Memo to FT editors: Be as crazy as you like, but give us an explanation.
There seems to be no end to the creative ways by which people justify outrageously contractionary monetary policies. First we were told that monetary stimulus was unacceptable because the ECB needed to focus like a laser on 2% inflation. Now we are told that 2% inflation is unacceptable because the ECB must allow the peripheral countries to experience the wonders of beneficial deflation. I guess I should be happy that people finally recognize that inflation is the wrong target, but I somehow expected something better to replace it. Here’s the Michael Heise in the Financial Times:
Nonetheless, bank lending has been on the retreat, bankruptcies have soared and disposable incomes have fallen. This is the kind of demand shock that fosters bad deflation: a financial crisis causes aggregate demand to shrink faster than supply, resulting in falling prices.
However, looking through the lens of aggregate supply, the difficulties of the eurozone’s periphery bear only a superficial resemblance to those plaguing Japan. In this case, falling prices are the result of a supply shock, through improved productivity or real wage reduction.
Low inflation or even deflation is testament to the fact that (painful) adjustment through structural reforms is finally working.
Actually the situation in the periphery is a lot like Japan, if not worse. After all, Japan does not have 12% to 27% unemployment (even accounting for mismeasurement in Japan.)
When AD declines you see a decline in both output and inflation. Then the self-correcting mechanism takes over. Heise seems to be suggesting that we are now seeing the self-correcting phase. But that’s clearly not the case; if it were then RGDP growth in the periphery would be above trend.
The mistake is to look at the inflation rate, which tells us nothing of interest. Rather the key variable is NGDP, where growth has slowed sharply since 2010, pushing the eurozone into a double-dip recession. That’s a demand shock, pure and simple. If the ECB raises the NGDP growth rate (and there are a few signs it may be shifting toward easier money) then the self-correcting mechanism will kick in. For any given growth rate of NGDP, more deflation is better. But first you need the NGDP growth.
The eurozone periphery is regaining competitiveness via internal devaluation. This could even be called “good deflation”, and is a world away from Japan, which slipped into deflation because it was able to duck structural reforms for too long with the help of expansionary fiscal policies.
So in Japan bad supply-side policies and fiscal stimulus cause deflation? I’m lost; I thought both were inflationary. I’m hoping that commenters can help me here, because this also seems crazy:
In the eurozone, both reasons for deflation – good and bad – interact. On the one hand, low inflation or deflation is a welcome reaction to structural reforms as they accelerate the restoration of (cost) competitiveness; on the other, it is a troubling sign of economic depression as it aggravates the problem of excessive debt.
It is not at all clear whether the ECB’s response addresses the good or bad sort of deflation. The ECB could easily end up killing the wrong guy.
So now it’s not clear whether easy money boosts AD or reduces AS? Really?
I’m all for wacky unconventional theories, this blog is full of statements that seem crazy to others. But I never insult the intelligence of my readers. I assume all my readers know the basic AS/AD model, and I assume that the FT’s readers also understand that model. It’s fine if you want to say things that seem totally strange on the surface, but if you do so then please provide us with an explanation. I always do so, and expect no less from the world’s leading financial newspaper.
PS. Everything in this post is doubly true when you considered that Heise’s article is saturated with the language of AS/AD, so he certainly can’t claim those concepts are irrelevant to his analysis.
PPS. Ryan Avent has a much better piece, which ends up by pointing to the similarities between inflation targeting and the gold standard:
The belief in the critical importance of low and stable inflation is more flexible than the gold standard was, and it is born of a better understanding of the workings of the macroeconomy. But it is a binding constraint on recovery and prosperity all the same. And the unwillingness to question its continued utility in the face of evidence that it is doing real harm looks all too similar to the intellectual fetters that led central bankers to persist in foolish policy in the early 1930s.
Pegging the price of gold failed to stabilize US national income, which fell in half from 1929 to early 1933. Targeting inflation failed to stabilize US national income, which fell 4% between 2008:2 and 2009:2. If we want to stabilize national income, why not target national income?
Ryan mentions a higher inflation target, but that’s not needed. The reason so many Keynesians keep returning to that assumption is that they rely on the wrong model, IS/LM with a downward-sloping IS curve. If they could somehow absorb Nick Rowe’s insight that the IS curve is often upward-sloping (especially for large monetary policy shifts), then they’d realize that NGDPLT is enough, no need for a higher inflation target. Easy money creates faster NGDP growth, which raises nominal interest rates. The zero bound is not a factor preventing monetary stimulus, it’s the result of an excessively low (implicit) NGDP target.
