Macro Issues

How to make the economy look good so monetary policymakers can “get a license to kill”

The concept of economic potential is key to the making of monetary policy. When there is a large positive gap – the difference between potential and actual output – the economy is in a recession. Such a situation requires monetary stimulus to trigger a recovery, i.e., the closing of the gap. The chart illustrates The

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EZ Q4 NGDP growth flat, though Germany "dangerously" accelerates in Q4 QoQ

As usual, we have a long wait for the EuroZone NGDP data to be released. We do get some large countries reporting and can use them to estimate for the whole of the monetary bloc. We also get Germany’s data and that is very important due to its 30% economic weight and nearly 50% moral

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Equity rally led by investors piling into banks: likely wrong move

Investors adding new money to the market and to the bank sector in particular, drive the current rally in US equities. Two reasons: deregulation and higher interest rates. We have discussed the deregulation issue already, creating a longer-term risk to the economy, as investment banks can now play chicken with the Fed all over again, and

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Bank of Canada Triples down on inflation targeting

In “Getting to the Core of Inflation” we read: Over the past 26 years, we have reduced consumer price index (CPI) inflation and maintained it at a level close to our 2 per cent target, with no persistent episodes of inflation outside our inflation-control range of 1 to 3 per cent. Because inflation has been low,

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What is the stance of UK monetary policy?

Many top economists are showing much confusion over the current state of the UK economy. There was near unanimity that a vote for Brexit would bring disaster. Clearly, the only “disaster” has been the fall in the currency, something that wreaks havoc only on foreigners owning assets denominated in GBP. A lot of havoc has

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Lambda, the measure of Central Bank discretion

Recently, Carney gave a speech at the LSE titled “Lambda”. Lambda is the coefficient on the output gap. If the coefficient is zero, the policymaker gives no weight to the stabilization of real activity, all that matters is inflation stabilization. On the other hand, a positive lambda indicates that the policymaker is willing to strike

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The Fed and the inflation obsession

From Yellen´s latest speech: Speaking on the eve of Donald Trump’s inauguration as the 45th U.S. president, she said the economy remains constrained by multiple long-term forces. “Economic growth more broadly seems unlikely to pick up markedly in the near term given the ongoing restraint from weak foreign demand,” rising interest rates, an aging population

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Appraising the state of the economy

Just as it is misleading to gauge the stance of monetary policy from the level of interest rates, it is also misleading to appraise the state of the economy from the rate of unemployment. Recently, Ken Rogoff said: “The Fed will tighten three times, they might even tighten four times” and “still be behind the

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Putting Construction Spending into Perspective

You may have seen the recent headlines about the stronger than expected construction spending report for November. One of the points certain outlets made about the report was the frankly banal observation that spending is now at an “all time high”. Spending-linked variables, in an economy with some sort of persistent inflation rate and population

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The PCE Chain-type Price Index Standard

Believe it or not, there are still people worried about inflation, about the US dollar losing its value. It is not hard to find articles where complaints about how the dollar has “lost its value” since 1913, 1936 or 1972, various points where the dollar was gradually shifted toward its modern “fiat” standard. Yes, the

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