Interesting links

1.  It’s increasing hard to keep up with all the good stuff in the blogosphere.  One of the most important is Josh Hendrickson’s post discussing James Bullard’s new paper (which I haven’t yet had time to read.)  Josh makes the following observations:

The basic argument made by Bullard is as follows:

1. The conventional wisdom prior to the crisis was the fiscal policy was largely ineffective as a stabilization tool and therefore stabilization should be left to monetary policy.

2. The New Keynesian model suggests that monetary policy is ineffective at the zero lower bound.

3. The effectiveness of fiscal policy is dependent on the role of monetary policy. Given the ineffectiveness of monetary policy at the zero lower bound, there is a potential role for fiscal stabilization policy.

4. There are three problems with this viewpoint:

i.) The political process in the United States is ill-equipped to make timely and effective decisions on fiscal policy.

ii.) Monetary policy over the last few years has shown that monetary policy is not ineffective at the zero lower bound.

iii.) “The actual fiscal stabilization policy experiment did not involve funding increased government spending with lump-sum taxes, as contemplated in the theory, but instead involved heavy borrowing on international markets. In models, the borrowing would be interpreted as promised future distortionary taxes, but it is exactly the shifting of distortionary taxes into the future beyond the period of the binding zero lower bound and financial market turbulence that can undo most or all of the benefits that might otherwise come from the fiscal stabilization program.”

Josh’s post also has some excellent quotations from Bullard.  If he’d mentioned NGDP I’d be ready to welcome him into the market monetarist club.

2.  Lars Christensen has a nice post on a piece by Sean Keyes in the British publication MoneyWeek, which touts market monetarism.  I like the article a lot, except this opening paragraph:

What if the recession wasn’t real? What if the UK economy could return to its former growth path quickly and almost without any cost? And what if all that was needed to start this process was a short statement from Bank of England governor Mervyn King?

Two problems.  A recession is a recession, it’s “real” even if caused by a fall in AD.  He probably meant “what if it’s not caused by real factors.”  But I see two possible real problems for the UK.  First of all, when world AD plunges, smaller open economies are much more likely to suffer from the “PSST” problem discussed by Nick Rowe in this post.  Britain’s not small, but it’s much smaller than the US.   Second, the huge growth in the size of the government in Britain since 2000 has almost certainly hurt the supply side of the economy.  So the old RGDP trend line may not be attainable with faster NGDP growth.  NGDP targeting is a great idea but it can’t produce miracles. 

3.  Over at Free Exchange,  Christian Odendahl  agrees with my argument that the ECB doesn’t necessarily favor Germany, but nevertheless is far from being optimal:

Accusing the ECB of favouritism is not only false, in my view, it will also make the ECB turn a deaf ear on an otherwise very sensible position: namely, that its monetary policy is inappropriate for the euro zone as a whole.

4.  David Beckworth has some good counterarguments in this post.  I won’t try to argue against his data on shocks, as he knows much more about the statistical techniques than I do.  However I’d quibble slightly with one argument, that a low inflation target favors Germany.  It’s true that Germany has traditionally liked low inflation, but the superneutrality of money principle suggests it shouldn’t matter, and that if the ECB targets low inflation there will be times that policy is too easy, or too tight, for both Germany and Greece.  The counter would be that superneutrality may break down at very low inflation rates, but that Germany is better than Greece at getting workers to accept low raises.  If so then David is right.  I have an open mind on this issue, but I still feel strongly that the 2001-06 period was one where policy looked too tight for Germany.  After that they got wages under control and have done well.

5.   David Beckworth gets it exactly right in pushing back against the gleeful attempts to satirize statements made in Fed meetings just as the housing bubble was bursting:

Normally, I am the first one to participate in such parties, but here I actually want to push back against this hysteria.  Yes, the Fed like most observers did not understand all the linkages between housing, the financial system, and the broader economy at the time, but this fact does not really matter. What matters–and is missed by these observers–is that the Fed was fairly successful in preventing the housing recession from spreading to the broader economy for almost two years!  From the peak of the housing market in the spring of 2006 to about mid-2008, the Fed was able to keep aggregate nominal spending growing with minimal slowdown from the housing recession.  It did so by keeping nominal spending (and by implication inflation) expectations stable over this time.