HT: Nicolas Goetzmann
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18. November 2013 at 12:00
T. Sargent is also arguing in favor of “beneficial” deflation – correcting mechanism should come from productivity surge or falling wages in his words.
http://www.wiwo.de/politik/europa/thomas-sargent-die-ezb-befindet-sich-in-einem-dilemma/9079542.html
Use translator because its in the language of deflation – German
18. November 2013 at 12:08
The current peevish fixation on inflation cannot be explained by economics. Recent history shows the USA flourished with moderate rates of inflation, such as the 1960s, or 1982 to 2008.
But the impulses that guide man are not always rational. We know man is content, even eager to forsake worldly gains if in service to a putative higher calling or political ideal.
Monetary ascetism appeals to many, has developed a captivating rhetoric and fulfills atavistic needs for discipline, perceived morality and control.
Logic? Who can explain the Bank of Japan after 1992? The ECB today?
But cultures have destroyed themselves rather than alter religious beliefs or traditions.
Oblations to 0 percent inflation are mounting not declining.
The new norm? Think Japan.
18. November 2013 at 13:01
“However, looking through the lens of aggregate supply, the difficulties of the eurozone’s periphery bear only a superficial resemblance to those plaguing Japan. In this case, falling prices are the result of a supply shock, through improved productivity or real wage reduction.”
yoy HICP October 2013
Ireland (-0.1)
Greece (-1.9)
Spain (-0.0)
Italy (+0.8)
Cyprus (-0.5)
Portugal (-0.0)
yoy Nominal ULC 2013Q2
Ireland (+2.1)
Greece (NA)
Spain (-2.4)
Italy (+1.5)
Cyprus (-4.2)
Portugal (+2.1)
http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-055412_QID_-2F7B81E9_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;INDIC_NA,L,Z,0;UNIT,L,Z,1;S_ADJ,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-055412S_ADJ,SWDA;DS-055412UNIT,PCH_SAME;DS-055412INDICATORS,OBS_FLAG;DS-055412INDIC_NA,NULC;&rankName1=INDIC-NA_1_2_-1_2&rankName2=S-ADJ_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=UNIT_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23
yoy Real Labour Productivity per Hour Worked 2013Q2
Ireland (-3.8)
Greece (NA)
Spain (+0.7)
Italy (-0.5)
Cyprus (-0.0)
Portugal (-0.3)
http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-055410_QID_2DE8AD6F_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;INDIC_NA,L,Z,0;UNIT,L,Z,1;S_ADJ,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-055410UNIT,PCH_SAME;DS-055410S_ADJ,SWDA;DS-055410INDICATORS,OBS_FLAG;DS-055410INDIC_NA,RLPP;&rankName1=INDIC-NA_1_2_-1_2&rankName2=S-ADJ_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=UNIT_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23
I can see the falling wages in Spain and Cyprus. But where’s this improved productivity of which he speaks?
18. November 2013 at 13:38
Petar, Yes, I did a post on that.
Ben, And just when they start to become less obsessed with inflation, they want to tighten even more. Even 2% inflation is too much, we need deflation!
Mark, I’m as puzzled as you are.
18. November 2013 at 19:40
“When AD declines you see a decline in both output and inflation. Then the self-correcting mechanism takes over. Heise seems to be suggesting that we are now seeing the self-correcting phase. But that’s clearly not the case; if it were then RGDP growth in the periphery would be above trend.”
Self-correction does not require that subsequent growth be “above trend”. It doesn’t require any constant unchanging trend. Self-correction is actually taking place when individuals continue to act in their own best interests given the new circumstances. A group of people building a home, and who realize they made a series of mistake, and who then act differently with that knowledge moving forward, are engaging in self-corrective behavior. It doesn’t require that the home building be on a specific trend thereafter. Indeed, it doesn’t even imply that the home will continue to be built. It could imply a new planning stage, and lower real “output” for a period of time. Self-correcting activity is taking place, despite the drop in “output”.
