Charles Wyplosz

• Professor (Full) at Graduate Institute of International and Development Studies

After centuries of metallic monies, for a long time, our understanding of fiat money had remained rudimentary and often controversial. Successive regimes eventually failed. The end of the Bretton Woods system marked the moment when the link between fiat money and gold was severed and when the possibility of letting exchange rates float became possi...

Why can Japan sustain debts above 200 percent of GDP, while Ukraine defaulted on its debt when it was 30 percent of GDP? This chapter investigates what causes a country to default and hence how to assess the sustainability of sovereign debt. It begins by looking at why a sovereign my renege on its debt operations—because it makes a strategic choice...

Why can Japan sustain debts above 200 percent of GDP, while Ukraine defaulted on its debt when it was 30 percent of GDP? Answering that question is challenging. First, debt sustainability does not easily translate into operational concepts and indicators. Second, servicing the debt is a strategic decision, the result of a cost-benefit analysis. Thu...

The ECB might seem to be the most independent central bank in the world. Its statutes were carefully designed to ensure independence and they are enshrined in an international treaty. Yet, while serving many governments may be a protection, it can also act as a constraint on policy decisions. This essay explains how the ECB has faced limits during...

The Changing Fortunes of Central Banking - edited by Philipp Hartmann March 2018

The Eurozone crisis occurred because the institutional setup was imperfect. The wrong concept of fiscal discipline, the inability of the ECB to act as lender of last resort, absence of a banking union, allowed some public debts to increase dangerously; the lack of comprehension of the crisis by political leaders led to contagion and a deep depressi...

Before the financial crisis, fiscal policy often played a secondary role to monetary policy, with the manipulation of interest rates to hit inflation targets being the main instrument of macroeconomic management. However, after the financial crisis and the subsequent euro crisis, fiscal policy has been brought back to the fore. In the past, the lim...

This article develops the international aspects of the two-handed growth strategy. Both the supply and demand side measures are reviewed. The need to work on both sides simultaneously is stressed, even if the specific topic of cooperation privileges the demand side. The report argues that inflation, while always a risk, should not be currently seen...

In April 2010, Greece became the first euro area country to request financial support from the IMF. The IMF joined the European Commission (EC) and the European Central Bank (ECB)—thus constituting what informally came to be known as the troika—in providing emergency financing, with the Fund’s contribution taking the form of a €30 billion three-yea...

When it was created, it was reasonable to think that the architecture of the monetary union was not perfect. It was also likely that the imperfections would lead to difficulties, possibly even crises. This article identifies six flaws, most of which had been identified even before the launch of the euro. It starts by pinpointing why the Eurozone, a...

The Eurozone crisis has shown that monetary union entails more than just sharing monetary policies. This column identifies four minimal conditions for solidifying the monetary union. In the case of fiscal policy, this means a decentralised solution. In the case of financial supervision and monetary policy, centralisation is unambiguously the approp...

Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of secur...

Economic and monetary union (EMU) started with serious flaws. Those flaws had been carefully diagnosed and yet no attempts were made to deal with them. As an original experiment, it would have been extraordinary that its design be perfect from the start. The fact that these flaws came together to generate the euro-area crisis is an indictment of th...

What have we learned from the Eurozone crisis? This column argues that, very much unfortunately, we haven’t learned that much. In desperate need of a way out of the current impasse, economists and policymakers are imagining a menu of solutions. A grand panacea seems implausible, at present. So the way to proceed should follow the time-honoured Euro...

This Chapter formulates a common pool model of fiscal policymak- ing including both countercyclical and productive spending motives to run deficits, and derives key principles for the optimal design of fiscal restraints. The model is then used to evaluate the welfare and design aspects of fiscal rules and delegation, with a view to the special case...

This chapter asks whether the global economic and financial crisis, which started in 2007, affects the cooperation path in East Asia and, if so, how. East Asia is no longer at the periphery of the globalized economy but it has become one of its nodes, in fact the fastestgrowing node. Until the crisis, East Asian policymakers looked at the European...

