How Germany Did Not Profit From The Euro

by Dr. Dirk Ehnst

Often in articles on the euro zone crisis I read things like this (written by Michael Pettis):

“In the end this is Germany’s crisis to resolve, not China’s. Germany has benefited tremendously from the euro. Nearly all of its growth in the past decade can be explained by its rising trade surplus which, given monetary policy driven almost exclusively by the needs of slow-growing and consumption-repressed Germany, came at the expense of the rest of Europe.”

I think this is basically right, but on the other hand misleading. Let me point out two things.

The Role Of Reserve Ratio Requirements In China – A Brake For Credit Growth?

by Dr. Dirk Ehnst

I have recently presented some joint work with Finn Körner, showing Chinese data at a conference in Berlin. We had the impression that China is using the reserve ratio requirements (RRR) to fight inflation. Increasing the RRRs would lessen room for the banks to expand credits. This would only work if banks care about the RRR. In case they are not constrained by RRRs, changes in the RRR might only have psychological implications, which doesn’t mean that they wouldn’t work.

Nominal GDP Targeting

by Dirk Ehnst

Paul Krugman has embraced nominal GDP targeting. And we are back at the old QE discussion. It is Richard Koo in the red corner, vs Paul Krugman in the blue corner. One is left with the impression that the whole case for a nominal GDP target is based on dubious assumptions and mixed evidence at best. The case for fiscal policy is much more clear-cut. Targeting nominal GDP is OK with me, as Paul Krugman says, why exclude the fiscal side? As it stands, it is a lender’s strike. Investors want to see aggregate demand rise, and not expect that it rises. Only then you get back to talking about credibility and confidence and all those things. Since we are in a situation which resembles the Great Depression, I am not aware that any country escaped from that event by changing expectations. Two things did it: exiting the gold standard (which gave you control over the interest rate and money supply), and ramping up fiscal policy. I wish there were another way.