For those interested in policy coordination and exchange rate policy, last week was both entertaining and informative. U.S. Treasury official Lael Brainard’s G-20 background briefing last Monday, interpreted by some as signaling a green light to Japan for further yen depreciation in support of growth, was followed by statements that seemed to repudiate, support, then reinterpret the statement. The result was significant volatility in foreign exchange markets. I suspect that was the opposite of what was intended. Beyond the noise, events last week signal a policy environment where countries have great latitude to take measures that have significant effects on exchange rates. “Currency wars” is hyperbole, but it’s capturing something real.
Jeremy Stein’s speech today–“Overheating in Credit Markets: Origins, Measurement, and Policy Responses”–provides valuable insight on the issue of credit bubbles that could result as a consequence of current Federal Reserve policy. As such, it speaks to the upcoming debate over the Fed’s exit strategy. It’s a must read.
My colleagues Daniel Ahn and Michael Levi are out today with a new look at the case for an oil tax. While an oil tax has little traction on the Hill, many economists favor it. Arguments for the tax usually include its efficiency (demand is relatively insensitive to price in the near term and it can be broadly applied) and its ability to account for environmental externalities.
If you are interested in the frontier thinking of European debt restructuring, you need to read the latest from Buchheit, Gulati, and Tirado. In it, they propose an amendment to the European Stability Mechanism (ESM) that would make future European restructurings easier by strictly limiting the rights of holdout creditors. It’s designed with an eye to the smaller countries of Europe, which have significant debt issued under foreign law. With the prospect of a restructuring in Cyprus on the horizon, and concerns about debt sustainability across the periphery, it’s a timely proposal. While a treaty change seems far fetched, some European policymakers will find it appealing. That doesn’t mean it’s good policy.
Macro and Markets examines the forces influencing the global economy, macroeconomic policies, and financial markets.