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Mundell is "theorising" out of his ass. "Flexible" labour markets are completely unnecessary for a working currency union, and government deficits are neither here nor there - they simply have nothing to do with the ability to maintain a fixed exchange rate. Trade imbalances have something to do with the ability to maintain a fixed exchange rate, but the government budget outcome just tells you how the balance of trade is divided between the public and the private sector.

Transfers are, of course, necessary, but that is not difficult - just politically unpalatable for Mundell. Labour mobility helps, but is not essential. Hard caps on government budget outcomes is either evil or idiotic, depending on whether the policymaker who proposes it is acquainted with basic Keynesian fiscal stabilisation or not.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Dec 13th, 2010 at 11:18:07 PM EST

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