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Guest Contribution: “Oceans Apart? China and Other Systemically Important Economies”



Today we are pleased to present a guest contribution written by Hongyi Chen, Senior Advisor at the Hong Kong Institute for Monetary and Financial Research, and Pierre Siklos, Professor of Economics at Wilfrid Laurier University.

There is a long tradition in economics suggesting that each country’s economic policies should be governed by the motto: “keep your own house in order”. For example, the textbook depiction of a flexible exchange rate is that it acts as an absorber of external shocks thereby allowing each country to independently set monetary policy. Indeed, this can explain why small open economies such as Canada have supported floating exchange rates the longest.  However, even policy makers in Canada have recognized for some time that exchange rate shocks produce distinct effects on goods markets than in financial markets (Dodge 2005).


Of course, the extent to which international linkages are tight or loose may be critical but, under certain assumptions, Obstfeld and Rogoff (2002) demonstrated that the gains from monetary policy coordination are small. More recently, it is the revival of interest in differential monetary policy conditions (e.g., see Howorth et. al. 2019), prompted in large part by the finding that the neutral real interest rate has fallen in large and systematically important economies (e.g., U.S., Eurozone, U.K., and Japan; see Holston, Laubach and Williams 2017), that has led to renewed interest in the policy coordination question. Clarida (2018) argues that, if the decline is truly global and policy rates are partly set according to ones in foreign economies, substantial economic benefits from coordination might accrue. But there are potential negatives to policy coordination in the form of potential losses in central bank credibility and new challenges to central bank communication (e.g., see Bordo and Siklos 2016).


In “Oceans Apart? China and Other Systemically Important Economies” we explore the extent to which the G4, which consists of the US, the Eurozone, Japan, and includes China, as a block contributes to global economic performance. Panel factor vector autoregressions (VARs) are used because these seem well suited to exploit cross-border links and assess the relative impact of domestic and global factors. We find that domestic and global shocks can reinforce each other. Next, we conclude it is essential not to treat China as an exogenous entity in global macro models if we are to better understand how shocks can interact with each other in the G4. For example, a tightening of domestic monetary conditions results in a global deterioration in real economic conditions because spillovers can reinforce the tightening among the systemically important economies. This same shock also leads to global tightening of financial conditions. Indeed, almost 60% of the variability of the global monetary shock can be explained by shocks in a global commodity factor and real economic factor. However, the findings are more muted when shocks from China are treated as exogenous. We conclude, at least empirically and for the sample considered, that there are net benefits from greater policy coordination.


How do we reach this conclusion? A couple of examples from the paper are used to illustrate the point. Readers are asked to look at the paper for additional calculations and estimation details.

Two figures below show factor scores for the G4 estimated using two different approaches, namely based on the full sample and using a time-varying method. The first figure shows the results for the real economy. A higher value is akin to an expansion in economic activity; a lower value represents, of course, the opposite. Whether full sample or time-varying estimates are used the message is broadly the same. There is considerable commonality in real economic conditions in the four economies.

Figure 1 Real Economic Conditions (i.e., Factor) in the G4. The shaded areas indicate recessions as estimated by the NBER (US), the JCER (Japan), the CEPR (Eurozone), and growth slowdowns in China (ECRI).

Figure 2 Financial Conditions (i.e., Factor) in the G4.

Matters are considerably different when financial conditions are examined. A rise signifies a tightening of conditions while a decline implies looser financial conditions. Now, not only can time-varying and full sample estimates be quite different but there is far less commonality in financial conditions across the four economies. We also find similar results when observable macroeconomic time series are used instead of the factors. Other stylized facts and econometric estimates result in similar interpretations.


When we add other factors (a monetary and a commodity factor), not to mention examining the difference between the case where shocks from China are exogenous versus a model where shocks from China are endogenously related to the rest of the G4, the picture that emerges from the panel VAR estimates is that spillovers, especially the global component of shocks, amplify domestic shocks. Incorporating a role for commodity prices and financial conditions also raises the relative importance of the global component of shocks when China is treated as a systematically important economy. The finding that China, when treated as part of the ‘club’ of systemically important economies, amplifies the impact of various shocks, notably real and financial shocks, is perhaps not surprising. However, differences from the impulse responses obtained when China is viewed as contributing only exogenously to the interactions between real, financial, and monetary shocks among the U.S., Japan, and the Eurozone suggest that transmission mechanisms in large economies have been significantly impacted by the rise of China as a global economic power.



