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Economic Policies for Growth and Sustainability
Edited by Nikolaos Karagiannis and John E. King
Wil Hout and M. A.M. Salih
An Overview of Asymmetrical Development
Wil Hout and M. A.M. Salih
In the aftermath of the Great Financial Crisis of 2007-2008, the United States and Europe are stuck in a state of political paralysis that is leading to a new norm of fiscal austerity, high unemployment, and, in the case of Europe, economic stagnation. With fiscal policy orientated around austerity it is the central banks – the Federal Reserve (the Fed) , the Bank of England (BOE) and the European Central Bank (ECB) – that remain the only macroeconomic authorities with the authority and political power to try to revive these struggling economies.
In the last two decades, there has been a global sea change in the theory and practice of central banking. The 'best practice' commonly prescribed by the international financial institutions and by many prominent economists, is the 'neo-liberal' approach to central banking (Epstein 2003). Its main components are: (1) central bank independence (2) a focus on inflation fighting (including adopting formal 'inflation targeting') and (3) the use of indirect methods of monetary policy (i.e., short-term interest rates as opposed to direct methods such as credit ceilings) (Bernanke et al. 1999).
The question “Why do central banks do what they do?” seems like an obviously important question, especially considering that political straitjackets limit countercyclical fiscal policy, leaving central banks as the dominant macroeconomic policy- making institution in most countries. Yet, mainstream macroeconomics has given very little thought to analyzing the economic and political sources of central bank goals and conduct. Rather, the implicit assumption of most mainstream analysis is that central banks try to make policy in the general interests of society as a whole. From this perspective, “poor” monetary policy stems from failures of theory, judgment or forecasting rather than from a lack of concern for the public interest.
Gerald Epstein and Juliet B. Schor
Current debates over international coordination of macroeconomic policy pose interesting conundrums for our understanding of domestic monetary policy. For a number of years the United States has been exerting pressure on Japan and West Germany to pursue an easier monetary policy, and particularly in the case of the West Germans the United States has been unsuccessful. German officials cite fear of inflation as their rationale for a restrictive policy. Yet, last year, consumer prices fell in West Germany, casting suspicion on either the sincerity or wisdom of the German government's stance.
As Jerry Ford left the White House he handed Jimmy Carter three envelopes, instructing him to open them one at a time as problems became overwhelming. After a year, Carter opened the first envelope. It said, "attack Jerry Ford." He did. A year later, Carter opened the second envelope. It said, "attack the Federal Reserve." He did. Three years into his term, and even more overwhelmed by the economy, Iran, Afghanistan and so forth, Carter opened the third envelope. It said: "prepare three envelopes." Paul Volcker, January 1981
In August 1979, virtually everyone with wealth and in the know were trying to get out of dollars. They were buying gold. They were buying anything "real" they could get their hands on. The dollar was in a free fall. And after presiding over three years of rapid, but inflationary economic growth, so was Jimmy Carter.