Yet for a new country to keep another’s currency is, on its face, an odd decision. It robs a country of many tools of autonomous economic policy: monetary policy, of course, but to a great extent fiscal policy as well, since monetary policy is no longer available to cushion expansionary or contractionary fiscal shocks. If it doesn’t want a euro-style crisis, it will have to run persistent current-account surpluses to accumulate sizable reserves of the anchor currency (much as Hong Kong has), a process that would probably involve deflation, austerity, or both.
Do poor countries really get richer?
For those watching the Federal Reserve’s meeting which ended today, no news was good news. The Fed, as expected, said it would end its bond buying programme (also known as quantitative easing) next month. Many in the market wondered if it would then signal a relatively brisk move to raise interest rates from near zero, where they have been since 2008. It did not: it said rates would stay there for a “considerable time” after bond-buying ended, provided the economy behaves as expected.
The political appeal of currency union and disunion
Some of the most innovative work in development economics focuses on how individuals’ lowly economic position may be perpetuated ( geographical and psychological factors may be important). But, says a new paper by two World Bank economists, the idea of poverty traps may be overblown. They focus on national economies and present some striking statistics.