Comment on David Laidler's "Concerning Currency Unions"

Salin, Pascal A icle Commen on Da id Laidle 's "Conce ning Cu ency Unions" Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik P o ided in Coope a ion wi h: Duncke & Humblo , Be lin Sugges ed Ci a ion: Salin, Pascal (1979) : Commen on Da id Laidle 's "Conce ning Cu ency Unions", Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik, ISSN 0342-1783, Duncke & Humblo , Be lin, Vol. 99, Iss. 1-2, pp. 163-165, h ps://doi.o g/10.3790/schm.99.1-2.163 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/291432 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ Commen on Da id Laidle 's "Conce ning Cu ency Unions" By Pascal Salin* In his pape Da id Laidle ecalls some basic ideas abou cu ency uni ica ion — concei ed as he ixing o exchange a es — he i s one being ha exchange a e changes a e o a nominal na u e. F om ha poin o iew i is no essen ial o choose ixed o lexible a es and he cu ency union issue is mos ly i ele an . In o he wo ds, he e a e no special cos s o a sys em o ixed a es, bu no p ecise eason o choos- ing hem, excep o he sa ing made in he use o money, which — as Da id Laidle says — may be o a second o de o impo ance. This e- la i e unimpo ance o choosing an exchange sys em is, o ins ance, ex- p essed in he ollowing e ms in he OPTICA 75 epo : "Mone a y union would be an ins i u ional o ganiza ion among coun ies aiming a economic union, such as o minimize he ine iciencies inhe en in he use and con ol o money wi hin he union." Such an in e p e a ion o mone a y uni ica ion se s he basic o he pa allel cu ency app oach. F om a heo e ical poin o iew, he e o e, he cos s and bene i s om cu ency uni ica ion — de ined as he ixing o exchange a es — a e o a second o de o impo ance. Howe e , al hough Da id Laidle accep s he mone a is iew, acco d- ing o which a coun y ough o decide a mone a y ule, he e uses o go one s ep u he and o admi ha , once a coun y has accep ed a mone- a y ule, i does no bea any addi ional cos by joining a cu ency union and abandoning he igh o de e mine i s own mone a y ule and i s own a e o in la ion. In ac he choice be ween ixed and lexible a es is mainly an empi- ical p oblem. Flexibili y means independence in he conduc o mone- a y policy, bu one can make a bad use o independence. Thus, he case o o agains cu ency uni ica ion o en shi s bade o a guess abou he beha io o mone a y au ho i ies and ma ke s. Da id Laidle 's c i e ion o choosing an exchange egime is he e- la i e speed o adjus men , o ins ance be ween money wages changes * Uni e si é Pa is-IX-Dauphine. 11* OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.163 | Gene a ed on 2023-04-04 11:56:17 164 Pascal Salin and exchange a e changes. In he same way, M. F iedman (1953) a gued, a long ime ago, ha i was easie o change he p ice o a cu ency in e ms o ano he han o change all nominal p ices in e ms o a cu ency. W. Fellne (1973) b ough an impo an elemen in o his discussion, based on he assump ion ha indi iduals a e a ional: i adjus men implies a dec ease in eal wages (o , a leas , a slowing down o hei a e o g ow h), i can be be e ob ained h ough a dep ecia ion o he exchange a e han by an incomes policy, e en i he e is no exchange a e illusion, con a y o wha is usually said. In ac , adjus men h ough he exchange a e implies ha e e yone bea s he adjus men cos a he same ime, in he o m o a dec ease o a slowing down o he pu - chasing powe o his income; whe eas nobody accep s his same esul h ough an incomes policy, since he ea s ha he migh be he only one o bea his cos i o he s succeed in de ea ing he incomes policy. Da id Laidle 's opinion is simila . Howe e i seems somewha exces- si e i s because he conside s he case o a need o an absolu e dec ease in eal wages and no only a slowing down in hei a e o g ow h. Al- hough his can happen — he eal ans e o oil-p oduce s, when he p ice o oil inc eases and a coun y canno sp ead ou he e ec s o he p ice ise o e ime by bo owing, is an example o such a case — i is a a he a e si ua ion. In mos cases a coun y only has o ace he neces- si y o slowing down he inc ease in eal wages. I can hus be assumed ha wage-ea ne s e use an absolu e eal wage cu , bu no a change in he a e o g ow h o eal wages so ha he p ocess o adjus men h ough wages would no be slowe han he p ocess o adjus men h ough exchange a es. I wage-ea ne s e use he needed slowing down o hei wages he e is no solu ion, wha e e he policy adop ed and he exchange egimes. Second, Da id Laidle assumes ha he exchange ma ke adjus s mo e quickly han he labo ma ke . A mo e impo an ques ion would be he ollowing: which ma ke is he mo e s abilizing? F om his poin o iew i could be a gued ha specula o s may ha e a des abilizing ole and e- cen expe iences wi h loa ing exchange a es could ein o ce his opinion. Expec a ions o a u he dep ecia ion o he cu ency induce specula o s o cause an ac ual dep ecia ion, which causes p ice inc eases, highe wage claims, e c... In his chain o causali y be ween exchange a es, wages and p ices, who is he mos esponsible o ins abili y? Wage-ea