Monetary policy: Levels and Growth Rates

In a recent Mercatus working paper, I argued that monetary policy works in two dimensions, by changing levels of key macro variables and by changing expected future growth rates of those variables.

This is easiest to see when looking at the impact of monetary policy announcements on the spot and forward exchange rate. A monetary policy announcement might cause the spot exchange rate to depreciate while also reducing the expected future appreciation in the currency. Or, it might cause the spot exchange rate to depreciate while raising the expected future appreciation in the currency. There are different kinds of “easy money” policies, and the actual outcome depends in part on “forward guidance”.

After writing this paper, I came across an interesting 2005 paper by Refet S. Gürkaynak, Brian Sack, and Eric T. Swanson. Here is the abstract:

We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We
test whether these effects are adequately captured by a single factor—changes in the federal funds rate target—and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a “current federal funds rate target” factor and a “future path of policy” factor, with the latter closely associated with Federal Open Market Committee statements. We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.

I like the way they look at policy shocks in two dimensions—immediate effects and changes in the expected future path of policy. It’s interesting that the impact on the future expected path of policy comes mostly from the policy statements that accompany the interest rate announcement.

Of course signals are only effective to the extent that they credibly describe future concrete actions by the central bank:

We emphasize that our findings do not imply that FOMC statements represent an independent policy tool. In particular, FOMC statements likely exert their effects on financial markets through their influence on financial market expectations of future policy actions. Viewed in this light, our results do not indicate that policy actions are secondary so much as that their influence comes earlier—when investors build in expectations of those actions in response to FOMC statements (and perhaps other events, such as speeches and testimony by FOMC members).

This is what I’ve been calling “long and variable leads”.

They also suggest that the findings support claims that monetary policy is still quite effective at the zero bound:

This finding has important implications for the conduct of monetary policy in a low-inflation environment—in particular, even when faced with a low or zero nominal funds rate, our results directly support the theoretical analysis of Reifschneider and Williams (2000) and Eggertsson and Woodford (2003) that the FOMC is largely unhindered in its ability to conduct policy, because it has the ability to manipulate financial market expectations of future policy actions and thereby longer-term interest rates and the economy more generally

What is Xi trying to hide?

The New Yorker has a very good article on the origins of Covid. They don’t take a definitive stand on the question, but along the way make some important points:

Before the pandemic, President Xi Jinping promoted wildlife farms as a means of poverty alleviation, and the industry, which was largely unregulated, employed more than fourteen million people. “There’s this incredible network of people involved in farming and raising animals and trying out new ideas,” Daszak told me last year. “It’s entrepreneurial, it’s chaotic, it’s the sort of farms that are half falling apart, with mixed species in them.” The W.H.O. report stated that some wild-meat suppliers to Wuhan were located in south China, where horseshoe bats that host sars-like coronaviruses primarily reside. Perhaps that is where the virus crossed from bats to animals, and those sickened animals were brought to Wuhan, where they were sold in Huanan and the city’s three other known live-animal markets. . . .

From one perspective, proving the virus has a natural origin is even worse for China. If wildlife farms were responsible for the pandemic, that would implicate the policies of President Xi Jinping. If there was a lab leak, just one, or a few, scientists are culpable of an accident. Either way, it is likely that the Chinese government prefers a storm of swirling theories, within which they can continue to push their own: that U.S. soldiers brought the virus to Wuhan in October, 2019, during the World Military Games, or that the American government manufactured the virus in Fort Detrick, Maryland. Or they can blame imported frozen food. The conspiracy theories branch out from there, in their own kind of evolutionary tree.

I’ve made the same point. The animal market theory should be worse for China’s reputation than a lab leak. Do you think Xi Jinping is more worried about the cause of Covid being his grand plan to develop an animal wildlife industry employing 14 million people that threatens to create repeated global pandemics, or more worried about a lab leak from an obscure Chinese scientist doing research funded by the US government? I don’t think people are looking at this from the Chinese point of view.

