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Time to Loosen up Will France, Denmark and Belgium keep monetary policy tight or follow UK and Italian lead? Indicator of monetary stance (3-month money minus 10-year bond yield) 10 10 10 8 6 4 2 0 –2 –4 France Denmark Belgium 1990 91 92 93 TIGHT LOOSE 8 6 4 2 0 –2 –4 Germany Netherlands 1990 91 92 93 Figure 10.1 Time to loosen up Will France, Denmark, and Belgium keep monetary policy tight or follow the UK and Italy’s lead? Indicator of monetary stance (3-month money minus 10-year bond yield) Source: Datastream, FT calculations TIGHT LOOSE 8 6 4 2 0 –2 –4 UK Italy US 1990 91 92 93 LOOSE TIGHT No Reason to Mourn 279
280 Unemployment and Monetary Policy in the European Union poratism, lack of competition and mounting unemployment needs a co-operative frontal attack. That there is another way is demonstrated by Switzerland, Italy, and the U.K. Switzerland has interest rates of less than 5 percent, far below Germany’s. The U.K. when it was pushed out of the ERM last autumn opted for growth and is well on the way, without signs of strain or loss of financial stability. Italy’s demise at the hands of speculators became the foundation for growth and for far-reaching domestic reform. Italy demonstrates that unions can be far-sighted and willing to co-operate in a growth strategy that does not translate into inflation. Interest rate cuts cannot be accomplished without some depreciation of currencies. Only with the expectation of an appreciation relative to the D-Mark can a currency have lower interest rates than Germany. The practical question then is how much the French franc, say, must decline to support moderate interest rates. Our view is that the necessary depreciation is very limited, perhaps 5 to 7 percent. After all, France is just moving ahead of German rate cuts by six to twelve months or so, and that hardly warrants big swings. Much the same argument applies to Belgium and Denmark. Thus the extent of depreciation need not be large and stabilising speculation can be counted on to limit the fall. There is, of course, a strong argument for limiting unnecessary volatility and uncertainty by broadly and informally co-ordinating the strategy among the floaters. For the most part they should be able to cut interest rates in line with one another, and that will limit excess volatility. Where they part company will depend on their attitude towards unemployment, their performance on inflation, and their success in reducing rates without overly large depreciation. If interest rate targeting takes advantage of the new room for letting exchange rates move and growth resume, there is also the question of when to tighten the margins and return to the EMU project. The immediate priority is flexibility and that precludes formal commitments to unsustainable exchange rate targets. There is no reason, however, to rule out pragmatic trading ranges around newly found levels of the exchange rates, once interest rates have been cut. Thus we do not expect extreme volatility, just because the margins are wide. Ultimately, 18 months or two years from now, Europeans can reexamine whether the preconditions for stable rates or even monetary union are in place, how to remedy shortcomings, how to assure better co-ordination, and how to proceed. Whether ultimately there is a common money or not, a common Europe has already shown its worth in the establishment of a market where goods and services flow freely. The good name of Europe will be all the better if further integration yields prosperity and not mass unemployment.
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THE COLLECTED PAPERS OF FRANCO MODI
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Franco Modigliani in 1992.
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© 2005 Massachusetts Institute of
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CONTENTS Preface Francesco Franco I
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PREFACE The essays collected in thi
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xii Introduction decades of the twe
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THE LIFE-CYCLE HYPOTHESIS I
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4 The Life-Cycle Hypothesis them. W
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6 The Life-Cycle Hypothesis which c
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8 The Life-Cycle Hypothesis extent
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10 The Life-Cycle Hypothesis Assump
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12 The Life-Cycle Hypothesis e dy d
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14 The Life-Cycle Hypothesis We wil
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16 The Life-Cycle Hypothesis The fi
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18 The Life-Cycle Hypothesis We fee
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20 The Life-Cycle Hypothesis P = y
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22 The Life-Cycle Hypothesis y y e
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24 The Life-Cycle Hypothesis consum
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26 The Life-Cycle Hypothesis as an
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28 The Life-Cycle Hypothesis It wil
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30 The Life-Cycle Hypothesis is one
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32 The Life-Cycle Hypothesis The re
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34 The Life-Cycle Hypothesis Unfort
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36 The Life-Cycle Hypothesis basis
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38 The Life-Cycle Hypothesis 14. Fo
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40 The Life-Cycle Hypothesis 33. It
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42 The Life-Cycle Hypothesis which
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44 The Life-Cycle Hypothesis assump
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2 THE “LIFE-CYCLE” HYPOTHESIS O
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The “Life-Cycle” Hypothesis of
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(11) I C 0.634 0.080 0.634 0.092 0.
