Charles Calomiris has a real interesting Forbes oped on Greece, amongst a much deeper insight.
"an across-the-board redenomination would lower prices throughout the economy"? Not necessarily. Why would whatever store lower prices only because it gets to lower reward too rent? Prices are non a "contract."
Thus, the redenomination should in all probability come upward amongst a (say) 1 calendar week cost control. Every cost must live lowered 30% over what it was the previous day, for a week, Just long plenty for each store to run across that its competitors too suppliers has besides actually lowered prices. Then stores tin flaming attain what they want.
The deeper number hither is only what is the cost too wage stickiness that so infects macroeconomic thinking. Why is "internal devaluation" yesteryear cost too wage adjustment so much harder than "external devaluation" yesteryear central charge per unit of measurement adjustment? Our formal models receive got costs of changing prices. Yet the actual costs of changing prices are tiny.
I scream back a "coordination problem" is to a greater extent than likely. The bakery doesn't desire to lower his cost because he soundless pays the same cost for wheat too yeast; the farmer doesn't desire to lower his cost because he pays the same cost for fuel, too so forth. This spider web of prices is of course of pedagogy thousands of times to a greater extent than complex than that story. That's why it takes so long for everyone to grip on lower prices together.
At times, however, prices too reward attain change, overnight, amongst no cost at all. When countries bring together the euro, every store changes cost -- too the symbol side yesteryear side to it -- overnight. That fact lonely should enjoin us that bill of fare costs, though a squeamish formalism, are non the existent microeconomic foundation of cost too wage stickiness. And in that place is a potential purpose for a authorities to coordinate cost changes.
What Charles is proposing, then, is just the same form of overnight cost too wage alter that happened on admission to the euro. If yous scream back prices too reward are "overvalued" inwards Greece, too a "devaluation" is all it takes for Thessaloniki to commencement exporting Porsches to Stuttgart, too so an overnight, coordinated, cost too wage alter is a real squeamish choice policy that nosotros mightiness commencement taking to a greater extent than seriously.
This is a fleck of a "thesis topic" suggestion. I scream back nosotros require a model of cost stickiness every bit a coordination failure that is every bit uncomplicated too tractable every bit the standard, but false, Calvo fairy or bill of fare cost models. Coordination failure models mightiness besides final result inwards the form of backward-looking stickiness that Phillips curves inwards the information seem to show.
Why only a week? Well, the macroeconomic presumption hither is that Hellenic Republic is suffering only about form of "imbalance" or "overvaluation" or "sticky wage." If that's right, 1 calendar week at the correct prices too reward should stick. Each private store or soul would too so live reluctant to enhance prices without the others going along. If prices boundary correct dorsum upward in 1 lawsuit to a greater extent than afterward a week, however, without the attention of authorities coordination, too so nosotros weren't so imbalanced to laid about with, too the occupation is actually structural non monetary.
I rather suspect that tourist prices are laid yesteryear contest amongst Sicily, non local wage stickiness, but it would live interesting to see. Prices of imported goods volition besides probable boundary correct dorsum up. Fine.
Charles doesn't advert prices, but he does advert debts. This is a lot harder, every bit a debt "redenomination" is non only a method to solve a coordination occupation too lower all prices too reward relative to High German ones going forward, it is a huge transfer of wealth too a technical default.
If yous run a java store too charged two euros for a cappuccino yesterday, having all the java shops alter to 1.5 euros overnight (for a week) is 1 thing. But changing the mortgage payment is another. One is a price. The other is a default.
Charles sneaks off into the economical passive vocalization hither "By applying redenomination.." which is e'er a sign of problem ahead. Most lenders, particularly international ones, volition become direct to courtroom on that one.
I besides attain non follow how "applying redenomination to deposits too loans, banks’ wellness would live revived – their loans would instantly live payable too thus to a greater extent than valuable, too their internet worth would consequently rise." Before redenomination: Assets: l euros mortgages, l euros greek authorities bonds. Liabilities: 99 euros deposits, 1 euro equity. After redenomination: all numbers cutting yesteryear 1/3. How is the banking concern whatever healthier? All ratios (capital, leverage) are the same.
So I scream back the proposal has the correct spirit but a slightly incorrect focus.
Charles continues
But that Greece's alone hope to avoid becoming the side yesteryear side Venezuela is "major reforms to task laws too contest policies, too to wage a credible state of war on corruption" is topographic point on. In or out of the euro, inwards our out of the EU, inwards the halt coin too merchandise liberty are minor parts of economical growth.
My proposal begins amongst authorities activity to write downwards the value of all euro-denominated contracts enforced inside Greece. This “redenomination” would brand all existing contracts – wages, pensions, deposits, too loans – legally worth only, say, 70% of their electrical current nominal value. This policy would kill several birds amongst 1 stone. It would significantly cut back pensions, relieving financial pressure level too satisfying troika demands for financial sustainability. It would attain so inwards a way that would besides mitigate the purchasing powerfulness consequences for pensioners, because an across-the-board redenomination would lower prices throughout the economy, making the reduction inwards nominal pensions to a greater extent than bearable. By applying redenomination to deposits too loans, banks’ wellness would live revived – their loans would instantly live payable too thus to a greater extent than valuable, too their internet worth would consequently rise. The 30% wage reduction would farther cut back financial problems too brand Greek producers competitive, too piece of work every bit an “internal devaluation” to enhance need for Greek products too tourism. Most importantly, this internal devaluation – yesteryear solving the problems of financial deficits, non-competitiveness too banking concern insolvency – would inspire confidence inwards Athens’ powerfulness to remain inside the eurozone, which should select deposits dorsum into the banking organisation to fuel a rebirth of lending.I scream back this is most one-half right, but a real proficient stance lies inwards here.