Or perhaps Xi doesn’t know the source of Covid and is engaged in a cover-up because he’d be embarrassed by either a wild animal market or a lab leak source for Covid. He just wants to confuse the issue with crazy theories of a US origin.

In the end, human beings are probably to blame either way:

Still, humans have changed the equation. Calling viruses zoonotic obscures the role we play in their evolution, whether in the wilderness, a wet market, or a lab. What is an ecological niche when humans have their hands in everything? 

PS. WaPo has an interesting piece on the discovery of a huge cave system with horseshoe bats in Hubei province, with wild animal farms nearby:

A reporter observed human traffic into Enshi caves, including domestic tourism, spelunking and villagers replacing a drinking water pump inside a cave. Defunct wildlife farms sat as close as one mile from the entrances.

But the Chinese government is covering this up:

Beijing has been less than eager to find answers in Hubei, as it touts its own theory that the virus may have originated overseas. One foreign scientist who worked for years with the Wuhan Institute of Virology, and who spoke on the condition of anonymity to discuss sensitive matters, said the institute’s field research in bat caves has been suspended since the pandemic began. . . .

A person with knowledge of the Wuhan market supply chains, who spoke on the condition of anonymity to protect his contacts, told The Post that live animals sold at markets in Wuhan were sourced from Hubei, particularly Enshi and Xianning prefectures, as well as from Hunan and Jiangxi provinces.

Chinese authorities have deflected questions about the presence of live wild animals at Wuhan markets before the outbreak. A Scientific Reports study in June that catalogued illegal sales of live wildlife at the markets has not been covered by China’s state-run media. The two Chinese authors did not respond to requests for comment about what they knew about those supply chains.

Why was the evidence from the crime scene destroyed? What is Xi trying to hide?

A bad economy doesn’t mean monetary policy is off course

The economy is currently beset by all sorts of problems, mostly related to supply-side problems. And yet, I see no evidence that monetary policy is significantly off course.

There are some reasons to worry that monetary policy is too expansionary. Inflation is above target and wage inflation (a far more important indicator than price inflation) is at 4.6% over the past 12 months. And yet NGDP growth over the past 18 months is running at an annual rate of roughly 3.6% and TIPS spreads are still reasonable, so there’s not much evidence of wildly excessive monetary expansion.

There are some reasons to worry that monetary policy is too contractionary. Employment is still down by 5 million compared to pre-Covid levels. But the unemployment rate has plunged from 14.8% to only 4.8%, a far faster recovery than from any other recent recession. And the solid growth in NGDP and strong TIPS spreads provides no indication of dramatically insufficient monetary stimulus. Total employment seems inhibited by supply-side factors.

A bad economic outcome is not evidence of a bad monetary policy. The economy is influenced by many factors, and monetary policy is just one of those factors.

That’s not to say that monetary policy is perfect; the distortions caused by Covid make it much harder than usual to “read the tea leaves”. But we are not far off course.

Off topic: While on vacation in the Pacific Northwest I read an article about a big surge in baby boomers retiring. An hour later in a small town coffee shop I heard someone say, “Boy, people are retiring right and left.”

The world’s biggest bully

People often say that the Chinese government is a big bully. And they are correct. But when it comes to bullying, no one comes close to the US government.

Yahoo news has a recent piece on the Biden’s administration’s decision to allow a gas pipeline to be built between Russia and Germany. I have no problem with the decision; what bothers me is the reporter’s implicit assumption that countries need to get permission from the US government before engaging in any sort of major economic investment:

But in May, the Biden administration served up good news for the project when Secretary of State Antony Blinken, minutes before his first meeting with Russian Foreign Minister Sergey Lavrov, announced the U.S. was waiving two key congressionally mandated sanctions on Nord Stream AG, which oversees the pipeline. The decision left critics fuming, all the more when the pipeline was completed last month.

Those were “the sanctions that could have stopped it,” former U.S. Ambassador John Herbst, now director of the Eurasia Center of the Atlantic Council, told Yahoo News. “And they lifted those sanctions. For zip.”