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3 LONG-RUN IMPLICATIONS OF ALTERNAT
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Long-Run Implications of Alternativ
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Table 3.1 A. Effects of Government
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4 RECENT DECLINES IN THE SAVINGS RA
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Table 4.1 (continued) Regression Va
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Recent Declines in the Savings Rate
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Table 4.2 (continued) First Differe
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Table 4.3 Period & estimation Surpl
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Table 4.4 The Role of Major Variabl
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Table 4.5 Estimates for Developing
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Table 4.6 (continued) Savings Growt
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5 THE AGE-SAVING PROFILE AND THE LI
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The Age Saving Profile 143 It is ob
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The Age Saving Profile 145 The exer
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The Age Saving Profile 147 same coh
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The Age Saving Profile 149 therefor
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The Age Saving Profile 151 One poss
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The Age Saving Profile 153 0 50 100
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The Age Saving Profile 155 0 5 10 1
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The Age Saving Profile 157 -10 -5 0
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10 40 45 Median discretionary savin
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The Age Saving Profile 161 effect f
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The Age Saving Profile 163 between
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The Age Saving Profile 165 tion. Si
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The Age Saving Profile 167 to save
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The Age Saving Profile 169 sampling
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The Age Saving Profile 171 10. One
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6 THE CHINESE SAVING PUZZLE AND THE
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Table 6.1 Chinese Household Income
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The Chinese Saving Puzzle 177 the p
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The Chinese Saving Puzzle 179 Even
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The Chinese Saving Puzzle 181 those
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The Chinese Saving Puzzle 183 3.3.2
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The Chinese Saving Puzzle 185 3. S(
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The Chinese Saving Puzzle 187 ddpCY
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Table 6.3 Estimates of Coefficients
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The Chinese Saving Puzzle 191 respe
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The Chinese Saving Puzzle 193 These
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The Chinese Saving Puzzle 195 marke
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The Chinese Saving Puzzle 197 coeff
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The Chinese Saving Puzzle 199 6 Con
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The Chinese Saving Puzzle 201 Accor
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The Chinese Saving Puzzle 203 Appen
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The Chinese Saving Puzzle 205 Horio
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7 AN ECONOMISTS’ MANIFESTO ON UNE
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An Economists’ Manifesto on Unemp
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Page 244 and 245: An Economists’ Manifesto on Unemp
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Page 255 and 256: 240 Unemployment and Monetary Polic
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Page 298 and 299: 11 LONG-TERM FINANCING IN AN INFLAT
Page 300 and 301: Long-Term Financing in an Inflation
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Page 304 and 305: 12 RISK-ADJUSTED PERFORMANCE: HOW T
Page 306 and 307: Risk-Adjusted Performance 291 portf
Page 308 and 309: Risk-Adjusted Performance 293 sugge
Page 310 and 311: Risk-Adjusted Performance 295 Nonet
Page 312 and 313: Risk-Adjusted Performance 297 relat
Page 314 and 315: Risk-Adjusted Performance 299 On th
Page 316 and 317: Risk-Adjusted Performance 301 Nonet
Page 318 and 319: Risk-Adjusted Performance 303 perfo
Page 320 and 321: 13 THE RULES OF THE GAME AND THE DE
Page 322 and 323: The Rules of the Game and the Devel
Page 334 and 335: 14 EMERGING ISSUES IN THE WORLD ECO
Page 336 and 337: Emerging Issues on the World Econom
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Page 340: Emerging Issues on the World Econom
Page 343 and 344: 328 Miscellanea mammoth unemploymen
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330 Miscellanea important one at th
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332 Miscellanea M M s M d M d Figur
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334 Miscellanea the flexibility of
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336 Miscellanea Table 15.1 (continu
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338 Miscellanea Table 15.2 Unemploy
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340 Miscellanea Table 15.2 (continu
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342 Miscellanea are equal: one must
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344 Miscellanea For the purpose of
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346 Miscellanea IV.4 The Saving—I
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348 Miscellanea corresponding axis
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350 Miscellanea understood however
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352 Miscellanea creates an excess s
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354 Miscellanea short of totalitari
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356 Miscellanea VI.5 The Role of Fi
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358 Miscellanea flexible nominal wa
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INTERVIEW IV
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364 Interview at Modigliani’s vac
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366 Interview Solow: Now, with Mars
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368 Interview in employment. When t
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370 Interview interest elasticity o
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372 Interview industries such as ag
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374 Interview The theorem, which by
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376 Interview governmental finance
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378 Interview Solow: You had a majo
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380 Interview consequences of “Pe
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382 Interview century, to below 6 p
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INDEX Accelerator effect, 221 Accou
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Index 387 Coefficients of the aggre
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Index 389 Equilibrium market, 328-3
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Index 391 cash, 142, 143 in China,
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Index 393 and open economy, 358 and
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Index 395 Monetary policy argument
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Index 397 Real wages. See Wages, re
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Index 399 Tanzania, income and savi
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Index 401 “Wedge” between pay a
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