-2019
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Twenty years after the introduction of the euro, the European Monetary Union (EMU) is at its crossroads. Following the outbreak of the European financial and debt crisis in 2008, the European Central Bank (ECB) took comprehensive measures to stabilize the common currency. Interest rates were cut to and below zero and several asset purchase programs have inflated the ECB balance sheet (Riet 2018). Within the European System of Central Banks, large imbalances have emerged via the TARGET2 payments system, which can be seen as quasi-unconditional credit in favor of the southern euro area countries (Sinn 2018). While the ECB terminated its asset purchase program at the end of 2018 and is expected to increase interest rates in late 2019, financial instability is reemerging. Growing uncertainty about the fiscal discipline of the Italian government has triggered a significant increase in risk premiums on Italian government bonds. In particular, in Italy and Greece, but also in Germany, bad loans and assets remain stuck in the banking systems. In the face of the upcoming downswing, European banks do not seem ready for new financial turmoil. In this fragile environment, the future path of the EMU is uncertain. To enhance the stability of the EMU, a group of German and French economists has called for a common euro area budget, for a strengthening of the European Stability Mechanism as lender of last resort for euro area countries and banks, as well as for a common European deposit insurance scheme (Bénassy-Quéré et al. 2018). In response, 154 German economists have warned against transforming the EMU into what they call a “liablity union,” which systematically undermines market principles and wealth (Mayer et al. 2018). In 2018, a French-German initative to introduce a common euro area budget faced strong opposition from a group of northern European countries as well as from Italy, symbolizing the political deadlock concerning reforms of the EMU. This article explains the different views on the institutional setting of monetary policymaking in Europe from a historical perspective. It begins with a description of the economic and monetary order in postwar Germany. It then discusses the positive implications for the European integration process and the economic consequences of the transformation of postwar German monetary order. The final section offers some economic policy recommendations.
Topic:
Economics, History, Monetary Policy, Reform, European Union, Banks, and Currency
Political Geography:
Europe and Germany