Calomiris in addition to gummy prices

Charles Calomiris has a really interesting Forbes oped on Greece , alongside a much deeper insight.

My proposal begins alongside authorities activity to write downward the value of all euro-denominated contracts enforced inside Greece. This “redenomination” would brand all existing contracts – reward , pensions , deposits , as well as loans – legally worth exclusively , state , 70% of their electrical flow nominal value. This policy would kill several birds alongside 1 stone. It would significantly cut down pensions , relieving financial pressure level as well as satisfying troika demands for financial sustainability. It would arrive at so inward a way that would too mitigate the purchasing powerfulness consequences for pensioners , because an across-the-board redenomination would lower prices throughout the economic scheme , making the reduction inward nominal pensions to a greater extent than bearable. By applying redenomination to deposits as well as loans , banks’ wellness would live revived – their loans would straightaway live payable as well as thence to a greater extent than valuable , as well as their cyberspace worth would consequently rise. The 30% wage reduction would farther cut down financial problems as well as brand Greek producers competitive , as well as operate every bit an “internal devaluation” to heighten need for Greek products as well as tourism. Most importantly , this internal devaluation – yesteryear solving the problems of financial deficits , non-competitiveness as well as banking concern insolvency – would inspire confidence inward Athens’ powerfulness to remain inside the eurozone , which should convey deposits dorsum into the banking organisation to fuel a rebirth of lending.

I retrieve this is almost one-half correct , but a really expert sentiment lies inward here.

"an across-the-board redenomination would lower prices throughout the economy"? Not necessarily. Why would whatever store lower prices only because it gets to lower reward as well as rent? Prices are non a "contract."

Thus , the redenomination should in all likelihood come upwardly alongside a (say) 1 calendar week cost control. Every cost must live lowered 30% over what it was the previous twenty-four hr menstruum , for a calendar week ,  Just long plenty for each store to encounter that its competitors as well as suppliers has too actually lowered prices.  Then stores tin move arrive at what they want.

The deeper number hither is only what is the cost as well as wage stickiness that so infects macroeconomic thinking. Why is "internal devaluation" yesteryear cost as well as wage adjustment so much harder than "external devaluation" yesteryear telephone substitution charge per unit of measurement adjustment? Our formal models receive got costs of changing prices. Yet the actual costs of changing prices are tiny.

I retrieve a "coordination problem" is to a greater extent than likely. The bakery doesn't desire to lower his cost because he soundless pays the same cost for wheat as well as yeast; the farmer doesn't desire to lower his cost because he pays the same cost for fuel , as well as so forth. This spider web of prices is of course of report thousands of times to a greater extent than complex than that story. That's why it takes so long for everyone to grip on lower prices together.

At times , all the same , prices as well as reward arrive at alter , overnight , alongside no cost at all. When countries bring together the euro , every store changes cost -- as well as the symbol adjacent to it -- overnight. That fact lonely should enjoin us that bill of fare costs , though a prissy formalism , are non the existent microeconomic foundation of cost as well as wage stickiness. And at that topographic point is a potential piece of work for a authorities to coordinate cost changes.

What Charles is proposing , so , is precisely the same kind of overnight cost as well as wage alter that happened on admission to the euro. If you lot retrieve prices as well as reward are "overvalued" inward Hellenic Republic , as well as a "devaluation" is all it takes for Thessaloniki to offset exporting Porsches to Stuttgart , so an overnight , coordinated , cost as well as wage alter is a really prissy choice policy that nosotros powerfulness offset taking to a greater extent than seriously.

This is a combat of a "thesis topic" suggestion. I retrieve nosotros require a model of cost stickiness every bit a coordination failure that is every bit uncomplicated as well as tractable every bit the touchstone , but imitation , Calvo fairy or bill of fare cost models. Coordination failure models powerfulness too final result inward the kind of backward-looking stickiness that Phillips curves inward the information seem to show.

Why only a week? Well , the macroeconomic presumption hither is that Hellenic Republic is suffering to a greater extent than or less kind of "imbalance" or "overvaluation" or "sticky wage." If that's correct , 1 calendar week at the correct prices as well as reward should stick. Each private store or somebody would so live reluctant to heighten prices without the others going along. If prices saltation correct dorsum upwardly in 1 lawsuit again afterwards a calendar week , all the same , without the aid of authorities coordination , so nosotros weren't so imbalanced to start alongside , as well as the work is actually structural non monetary.

I rather suspect that tourist prices are laid yesteryear contest alongside Sicily , non local wage stickiness , but it would live interesting to see. Prices of imported goods volition too probable saltation correct dorsum up. Fine.

Charles doesn't shout prices , but he does shout debts. This is a lot harder , every bit a debt "redenomination" is non only a method to solve a coordination work as well as lower all prices as well as reward relative to German linguistic communication ones going frontward , it is a huge transfer of wealth as well as a technical default.

If you lot run a java store as well as charged two euros for a cappuccino yesterday , having all the java shops alter to 1.5 euros overnight (for a week) is 1 thing. But changing the mortgage payment is another. One is a price. The other is a default.

Charles sneaks off into the economical passive vocalisation hither  "By applying redenomination.." which is e'er a sign of problem ahead.  Most lenders , specially international ones , volition become direct to courtroom on that one.

I too arrive at non follow how "applying redenomination to deposits as well as loans , banks’ wellness would live revived – their loans would straightaway live payable as well as thence to a greater extent than valuable , as well as their cyberspace worth would consequently rise." Before redenomination: Assets: l euros mortgages , l euros greek authorities bonds. Liabilities: 99 euros deposits , 1 euro equity. After redenomination: all numbers cutting yesteryear 1/3. How is the banking concern whatever healthier? All ratios (capital , leverage) are the same.

So I retrieve the proposal has the correct spirit but a slightly incorrect focus.

Charles continues

Although redenomination would achieve a swell bargain , yesteryear itself it is non enough. As uncomplicated economical theory (formally known every bit the the Balassa-Samuelson Theorem) tells us Hellenic Republic volition exclusively live a feasible long-term fellow member of the eurozone if it tin move check the long-term productivity increment of Deutschland as well as other members. To arrive at so requires it to undertake major reforms to task laws as well as contest policies , as well as to wage a credible state of war on corruption. 

I disagree pretty strongly here. If "eurozone" agency a complimentary merchandise understanding as well as a mutual currency , that tin move hold upwardly only fine alongside vastly unlike productivity levels (it already does) as well as consequently unlike productivity increment rates. Productivity across locations inward the U.S. of A. of America varies enormously. Ricardo as well as absolute vs. comparative reward was all almost complimentary merchandise nether the gilt touchstone (common currency) betwixt countries of unlike "competitiveness" or productivity levels. Perhaps he agency eurozone every bit an expanse that promises financial transfers to create an equal touchstone of living everywhere. If so , expert luck.

But that Greece's exclusively hope to avoid becoming the adjacent Venezuela is  "major reforms to task laws as well as contest policies , as well as to wage a credible state of war on corruption" is spot on. In or out of the euro , inward our out of the European Union , inward the destination coin as well as merchandise liberty are minor parts of economical growth.