Comment on the paper by A. Bhaduri and E. Matzner

Steindl, Josef

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Document type:: Works

Collection:: Josef Steindl Collection

Title:: Comment on the paper by A. Bhaduri and E. Matzner

Author:: Steindl, Josef

Scope:: Typoskript, 4 Blätter

Year of publication:: 1990

Language:: English

Description:: Altogether our world seems to be dominated not only by finance, but more specifically by short run speculation. Autonomous economic policies are called in question by lack of controll over interest and exchange rates and over capital movements. (Auszug, S.1)

Subject:: Beschäftigungspolitik Vollbeschäftigung Steuerpolitik Tobin-Steuer Wechselkurspolitik Internationale Kapitalbewegung Internationale Wirtschaftspolitik Internationale Finanzpolitik Neokeynesianismus

Related work:: Bhaduri, Amit and Matzner, Egon: Relaxing the international constraints on full employment. In: Banca Nazionale del Lavoro Quarterly Review, 1990, Vol 43, Issue 172, S. 49-62 Steindl, Josef: Relaxing the international constraints on full employment. A comment. In: Banca Nazionale del Lavoro Quarterly Review, 1990, Vol 43, Issue 172, S. 63-67

Topic:: Economic policy

JEL Classification:: J21 [Labor Force and Employment, Size, and Structure] F38 [International Financial Policy: Financial Transactions Tax, Capital Controls]

Shelfmark:: S/M.77.3

Access:: Free access

COMMENT ON THE PAPER BY A.BHADURI AND E.MATZNER. By Josef Steindl I. The authors ask themselves how an individual country could manage to pursue an independent full employment policy in an unpropitious international environment. I should like first to say a few words on why this environment is so unfavorable nowadays. For practical purposes the flow of capital between countries is uncontrolled or uncontrollable. The amount of such funds which are subject to quick movement from country to country is enormously large in relation to the reserves which are at the command of governments and central banks. Countries are strongly divided between surplus and deficit countries. The exchange rates are unstable. The world of free financial flows was originally created by the United States who then had reason to think that it was to their advantage. In the meantime the world has changed and, in part at least, the advantage has passed to Japan and Germany. The U.S. is in a hybrid position: It is a creditor to Latin America and a debtor to Japan and Europe. The dollar has still a unique position as a widely accepted and trusted asset with all the advantages which this confers on the U.S. monetary policy, yet it cannot serve as a standard or basis for other currencies; New York is still the first centre, but U.S. does not provide a lender of the last resort. The IMF which prescribes strong doses of restriction to suffering debtors certainly does not fulfill this role. The position of the world is thus in some respects not unlike that of the early thirties when, as Kindleberger reminds us, there was no financial leader (England no more, the U.S. not yet ). The financial health of the world is watched over and policies are coordinated by a group of ten who meet every quarter of a year when they have their photograph taken. This unstable position in the international field is not unconnected with the national scene where everywhere the financial sector has gained in weight and influence and has been - especially in the U.S. - the instrument of tremendous structural changes and of shifts of power and wealth. The process in which this is being brought about has been justly called the Casino Society. The result of it is a tremendous pile of debts in the corporate sector, due to the replacement of shares by junk bonds, a process which offers a certain parallel to the indebtedness of the development countries (the parallel has been drawn by G.P.Brockway in Challenge May-June 1989 ).Altogether our world seems to be dominated not only by finance, but more specifically by short run speculation. Autonomous economic policies are called in question by lack of controll over interest and exchange rates and over capital movements. II. What are the consequences of the tax which the authors, following Tobin, propose to levy on all transactions on the foreign exchange market? The question is hypothetical for we have not experience with such a tax. We can answer it with some confidence as far as the relation between the quotations of the exchange rate in different places is concerned. If the tax were 1/2 p.c. in Germany the price of the dollar in New York in terms of DM might be up to 1/2 % higher or lower than its price in Frankfurt. Like the gold points the tax establishes a certain range of freedom where arbitrage would not work. (I assume in the context that the transaction costs are negligible). .If the price in the home market can diverge by a certain amount from that abroad this will to the same extent also permit a divergence of interest rates, because the arbitrage will not be able to equalise completely the interest on loans in, say, dollars in the two places. If the tax were variable and could be quickly adjusted then it might conceivably be used to shield the country in question against a change in interest rate in some other country which might otherwise force the first country into following this change. This would indeed constitute a rather powerful means of protecting a country's

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