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Friday Roundup – Inequality, Biofuel Prices, Exchange Rates and Keynes vs Austerity

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Three new Policy Research Working papers, a Project Syndicate piece by Ken Rogoff, and an Eduardo Porter column in the New York Times, titled ‘A Keynesian Victory, but Austerity Stands Firm,’ made for an interesting week.

A working paper published this week by Milanovic Branko uses multiple techniques to gauge how close measured inequality is to the maximum inequality that can exist in a given society.  Looking at historical data tracing back several centuries, Branko finds that inequality in colonies was pushed almost to its maximum. Branko also looks beyond inequality as measured by income inequality to inequality in social terms.

Harry de Gorter, Dusan Drabik and Govinda Timilsina have a working paper on the relationship between volatility in crude oil prices, biodiesel and oilseeds (soy beans and canola).  They find that higher crude oil prices increase biodiesel prices if biofuels benefit from a fuel tax exemption, but lower them when a blending mandate is imposed.  When both canola and soybeans are used to produce biodiesel, an increase in the crude oil prices lead to higher canola prices, but the effect on soybean prices is ambiguous.

A new paper by Kaushik Basu and Aristomene Varoudakis looks at exchange rate management by central banks.  Basu and Varoudakis find that central banks can achieve more optimal outcomes if their interventions adhere to rules that signal commitments to buying and selling different quantities of foreign currency conditional on the exchange rate.  They go on to write that exchange rate management and reserve management can then be treated as two independent objectives for a central bank.

Looking to the other side of the Atlantic, Harvard University's Ken Rogoff published an opinion piece on Project Syndicate suggesting that applying Keynesian solutions in Europe to what are tough structural problems will not be the magic bullet the continent is looking for. "European financial and monetary integration [have got] far ahead of actual political, fiscal and banking union," writes Rogoff; the answer lies instead in wholesale debt write-offs, moderate inflation, tackling competitiveness issues and greater political union.

In contrast, Eduardo Porter of the New York Times writes that 'governments across the industrial world are zealously tightening their belts.' Porter writes that while mainstream economists give the impression that now 'is the best of times for Keynesian economics,' the reality is closer to a 'theoretical victory and policy defeat.'  The reason?  Moral views are getting in the way of reason, policy serves the interests of moneyed creditors, and the costs and benefits of fiscal stimulus and austerity are geographically dispersed ('Keynesian stimulus [in Greece, Spain or Italy] would require German money.').  The solution, proposes Porter, is to combine stimulus in the present with legally binding initiatives that will limit spending in the future