Since when is it for the US to decide what sort of economic arrangements are made between Russia and Germany? Or France and Iran? Or Canada and Cuba? Or Japan and China? China’s government often bullies smaller countries, but can you imagine the Chinese telling the Germans that they are not allowed to build a gas pipeline to Russia? Even the Chinese government would never go that far.

Everyone interviewed by the reporter wanted the US to stop the pipeline. These experts are presumably a part of the same foreign policy “blob” that has done such an outstanding job of directing our foreign policy since the Vietnam War.

Permitting the Nord Stream 2 pipeline to become functional “is a mistake from so many angles,” said Herbst. “I understand that Biden wants to be the anti-Trump. Trump was mean to Merkel. Biden wants to make up with Merkel. That’s a good idea in principle, but not by giving Germany something that is bad for the U.S., bad for Germany and bad for Europe. It’s a strategic mistake of the first order.”

So the US is so adept at making wise foreign policy decisions that it knows better than the German government what is “bad for Germany”? The country where a recent president told Xi Jinping that it was a good idea to put a million Muslims into concentration camps? The country where the leader of one of the two major political parties no longer even accepts the outcome of democratic elections? That’s the country you want running the world?

As an aside, the gas pipeline may or may not be a good idea, but that issue has no bearing on this post.

Films of 2021:Q3

Here’s my latest dump of movie reviews:

Newer Films:

A Sun  (Taiwan)  3.7  I found the first half to be a bit slow and predictable, but the second half is really good.  Netflix has an excellent 4k print.  The director was also producer for The Great Buddha, and you can see some similarities in style.

Annette  (US)  3.7   Leos Carax’s new film is a musical, which isn’t exactly my favorite genre.  But this one shows some real imagination, an increasingly rare commodity in modern Hollywood.

The Lost Leonardo (US)  3.5  They kept saying that Da Vinci was the greatest painter of the Renaissance, but I’m not sure he’s even as good as Tintoretto, much less Titian.  (A better argument is that he was the greatest man who painted during the Renaissance, where his only rival for all-around renaissance man is perhaps Michelangelo?)  But whatever you think of the painting itself, the story is a quite entertaining look at the intersection of art, commerce, academia, museums, politics, etc.

Roadrunner  (US)  3.5  It’s going to depend on what you think of Anthony Bourdain.  I thought he was pretentious when I first saw him, but gradually warmed up to his act.  He has a package of skills that is actually pretty rare.  (The food stuff in his show is totally beside the point.)

Malice in the Palace  (US)  3.4  Not sure how non-NBA fans would react to this, but for NBA fans this is must see TV.  Not to sound all “woke”, but seeing this did give me a better sense of what people mean by unconscious racism.  I squirmed a bit at all the white commentators (even liberals) talking about how NBA players are “thugs” with tattoos and a hip-hop style.  One NBA player pointed out that they don’t seem to say that about hockey players, even though that sport is ten times more violent.  Yes, this one incident involved a couple players going into the stands, but the commentators kept saying that there there was a continuing problem of violence in the NBA, which has to mean violence on the court.  Really?  Compared to hockey?  And why all the tsk-tsking when African American players skip college and go right into the NBA, but no similar complaints when white athletes go into professional tennis, golf and baseball at age 18?

The River Runner  (US)  3.4  Interesting documentary about some pretty extreme kayakers.  Is this the riskiest hobby?

Days  (Taiwan)  3.0  An interesting exercise in Asian slow cinema, but I don’t think Tsai Ming-liang quite pulls it off.  It reminded me a bit of Karl Knausgaard’s famous novel, but Tsai didn’t always seem to know how to make this idea work using images rather than words.  Still, there are some things to appreciate in the film.  Perhaps I underestimated it.

Silver Skates  (Russia)  2.6  Everything that is wrong with recent films.  Way too much CGI, instead of relying on St Petersburg’s natural beauty.  Tiresome action sequences that go on forever.