“The mistake is to look at the inflation rate, which tells us nothing of interest. Rather the key variable is NGDP, where growth has slowed sharply since 2010, pushing the eurozone into a double-dip recession. That’s a demand shock, pure and simple. If the ECB raises the NGDP growth rate (and there are a few signs it may be shifting toward easier money) then the self-correcting mechanism will kick in. For any given growth rate of NGDP, more deflation is better. But first you need the NGDP growth.”
The mistake is to look at NGDP, which tells us nothing of interest. Rather the key variable is economic calculation, where unhampered calculation has slowed sharply since 2010, pushing the eurozone into a double-dip recession. That’s a demand shock, pure and simple. If the ECB raises unhampered calculation (and there are a few signs it may be shifting toward easier money) then the self-correcting mechanism will kick in. For any given economic calculation, more deflation is not necessarily better. But first you need the unhampered calculation.
“I’m all for wacky unconventional theories, this blog is full of statements that seem crazy to others. But I never insult the intelligence of my readers.”
That’s a lie. My intelligence for example has been insulted more than once on this blog by its owner.
“Easy money creates faster NGDP growth, which raises nominal interest rates.”
Not necessarily. If the Fed is accelerating its inflation, it can hold interest rates down for quite a number of years.
18. November 2013 at 20:30
” If we want to stabilize national income, why not target national income?”
Dont inflation and ngdp move together? raising the inflation target is like raising the NGDP target correct?
18. November 2013 at 21:19
There seems to be no end to the creative ways by which this blog justifies outrageously expansionary monetary policies.
18. November 2013 at 23:10
Scott,
“The reason so many Keynesians keep returning to that assumption is that they rely on the wrong model, IS/LM with a downward-sloping IS curve. If they could somehow absorb Nick Rowe’s insight that the IS curve is often upward-sloping (especially for large monetary policy shifts), then they’d realize that NGDPLT is enough, no need for a higher inflation target.”
I always think about a modified IS curve with the following characteristics:
1) Use the real price of financial assets (1/1 – real IRR) rather than i on the y axis. This gets rid of the distractions of a) nominal interest rates and b) the ZLB.
2) Y stays on the x axis.
3) The curve therefore becomes upward sloping.
4) Changes in expected NGDP will cause the curve to shift left or right. Higher expected NGDP shifts the curve right. Lower expected NGDP causes a shift to the left.
5) Alternatively, you can just put expected NGDP on the z axis.
For me this is a lot more straightforward than Nick’s model where you have Serling-esque flips of the sign of the slope of the curve.
19. November 2013 at 01:12
“Except at the margins, the Fed is completely boxed in by a political consensus it dares not question.”
– David Glasner
http://uneasymoney.com/2013/11/18/the-internal-contradiction-of-quantitative-easing/
19. November 2013 at 02:26
Scott,
David Glasner also says,
“The quantity of money in private hands, being almost costless to hold, is no longer a hot potato. “
When you can’t even convince the choir, maybe it’s time to rethink the HPE sermon.
Scott, trust me on this and take a leap of faith.
19. November 2013 at 04:10
Barry Ritholz on how to spot a bubble in real time: http://www.ritholtz.com/blog/2011/06/how-to-spot-a-bubble-in-real-time/
19. November 2013 at 04:12
dtoh, but I don’t think either you or Glasner actually believe in eternally infinite liquidity preference, right…?
19. November 2013 at 04:22
Saturos,
I don’t believe HPE is the transmission mechanism so IMHO it makes no difference whether money is held as medium of exchange or as a store of value. What matters for the transmission mechanism is the real price of financial assets relative to price of goods and services. It doesn’t matter whether the financial assets are Treasuries, auto loans or money being held as a store of value rather than as an MOE.
19. November 2013 at 07:21
This blog has argued a positive theory /that/ ECB policy has been misguided — that the laser has been focused on the wrong target, and in fact pointing in the wrong direction. But I would like to see more thoughts on /why/ ECB policy has been so wrong. And by extension, Fed policy.
At this point the answer can’t just be lack of knowledge within the profession and institutional inertia. This blog has created measurable impact on policy debates, but I would say the truth is now out there. Each ECB GC member and Fed BOG member would be able to correctly identify “NGDPLT” and use it in a sentence. And yet I can’t shake the feeling that maybe things are the way they are because influential people want them that way.
For all his shortcomings Keynes (if not Keynesians) had trenchant observations about self-defeating self-interest on the part of opponents of his policy agenda, here read to be one of raising expected NGDP.