The Global Financial Crisis and the Eurozone crisis have led to a profound rethink in East Asia about the international monetary system and regional monetary and financial integration. After the Asian financial crisis of 1997-8, deeper regional cooperation was seen as the way to avoid reliance on the IMF and the rest of the world. Steps were taken,...

The Euro Area Crisis and the Two ECB The ECB reacted swiftly and efficiently when the financial crisis burst in 2007 but it then experienced difficulties to cope with the euro sovereign debt crisis. Up till July 2012 the ECB refused to act as lender of last resort thus aggravating the crisis. Then the new ECB took a courageous bend and launched the...

A widely accepted narrative of the European sovereign debt crisis is that it was due, at least in a large part, to a loss of competitiveness suffered by a number of countries. This article argues that this assertion is factually wrong. Working with the same data used to make the assertion, the article shows that the competitiveness loss view is the...

This chapter contrasts the United States (US) and European situations during the global financial and economic crisis and examines how much of the crisis has been imported by Europe from the US. The chapter argues that Europe never had a chance to avoid contagion from the US. Trade and financial links - some of which operate through third countries...

This paper reviews some of the current debates on the reform of the international monetary system. Despite its deficiencies, the United States (US) dollar will remain the dominant currency and Special Drawing Rights (SDR) cannot serve as either an international medium of exchange or a reserve currency. The International Monetary Fund (IMF) has chan...

Fiscal indiscipline is a feature of many developed countries. It is generally accepted that the source of the phenomenon lies in the common pool problem, the fact that recipients of public spending to fail to fully internalize the costs that taxpayers must assume. As a result, democratically elected governments are led to postpone tax collection, o...

Macroeconomics provides a solid foundation in contemporary macroeconomics, analysing different theoretical approaches and contextualising the theory with up to date monetary policy examples. The policy examples have been updated throughout to ensure that the reader can relate the economic concepts to the real world. The focus is on European economi...

Debt sustainability is a vexing issue. Its importance is immediately obvious but it escapes any easy definition. This situation is not unheard of in economics; price stability and full employment are examples of other crucially important policy objectives that cannot be simply defined. Yet, while price stability or full employment can both be measu...

The lack of fiscal discipline is a natural and pervasive implication of the perceived separation between the benefits from public spending and the taxes that individuals and interest groups receive and pay, respectively. The implication is that budget preparation, decision and execution must be constrained. The challenge is that the policymakers wh...

The current European debt crisis is bringing to the fore well-defined cracks in the Eurozone’s construction. There are two possible scenarios for the future of the Eurozone: Either its members will have the collective will to roll back national sovereignty, or current plans for a European Financial Stability Fund will founder.

The importance of fiscal discipline for developed countries has long been ignored or minimised, because they seemed able to borrow and to keep borrowing for decades. The crisis has shown that discipline may be slow to assert itself, but has acutely painful consequences when it does. This 13th Geneva Report on the World Economy is devoted to fiscal...

We examine the conditions under which a central bank raises welfare by revealing its expected future interest rate in a simple two-period model with heterogeneous information between the central bank and the private sector. The central bank optimally sets the interest rate given its information. The model is designed to rule out common-knowledge an...

The budget deficit bias is modeled as the result of a domestic common pool problem and of an international externality. Deficits can be used to finance both unproductive and productive public spending. An optimally set supranational deficit ceiling is examined and welfare is compared to the unconstrained outcome and to the case of nationally set de...

This is an action program for the first year of a new presidency. After the presidential elections, Ukraine will have a unique opportunity to implement reforms that will lay foundation for sustainable economic growth. The new presidential mandate, the shock of a recent severe economic crisis, and popular dissatisfaction with the status-quo create i...

