Buttonwood up your mouth
Matty Yglesias has an amazing catch. He says that competitive devaluations achieved via unsterilized interventions would be a good thing, becuase they would cause inflation. He notes that someone disagrees.
The Economist’s Buttonwood
“The result is like a game of deflationary pass the parcel…”
Of course, Mr or Ms Buttonwood should have written
“The result is like a game of inflationary pass the parcel…” which is Yglesias’s point.
The dark ages of macro. I think what is happening is that Buttonwood is sure that selfish begger thy neighbor policies are bad and that allegedly painless remedies based on printing money and buying stuff are unwise, that he or she has noticed that these days deflation is even more feared than inflation and thus decided that printing currency and buying stuff must be deflationary.
Bagehot is turning over in his grave.
Depends if sterilized (no money supply expansion) or unsterilized interventions are pursued.
Yglesias specifically posted about an unsterilized intervention. Even if interventions were sterilized, the fight to the bottom wouldn’t be deflationary. It would be a neither inflationary nor deflationary game of pass the parcel resulting in very high holdings of foreign reserves all around.
I have been looking for evidence to see if it is indeed unsterilized or not, and teh mechanizm by which Japan is executing this. Are they prinitng Yen and buying T-bills? The mechanism may be important
If it is sterilized it will not expand the money supply, but will not contract it either. In this case it just helps Japan export more by lowering their currency relative to the dollar, which is their desired outcome, and why I think it could be sterilized.
So, it’s on the next strategy? When was this national practice most recently employed by a G-8 or G-20 nation?
You miss the point. In pass the parcel, only one person ends up with the parcel. Countries fear that they will end up with the deflationary problem of a rising currency, and thus a smaller share of world trade, at a time when domestic demand. So deflation is the thing they are trying to avoid., rather than the process leading to deflation.
the analogy is with the 1930s when countries that stuck with the gold parity suffered more than countries that devalued sooner