Maybe the request I am making is: try to understand why proponents of current (or more restrictive) monetary policy haven’t changed or have dug in, without assuming they are ignorant of NGDPLT and its virtues. +1 bonus point each for an explanation that includes: central bankers, commercial bankers, the WSJ op-ed page, old people, poor people, European people, CEO/corporate board members, the median voter, Australia, and Japan.
I searched google for ‘site:themoneyillusion.com “political economy” ‘ and didn’t find satisfying answers, mostly just disagreements with Krugman.
19. November 2013 at 07:50
Too much liquidity preference amongst the existing asset holders and banks means little effect on ngdp from MP. Change the counterparties of the fed to those with a lower average liquidity preference and then ngdp will react to changes in the money supply. A central bank mechanism of heli drops with the people is the answer.
19. November 2013 at 08:10
November 19, 2013
The Internal Contradiction of Quantitative Easing
By David Glasner
“…Now maybe you don’t like the Eurozone, as it includes all those dysfunctional debt-ridden southern European countries, as a baseline for comparison. OK, then let’s just do a straight, head-to-head matchup between the inflation-addicted US and solid, budget-balancing, inflation-hating Germany. Well that comparison shows (see the chart below) that since 2011 US real GDP has increased by about 5% while German real GDP has increased by less than 2%.
http://uneasymoney.files.wordpress.com/2013/11/us_germany_rgdp.jpg
So it does seem possible that, after all, QE and low interest rates may well have made things measurably better than they would have otherwise been. But don’t expect to opponents of QE to acknowledge that possibility…”
However, I can see some people claiming that Germany’s worse economics performance since 2011Q1 is attributable precisely to her fiscal fastidiousness. There is however ample reason to believe that is not the case. The following is the percent change in the real general government consumption expenditure between 2009Q4 and 2013Q2 (except as noted):
1.Malta 13.6
2.Luxembourg 10.0
3.France 4.5 2013Q3
4.Estonia 4.2
5.Germany 3.5
6.Belgium 2.9
7.Finland 2.0
8.Austria 0.5 2013Q3
Euro Area (-0.6)
9.Netherland (-2.4) 2013Q3
10.Slovenia (-4.1)
11.Italy (-4.6)
12.Spain (-5.1)
United States (-5.3) 2013Q3
13.Slovakia (-6.0)
14.Ireland (-10.6)
15.Portugal (-11.2)
16.Cyprus (-17.0)
17.Greece (-20.0) 2011Q1
http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-055780_QID_-3AE25C01_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;S_ADJ,L,Z,0;UNIT,L,Z,1;INDIC_NA,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-055780S_ADJ,SWDA;DS-055780INDIC_NA,P3_S13;DS-055780INDICATORS,OBS_FLAG;DS-055780UNIT,MIO_NAC_CLV2005;&rankName1=INDIC-NA_1_2_-1_2&rankName2=S-ADJ_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=UNIT_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23
This information also stands in stark contrast to the claims by Austrian Economic Theorists, Monetary Realists, Modern Monetary Theorists and others that there has been absolutely no fiscal consolidation taking place in the United States.
19. November 2013 at 09:12
lxdr, There’s a huge difference between “moves together” and perfectly correlated.
dtoh, That might work, but I’d prefer we get rid of the model entirely.
Saturos, I’ve always argued the Fed follows a consensus of economists. Politicians know nothing about monetary policy, so the Fed can’t follow their lead. Do you know any politicians that were telling the Fed to do “forward guidance?”
dtoh, I don’t see how that Glasner quote conflicts with what I’m saying in this blog.
JLK, My sources in Europe tell me that there is a shocking ignorance about the importance of AD/NGDP among policymakers. I have no first hand knowledge, I simply report the results. I generally assume policymakers are well intentioned, I would be if I was a policymaker, and I don’t see why they would behave differently. Since lots of private European economists with no ax to grind agree with the ECB, there’s really no evidence that it’s political pressure leading to this policy. Also note that the ECB has recently split over a rate cut, indicating that people are learning, and change is coming gradually.
Thanks for the info Mark.