The financial crisis has led to the setting up of the G20 and to a historically large new allocation of Special Drawing Rights. Is this signaling the end of the dominant role of the U.S. dollar and to a new world order based on a global currency? The paper argues that, for many reasons, there is readily available currency to replace the dollar alth...

Summary Independent Fiscal Policy Councils (FPCs) share the attractive fea- tures of independent Monetary Policy Committees in central banks. They offer many of the advantages of both rules and discretion, with- out their drawbacks. Rules are bound to be counterproductive some- times because unexpected events occur. Discretion, the most frequent pr...

This paper contrasts the United States (US) and European situations during the crisis and examines how much of the crisis has been imported by Europe from the US. The paper argues that Europe never had a chance to avoid contagion from the US. It also documents the relatively limited reaction of both monetary and fiscal authorities. Muted fiscal pol...

Nearly two years after the onset of the financial crises, many central banks have brought their policy interest rates down to, or close to zero. Various governments have seen their budget deficits soar. Both policies have affected exchange rates, partly through market expectations. With a majority of exchange rates officially floating, exchange rat...

There is little connection between structural reforms and macroeconomic policies. Macroeconomic policies only aim at smoothing cyclical fluctuations while structural reforms aim at the long run and have permanent effects. There is not much support either for the view that expansionary macroeconomic policies should be used to create political condit...

This article offers an overview of recent developments among East Asia's emerging market economies (EMs), including China. It shows that most East Asian countries have made considerable progress in making their financial systems more resilient, having prudent macroeconomic policies, and having accumulated large amounts of foreign exchange reserves....

In einem weltweiten Appell vom 2. Oktober 2008 haben führende Ökonomen aus Europa und den USA, darunter DIW-Präsident Klaus F. Zimmermann, die europäischen Staaten zu einem ge meinsamen Vorgehen in der Finanzmarktkrise aufgerufen. Die Krise sei noch be-herrschbar – nur ein schnelles, europaweit koordiniertes Vorgehen könne aber verhindern, dass sie...

Paper prepared for the International Monetary Advisory Group of the Asian Development Bank. I am indebted for comments and suggestions received at the two meetings of the Group in New York (September 2009) and Tokyo (March 2010).

These two chapters are in the tradition of politico-economic interpretations of fiscal policy-setting institutions. For more than a decade, now, following the seminal contributions of Weingast et al. (1981), a lively literature has recognized that economic analyses of deficits and debts cannot ignore the political context in which policy is conduct...

This chapter formulates a common pool model of fiscal policy-making including both countercyclical and productive spending motives to run deficits, and derives key principles for the optimal design of fiscal restraints. The model is then used to evaluate the welfare and design aspects of fiscal rules and delegation, with a view to the special cases...

This paper improves upon the recently developed literature on exits from fixed exchange rate regimes in three ways: (1) It allows for two indicators for post-exit macroeconomic conditions, the change in the exchange rate and the change in the output gap; (2) it tests whether the distinction between orderly and disorderly exit is statistically justi...

We examine the effects of the release by a central bank of its expected future interest rate in a simple two-period model with heterogeneous information between the central bank and the private sector. The model is designed to rule out common-knowledge and time-inconsistency effects. Transparency—when the central bank publishes its interest rate pa...

The European Monetary Union is an original, complex undertaking in the making. The single currency has so far operated smoothly, yet many of its details are controversial. Inflation has been low and the European Central Bank has achieved some credibility, though its strategy is often criticized. The euro has not displaced the dollar as the world cu...

Business cycles in different regions of the United States tend to synchronize. This study investigates the reasons behind this synchronization of business cycles and the consequent formation of a national business cycle. Trade between regions may not be strong enough for one region to "drive" business cycle fluctuations in another region. This stud...

In this paper we examine the impact of membership in Preferential Trade Agreements (PTAs) on trade between PTA members. Rather than considering the impact of PTA membership on the volume of trade we consider the impact of membership on the structure of trade. For a large sample of countries over the period 1962-2000 we find that membership in a PTA...