The link to the paper:



Bordo, M., and P. Siklos (2016), “Central Bank Credibility: An Historical and Quantitative Exploration”, In Central Banks at a Crossroads: What Can We Learn From History? Edited by M.D. Bordo, Ø. Eitrheim and M. Flandreau (Cambridge, Mass.: Cambridge University Press), pp. 62-144.


Clarida, R. (2018), “The Global Factor in Neutral Policy Rates: Some Implications for Exchange Rates, Monetary Policy, and Policy Coordination”, BIS working paper No. 732, July.


Dodge, D. (2005), “Monetary Policy and Exchange Rate Movements”, remarks by the Governor to the Vancouver Board of Trade, 17 February, available from


Holston, K., T. Laubach, and J. Williams (2017), (2017), “Measuring the Natural Rate of Interest: International Trends and Determinants”, Journal of International Economics 108 (S1): S29-S75.


Howorth, S., Lombardi, D., and P. Siklos (2019), “Together or Apart? Monetary Policy Divergences in the G4”, Open Economies Review 30 (April): 191-217.


Obstfeld, M. and K. Rogoff (2002), “Global Implications of Self-Oriented National Monetary Rules.” Quarterly Journal of Economics 117: 503-36.

This text written by Hongyi Chen and Pierre Siklos.

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Inequality, morals & Marxism



One thing this crisis is demonstrating is that there are plenty of bad employers: the Guardian and Labour List both have lists of them. Another is that, as Sarah O’Connor says, “the people we need the most are often the ones we value the least.” As Paulo dos Santos says, society “grossly undervalues” care work and other jobs essential to fighting the pandemic.

Both these facts show the need for a Marxian perspective.

First, we must ask: why are care workers and others so underpaid? It is certainly not because they lack moral desert. Nor is it because they lack skills: caring demands immense “soft skills” such as patience, discipline and an ability to get on with people as well as physical ones. From a purely technical point of view – that is, one divorced from socio-economic factors – it would be cretinous to claim that a nurse is less skilled than the grifter opinion-mongers who pollute the media.

Instead, care workers are badly paid because they lack power. Some of this is the result of longstanding norms: work done by women and immigrants has long been stigmatized, devalued and regarded as “unskilled.” But another part of it is simply a lack of outside options and hence of bargaining power. As Paulo says:

Market wages and conditions reflect the precarious social positions and sometimes utter desperation of those who typically perform them.

The point, of course, broadens. As Rick said, “all pay is, ultimately, a function of power.” It is trivially true that labour is the source of value, as this lockdown is reminding us. But how that value is distributed depends upon power. Your “skills” are only one element in your power: parlaying these into a decent income is another matter.

Power also lies behind the fact of bad employees. Big firms have a degree of monopoly power: they wouldn’t be profitable if they did not. Good employers use this power to share rents with workers. Bad ones, however, use their monopsony power to jack up the rate of exploitation.

What should be done about this? Some leftists think we need to make a moral case for paying key workers more and that we need to shame bad employers into improving.

Moral exhortation, however, might work sometimes but it is not enough. We do not reduce burglary or murder merely by appealing to criminals’ better nature. We use force as well. Similarly, we won’t abolish poverty pay and bad working conditions merely by asking nicely.

We must instead realize, as Marxists do, that material conditions matter. As the late great Norman Geras wrote in his essay Marxism and Moral Advocacy, ethical analysis and advocacy:

Need to be done with some thought for the social and material conditions of attaining any given ideals, the means of and agencies for attaining them, [and] the social interests and movements that can conceivably be coupled with or become attached to the ideals and imperatives in question.  

It is easy to see how we might abolish the material conditions that give rise to inequality, bad employers and poverty wages. Macroeconomic policy must be aimed at ensuring over-full employment. We need strong trades unions and a high citizens basic income to empower workers to reject bad pay and conditions. And government (and local authority) procurement should be used to encourage coops. 

Most social democrats would agree with this. We Marxists, however, have two doubts.

The first concerns how to get there. How do we mobilize the social movements and interests that would deliver a government committed to these, and weaken those that would prevent such a thing? 

The second is that these policies are only stepping stones, part of what Erik Olin Wright called an interstitial transformation (pdf). They will lead to a squeeze on profits. When this happened in the 70s, it led to a backlash against social democracy and to Thatcherism. The challenge is to ensure that it leads instead to socialistic forms of ownership. Historically, social democrats have resiled from this challenge.

This crisis has increased the salience of inequality and injustice. But there’s a huge distance between an issue being salient and it actually being properly addressed. We have little hope of closing this distance without a Marxian perspective.