Older Films:

An Autumn Afternoon  (Japan, 1962, CC)  3.9   Seeing this a second time, I am struck by the enormous amount of alcohol consumed in the 110 minute length of the film. I wonder if that stood out at the time?

Happy Together  (HK, 1997, CC)  3.8  Each time I see this it takes me while to get into the rhythm of the film, but once I do it becomes very enjoyable to watch.  Great acting and great cinematography.  Criterion Channel has a very interesting documentary on the film with lots of outtakes that were not used in the film.  These outtakes almost form an alternative film.  I really miss the golden age of HK/Taiwan filmmaking, which seems to be over.

Ran  (Japan, 1985)  3.8  Probably Kurosawa’s most ambitious film, although his talent had slipped a bit from his peak period.  Perhaps that makes the film (based on King Lear) slightly autobiographical.  Seeing it in 2021, the visuals of pre-Edo era Japan have a sort 1980s vibe, which is slightly disconcerting.  Despite these reservations, there is some pretty overwhelming spectacle.

The Dead  (Ireland, 1987, CC)  3.8  It’s hard to imagine someone my age not liking this gem, which was John Huston’s final film.  (His daughter is great, as usual.) I enjoyed this even more the second time around. (And don’t say the short story is better—what do you expect?)

Tokyo Twilight  (Japan, 1957, CC)  3.8  One of Ozu’s more tragic stories.

The End of Summer  (Japan, 1961, CC)  3.8  What I’ll most remember about this film is Ozu’s use of color.  It gave me the feeling that this was the first truly color film that I had ever watched, that all other modern films were merely “not black and white.”

The Hand  (Hong Kong, 2004, CC)  3.7  This was somewhat longer than the version that appeared in “Eros”, which contained three short films, but still runs well under an hour.  I find this film hard to rate, as in some ways it’s almost perfect, but also seems to be a bit lacking in something.  It’s a film I respect more than I like.

Mr. Klein  (France, 1976, CC)  3.7  A beautifully restored print of this stylish and intelligent film directed by Joseph Losey.

The Hit  (UK, 1984, CC)  3.7  A very entertaining crime story with some great acting by Terence Stamp, Tim Roth and John Hurt.

Key Largo  (US, 1948, CC)  3.7  It’s the acting that makes this a classic Hollywood film, especially Bogart and Edward G. Robinson.

Alois Nedel  (Czech , 2011, CC)  3.6  B&W animation with very strong visuals.

The Burmese Harp  (Japan, 1956, CC)  3.6  This (somewhat dated) classic Japanese film reminds me a bit of The Bridge on the River Kwai.  Both films show a few of the horrors of war, but both also romanticize war.  In the early postwar decades, audiences weren’t interested in seeing how bad it really was. Even today, most people don’t want to see war as it really was.

Remember the Night  (US, 1940, CC) 3.6 Another great performance by Barbara Stanwyck, in this case in a rather sentimental romantic comedy.

Dracula: Pages From a Virgin’s Diary  (Canada, 2002, CC)  3.5  Black and white (and a touch of red) — silent — vampires! — Mahler — ballet — Guy Madden.  Enuf said.

Diary of a Chambermaid  (France, 1964, CC)  3.5  Bunuel’s version is skillfully made and very dark.  Hard to feel good about the human race after seeing this film.

Reflections in a Golden Eye   (US, 1967, CC)  3.4  A good film for a gender studies class.  Laugh all you want at the 1967 perspective, but these cultural artifacts are still pretty interesting a half a century later.  As is usually the case, Liz Taylor and Marlon Brando give interesting performances, and John Huston did a really good job directing several of the scenes.

Christmas in Connecticut  (US, 1945, CC)  3.4  Routine screwball comedy raised to a higher level by the presence of the sublime Barbara Stanwyck.  (BTW, the film featured a tasteless joke based on the idea of a black man being able to explain the Greek origin and meaning of the word ‘catastrophe’ to a white man.  In a weird coincidence, the very next day I read about Zaila Avant-garde winning the national spelling bee.  Old Hollywood films often have a racist joke or two.)

