Edited by Matías Vernengo
Since the debt crisis in the early 1980s, and the collapse of the state-led industrialization strategy, Latin American economies have been subjected to several adjustment programmes, frequently imposed by the International Monetary Fund (IMF). The economic slowdown and the higher levels of unemployment in this period were only subdued during the short period of the commodity boom between 2003 and the beginning of the Global Financial Crisis in 2008. While there was a short-lived Keynesian moment after the crisis, the return of the balance of payments constraint, and policy choices related to the ascendancy of conventional views on fiscal policy, favouring adjustment and balanced budgets, reasserted their dominance. The growth and employment outlook for the region in the near future looks grim.
This short paper introduces Lauchlin Currie's unpublished memorandum to the Board of Governors of the Federal Reserve discussing Keynes's General Theory. The memorandum falls short of a full review of Keynes's magnum opus, but together with other published material it provides a picture of Keynesian ideas within the Fed during the Great Depression. It is suggested that Currie's views on Keynes are relevant, in particular because, contrary to what would become the dominant view, he does not think that wage or interest-rate rigidity is at the heart of the Keynesian results.
Thomas Palley and Matías Vernengo
Esteban Pérez Caldentey and Matías Vernengo
The justification for inflation targeting rests on three core propositions. The first is called ‘lean against the wind,’ which refers to fact that the monetary authority contracts (expands) aggregate demand below capacity when the actual rate of inflation is above (below) target. The second is ‘the divine coincidence,’ which means that stabilizing the rate of inflation around its target is tantamount to stabilizing output around its full employment level. The third proposition is that of stability. This means that the inflation target is part of an equilibrium configuration which generates convergence following any small disturbance to its initial conditions. These propositions are derived from a closed economy setting which is not representative of the countries that have actually adopted inflation targeting frameworks. Currently there are 27 countries, 9 of which are classified as industrialized and 18 as developing countries that have explicitly implemented a fully fledged inflation targeting regime (FFIT). These countries are open economies and are concerned by the evolution of the external sector and the exchange rate as proven by their interventions in the foreign exchange markets. We show that these three core propositions and the practice of inflation targeting are inoperative in an open economy context.