19. November 2013 at 09:12
Off topic, but you’d have to have a heart of stone not to laugh at Barack Obama’s latest poster gal;
http://politicalticker.blogs.cnn.com/2013/11/19/woman-cited-by-president-as-obamacare-success-story-frustrated-by-sign-up-process/?hpt=hp_t2
———quote————
“Wow. You guys really screwed me over,” Sanford wrote. “Now I have been priced out and will not be able to afford the plans you offer. But, I get to pay $95 and up for not having health insurance. I am so incredibly disappointed and saddened. You majorly screwed up.”
….
“This is it. I’m not getting insurance,” Sanford told CNN. “That’s where it stands right now unless they fix it.”
———–endquote———-
19. November 2013 at 09:31
Patrick R. Sullivan,
Laugh at her or feel sorry for her? For me, it’s the latter. I tend to feel sorry for those in troubled circumstances who have been swindled…
19. November 2013 at 09:35
“Your household has been determined eligible for a Federal Tax Credit of $0.00 to help cover the cost of your monthly health insurance premium payments”
****! What ******* ****-****** *******!
(Fill in the blanks as needs be. There’s nothing in “Brazil” that exceeds that message in its level of parodying government bureaucracy.)
19. November 2013 at 10:26
“dtoh, That might work, but I’d prefer we get rid of the model entirely.”
Try my model for two weeks. It will make your life easier. Your posts will be much shorter, and all of the comments will just be “Right I agree.” (Except maybe Geoff).
“dtoh, I don’t see how that Glasner quote conflicts with what I’m saying in this blog.”
Seems to me Glasner is saying HPE doesn’t work at the ZLB.
19. November 2013 at 12:37
‘Laugh at her or feel sorry for her?’
She’s still in denial, and would probably vote for Obama again. Read the CNN piece.
19. November 2013 at 18:29
[…] targeting as a fetish, a guarantee of order, while it generates economic disorder; wanting ever lower levels of […]
19. November 2013 at 18:35
Partly inspired by this post (and your blogging generally), I thought I would have a go at explaining why conservatives keep repeating the same mistakes–and not only in monetary policy (though it provides an excellent example).
http://skepticlawyer.com.au/2013/11/20/why-conservatives-dont-learn-from-history/
19. November 2013 at 19:29
Thanks for the reply Scott (as well as the blog for that matter). It’s pretty remarkable that the hotshot proprietor of this blog responds to anonymous nobodies like me. That said, I note that the response didn’t grant my premise that central bankers are hip to NGDPLT. (Certainly the US ones are, at least?) And I’ll confess I was hoping for a little more than an assumption of misguided good intentions in explaining why the central banks don’t choose to inflate, especially since a fundamental tenet around here is that a central bank that wants to inflate will be successful.
Maybe the Scott Sumner version of Tyler Cowen’s Tyrone alter ego could engage?Thanks again.
20. November 2013 at 06:06
Patrick R. Sullivan,
I just did. I’m reminded of how peasants in Tsarist Russia could rarely accept that the Tsar wasn’t benevolent- it was always the fault of the local bureaucrats or Jewish merchants or whatever…
20. November 2013 at 09:10
Scott,
The following is a reply to a comment on David Glasner’s most recent post:
http://uneasymoney.com/2013/11/18/the-internal-contradiction-of-quantitative-easing/#comment-27388
Diego Espinosa,
“QE is dangerous and ineffective for a few reasons. First, it shortens the duration of government (consolidated) liabilities. If it continues for a few years, which it well might given its ineffectiveness, QE could leave the consolidated balance sheet mostly funded at the short-term IOR. Implications? The U.S. taxpayer is much more exposed to a future increase in rates; institutionally, it also raises the possibility that the Fed will attempt to avoid visible losses by delaying rate increases. Both have implications for deficits and inflation.”
This claim seems rife with contradictions. The only coherent reason for why US interest rates may rise if if the economy recovers in which case government revenue will rise and paying the net interest costs will not be much of an issue. As for the effect on the Fed’s balance sheet, losses are only an issue if one were concerned about the Fed’s ability to shrink the monetary base, in which case presumably inflation is the problem and in which case we must assume that the economy has recovered. in short if QE is ineffective there will be no interest rate increase. If QE is effective then these issues are probably trivial thanks to the recovery of the economy.
“Second, QE is dangerous because it aligns speculator strategies along the carry/frontrunning trade. The effect of this alignment is a homogeneity in speculator balance sheets. This homogeneity results in a fragile system vulnerable to shock and panic once QE begins to unwind. BTW, this sort of analysis uses complexity theory as its guide.”
