Larry Summers and Paul Krugman have put stagnation on the table, but there is a grave danger that policymakers only focus on financial market reform and ignore reform of America’s flawed economic paradigm.
A higher inflation rate of three to five percent produces better outcomes by lowering the unemployment rate and creating labor market bargaining conditions that help connect wages to productivity growth.
Neoliberalism aims to diminish the role of the state and enhance the power of the market, and this goal is reflected in neoliberal monetary theory which guided the euro’s design.
This paper examines three different explanations of the global financial imbalances. It begins with the neoliberal globalization hypothesis that explains the imbalances as the product of the model of globalization implemented over the past thirty years. It then examines the saving glut and reserve currency hypotheses. The paper concludes by arguing that both the saving glut and reserve currency hypotheses are inconsistent with the empirical record and both provide a misleading guide for policy.