Fundamental Disequilibrium Research Articles

Accelerate or brake?—The connection of credit gaps and economic disequilibrium

AbstractCredit supply shocks significantly aggravate the impact of economic recessions. Understanding the underlying reasons why credit market shocks occur and detecting the market turbulences in time can give a decision support tool for the economic policy to intervene more efficiently on the market and to reduce the effect of economic downturns. The goal of the current article is to investigate the factors that signal possible credit shocks by analyzing the quarterly data of 17 European countries over the period 1995–2021. The focus of the article is on the credit given to the nonfinancial corporations. In our analysis, we have built on the credit gap methodology by determining the deviations of the lending activity from its trend, and then we have modeled these credit gaps using fundamental macroeconomic indicators, such as the balance of the current account, the ratio of short‐ and long‐term capital investments and government debt. Our conclusion is that in the presence of fundamental disequilibrium in the economy excessive lending creates positive credit gaps that increase the chance of negative credit market shocks. According to our new findings, the existing credit gap methodology can be improved by incorporating real economic factors; slowing long‐term capital investment and increasing the deficit of the current account signal the emergence of a credit gap. We found significant regional heterogeneity as in Southern European countries, and the credit gaps were more substantial. Among the investigated macroeconomic factors, the governmental indebtedness was especially high in these countries suggesting that countries with high public debt rates are more prone to develop credit gaps.

Covid-19 Pandemic As An Excuse Of Non-Performance Of Contractual Obligations From Transnational Law Perspective

Background: The outbreak of COVID-19 has greatlyinfluenced the world’s economic situation. Its lethal potential as well as its drastic effects on international contracts, would lead to the post-pandemic litigation and arbitration questioning the applicability of the doctrines of force majeure, frustration, and hardship as an excuse of non-performances of several contractual obligations amidst the COVID-19 pandemic. Purpose: This research will discuss on the matter of the applicability of the aforementioned doctrines and its subsequent effects to excuse a non-performing party. Methods: This research uses normative juridical method with descriptive analytical approach by researching library materials and secondary data. Results: Invoking the force majeure clause requires the event to occur externally beyond the obligor’s control; the event and its consequences could not reasonably avoided or overcome by the obligor based on an external event not by their own fault. On the other hand, contracts can be frustrated under several bases, such as changes in the law, supervening illegality, outbreak of war, cancellation of an expected event, and abnormal delay outside what the parties could have reasonably contemplated at the time of contracting. While the requirements of hardship encompass the occurrence of an event for which the obligor has not assumed the risk, non-foreseeability, unavoidability and the causing by the event of a fundamental economic disequilibrium in the contract. Conclusion: To apply the doctrines of force majeure, frustration, and hardship as an excuse of non-performance of contractual obligations during an unprecedented event such as the COVID-19 outbreak, it must be assessed on a case-by-case basis of the language of the contract in light of the governing law and the circumstances of the parties’ commercial relationship.

The future of the museum in the twenty-first century: recent clues from France

ABSTRACTThe vast majority of public funded museums are suffering severe and continuous declining resources. But we can wonder whether the economic crisis explanation is the sole credible culprit or if the current situation reveals a more fundamental disequilibrium. The traditional tripartite basis of the museum – the collection itself, its educational function, and the professionalisation of competences – is increasingly destabilised, and an increasing number of museums are asked to become ‘cultural centres’ and social capital producers. Considering the recent evolution of French museums, we describe three main economic models that can sometimes overlap. The ‘Branding Museum’: in this case museums are increasingly looking for new kinds of income-generating activities, such as the merchandising of by-products, publication of written or audio-visual materials, research and consulting services offering, and more broadly, exploiting their intellectual property rights. The ‘Event-driven museum’: such museums organise cultural events, exhibitions, concerts, conferences, and so on in the hope of attracting both faithful and new visitors, and thus remaining financially sustainable. The ‘Empowering local community museum’: resource-poor in tourism and funding, such museums are seen at best as public spaces for local meetings and debates, or as hosting places for art events of purely local interest, on the increasing basis of voluntary work.

