Thomas D. Willett


Thomas D. Willett (PhD University of Virginia) serves as Director of the Institute for Economic Policy Studies and is Horton Professor of Economics at Claremont Graduate University and Claremont McKenna College. He has served on the faculties at Cornell and Harvard University and as a senior economist at the Council of Economic Advisors and Deputy Assistant Secre-tary and Director of International Research at the US Treasury. He has written widely in areas such as exchange rate policy, inflation, international capital flows and currency and financial crises, the political economy of domestic and international economic policies and international organisation, reform of the international finance architecture, regional integration and the implications of conflicting mental models.

Papers Published in World Economics:

The Long and Winding Road from the International Macroeconomic Policy Trilemma to the Integrated Policy Framework

For many years the international macroeconomic policy trilemma, which argues that it is impossible to simultaneously have a pegged exchange rate, monetary independence and an open capital account, has provided a theoretical foundation for open economy macroeconomics and international monetary economics. The original form of the trilemma has been criticised and modified to suggest that its corners can be rounded and that the constraints imposed by it may be circumvented in the short run. The trilemma has also been criticised for ignoring the importance of financial stability. The most extreme allegation has been that the trilemma does not exist at all because flexible exchange rates do not provide effective insulation from a global financial cycle and that therefore countries only have a choice between monetary autonomy and capital controls. Much of the research in international monetary economics since the inception of the trilemma has tended to focus on its key elements, particularly in terms of exchange rate policy and capital controls, in a world that exhibits increasing financial globalisation. The research agenda recently embarked upon by the International Monetary Fund under the umbrella of the Integrated Policy Framework (IPF) concentrates on how countries should respond to the volatility of international capital flows. This article provides a summary of the evolution of international monetary economics in the context of the trilemma, as well as a measured and constructive critique of the IPF. In so doing, it assesses the current state and future direction of open economy macroeconomics and international monetary economics.

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Modern Monetary Theory and the Policy Response to COVID-19

The COVID-19 pandemic has raised questions about the design of fiscal and monetary policy to assist economic recovery. Modern monetary theory (MMT) strongly argues in favour of substantial and fairly persistent fiscal expansion, claiming that there is neither a near-term capacity constraint, nor a financial one. MMT is, however, not particularly ‘modern’. Many of the basic ideas that it promulgates can be found in fairly standard neo-Keynesian analysis. Advocates of MMT unwisely downplay the potential problems associated with inflation, financial instability and the balance of payments. They also are too dismissive of central bank independence, which has played an important role in anchoring inflationary expectations. To argue in favour of fiscal and monetary expansion in the particular circumstances of the COVID-19 pandemic does not involve endorsing the full MMT approach to macroeconomic policy.

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Currency Wars

The concept of ‘currency wars’ has come into popular use in recent years. This article examines various meanings of the phrase and its historical antecedents. It goes on to discuss why currency wars have become the focus of attention and the economic policy weapons that may be used to conduct such wars. It draws attention to the collateral economic damage that may be caused by unleashing these weapons both for the individual countries that use them and for the world economy. The article concludes that, while there may have been occasional currency battles or skirmishes, the empirical evidence does not support the claim that there is widespread currency warfare. However, currency misalignment does exist and correcting it would help induce the international adjustment needed to reduce the global economic imbalances that threaten international financial stability. The problem is to find effective institutional arrangements for encouraging this to happen. Current proposals under discussion that envisage an enhanced role for the IMF and the G20 seem unlikely to be very successful.

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The Euro Crisis

The crisis in Greece and other mainly southern Eurozone countries has been discussed primarily as a fiscal issue. Current account deficits of the same countries have received less attention in spite of the relatedness of current account and fiscal deficits. We argue that the failure of many countries within the Eurozone to develop adequate internal adjustment mechanisms is also an important factor behind the crisis. After reviewing the major perspectives that have been offered on the crisis, we present data that support our argument by demonstrating the lack of price and cost convergence in the Eurozone since 1999. Ironically, it seems that the surplus countries have carried out more of the adjustment pointed to by the endogenous optimum currency area (OCA) theory than the deficit countries. We recommend that the responsibility of a ‘European Debt Surveillance Authority’ should include surveillance of intra-euro payment flows, imbalances and adjustment in labour and goods markets, and setting benchmarks for the Eurozone guarantees of sovereign debt based on ability to adjust internally. Thereby, a potential moral hazard problem of an implicit Eurozone guarantee of countries’ sovereign debt could be avoided.

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Why do Governments Delay Devaluation?

In the sequence of currency crises in emerging economies in the 1990s, there was an observed reluctance to devalue the exchange rate. Although ultimately adopted, the decision to devalue was usually delayed, often until it could no longer be avoided. While economic explanations of delay are available, they need to be combined with an evaluation of the political implications in order to secure a better understanding of exchange rate inertia. This article presents a political economy interpretation of delayed devaluation. It introduces and discusses the determining factors drawing on available empirical evidence and briefly applies these ideas to a range of specific examples. It also examines why there may be even more impediments in the way of timely revaluation. Since delayed exchange rate adjustment carries economic costs, the article also considers ways in which delay may be minimised.

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Global Imbalances and the Lessons of Bretton Woods

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Multilateral Surveillance

The IMF presents multilateral surveillance as one of its core responsibilities and has recently sought to enhance this role via a series of multilateral consultations with systemically important countries, designed to coordinate exchange rate and macroeconomic policy in order to reduce the global economic imbalances that threaten the stability of the international financial system. The authors examine the evolution of the IMF's multilateral surveillance and assess what it has achieved. They also investigate what may reasonably be expected from surveillance and, in the light of this analysis, evaluate the outcome of the multilateral consultations. Concluding that there are strict limits on what the Fund can achieve in terms of using multilateral surveillance to avoid economic and financial crises, they also explore areas relating to crisis management where the IMF might be able to make a more important contribution. The Fund needs to temper ambition with reality if it is to maintain credibility as an international financial institution.

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