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Friday, April 08, 2016

'The Case for a Grand Bargain'

Barry Eichengreen (I left out quite a bit of the discussion...):

The Case for a Grand Bargain: The current malaise of stagnation and lowflation is a global phenomenon. And, unfortunately, individual efforts to defeat it, by central banks and governments proceeding on their own, are clearly not working. ... Nor do policy makers in different countries all share a common diagnosis of the nature of the problem and its remedy. ...
But in the underbrush of these disagreements lie the seeds of a grand bargain. Countries with fiscal room for maneuver, such as the United States and Germany, should agree to use it. Economies lacking fiscal space for their part can agree to use monetary stimulus more aggressively... And countries where structural reform is urgent, not just the Southern European countries that are Germany’s concern but also emerging markets like China and Brazil, can recommit to the reform...
This is not the perfect bargain, but then we do not live in a perfect world. In particular, the dollar would strengthen against other currencies... That strong dollar would cause U.S. exporters to howl, but that is the price of international cooperation to jumpstart global growth. A relatively strong dollar is appropriate, after all, given the relatively strong condition of the U.S. economy... A further problem or cost is that global imbalances – a growing external deficit for the U.S. and surpluses for other countries – would reemerge.
But only temporarily. Once global growth firmed, U.S. fiscal stimulus could be withdrawn. Monetary policies in other countries could be normalized.  The dollar would give back ground, and global imbalances would narrow. ...
Skeptics will say that I am a dreamer for imagining this grand bargain. But the alternative to this dream is an ongoing economic nightmare.

    Posted by on Friday, April 8, 2016 at 07:33 AM in Economics | Permalink  Comments (29)


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