The present paper extends the literature on central bank transparency that relies on information heterogeneity among private agents in four directions. First, it adds the interest rate to the list of signals that the central bank can reveal. Second, it allows for more than one economic fundamental. Third, it extends the range of uncertainties that...

Collection of essays based on the outcome of CASE's 2005 international conference held in Warsaw. In this collection, several prominent economists discuss the five big challenges to the development of the European Union (EU). These are: the new European Constitution, European finances and the Euro, the need to boost economic growth, competition in...

Where is Europe going? In this 2007 collection, several prominent European economists offer essays on the five big challenges to the development of the European Union (EU). Namely, the new European Constitution, European finances and the euro, the need to boost economic growth, competition in both new member states and countries further to the East...

Introduction Once upon a time Europe was a small group of like-minded countries, determined to integrate politically and economically in order to eliminate war. After centuries of recurrent devastation, this was an ambitious project. It was built on JeanMonnet’s prudent step-by-step strategy, now called neofunctionalism. 1 Integration always progre...

We examine the conditions under which a central bank raises welfare by revealing its expected future interest rate in a simple two-period model with heterogeneous information between the central bank and the private sector. The central bank optimally sets the interest rate given its information. The model is designed to rule out common-knowledge an...

We examine the conditions under which a central bank raises welfare by revealing its ex- pected future interest rate in a simple two-period model with heterogeneous information. The release of this information fully aligns central bank and private sector expectations about future shocks, therefore about future in‡ation and interest rates, which det...

The budget deficit bias is modeled as the result of a domestic common pool problem and of an international externality. Along with Piguvian taxes, a number of policy measures are examined and welfare-ranked: deficit ceilings, golden rules and delegation. In general, the combination of delegation and an optimally-set deficit ceiling deliver the soci...

This paper looks at the measures taken by East Asian countries since the 1997-8 crisis to reduce the odds of a new crisis. It finds that odds are low, but far from zero. Much progress has been done to deal with the vulnerabilities that have been identified so far, but some remain. The massive accumulation of foreign exchange reserves is raising the...

Exchange rates in transition economies undergo early depreciation followed by continuing real appreciation. The paper documents and interprets this stylized fact. It provides estimates of the real equilibrium exchange rate based on a sample of 80 countries, and estimates well the dynamics of the real exchange rate in the early transition phase. The...

This article revisits the long process of deep integration in Europe, asking which elements belong to a blueprint that could be used elsewhere, particularly in Asia. To that effect, it delves into those features that are not desirable and that should be avoided. The underlying theme is that integration is thoroughly controversial: delegation of pow...

This paper revisits the debates that have surrounded the launch of a unique experience: the adoption of a common currency among developed countries. A striking aspect of this history is that, pressed by what they correctly identified as a window of opportunity, policy-makers crafted this complex project in a short period of time, largely eschewing...

This paper provides a comparative analysis of macroeconomic trends in the transition economies over the 1992-2003 period. It also describes some differences between the transition economies and emerging markets more generally. Good governance and appropriate institutions are found to be essential ingredients for success. However, history and geogra...

Regional arrangements generally remain controversial. They are sometimes seen as a threat to multilateralism, and multilateralism is, in principle, first best. The argument for multilateralism and against regionalism is best developed for trade arrangements: Regional agreements have a trade-creating effect within the region but also a trade-diverti...

This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political auton...

The economic integration of Europe has almost come to a end. The single market, the single currency and the common marketing policy are the result of a unique world enterprise which strongly contributes to ensure peace and prosperity on the continent. Is it necessary to continue to transfer other national competencies? With regard to the economic q...

Debt sustainability is an essential attribute of good macroeconomic policies but its precise definition is elusive and its assessment is even more challenging. The IMF has developed a sophisticated approach but it must be recognized that, because the future is unknown, any debt sustainability assessment is only valid within the bounds of the underl...