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National Monetary Policy, Internatinal Economic Instability and Feeback Effects - An Overinvestment View

Author

Listed:
  • Andreas Hoffmann
  • Gunther Schnabl

    () (Institute for Economic Policy, University of Leipzig)

Abstract

The paper explains internationally transmitted boom-and-bust cycles as the outcome of excessive liquidity supply based on the credit boom theories of Hayek (1929; 937), Mises (1912) and Minsky (1986). We show how too expansionary monetary policies cause distortions in the economic structure and boom-and-bust cycles on both a national and an international level. Feedback effects of crises in periphery countries on center countries are shown to trigger a new round of monetary expansion in large countries, which provide international currencies to an asymmetric world monetary system. Crisis and contagion in globalized goods and financial markets indicate the limits of purely national monetary policies, which solely focus on domestic consumer prices and output. This makes the case for monetary policies in large countries, which take responsibility for the long-term effects of monetary policy on goods and financial markets in both home and foreign as put forward by Hayek (1937).

Suggested Citation

  • Andreas Hoffmann & Gunther Schnabl, 2011. "National Monetary Policy, Internatinal Economic Instability and Feeback Effects - An Overinvestment View," Global Financial Markets Working Paper Series 19-2011, Friedrich-Schiller-University Jena.
  • Handle: RePEc:hlj:hljwrp:19-2011
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    File URL: http://pubdb.wiwi.uni-jena.de/pdf/wp_hlj19-2011.pdf
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    References listed on IDEAS

    as
    1. Gunther Schnabl & Andreas Hoffmann, 2008. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View," The World Economy, Wiley Blackwell, vol. 31(9), pages 1226-1252, September.
    2. Andreas Hoffmann, 2010. "An Overinvestment Cycle In Central And Eastern Europe?," Metroeconomica, Wiley Blackwell, vol. 61(4), pages 711-734, November.
    3. Ronald McKinnon & Gunther Schnabl, 2004. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 331-360, August.
    4. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June.
    5. Ronald McKinnon & Gunther Schnabl, 2009. "The Case for Stabilizing China's Exchange Rate: Setting the Stage for Fiscal Expansion," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(1), pages 1-32.
    6. Ronald McKinnon, 2010. "Rehabilitating the unloved dollar standard," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 24(2), pages 1-18, November.
    7. Roger W. Garrison, 2004. "Overconsumption and Forced Saving in the Mises-Hayek Theory of the Business Cycle," History of Political Economy, Duke University Press, vol. 36(2), pages 323-349, Summer.
    8. Axel Löffler & Gunther Schnabl & Franziska Schobert, 2010. "Inflation Targeting by Debtor Central Banks in Emerging Market Economies," CESifo Working Paper Series 3138, CESifo Group Munich.
    9. Andreas Hoffmann & Gunther Schnabl, 2011. "A Vicious Cycle of Manias, Crises and Asymmetric Policy Responses – An Overinvestment View," The World Economy, Wiley Blackwell, vol. 34(3), pages 382-403, March.
    10. Schnabl, Gunther & Freitag, Stephan, 2010. "Reverse causality in global current accounts," Working Paper Series 1208, European Central Bank.
    11. Barry Eichengreen & Kris Mitchener, 2003. "The Great Depression as a credit boom gone wrong," BIS Working Papers 137, Bank for International Settlements.
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    Citations

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    Cited by:

    1. Gunther Schnabl, 2012. "Monetary Policy Reform in a World of Central Banks," Global Financial Markets Working Paper Series 26-2012, Friedrich-Schiller-University Jena.
    2. Schnabl, Gunther, 2013. "The global move into the zero interest rate and high debt trap," Working Papers 121, University of Leipzig, Faculty of Economics and Management Science.
    3. Nicolas Cachanosky, 2014. "The Mises-Hayek business cycle theory, fiat currencies and open economies," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 27(3), pages 281-299, September.
    4. Gunther Schnabl & Timo Wollmershäuser, 2013. "Fiscal Divergence and Current Account Imbalances in Europe," CESifo Working Paper Series 4108, CESifo Group Munich.
    5. Schnabl Gunther, 2013. "Die japanischen Lehren für die europäische Krise," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 62(1), pages 3-22, April.

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    Keywords

    Feeback Effects; Economic Instability;

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