Can Europe Prosper Without the Common Currency? A Historical Perspective

The Eurocrisis displays an astonishing similarity to the causes of the Great Depression in the form of massive current account imbalances, destabilising capital flows, financial fragility, and the commitment to defending a fixed exchange rate arrangement by means of austerity and internal devaluation. From the interwar economic and political disaster Europe eventually drew the lesson that internal balance had to enjoy priority over external balance, giving rise to a three-decade long period of unprecedented economic growth after the Second World War. As Europe has again stumbled into many of the policy errors that caused the Great Depression, it will need to relearn some of these lessons. In particular, the paper suggests that Europeanisation has gone too far and that rather than completing the monetary Union, Europe's prosperity and political stability would be better served by compartmentalisation of financial markets, vertical industrial policies and an escape clause in the common currency allowing for temporary exit in case of fundamental disequilibria.

Reflections on new currency solutions

The Washington agreement of last December achieved an important result in one respect: through an adequate realignment of major currencies it corrected the overvaluation of the dollar, thus setting in motion a process of reabsorption of the fundamental disequilibrium between the U.S. and its main trading partners, to be completed in two years or so. Therefore, it has fully succeeded in solving the immediate problems brought to the surface by the May-August exchange crisis. However, no advance has been made, beyond the identification of the main issues, in solving the structural crisis which has plagued the international monetary system since the beginning of the sixties. The present article examines the adjustment, confidence and liquidity problems of the international monetary reform, the second activation of SDRs and intra-EEC monetary relations.

Real Exchange Rate Changes and the Trade Balance: The Evidence from Pakistan

This study uses quarterly data from July 1980 to June 2006 to explore the relationship between changes in real exchange rate and the trade balance of Pakistan. Applying the Auto Regressive Distributed Lag (ARDL) approach to cointegration, we examine the existence of a possible long-run relationship. We find the following: (1) a long-run relationship between the series exists, and (2) the coefficient of elasticity is negative and statistically significant, which does not support for the J-relation. Given this, the policymakers should take a conservative approach in using currency devaluation to cure the fundamental disequilibrium in the balance of payments. It is likely that such policy may not produce the desired outcome—i.e., the trade balance may not improve.

Macroeconomic constraints to growth of Brazilian economy

In the last 20 years the Brazilian economy averaged an annual growth rate of only 0.7% in per-capita terms, well below the value of about 3% it reached between 1950 and 1980. Performance was also below that of similar emerging countries like South Korea, China, Mexico and Chile. If it were to continue at such a speed, Brazil would need about 100 years to double per-capita income, and even so it would never reach anything near the standard of living of the present developed countries. The main factors for low growth in the last 20 years are well known. We can pinpoint two fundamental disequilibrium in the economy, which in a long run perspective account for its semi‐stagnation. On one side, there is a progressively increasing internal disequilibrium, as a result of the attempt to cope with inflation via mechanisms of price and wage indexation, which have contributed to maintain inflation high and with a persistent tendency to accelerate. Only the “Plano Real” managed to curbe down the inflationary tendency, at least partially. At the same time, domestic disequilibrium was reduced by means of a monetary policy that was excessively conservative, to the effect of keeping the country’s rates of interest among the highest in the world, at the same time as generating the currency ap‐ preciation in the period between 1994 and 1998. The default on the external debt declared in 1987, exposed the extent and weight of Brazil’s external disequilibrium. This latter was the result of a policy that had excessively relied on external savings and the current account as instruments to finance economic growth in the second half of the 1970. The current account deficit, practically eliminated in the second part of the 1980, was to reappear dur‐ ing the first mandate of Fernando henrique Cardoso, as a result of the adoption of an exchange rate anchor. The correction of such disequilibrium could only be real‐ Brazilian Journal of Political Economy, vol 31, no 5 (125), pp 874-879, Special edition 2011

Adjusting the U.S. Current Account Deficit: What Role for the Dollar, Euro and Yen?

ABSTRACT The world economy is characterised by a three-polar structure between the United States of America, Europe and Asia and fundamental disequilibria, revealed by the accumulating current account deficit of the United States. What role can exchange rate policies play in stabilizing the world economy? This paper argues that the stable exchange rates between Asian currencies and the U.S. dollar have made an important contribution to Asia's rapid economic growth. Reducing volatility has lowered risk and uncertainty for investors and the undervalued real exchange level has increased the profitability of Asian investments. But the need to correct the U.S. current account may require policies, which put this successful arrangement into question-with far-reaching consequences for growth worldwide. As a solution to this problem emerging Asian economies, including China, may want to consider re-pegging their currencies to a basket, which contains mainly the Euro and the Yen. This would preserve the benefits of stable exchange rates for Asia and avoid an excessive appreciation of the Euro, while giving the United States of America the flexibility to adjust its external imbalance. Such a choice is facilitated by the relative weight of Europe, Asia and the United States in Asian trade flows.

