Read the Beforeitsnews.com story here. Advertise at Before It's News here.

By Macro and Other Market Musings (Reporter)
Contributor profile | More stories

Story Views
Now:
Last hour:
Last 24 hours:
Total:

Fool Me Once, Shame on You; Fool Me Twice Shame on Me.

Sunday, March 8, 2015 22:03

% of readers think this story is Fact. Add your two cents.

On Friday I was interviewed by Erin Ade on Boom Bust. We discussed why the Eurozone is not an optimal currency area–low labor mobility, limited fiscal transfers, differing regional business cycles–and why this means a one-size-fits all monetary policy is bound to make problems for this monetary union.

This discussion was a follow-up to a recent post where I illustrated the challenges of a one-size-fits-all monetary policy by plotting Taylor rules for the Eurozone’s core and periphery economies. These Taylor rules prescribe very different interest rates for these two regions since the Euro’s inception, yet there is only one interest rate target. What to do? The chart below, which was used on Boom Bust, reveals what the ECB did in practice:

Note that the ECB policy rate (grey) and the core Taylor rule rate (green) track each other relatively closely. This means the ECB adjusted its interest rate target in a manner more consistent with the core economies. It also means the ECB policy was destabilizing for the periphery. For example, it was far too easy for the periphery prior to 2008–helping fuel the run up in debt, soaring asset prices, and current account deficits in those economies–while after that time it has been far too tight. For the core, ECB policy has been about right since 2010. This explains, in part, the ECB’s reluctance to ease since then.

Interestingly, this is not the first time European monetary policy has served to stabilize the core economies while destabilizing the periphery. The first go-round occurred in 1992 under the European Monetary System (EMS). Under this arrangement, each country had their own currency but was pegged to the German Deutsche Mark. This meant European monetary policy was effectively set by the Bundesbank in Germany. Unsurprisingly, what was good monetary policy for Germany–the core economy–was not necessarily good for the periphery.

This became apparent in 1992 when Germany, worried about overheating from the spending on its reunification, decided to tighten monetary policy. To maintain their pegs, the EMS countries had to follow suit and tighten too. For many countries, though, this was hard to do because their economies were already weakening. Monetary policy, in other words, was tightening in order to stabilize the core economy even though the periphery needed easing. In the United Kingdom and Italy the pain of this tightening proved to much and they were forced to leave the EMS. Other periphery countries like Spain and Portugal limped along.

So the problems in the Eurozone periphery since 2010 are an eerie Deja Vu of the 1992 EMS experience. In hindsight, then, it seems that the periphery should have known better than to try a second monetary marriage with the core economies. As the saying goes, fool me once shame on you; fool me twice shame on me. The core economies continue to have the upper hand when it comes to the conduct of monetary policy in the Europe. And it does not seem that this will change anytime soon. This is a lesson the periphery needs to learn.

Source: http://macromarketmusings.blogspot.com/2015/03/fool-me-once-shame-on-you-fool-me-twice.html

Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world.

Anyone can join.
Anyone can contribute.
Anyone can become informed about their world.

"United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.

Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world. Anyone can join. Anyone can contribute. Anyone can become informed about their world. "United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.

LION'S MANE PRODUCT

Try Our Lion’s Mane WHOLE MIND Nootropic Blend 60 Capsules

Mushrooms are having a moment. One fabulous fungus in particular, lion’s mane, may help improve memory, depression and anxiety symptoms. They are also an excellent source of nutrients that show promise as a therapy for dementia, and other neurodegenerative diseases. If you’re living with anxiety or depression, you may be curious about all the therapy options out there — including the natural ones.Our Lion’s Mane WHOLE MIND Nootropic Blend has been formulated to utilize the potency of Lion’s mane but also include the benefits of four other Highly Beneficial Mushrooms. Synergistically, they work together to Build your health through improving cognitive function and immunity regardless of your age. Our Nootropic not only improves your Cognitive Function and Activates your Immune System, but it benefits growth of Essential Gut Flora, further enhancing your Vitality.

Our Formula includes: Lion’s Mane Mushrooms which Increase Brain Power through nerve growth, lessen anxiety, reduce depression, and improve concentration. Its an excellent adaptogen, promotes sleep and improves immunity. Shiitake Mushrooms which Fight cancer cells and infectious disease, boost the immune system, promotes brain function, and serves as a source of B vitamins. Maitake Mushrooms which regulate blood sugar levels of diabetics, reduce hypertension and boosts the immune system. Reishi Mushrooms which Fight inflammation, liver disease, fatigue, tumor growth and cancer. They Improve skin disorders and soothes digestive problems, stomach ulcers and leaky gut syndrome. Chaga Mushrooms which have anti-aging effects, boost immune function, improve stamina and athletic performance, even act as a natural aphrodisiac, fighting diabetes and improving liver function. Try Our Lion’s Mane WHOLE MIND Nootropic Blend 60 Capsules Today. Be 100% Satisfied or Receive a Full Money Back Guarantee. Order Yours Today by Following This Link.

Comments

Visits:	1,708,746,406
Stories:	8,451,208