Lilith  (US, 1964, CC)  3.3  Halfway between an exploitative American film on insanity and a European art film.  Worth seeing for Jean Seberg’s performance, and the other actors are also pretty good.

Cutter’s Way  (US, 1981, CC)  3.3  This noir starring Jeff Bridges really captured the feel of life in 1981.

A Farewell to Arms  (US, 1932, CC)  3.2  At less than 90 minutes, it has enough space for a Hemingway short story, but tries to pack in a entire novel.  It’s Hollywood, not Hemingway. On the plus side, Borzage’s direction has a nice visual flair.  Helen Hayes is an odd looking actress.

Carmen Comes Home  (Japan, 1951, CC)  3.2  Although it’s just a silly B film, Japan’s first color film feels like some sort of cultural turning point.  I suspect that Japanese audiences left the theatre a bit more “modern” than they entered.  Stupid, but also as fun as eating cotton candy at a carnival on a summer evening when you were young.

People on Sunday  (Germany, 1930, CC)  3.1  This silent film made by a couple future Hollywood directors is not all that entertaining, but it’s nevertheless a sort of treasure, a peek at how people in Berlin spent Sunday’s back in 1929.  At least for the middle class, life was definitely “worse”, without actually being any worse than today.

The Spy in Black  (UK, 1939, CC)  3.1   A Powell/Pressburger WWI film made in 1939, perhaps before WWII broke out.  The Germans were treated respectfully.

An Irrational Man  (US, 2015)  3.0  At this point there’s not much to say about newer Woody Allen films.  Here I think he would have benefited from having a younger and more intelligent screenwriter, as much of the philosophy discussion seemed to come out of a 1960s-era copy of Cliff’s Notes.  Still, I always enjoy a good black comedy, even if it’s not so good.

City of Women   (Italy, 1980, CC)  3.0  Right off the bat you know you are in the hands of a brilliant director.  Unfortunately, it soon becomes apparent that he’s a director that has been given too much freedom and has lost his way.  The second half of this late Fellini film had enough to keep me interested—barely.

The Touch  (Sweden, 1971, CC)  3.0  To outsiders, a love affair often seems to make no sense.  Whereas most directors romanticize love affairs so that they makes sense to the average person, Bergman is oblivious to audience expectations.  He seems to embrace the senselessness of love, and doesn’t seem bothered by the fact that the affair will make no sense to most viewers of this film. The problem here is Elliot Gould; it’s unclear (at least to me) what Bergman was trying to do with his character.

California Split  (US, 1974, CC)  3.0  I often find Altman films to be slightly disappointing.  He generally seems more interested in capturing the zeitgeist than in actually making an excellent film.  I just don’t connect with his sensibility.

Midnight  (US, 1939, CC)  3.0  OK romcom starring Claudette Colbert.

Nothing Sacred   (US, 1937, CC)  3.0  At the beginning, the screenwriter Ben Hecht is pretty hard on Vermont.  Recall that in the 1936 election, Vermont was only one of two states to vote against FDR.  Hecht was a leftist.  OK film; nothing special.  Oddly, the film is in color.

Song to Song  (US, 2015)  2.8  Malick has recently produced some interesting experimental films, with a sort of stream of consciousness style.  This is more of the same, but now I’d call it an interesting failure, as the style seems increasingly hollow.  Watch it as a pretty travelogue of 21st century Austin.

Death Takes a Holiday  (US, 1934, CC)  2.7     Not just death, good acting and dialogue also take a holiday.  Still, it’s an interesting cultural artifact.  “There are only three games: money, love, and war.”

Five Corners  (US, 1987, CC)  2.5 Not sure why Criterion Channel had this one—perhaps the attraction was seeing a young John Turturro and a young Jodie Foster.  Also not sure what sort of film the director was trying to make; it’s a mishmash that doesn’t fit together.