The Evolving International Monetary Order and the Need for an Evolving IMF

Earlier this year, Martin Wolf of the Financial Times used his column pose an interesting question: If the International Monetary Fund did not exist, would we invent it? (1) His answer, at the risk of oversimplifying, was no, because today's world does not have the courage and vision create powerful multilateral institutions. We are not sure that we agree with his answer or with his reasoning for it, but we are sure that this is exactly the kind of question that needs be asked. What we would like do for the purposes of this article is take a slightly different approach Wolf's question. More specifically: If the IMF did not exist and we set out create it from scratch, what would be its role in the global economy? What should an IMF do, and what should it not do? Some might suggest that these very questions are being asked and answered right now within the IMF, in the context of the internal strategic review initiated by Managing Director Rodrigo de Rato. De Rato is be commended for taking on this task. But it seems us that the review, while important and useful, has been focused on finding better ways for the existing institution do what it already does. We would like approach this issue from a more basic level and ask: What is required for the IMF evolve into the best possible institution, designed for the global economy of the twenty-first century? For that evolution take place, the key shareholders of the institution need show leadership and vision. To set the stage for the discussion that follows, we will briefly review how and why the IMF came into being, and briefly consider how the global economy has evolved since the founding of the IMF. Next we will elaborate on what we see as the role for the IMF in today's global economy, and then discuss the changes that would need take place in order for the institution of today evolve into the ideal IMF. The Rise and Fall of Bretton Woods Let us begin by going back sixty years the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire. The delegates--representing forty-five nations--were nothing if not ambitious. They ended up creating two (almost three) international institutions. There was the International Bank for Reconstruction and Development--now known as the World Bank--charged with providing aid for the rebuilding of Europe. Delegates also came close creating the International Trade Organization, which was be dedicated keeping protectionism in check and facilitating freer international trade in goods and services. This organization eventually came into being a couple of years later as the General Agreement on Tariffs and Trade, which subsequently morphed into the World Trade Organization. And, of course, the third institution was the International Monetary Fund. The IMF was meant create an international monetary order that would allow trade flourish again and postwar reconstruction take place. The institution that these delegates created was very much a creature of its time, and its roles and responsibilities reflected the experience of the Great Depression. The great policy failure of the 1930s was the competitive beggar-thy-neighbor currency devaluations which nations resorted. The Bretton Woods delegates sought prevent countries from adopting such policies. The first of the Articles of Agreement that govern the IMF called on it to promote international monetary co-operation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. Exchange rates were be fixed and were be adjusted only in the case of fundamental disequilibrium. The delegates also correctly identified liberalized trade in goods and services and the promotion of economic specialization as crucial for the creation of wealth. …

Currency Misalignments and Trade Asymmetries among Major Economic Areas

Large exchange rate misalignments are the most serious asymmetry in the world economy today because they interfere with international specialization and trade based on comparative advantage, and it leads to protectionism. The paper examines the extent to which these asymmetries are a reflection of fundamental disequilibria in the world's major economic areas (the United States, the European Monetary Union, Japan and China), rather than being simply exchange rate problems. It also examines the type and extent of the structural measures required in each of the major economies or areas to adequately deal with the problem currency misalignments.

Reform of Corporate Governance in the EU

This article provides a critical overview of the latest spate of European Commission proposals on the reform of corporate governance in the EU. The authors suggest that most of the proposed measures are simply reactions to recent corporate governance fallouts and new legislation in the US. This article supplies evidence that the EC’s measures are in fundamental disequilibrium with the core and supporting institutions of corporate governance in the EU. The authors conclude that the EU should, rather than embark on a complex exercise in harmonisation, build on the strength of its diversity and imitate the US where it is warranted.