If investor balance sheets are homogeneous this should lead to greater financial market volatility (Unlike a sand pile, markets are in constant motion and consequently homogeneity is reasonably easy to detect.) I’ve been tracking financial market volatility by a number of measures throughout the course of the QE programs. I have divided up the periods into Precrisis (before 9/10/2008) , PreQE1, QE1, PreQE2, QE2, PreMEP (Maturity Extension Program), MEP and QE3. What I find is that US stock market volatility was lower during QE2 and QE3 than during the precrisis period, and that bond market volatility has been lower during MEP and QE3 than during the precrisis period.
In contrast, in the Euro Area, where there has been no QE, I find that stock market volatility only dropped to below precrisis levels during QE3 and that it has been consistently above US levels since the end of QE1. With respect to bond market volatility, I find that it has been above precrisis levels throughout, and that it has been consistently above US levels since the end of QE2.
In short I find the exact opposite of what you are claiming. US financial market volatility has dropped with each succeeding QE program to very low levels. In contrast, in the Euro Area, where there has been no QE, financial market volatility has been consistently higher than US volatility, depending on the type of asset, since 2010-11.
“Third, QE is dangerous because it is seen by market participants as propping up the prices of legacy assets. This reduces capital mobility and economy-wide returns, and depresses investment.”
This claim is especially strange since it particularly applies to the Euro Area, where they have done no QE, and not to the US.
The issue of Euro Area financial sector legacy assets has been prominent in the news since early last year as the exact mechanics of a proposed banking union has been discussed. The existence of these assets exacerbates the sovereign debt crisis through bank-sovereign links.
Traditionally one of the approaches to looking at the issue of capital mobility is through real long-term interest rates. In fact the differences in real long-term interest rates that have grown in the Euro Area since the recession have been credited precisely to the poor condition of the financial sector in peripheral countries. This has also been highlighted as evidence of a broken monetary transmission mechanism within the Euro Area.
Another approach to looking at the issue of capital mobility is the correlation between savings and investment rates. If capital is mobile there should be no correlation between the two ratios. And in fact the correlation between gross savings and fixed capital formation in the Euro Area was statistically insignificant just prior to the recession, but it is now highly significant with the correlation coefficient at a level more consistent with states that are not members of the same currency area. It’s very likely that this sharp decline in capital mobility within the Euro Area has inordinately depressed aggregate investment.
And in fact that is what we seem to find. The following is the percent change in the real fixed capital formation between 2010Q1 and 2013Q2 (except as noted):
1.Estonia 60.9
2.Luxembourg 23.3
United States 16.1 2013Q3
3.Austria 10.2 2013Q3
4.Germany 9.4
5.Finland 8.3
6.Slovakia 2.8
7.France 0.9 2013Q3
8.Belgium 0.9
9.Netherlands (-2.9) 2013Q3
Euro Area (-4.6)
10.Italy (-14.5)
11.Slovenia (-18.2)
12.Greece (-19.2) 2011Q1
13.Spain (-19.7)
14.Ireland (-21.2)
15.Malta (-22.4)
16.Portugal (-30.8)
17.Cyprus (-42.5)
http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-055780_QID_6FA8C7B_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;S_ADJ,L,Z,0;UNIT,L,Z,1;INDIC_NA,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-055780S_ADJ,SWDA;DS-055780INDIC_NA,P51;DS-055780INDICATORS,OBS_FLAG;DS-055780UNIT,MIO_NAC_CLV2005;&rankName1=INDIC-NA_1_2_-1_2&rankName2=S-ADJ_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=UNIT_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23
20. November 2013 at 13:42
dtoh, David said:
“So it does seem possible that, after all, QE and low interest rates may well have made things measurably better than they would have otherwise been. But don’t expect to opponents of QE to acknowledge that possibility.”
That’s exactly my view.
JLK, I think you overestimate how much they know, but let’s put that aside. The most plausible reason for ECB hawkishness is that they don’t think NGDPLT would help the real economy. In Europe most economists seem to think the problems are structural, and that more NGDP would not help. Or they think it would help a little bit, but not enough to justify taking the hit to credibility from abandoning their inflation target.
Thanks Mark, Seems to me that short term debt is less risky. If the economy recovers rates rise, but so do tax revenues.