Dawn Holland, Jonathan Portes 01 November 2012
EU governments have individually embraced severe austerity programmes in an effort to avoid becoming the next Portugal. This column presents results from the National Institute Global Econometric Model suggesting that these individually rational polices are leading to collective folly. Keynes’ 'paradox of thrift' is in full swing since EU nations continue to act like small open economies while in fact they are a large closed economy.
Is austerity – particularly the fiscal consolidation programmes currently under way in most EU countries – self-defeating? DeLong and Summers (2012) have argued that, in current economic circumstances, the negative impact of fiscal consolidation on growth may be so great that the impact on debt-GDP ratios will be perverse, causing them to rise rather than fall.
Eurozone crisis, paradox of thrift, self-defeating austerity
Global imbalances and the paradox of thrift
Max Corden 11 April 2011
People critical of global imbalances often blame the surplus countries and their currency manipulation. This column introduces a Policy Insight that argues that the basic problem has been the inefficiency of the world’s financial sector, which led to unfruitful investment in the US rather than productive investment in emerging economies.
The global imbalances are widely seen as a problem, especially by the US government and US economists. Sometimes they are even seen as a cause of the financial crisis (Suominen 2010). Yet such imbalances – i.e. current-account surpluses and deficits – reflect international intertemporal trade, and there should be gains from such trade as from “ordinary” trade, on the basis of standard arguments for free trade (see Obstfeld and Rogoff 1996, Chapter 1).
Global crisis International trade
global imbalances, global crisis, exchange-rate policy, paradox of thrift