Reconsidering the Debate Concerning the Cartesian Cogito

This essay will consider some of the issues that have been posed by Foucault and Derrida concerning their disagreement on the Cartesian cogito. I will argue that what is at stake this debate is the question of where exclusion takes place and what exactly its nature is. As we shall see, Derrida's argument is that exclusion is connected with certainty and objectification, and this is the meaning of the discussion of hyperbolic doubt Descartes. The sheltering of the cogito from hyperbolic wanderings amounts to an act of mastery which is unjustifiable. The debate also reflects a difference between the two philosophers as far as historicity and critique are concerned. Nevertheless, it shows a common theme that runs throughout their philosophy; that is, the dangers the movement of thought to function within an economy, along with the different levels of inclusion and exclusion the realm of meaning its relation to what does not yet belong to it. Both thinkers want to disrupt totality, and thus emphasize the opening of thought as opposed to its closing upon itself, as it relates itself to its objectifications as total and absolute determinations. The debate began with Derrida's critique of Foucault's first book on madness.1 Derrida's critique focused on two main points: on Foucault's reading of Descartes' First Meditation the introduction to his book, and on some methodological and philosophical issues dealing with the whole project of Foucault's analysis. His discussion of Descartes concentrates on the passage from the example of madness to the example of dreams, and how this relates to their status, continuity, or rupture Descartes' system. Descartes' First Meditation is about doubt as far as the senses are concerned. As Descartes says, though we learn through the senses, we have been deceived by them as well and this constitutes sufficient reason not to trust them at all. Nevertheless, he speculates that there are things that we cannot have any doubt about. example, there is the fact that I am here, seated by the fire, attired a dressing gown, having this paper my hands and other similar matters.2 Only persons devoid of sense who think they are kings when they are poor can have doubts about these things. Descartes continues: But they are mad, and I should not be any the less insane were I to follow examples so extravagant.3 However, Descartes says the next paragraph, when we sleep and dream we experience things that those who are insane do when they are awake. For example, we may dream that we sit next to the fire while reality we are bed. Though, he remarks, it is true that what happens our waking moments appears more clear, there are not clear indications on the basis of which we can distinguish the status of sleep from that of wakefulness. At this, Descartes says, he is lost astonishment; And my astonishment is such that it is almost capable of persuading me that I now dream.4 According to Foucault's reading, Descartes' analysis, madness and dreams or sensation have a different status. As he put it, in the economy of doubt there is a fundamental disequilibrium between madness on one side and error on the other. Their situation is different relation to both truth and inquiry; dream and illusion are surmounted through the very structure of truth; but madness is excluded by the subject who doubts.5 Derrida challenges this reading of Descartes. According to Derrida, Descartes does not exclude madness from the interiority of thinking. Thus, the relation of madness and dreams to sensation Descartes' text is not one of philosophical and methodological rupture. Derrida argues, on the contrary, that Descartes is not moving from the example of madness to the example of dreams, because he decides that madness should be excluded from the possibility of thinking. Rather, the gesture is a pedagogical and a rhetorical one. Therefore, where Foucault finds a definite conclusion, Derrida sees the continuation of the issue. …

Defining fundamental disequilibrium: Keynes's unheeded contribution

The Bretton Woods agreements set up the post‐war monetary order on the basis of fixed exchange rates and autonomous national economic policy. Changes in parity were allowed in the case of fundamental disequilibrium, but this concept was not defined, promoting a lengthy but sterile debate. This paper, after reviewing the main features of the discussion, analyzes Keynes's overlooked contribution, which helps to clarify the issue at stake.

Intertemporal Balance, Sustainability and Efficiency of the Exchange Rate Mechanism

Under the assumption that the balance of payments must satisfy the expected intertemporal balance, this paper seeks to establish a pre-condition for a crisis of the Exchange Rate Mechanism (ERM). Proposing that non-stationarity of the growth rate of assets is evidence of a violation of expected intertemporal balance, we calculate Augmented Dickey-Fuller statistics of the growth rate of foreign exchange reserves prior to the ERM crisis in September, 1992 for member states. In all, but one, of the crisis experiences, there is no evidence of a violation of intertemporal balance prior to the month of the crisis. However, the persistent violation of intertemporal balance by Italy prior to the crisis reflects that the fundamental disequilibrium matters to the viability of the ERM. With no evidence of ef ficient allocation of the foreign reserves within the member states, the ERM is exposed to attack by speculators. (JEL Classification: F31, F33)

The effect of real exchange rate changes on output: Jamaica's devaluation experience

AbstractDeveloping economies have relied upon devaluation to assist in the correction of fundamental disequilibrium in the balance of payment. As posited by conventional economic theory and proven by empirical research, a devaluation improves the balance of payments by reducing the demand for imports and increasing the supply of exports. However, recent research on devaluation insists that correction of the trade deficit occurs concurrently with income reduction. Using a three‐market Keynesian model, the conclusion reached in this research on the Jamaican economy is that a devaluation is contractionary in the short run and expansionary in the long run.

