Archive for June 11th, 2013

Inflation Expectations of India’s households decline…

June 11, 2013

Well more than falling inflation numbers, RBI would take some respite from its recent Survey of Indian households on Inflation Exp.  As most mon pol econs would say it is expectations which matter.

With decline in WPI inflation, the inf exp of HH have also declined.Earlier no of people expecting inflaiton to rise higher than current rate was hovering around 70-75%. This has declined to touch 59% which is still high but better than the 70% number. Having said that future inflation numbers continue to hover in double digits for most people.

Some respite but still not out of the inflation woods..

The road to the U.S. monetary union was not as smooth as imagined…

June 11, 2013

Well here Because of EZ crisis, no of econs have pointed to how US stitched its fiscal union ahead of mon union. And how that is the path EZ should take as well. This blog has pointed to several such research papers. The problem with such pieces is that they make this whole stitching of political and mon union look like a cakewalk.

Peter Rousseau of Vanderbilt shows in this fab paper why this whole union business was not easy at all. There was lots of politics in it and was drawn over many decades:

Is political unity a necessary condition for a successful monetary union? The early United States seems a leading example of this principle. But the view is misleadingly simple. I review the historical record and uncover signs that the United States did not achieve a stable monetary union, at least if measured by a uniform currency and adequate safeguards against systemic risk, until well after the Civil War and probably not until the founding of the Federal Reserve. Political change and shifting policy positions end up as key factors in shaping the monetary union that did ultimately emerge.

Based on US history, Europe is not much different from US in 1790s :

Seen from this perspective, the early United States was not much more of a “political union” in 1790 than today’s European Union, though it did enjoy the advantages of a common culture and language early on. If history offers insights for the future, perhaps monetary stability in the EU will also arise through a sequence of informed trial and error across political and monetary actors, though knowledge of the past may accelerate the time frame this time around.

This is not to say that the Federal Constitution was unimportant. The lack of even a rudimentary political union among the thirteen colonies prior to their independence allowed, for example, individual colonies in New England to undermine a loose regional currency zone, and the weak political union that emerged with the Continental Congress during the Revolution (1776-1781) and then under the Articles of Confederation (1781-1789) aggravated problems of monetary control. Moving to a single unit of account in the dollar, privatizing the money creation process, and ceding some fiscal authority to the Federal government after 1789 represented a leap towards a well-functioning monetary union, but the process by no means ended there. Rather, political struggles shifted the balance of power between centralist and decentralist influences in the government and produced a patchwork of institutions and monetary practices that ended up being codified in the compromise that was the Federal Reserve Act of 1913.

The paper goes on to show how various political wars were fought by politicos then over the US economic and monetary system. It is all about politics at the end of the day.

Today’s U.S. monetary union would look quite different had the Federalist plan gone off without a hitch. In this paper I lay out the broad history of how political and economic forces interacted up to the founding of the Federal Reserve, emphasizing how a basic political union was insufficient for having a stable monetary union, and how the two evolved side by side. In this respect, optimism about the European Union’s prospects for emerging in the end as a true political and economic union does not seem misplaced.

Hmm.. But would Germans want to be part of the same country as French?

Superb read on econ history of US and comparison to EZ. Would be amazing to read such an account on India as well..


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