It’s all-to-easy to make fun of people who didn’t know what was going to happen next, but I wonder how many people who are gloating over Fed errors in 2006 and 2007 were getting rich selling short the big banks and real estate companies in 2007 and 2008.  (Also check out Marcus Nunes, who has similar comments.)

6.  David Beckworth is on a roll.

7.  Ryan Avent has very interesting thoughts on resource constraints and world growth.  I’m not entirely convinced, but then he isn’t either.  It’s probably true to some extent, but how much?  (I seem to recall that commenter Statsguy had a similar theory.)



10 Responses to “Interesting links”

  1. Gravatar of Lars Christensen Lars Christensen
    13. January 2012 at 15:22

    Scott, concerning the weak recovery in the UK economy David Eagle has a much better explanation than PSST.

    Even if you accept that the Bank of England is targeting NGDP you should acknowledge that BoE is targeting the GROWTH of NGDP rather than the level. As David Eagle shows targeting NGDP growth is nearly as bad as inflation targeting.

    With growth targeting monetary policy is tightened much earlier than with LEVEL targeting and this obviously is reflected in expectations.

    David’s research that the speed of recoveries in the US economy to a very large degree can be explained by whether the Fed has targeted growth or the level of price or NGDP.

    I am pretty certain that the UK economy if the BoE read David’s research and acknowledged the problem with NGDP growth targeting and instead implemented a NGDP LEVEL target.

  2. Gravatar of Dan S Dan S
    13. January 2012 at 15:28

    Scott, I wonder if your emphasis on NGDP (and/or NGDP futures) targeting as an inseparable part of market monetarism is misguided. It seems that you have 2 main points to make. The one is that monetary policy is actually effective at the zero bound, that the liquidity trap is irrelevant/non-existent/really just a result of the FOMC focusing on interest rates as the announced policy metric; in other words, that this recession is curable through monetary policy and the Fed need only announce “Attention: we will print money until the economy is better,” and it will be so.

    The other is that NGDP level futures targeting is the best rule of monetary policy for the Fed to follow, as opposed to, say, price level futures targeting, or just price level targeting without the futures. The latter point may be correct, but it does not seem to me that it depends all that highly on the former one. The primary issue facing the economy right now is that the Fed has not recognized the first one.

    In other words, if the FOMC announced tomorrow that they have made a huge mistake and will immediately begin targeting the pre-2007 trend price level, no matter how much QE it required, but that they would not use NGDP futures targeting, I suspect you wouldn’t be crying yourself to sleep at night about it. The economy would get better, and quickly, which was really what prompted you into blogging in the first place. It wasn’t the Fed’s failure to specifically do NGDP targeting, it was their failure to maintain a high enough level of AD.

    So I say, let Bullard into the club. At this point in the game, who cares if he isn’t endorsing the exact same rule as the market monetarists, as long as he’s with you in spirit.

  3. Gravatar of marcus nunes marcus nunes
    13. January 2012 at 16:33

    Dan S
    That´s why I titled my post A “nuanced” hawk. He only has to abandon his IT target. If it weren´t for that point…

  4. Gravatar of StatsGuy StatsGuy
    13. January 2012 at 17:58

    The problem with large lag VARs is that they are so internally opaque. I’m also not sure I follow the inclusion of Fed policy as an exogenous variable. Certainly, Fed policy in 2011 was not independent of prior ECB choices (like the decision to raise ECB rates earlier in the year, which probably contributed to the Fed’s “twist” later in the year). It immediately raises the question of whether the non-inclusion of this variable changes results at all. Leverage in these kinds of regressions tends to be driven by periods of non-correlation in the independent variables (the most important of which seems to be 2001-2002, and the aftermath). In 2007+, it’s clear the policy is inappropriate for the periphery AND the core, so the question (subjectively) to ask is whether in 2001-2002ish ECB policy somehow was “appropriate” for Germany and inappropriate for the periphery – I don’t know that period well enough in the EU.

    Beckworth also writes:

    “First, the Germans only agreed to cede monetary power to the ECB after they got it located in Frankfurt and made sure its first leader (Wim Duisenberg) and chief economist (Otmar Issing) were supporters of the hard money view.”

    While true, it’s also true that ECB policy was institutionally locked into hard money bias in order to allow peripheral countries to borrow at much lower interest rates… So they, too, got what they wanted. Also, the comments on the final graph (NGDP vs. ECB policy rate) only refers to trends – at an ABSOLUTE level, the rate was inappropriate for Germany for much of the period.