ne s? Specula o s? The u h is ha expec a ions can be des abilizing only i mone a y au ho i ies alida e hem: specula ion on he exchange ma ke is no des abilizing in i sel , bu only as a as i may induce des abilizing mone- a y policy, he mone a y au ho i ies being unable o unwilling o esis OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.163 | Gene a ed on 2023-04-04 11:56:17 Commen on Da id Laidle 165 he exchange dep ecia ing — and in la iona y p essu es s emming om he specula o s' beha io . I i is hen assumed ha he money supply is pe ec ly o highly elas ic and alida es in la iona y p essu es i is impo an o compa e he o ma ion o expec a ions on he exchange ma ke and he labo ma ke : ecen expe iences would no be in a o o Da id Laidle 's opinion, since he exchange a e has been much mo e ola ile han he wage a e in mos coun ies. The eason could be a ibu ed o "di y loa ing", bu , also, o o he ac o s, o ins ance he lack o specula ion.1 In such a case he adjus men p ocess would be mo e cos ly by elying upon exchange a e changes han upon changes in he a e o g ow h o wages. Thi d, Da id Laidle belie es ha "wage adjus men " implies unem- ploymen . Bu adjus men could also be e ec ed h ough labo mobili y. Such a p ocess could ha e long- un e ec s in he o m o esul ing allo- ca ion o ac i i ies. Wha is he di e ence in his espec be ween ixed and lexible a es? Le us assume — as was done in " adi ional" li e a- u e on cu ency uni ica ion — ha he e is a shi in demand away om he goods in which a coun y p e iously specialized. Nominal wages being in lexible, unemploymen appea s unde ixed a es. Real wages dec ease unde lexible a es. In any case, adjus men implies ha ac- o s o p oduc ion mo e o o he ac i i ies in he coun y o mo e o o he coun ies. Will labo mobili y espond mo e o unemploymen o o he dec ease in eal wages? The answe can only be empi ical, and he e is no a p io i eason o hink ha he adjus men is as e o less cos ly wi h one o he o he exchange egime. The e o e one could disag ee wi h he ollowing asse ions by Da id Laidle : " he a e age le el o unemploymen o e ime will, o a simila pa e n o shocks be highe in a coun y which belongs o a cu ency union"; o "The main enance o mone a y independence by indi idual coun ies would lead o smalle sho - e m luc ua ions in ou pu and employmen ". One eason o disagg eemen is he one we jus s essed, namely ha he necessa y ac o mobili y is no necessa ily highe unde one o he o he sys em. Ano he eason is he ollowing: i canno be denied ha a coun y's policy is independen unde lexible a es, bu his does no mean ha he coun y's policy is mo e s abiliz- ing. Le us jus imagine ha a coun y uses i s mone a y independence o emba k upon a e y es ic i e mone a y policy: eal shocks implying eal wage cu s will c ea e unemploymen . Wha would ha e happened unde ixed a es? One canno answe wi hou knowing he beha io o he "common mone a y au ho i ies": one possibili y would be ha he 1 C . R. I. McKinnon (1976). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.163 | Gene a ed on 2023-04-04 11:56:17 166 Pascal Salin union adop s he same a e o in la ion as he coun y would ha e done unde loa ing a es. Ano he possibili y would be ha he "common a e o in la ion" is highe , in which case he sho - un a e o unemploymen would be smalle . O he a e o in la ion could be lowe in he union, especially i he coun y conce ned is small so ha i canno ha e much in luence on he decisions aken by he "common au ho i ies" and i i is ela- i ely mo e a ec ed by he assumed eal shocks. The issue may hus depend on he dis ibu ion o powe in he union and on he dis ibu ion o shocks. In some sense, Da id Laidle makes a plea in a o o in la- ion and no a plea in a o o loa ing a es. The plea in a o o in la- ion is based on he assump ion o some sho - un ade-o be ween unemploymen and in la ion and he ela i e social cos s o bo h and we ha e no o discuss i as such. The only poin we wan o s ess is he ollowing: e en i one ag ees ha in la ion has o be p e e ed o unem- ploymen in he sho - un and he e is no isk o con inuing in la ion, i is no heo e ically ue ha mone a y uni ica ion — de ined as a e- gime o ixed a es — is ela i ely an i-in la ion-biased, so ha loa ing a es would be be e . Re e ences Commission o he Eu opean Communi ies, OPTICA Repo 1975: Towa ds Equilib ium and Mone a y Uni ica ion in Eu ope, Repo by a g oup o independen expe s, II/909/75-E, 16 Janua y 1976. Fellne , W. (1973), Con olled Floa ing and he Con used Issue o Money Illusion, Banca Nazionale del La o o Qua e ly Re iew, Sep embe , pp. 206 - 234. F iedman, M. (1953), The Case o Flexible Exchange Ra es, in: M. F iedman, Essays in Posi i e Economics, The Uni e si y o Chicago P ess. McKinnon, R. I. (1976), Floa ing Fo eign Exchange Ra es 1973-74: The Em- pe o 's New Clo hes, in: K. B unne and A. H. Mel ze (eds.), Ins i u ional A angemen s and he In la ion P oblem, Ca negie-Roches e Con e ence Se ies on Public Policy, Ams e dam, No h-Holland, p. 79 - 114. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.163 | Gene a ed on 2023-04-04 11:56:17