"an across-the-board redenomination would lower prices throughout the economy"? Not necessarily. Why would whatever store lower prices only because it gets to lower reward too rent? Prices are non a "contract."
Thus, the redenomination should in all probability come upward amongst a (say) 1 calendar week cost control. Every cost must live lowered 30% over what it was the previous day, for a week, Just long plenty for each store to run across that its competitors too suppliers has besides actually lowered prices. Then stores tin flaming attain what they want.
The deeper number hither is only what is the cost too wage stickiness that so infects macroeconomic thinking. Why is "internal devaluation" yesteryear cost too wage adjustment so much harder than "external devaluation" yesteryear central charge per unit of measurement adjustment? Our formal models receive got costs of changing prices. Yet the actual costs of changing prices are tiny.
I scream back a "coordination problem" is to a greater extent than likely. The bakery doesn't desire to lower his cost because he soundless pays the same cost for wheat too yeast; the farmer doesn't desire to lower his cost because he pays the same cost for fuel, too so forth. This spider web of prices is of course of pedagogy thousands of times to a greater extent than complex than that story. That's why it takes so long for everyone to grip on lower prices together.
At times, however, prices too reward attain change, overnight, amongst no cost at all. When countries bring together the euro, every store changes cost -- too the symbol side yesteryear side to it -- overnight. That fact lonely should enjoin us that bill of fare costs, though a squeamish formalism, are non the existent microeconomic foundation of cost too wage stickiness. And in that place is a potential purpose for a authorities to coordinate cost changes.
What Charles is proposing, then, is just the same form of overnight cost too wage alter that happened on admission to the euro. If yous scream back prices too reward are "overvalued" inwards Greece, too a "devaluation" is all it takes for Thessaloniki to commencement exporting Porsches to Stuttgart, too so an overnight, coordinated, cost too wage alter is a real squeamish choice policy that nosotros mightiness commencement taking to a greater extent than seriously.
This is a fleck of a "thesis topic" suggestion. I scream back nosotros require a model of cost stickiness every bit a coordination failure that is every bit uncomplicated too tractable every bit the standard, but false, Calvo fairy or bill of fare cost models. Coordination failure models mightiness besides final result inwards the form of backward-looking stickiness that Phillips curves inwards the information seem to show.
Why only a week? Well, the macroeconomic presumption hither is that Hellenic Republic is suffering only about form of "imbalance" or "overvaluation" or "sticky wage." If that's right, 1 calendar week at the correct prices too reward should stick. Each private store or soul would too so live reluctant to enhance prices without the others going along. If prices boundary correct dorsum upward in 1 lawsuit to a greater extent than afterward a week, however, without the attention of authorities coordination, too so nosotros weren't so imbalanced to laid about with, too the occupation is actually structural non monetary.
I rather suspect that tourist prices are laid yesteryear contest amongst Sicily, non local wage stickiness, but it would live interesting to see. Prices of imported goods volition besides probable boundary correct dorsum up. Fine.
Charles doesn't advert prices, but he does advert debts. This is a lot harder, every bit a debt "redenomination" is non only a method to solve a coordination occupation too lower all prices too reward relative to High German ones going forward, it is a huge transfer of wealth too a technical default.
If yous run a java store too charged two euros for a cappuccino yesterday, having all the java shops alter to 1.5 euros overnight (for a week) is 1 thing. But changing the mortgage payment is another. One is a price. The other is a default.
Charles sneaks off into the economical passive vocalization hither "By applying redenomination.." which is e'er a sign of problem ahead. Most lenders, particularly international ones, volition become direct to courtroom on that one.
I besides attain non follow how "applying redenomination to deposits too loans, banks’ wellness would live revived – their loans would instantly live payable too thus to a greater extent than valuable, too their internet worth would consequently rise." Before redenomination: Assets: l euros mortgages, l euros greek authorities bonds. Liabilities: 99 euros deposits, 1 euro equity. After redenomination: all numbers cutting yesteryear 1/3. How is the banking concern whatever healthier? All ratios (capital, leverage) are the same.
So I scream back the proposal has the correct spirit but a slightly incorrect focus.
Charles continues
Although redenomination would achieve a peachy deal, yesteryear itself it is non enough. As uncomplicated economical theory (formally known every bit the the Balassa-Samuelson Theorem) tells us Hellenic Republic volition alone live a feasible long-term fellow member of the eurozone if it tin flaming fit the long-term productivity increment of FRG too other members. To attain so requires it to undertake major reforms to task laws too contest policies, too to wage a credible state of war on corruption.I disagree pretty strongly here. If "eurozone" agency a costless merchandise understanding too a mutual currency, that tin flaming last only fine amongst vastly dissimilar productivity levels (it already does) too consequently dissimilar productivity increment rates. Productivity across locations inwards the U.S. of America varies enormously. Ricardo too absolute vs. comparative reward was all most costless merchandise nether the gilded criterion (common currency) betwixt countries of dissimilar "competitiveness" or productivity levels. Perhaps he agency eurozone every bit an expanse that promises financial transfers to attain an equal criterion of living everywhere. If so, proficient luck.
But that Greece's alone hope to avoid becoming the side yesteryear side Venezuela is "major reforms to task laws too contest policies, too to wage a credible state of war on corruption" is topographic point on. In or out of the euro, inwards our out of the EU, inwards the halt coin too merchandise liberty are minor parts of economical growth.