  5. Gravatar of Jim Glass Jim Glass
    13. January 2012 at 19:27

    David Beckworth gets it exactly right in pushing back against the gleeful attempts to satirize statements made in Fed meetings just as the housing bubble was bursting…

    Well, I haven’t seen this glee reported: Laughter in the FOMC Minutes as an economic indicator. (Emphasis in original.)

    …Putting hindsight economic analysis aside, you quickly realize more than anything else: the FOMC is full of burgeoning comedians.

    Commentators have already highlighted the “humor” of the FOMC meetings, but it is really over the top at times … [jokes by Greenspan, Geithner and crew omitted.]

    Well, being a data nerd with nothing better to do on a Thursday night, I looked into it. To be precise, I went back for the last six years (2001-06) and searched for how many times the stenographer’s notation for laughter appeared in the released transcripts of each FOMC meeting.

    Suffice it to say the data is funny… [Chart]

    The number of recorded laughs increased in frequency from 2000 to 2006. In 2001, the FOMC erupted into laughter 16.5 times per meeting on average. In 2003, it was over 19. In 2005, 27. And then in 2006, the FOMC burst into laughter nearly 44 times per meeting!

    And just in case you woke up from a 5-year coma this morning, the Case-Shiller 20-city Home Price Index also peaked in 2006. [Chart]

    That’s right, the FOMC was laughing all the way to the top!

  6. Gravatar of Morgan Warstler Morgan Warstler
    13. January 2012 at 19:29

    Dan S,

    I think the expectations arguments made by Shlaes (and me) are the reason.

    But she is overly concerned and misses that we can just use a slightly lower NGDP target, like Woolsey’s 3% – and inflation fears won’t increase.

    Also, Scott routinely makes the GIANT MISTAKE of focusing on the money printing side of the equation, when the real compelling argument about NDGP level targeting is the pissing on booms bit.

    Scott, completely gets the pissing on booms (rasing rates far more aggressively then we have before) is EQUAL to the money printing side of the equation, he just doesn’t think it is salient right now, because he is trying to convince liberals – I think liberals don’t matter and only want to convince conservatives.

    Level targeting (and futures more so) is closer to Friedman’s replacing the Fed with a computer.

    I like the futures bit, because I like the idea of newly printed money being handed directly Vegas-style to whoever bet on the outcome.

    Finally, as I keep saying here, over, and over, and over… there are tremendous upside effects to the clarity brought by “level targeting” if you instead think of it as “capped growth”

    We simply choose to cap growth as a spot that is ever so slightly below what is historically achievable (allowing for a bit of commodity inflation)… let’s say 4%…

    And now, every time the govt. wants to give public employees a raise, say right when things are moving along at 4%, the public outcry is immediate because we know that will artificially push up GDP, and if it is coming in at 4.2% – well shit, let’s just fire 5% of public employees and keep the good times rolling.

    If it helps, you can think “have a war” instead of giving public employees a raise, but you get the idea:

    A capped growth system, makes us all KNOW the difference between rel private market growth, unfortunate commodity inflation, bad price-increasing regulations, and straight up shitty gvt. deficit spending crowding out real private growth.

    As they say in porn, “All DP is not the same” and under a targeted level (capped growth) NGDP system, everyone In America would know it.

  7. Gravatar of ssumner ssumner
    13. January 2012 at 19:30

    Lars, I agree that faster NGDP growth would help, but I also think they have an AD problem. The P/Y split is worse than in the US, for some reason.

    Dan, Good point, I think they are two separate issues.

    Marcus. Thanks for the link.

    Statsguy, I’m going to pass on that because I haven’t had time to properly evaluate his argument. Perhaps he’d respond to a comment over at his blog.

  8. Gravatar of ssumner ssumner
    14. January 2012 at 06:52

    Jim Glass, I actually like that sort of empirical study.

  9. Gravatar of Otto Maddox Otto Maddox
    15. January 2012 at 11:26

    “What matters-and is missed by these observers-is that the Fed was fairly successful in preventing the housing recession from spreading to the broader economy for almost two years! ”

    I must have a different definition of success.

  10. Gravatar of ssumner ssumner
    16. January 2012 at 11:58

    Otto, The mistakes were made after mid-2008

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