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From Torsten Slok’s excellent email links:

Jonathan Dingel and Brent Neiman: The places hardest hit by the virus are also the places where most jobs can be done at home.

Also the highest wage occupations are easiest to do at home. Good for GDP, bad for people with low wages.

New York Fed Weekly Economic Index

But it’s not just a fall, it’s also a radical shift in demand. A list of lots and lots of job openings, in all the places you’d guess. The instinct to just pay people to sit at home has downsides.

LA times via Marginal Revolution

They were ready to roll whenever disaster struck California: three 200-bed mobile hospitals that could be deployed to the scene of a crisis on flatbed trucks and provide advanced medical care to the injured and sick within 72 hours.

Each hospital would be the size of a football field, with a surgery ward, intensive care unit and X-ray equipment. Medical response teams would also have access to a massive stockpile of emergency supplies: 50 million N95 respirators, 2,400 portable ventilators and kits to set up 21,000 additional patient beds wherever they were needed.

…in 2011, the administration of a fiscally minded Democratic governor, Jerry Brown, who came into office facing a $26-billion deficit. And so, that year, the state cut off the money to store and maintain the stockpile of supplies and the mobile hospitals. 

… The annual savings for eliminating both programs? No more than $5.8 million per year, according to state budget records, a tiny fraction of the 2011 budget, which totaled $129 billion.

My emphasis. 50 million is a lot. A lesson in what government can do, and I hope will do next time.

Not to rub it in, but Gov. Brown did want to spend $80,000 million on a high speed train, all to lower the average global temperature by about 0.0001 (?) degree in the year 2100. Which is not a personal observation so much as an observation about the probabilities of various events that all of our elite intelligentsia assumed.

Amit Seru and Luigi Zingales want to save capitalism from the cares act. Besides the prospect of direct bailouts to big business, the Fed’s actions are truly gargantuan and under reported. Vastly oversimplifying,  the Fed is prepared to lend about $4 trillion dollars of newly printed money (really newly printed government debt) directly to businesses, and to backstop the entire non-bank financial system. Good or bad? Let us hope it doesn’t come to that.

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Cases and Deaths from Coronavirus Doubling Every Three Days Is Very Bad News Indeed



I confess I am positively unmanned by the every-three-days doubling of reported cases and deaths here in the United States. I had thought that we would see true cases doubling every seven days. And back when reported cases started doubling every three days, I was encouraged, because I thought it meant that we were catching up on testing, and so getting closer to detecting the bulk of the symptomatic cases.

But now it looks like that was wrong: reported cases were doubling every three days because true cases were doubling every three days—that is what deaths tell us was happening to true cases up until three weeks ago. The lack of case curve-bending makes me think that testing is not improving. It makes me think that reported cases are doubling every three days because true cases are doubling every three days.

That means that the Trump administration has only 40% as much time to get its ass in gear as I thought it did.

And that means the chances it will are very very low indeed:

I must confess it had never occurred to me back when China shut down Wuhan that we would simply not test everyone who presented with symptoms—and then backtrace their contacts. It is really looking now as though China—even with its authoritarian blindness fumbling of the intitial response (see Zeynep Tufekci: is going to be studied in the future as a positive model of public health in the 21st century, while the Trump Administration’s reaction—currently on track as the worst in the world in handling coronavirus <>—will be studied in the future as a negative example: Brad DeLong: The Trump Administration’s Epic COVID-19 Failure 'As officials at the US Centers for Disease Control and other public-health bodies surely must have recognized, asymptomatic transmission means that the standard method of quarantining symptomatic travelers when they cross national (or provincial) borders is insufficient. It also means that we have known for almost two months that we were playing a long game against the virus. With its spread more or less inevitable, the primary task was always to reduce the pace of community transmission as much as possible, so that health-care systems would not be overwhelmed before a vaccine could be developed, tested, and deployed. In the long game against a contagious virus, how to mitigate transmission is no secret. In Singapore, which has largely contained the outbreak within its borders, all travelers from abroad have been required to self-quarantine for 14 days, regardless of whether they have symptoms. In Japan, South Korea, and other countries, testing for COVID-19 has been conducted on a massive scale. These are the measures that responsible governments take. You test as many people as you can, and when you locate areas of community transmission, you lock them down. At the same time, you build a database of all those who have already developed immunity and thus may safely resume their normal routine…

#coronavirus #highlighted #orangehairedbaboons #publichealth #2020-03-27

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