Tuesday, April 16, 2013

Quite To The Contrary

Scott Sumner asserts:

Lots of people confuse policies aimed at nominal exchange rate depreciation (monetary stimulus) with policies aimed at real exchange rate depreciation (high government saving.) The two policies are so different that they ought not even be covered in the same course. To say the Japanese government is not engaged in excessive saving would be an understatement.

No, deliberate attempts at reducing the real exchange rate while avoiding inflation is aimed at strengthening the trade balance (reducing deficit, increasing surplus or turning deficit into surplus), not the budget balance. And while a stronger budget balance will, other things being equal, cause the trade balance to get stronger, there exist no causal link in the opposite direction. (Unless it increases growth, but there is no reason to believe in such a link in most circumstances).

By contrast, what Sumner calls "monetary stimulus" (a euphenism for what most people call inflation) will strengthen the government budget as the real value of debt and real interest rates are pushed down. As I discussed in the previous post, that is likely the most important motive behind Shinzo Abe's inflationary surge.


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