On Designing an International Monetary System

I agree with Paul Davidson's assessment of the positive role that the Bretton Woods system played in nurturing world prosperity during the 1950s and 1960s, and I have indeed analyzed elsewhere the way in which the rules of the intemational system helped to support economic performance (Williamson, 1985). I argued that a Keynesian policy assignment of demand management to continuous internal balance and the exchange rate to medium-run external balance was implicit in the Bretton Woods system (notably the requirement that the exchange rate be changed in the case of a fundamental disequilibrium but not otherwise).' This had the advantages of avoiding a waste of resources on unnecessary unemployment, of preventing the competitive use of exchange-rate policy, and of desynchronizing the business cycle internationally, while building in an early warning signal of emerging inflationary pressures and providing an automatic stabilizer that would limit the damage caused by excess demand (in terms of a buildup of inflationary momentum) until needed deflationary measures could become effective. All these good features were lost when Bretton Woods was replaced by the intemational monetary nonsystem in 1973. But this positive assessment should not lead one to overlook the deep flaws in the Bretton Woods system. It worked as well as it did for something over a decade because of a series of happy accidents: liquidity

External Adjustment and the Optimal Demand for International Reserves

This paper provides a theoretical underpinning for the major determinants of optimal reserve demand in the case where fundamental disequilibrium constitutes a key element governing reserve management. Emphasis is given to the role of reserves to smooth the process of economic adjustment by financing part of external disequilibrium, as well as to meet temporary random fluctuations in the excess demand for foreign exchange. The analysis incorporates this financing aspect of reserve holdings into a simple inventory model and discusses the optimal stock of reserves in the context of the optimal mix of adjustment and financing.

Prebisch’s ideas on the world economy

This article identifies three main phases in the evolution of Prebisch’s ideas on the international economy. During the first of these, he outlined his concept of the centre-periphery system and its role in the fundamental structural disequilibria of peripheral countries, with particular attention to their propensity to deficits and indebtedness and the trend towards a deterioration in the terms of trade of the primary commodities they exported. He also brought out the repercussions of their narrow specialization in primary activities, associated with adherence to the principle of static comparative advantage.

Price, output, and exchange rate movements in the open economy

Since the advent of managed floating it has come to be accepted as a stylized fact that short-run deviations from purchasing power parity are both substantial and persistent. Two explanations of these deviations have been advanced in the literature. One emphasizes the role of changes in non-traded goods prices while the other views deviations from purchasing power parity as being due to sticky goods prices and slow adjustment of goods markets. This paper presents yet a third possible explanation of deviations from purchasing power parity — they may be necessary in order to facilitate the relative price changes that are required to maintain equilibrium in the face of unanticipated shocks. In addition, the issue of exchange rate overshooting is addressed. Whereas the sticky price models view exchange rate overshooting and exchange rate volatility as symptoms of some fundamental disequilibrium, the perspective taken here is that these events are, in principle, compatible with a world in which all markets clear continuously.

Flexible Exchange Rates: Old vinegar in New Wine?

Few experiments began with such exuberant expectations and dire predictions as the introduction in 1973 of flexible exchange rates. The literature on both sides is familiar. The exuberants, almost all academics, had posited that true flexibility would permit avoidance of trade and capital controls, provide more independence for monetary policy, help to insulate domestic macroeconomic policy from external shocks, and potentially provide greater exchangerate stability than fixed but adjustable parities (Friedman, 1953; Johnson, 1969; Machlup, 1969). The Cassandras, mostly officials and traders, predicted trade disruption, erratic capital movements (resulting in overshooting and undershooting of rate changes), and a loss of internal discipline leading to higher levels of inflation (Coombs, 1976). The officials controlled the policy-making machinery, and flexible exchange rates came not by design but by default. Give credit to events in the real world rather than to learned persuaders. The shift was accompanied by requiems on the end of the Bretton Woods system, implying that the heart of the International Monetary Fund (IMF) was embodied in the undefined phrase fundamental disequilibrium, when, under the old rules, parities could be adjusted. Although its original exchange rules have passed away, the legacy of Bretton Woods (the IMF) is not dead, although it is operating in a different milieu. If anything, the role of the IMF has increased in recent years as a result of the quantum leap in current account surpluses and deficits. It is clear now that both sides had overstated their positions, the one on the benefits of flexible exchange rates and the other on its costs.