Archive for January, 2015

ECB Announcement 01/22/15

Thursday, January 22nd, 2015

So the announcement has finally come out from the European Central Bank to pledge a higher than expected buying program of government and corporate bonds, and debt securities at a rate of €60 billion ($69 billion) a month. I don’t believe they have marked an end point to the program but the ECB has also lowered it’s interest rate it charges on four year loans by 0.10 %. Here are some highlights from a WSJ journal article on the issue.

“Officials kept its main lending rate unchanged at 0.05% and a separate rate on overnight bank deposits parked with the central bank at minus 0.2%, meaning banks must pay a fee to keep surplus funds at the ECB.”

“Bond yields have tumbled across the region, and the euro has declined sharply, potentially boosting exports.”

“the ECB was left with few options apart from buying securities in the public debt market with newly created money, thus raising the money supply”

“Still, many analysts question whether quantitative easing will work within Europe’s fragmented economy and banking system, particularly in stagnant economies such as France and Italy that have been slow to reform their labor markets to make them more flexible.”

The full article from Brian Blackstone at the WSJ is here

The Consequences of Greece Leaving the Eurozone

Wednesday, January 21st, 2015

Although the reputation of the Greek economy has been mostly shattered over the past four years, the Economist recently published an article warning that it would be imprudent for the EU and Greece to cut ties at this point.

Examining the article

Context: Greece is holding an election on January 25th to decide whether or not to withdraw from the EU. A withdrawal would entail Greece installing its own currency (the drachma), severing the ties between the EU Central Bank and its own, and becoming fully responsible for domestic monetary and fiscal policy.

Facts:
The Economist notes that the drachma would rapidly depreciate against the Euro, which is logical due to the current weakened state of the Greek economy. This is good because it could help kick-start the Greek trade and tourism industries. A weak drachma means exports will be cheaper and national production will rise. Furthermore, wealthy EU citizens would enjoy a high level of purchasing power if they take their six weeks of guaranteed vacation in Athens. However, the Economist warns this process could be very messy in the short-term, as the country must redenominate a significant portion of its debts and assets. A weak Greek economy may not be able to withstand a volatile economic shock, and the citizens could face stagnation or hyper inflation as the drachma becomes worthless.

Furthermore, a significant change could completely undermine the faith of foreign investment. This would make it impossible for Greece to borrow money to pay off currently held foreign debts. If the drachma depreciates as expected, the Greek government could be forced to default on all foreign debts held, and domestic debts would be settled at well below value.

In reality, Greece has been on the road to economic recovery. The government has run surpluses the past two years, and international trade is starting to rebalance. The Economist believes that a withdrawal would be detrimental to both the Greeks and the EU, and I agree. When we wonder about the economic stability of the EU, the Greece example shows that its stability is unlikely be challenged by the weakest economies. Instead, we should focus on the incentives the strongest economies gain by remaining members of the trade bloc.

Exchange Rate Data

Monday, January 19th, 2015

Attached below is the link to the exchange rate data that I gathered.  The spreadsheet is organized as follows:

  1. Currencies graphed using St.Louis Federal Reserve Data
  2. St. Louis Federal Reserve Data in monthly format
  3. IMF Data listed daily

https://docs.google.com/spreadsheets/d/1FzNMLgCTzfrTJzw84RploepzBkMj72dGsDfz085-M2g/edit?usp=sharing

Equilibrium Exchange Rates

Saturday, January 17th, 2015

Based off our conversation on exchange rates, we will need to establish what it means for an exchange rate to be in equilibrium. I will post more about the various ways of defining this in the future.

Test Blog

Saturday, January 17th, 2015

Test

Key Economic Indicator Data

Friday, January 16th, 2015

Below is a link to key economic data for all countries:

https://docs.google.com/spreadsheets/d/1XkXLJ2elnUBbH_dYY3I2_esbxAF3U9AnjmT3cJtNqVE/edit?usp=sharing

The data is from the World Bank, covering the years 1990-2013, and includes the following variables:

  • Unemployment Rate
  • Inflation Rate
  • Interest Rate
  • GDP
  • GNI

It also includes dummy variables for whether or not the country is a member of the E.U. or the Eurozone (1 = yes, 0 = no).

“Switzerland scraps currency cap”

Thursday, January 15th, 2015

http://www.wsj.com/articles/switzerland-scraps-currency-cap-1421320531?mod=WSJ_hp_LEFTTopStories

Theory of Optimum Currency Areas

Thursday, January 15th, 2015
It is patently obvious that periodic balance-of-payments crises will remain an integral feature of the international economic system as long as fixed exchange rates and rigid wage and price levels prevent the terms of trade from fulfilling a natural role in the adjustment process.
- Robert Mundell In class Dr. Greenlaw mentioned the Theory of Optimum Currency Areas in passing. To further elaborate, this is the belief that a single currency in a specific are will yield greater economic benefits; investopedia gives a nice summary. For a more in-depth analysis, Robert Mundell’s paper in the American Economic Review makes an interesting read.

What is the Euro?

Wednesday, January 14th, 2015

What is the Euro?

The euro (€; code: EUR) was introduced to world financial markets as an accounting currency in 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1 (US$1.1743). Physical euro coins and banknotes entered into circulation in 2002, formally replacing 12 currencies. It is the official currency of the Eurozone.  The Euro is the only significant challenger to the US dollar as the world’s main reserve currency. The share of the euro as a reserve currency has increased from 18% in 1999 to 27% in 2008. Over this period the share of the U.S. dollar fell from 71% to 64%

The euro was established by the provisions in the 1992 Maastricht Treaty. To participate in the currency, member states are meant to meet strict criteria, such as a budget deficit of less than three per cent of their GDP, a debt ratio of less than sixty per cent of, low inflation, and interest rates close to the EU average.

Countries Involved

The Eurozone is a monetary union of 19 European Union (EU) member states that have adopted the euro (€) as their common currency.  These 19 (of the 28) member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Others who have adopted the Euro:

  • The currency is also officially used by Andorra, Monaco, San Marino, and the Vatican City which have formal agreements with the EU to use the euro as their official currency and issue their own coins.
  • Kosovo and Montenegro have adopted the euro unilaterally.
  • Four overseas territories of EU members that are not themselves part of the EU (Saint Barthélemy, Saint Pierre and Miquelon, the French Southern and Antarctic Lands and Akrotiri and Dhekelia) have adopted the Euro.
  • Together this direct usage of the euro outside the EU affects nearly 3 million people. It is also gaining increasing international usage as a trading currency, in Cuba, North Korea, and Syria.

Countries Pegged to the Euro:

Note: A pegged exchange rate also known as a fixed exchange rate is a type of exchange rate system where a currency’s value is fixed against the value of another single currency. Pegging a country’s currency to a major currency is regarded as a safety measure, especially for currencies of areas with weak economies. It prevents runaway inflation and encourages foreign investment due to its stability.

  • A total of 22 countries and territories that do not belong to the EU have currencies that are directly pegged to the euro including 13 countries in mainland Africa (CFA franc), two African island countries (Comorian franc and Cape Verdean escudo), three French Pacific territories (CFP franc) and two Balkan countries, Bosnia and Herzegovina (Bosnia and Herzegovina convertible mark) and Macedonia (Macedonian denar).

Benefits

“The largest benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to complete previously unprofitable trades. The absence of multiple currencies also theoretically removes exchange rate risks. There have also been many studies conducted all showing that both trade and investment within the Eurozone has increased after the adoption of the Euro.”

Top EU Trading Partners:

Test Post-What is the Eurozone?

Wednesday, January 14th, 2015

Insert Eurozone here.