Ed Dolan's Econ Blog

Archive for November, 2010

  • How China’s Inflation Policy Will Shape the Yuan-Dollar Exchange Rate

    By freezing its exchange rate and pulling out all the stops on fiscal and monetary stimulus, China got through the global recession with only a mild slowdown in GDP growth. Now it is facing the inflationary consequences. Consumer price inflation, after rising steadily all year, hit a 4.4% annual rate in October, approaching the government’s red line. How will China choose to deal with the inflation threat? The answer is important both for China and its trading partners, because anti-inflation policy will determine what happens to the exchange rate of the yuan over the coming months.

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  • No Fix for U.S. Fiscal Policy Without New Rules

    A short time ago, I wrote that the EU needs better rules for fiscal policy. So does the United States. A new report from the Peterson-Pew Commission on Budget Reform provides an outline for such a set of rules. It is unfortunate that the Peterson-Pew report has been overshadowed by the almost simultaneous release of the draft co-chairs’ report of the president’s fiscal reform commission, because they complement one another. The mandate of the president’s commission is to figure out a combination of tax reform and spending cuts that will get the deficit down to a sustainable level, whereas the Peterson-Pew report focuses on the rules needed to maintain sustainability over the long term.

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  • The Debt Commission Is Right: Tax Reform Is the Path to Growth-Friendly Fiscal Consolidation

    The day before yesterday’s draft co-chairs’ proposal from the bipartisan National Commission on Fiscal Responsibility and Reform is the latest contribution to the ongoing national debate on fiscal consolidation. The G20 finance ministers, at their pre-summit meeting, issued a Communiqué endorsing the concept of “ambitious and growth-friendly medium-term fiscal consolidation,” but gave no hint as to what such a program might actually look like. The NCFRR co-chairs’ make a good start at filling in the blanks by placing tax reform at the heart of their proposal. It is the best way forward, and really, the only way.

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  • India’s Secret Weapon in its Economic Race with China

    The eclipse of the G7 by the G20 puts the spotlight more than ever on India and China as the economic superpowers of the future. So far, China has the lead, but India has a secret weapon that will carry it into first place by the end of the century. What exactly? Widely spoken English? That helps India’s service sector, but it is not decisive. Democracy? True, democracies outperform authoritarian regimes on average. It is no coincidence that 17 of the G20 are functioning democracies, but China is hanging in there as an exception to the rule. No, the real secret weapon that will carry India into the lead is demographics.

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  • Could QE2 Cause the Fed to Go Broke?

    The Fed’s new program of quantitative easing, QE2, once again raises an old question: Can central banks go broke? Conventional analysis, aptly summarized by Willem Buiter in a 2008 report, says no, or at least, hardly ever. However, when we look closely, the conventional analysis is not altogether reassuring. Although the Fed most assuredly is not going to go broke, preventing that from happening could raise difficult political issues and perhaps even threaten the Fed’s independence.

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