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A successful fiscal expansion in the US requires a succesful fiscal expansion everywhere? December 10, 2008

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Dani Rodrik notes that a Keynesian stimulus in the US will have extraordinarily limited impact if much of the money goes to buying now-cheaper imports. He poses a curious dilemma:

“…unless we come up with a solution to the credit constraints in the developing world, we are going to either endanger the effectiveness of Keynesian policies in the U.S. and other advanced nations, or risk a sharp increase in protectionism.  Not a pleasant choice.”

He puts out two possible solutions: way more liquidity via the IMF, or a Tobin tax with revenues redistributed to developing countries. I can’t say whether either would work, but it is definitely an interesting thought that a successful US fiscal expansion may hinge on a successful global fiscal expansion. Has the US ever before so badly needed the rest of the world to march to the same tune?

Financial crisis likely means Foreign Aid will drop October 16, 2008

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Interesting ideas, via the Center for Global Development:

Chilean lessons for the US crisis? October 6, 2008

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Via Roubini Global Economics Monitor:

Chile faced a similar situation to the one that the United States is experiencing today. In Chile, the government adopted two types of program: one for bank debtors and another for banks. Bank debtors were offered the possibility of rescheduling their obligations and receiving a preferential exchange rate for the repayment of foreign-currency liabilities. Banks were assessed for their long-term viability. Viable banks were offered the possibility of selling bad loans to the Central Bank, with a repurchase agreement based on future profits. Indeed, the majority of domestic banks used this facility and the total amount involved reached US$5 billion. Non-viable banks were intervened and liquidated.

The Chilean solution to the crisis was heterodox in the sense that many policies appear to have been arbitrary, and policy mistakes were made and corrected along the way. However, the economy recovered relatively quickly, and since has built a strong financial sector that allowed the country to avoid the financial turmoil observed during 1995 and 1997-98 in other emerging market economies.