Beyond the Austerity Debate: the Deficit Bias in the post-Bretton Woods Era


By Carlo Cottarelli

(Version in Español)

The austerity vs. growth debate has raged in recent months, pitting those who argue that fiscal policy should be tightened more aggressively now to bring down high levels of debt, even though economic growth remains weak, against those who want to postpone the adjustment to better times. This is a critical issue for policymakers, perhaps the most important one in the short run.

And yet, this debate—which, mea culpa, I have myself contributed to―is attracting too much attention.

This is bad for two reasons:

  • The debate is driven, to some degree, by ideology and is therefore more focused on the relatively limited areas of disagreement than on the far broader areas of agreement. Most economists would agree that fiscal consolidation is needed in advanced economies, and that the average annual pace of adjustment during 2011-12―about 1 percentage point―is neither too aggressive nor excessively slow. Most economists would also agree that countries under pressure from markets have to adjust at a faster pace, while those that do not face such constraints have more time. Of course, there is disagreement on some aspects of the fiscal strategy, but it relates to specific country cases.
  • The debate is detracting attention from policy issues that may seem less urgent, but which are nevertheless critical in the medium term. I am referring to what I would call the institutional gaps in fiscal policymaking that still exist in most advanced and emerging economies. These gaps have contributed to a bias in the conduct of fiscal policy in favor of deficits that is behind many of the current problems.

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Reserve Currencies in the Post-Crisis International Monetary System


By Reza Moghadam

The dollar has been the cornerstone of the international monetary system since the Second World War. It is the most important reserve currency, accounting for at least two-thirds of reserve assets, according to the IMF’s Composition of Foreign Exchange Reserves database. Among central banks that do not report this information to the IMF, it is estimated (e.g. by Brad Setser) that 70 percent is held in dollar assets.

The bulk of foreign exchange transactions involve dollars, and significantly more trade gets settled in dollars than involves the United States. Goldberg and Tille examined 23 advanced and emerging economies in Asia and Europe and found that all settled a greater proportion of their trade in dollars than their trade with the United States. The divergence was particularly stark for emerging Asia, where trade with the United States only accounted for about 20 percent of total trade but the bulk of total trade was settled in dollars. ( “Vehicle Currency Use in International Trade,”  Journal of International Economics, Issue 76, Vol. 2, pp. 177-192, December 2008).

The recent crisis has prompted an abundance of commentary on the future of the international monetary system and potential alternative reserve currencies. Those calling for a re-examination of the dollar’s role include Italian economy minister Giulio Tremonti, People’s Bank of China Governor Zhou Xiaochuan, Ousmène Jacques Mandeng of Ashmore Investment Management Limited, and Nobel Laureate Joseph Stiglitz. What does all this mean for the future of the international monetary system and the role of the dollar? 

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