Macro Issues

Puzzling Surprises

Lael Brainard, a prominent member of the Fed’s board of governors, made the following admission in a recent speech, highlighting what policymakers see as economic puzzle: “At a time when the unemployment rate has fallen from 8.2% to 4.4%, core inflation has undershot our target for 58 straight months.” And: Albert Edwards, strategist at Societe Generale, is equally flummoxed: “It is incredible to think that this US recovery, the third longest in history, has seen core PCE barely exceed its 2% target and for only three months in 2012. That shows how deeply entrenched deflationary pressures are.” What is an “incredible puzzle”… Read More

Share

In trying to “square the circle”, the Fed is courting disaster!

Tim Duy summarizes the problem as the Fed sees it: The Federal Reserve can’t catch a break on the inflation numbers, which are simply not helping in its drive to normalize monetary policy. Monetary policy makers have three possible responses to the weak inflation data. First, they can define down the extent of an acceptable miss on their target. Second, they can dismiss the numbers as transitory and focus instead on full employment. Third, they can rethink their estimates of full employment and the subsequent implications for the path of interest rates. Early indications are that the Fed will pursue… Read More

Share

Unfathomable Monetary Policy Parameters

While Stanley Fischer defended central bank discretion, John Williams, of the San Francisco Fed defended a change in the monetary framework and strategy, arguing for a change in the monetary policy target, from inflation targeting to price level targeting: It’s been said that “getting over a painful experience is much like crossing monkey bars. You have to let go at some point in order to move forward.” Now that we’ve gotten the monkey of the recession off our backs, we have the luxury of being able to look to the future. This presents us with the opportunity to ask ourselves whether… Read More

Share

U.S. orthodox macroeconomists are criticizing the Trump Administration’s proposed business tax cuts for widening federal deficits in the years ahead, by possibly a few trillion dollars. But why? Do we not live in the Age of Mobius-Strip Economics? The central bank the Bank of Japan has been buying back trillions of dollars of Japanese government bonds (JGBs) under its ongoing quantitative easing program—in fact, so much that the Japan national debt will be effectively vaporized, perhaps within 10 years. The BoJ owns 42.3% of the JGB market at present. Despite record low unemployment rates, the BoJ has been unable to… Read More

Share

The ZLB is a Central Bank ‘construct’

In his latest post, Bernanke starts off: If inflation is too low or unemployment too high, the Fed normally responds by pushing down short-term interest rates to boost spending. However, the scope for rate cuts is  limited by the fact that interest rates cannot fall (much) below zero, as people always have the option of holding cash, which pays zero interest, rather than negative-yielding assets. [1] When short-term interest rates reach zero, further monetary easing becomes difficult and may require unconventional monetary policy, such as large-scale asset purchases (quantitative easing). Before 2008, most economists viewed this zero lower bound (ZLB) on short-term… Read More

Share

How monetary policy unraveled

Today, George Selgin posted A Stable Spending Catechism, a nice primer on NGDP Level Targeting. Here I show how the Fed´s monetary policy unraveled when it forfeited “Stable Spending growth”. In the 1990s, a period known in economics as the “Great Moderation,” it seemed the Fed could do no wrong. Policy makers and voters saw it as a machine, with buttons officials could push to heat or cool the economy as needed. Now, after a decade of economic disappointment, the central bank confronts hardened public skepticism and growing self-doubt about its own understanding of how the U.S. economy works. The Fed in… Read More

Share

Monetary Policy failure

In 2011, Christina Romer wrote a very perceptive piece for the NYT: “The Hope That Flows From History”. Some snippets: AFTER the grim economic developments of the last few weeks, it’s easy to lose hope. Could the Great Recession of 2008 drag on for years, just as the Great Depression did in the 1930s? Adding to the despair is the oft-repeated notion that it took World War II to end the economic nightmare of the ’30s: If a global war was needed to return the economy to full employment then, what is going to save us today? As I showed in an academic… Read More

Share

The Holy Grail even yet for many macroeconomists is 0% inflation, and barring that, some rate under 2% (but always leaning towards the nirvana of 0%). News from the Bank of Japan suggests that paper cash and low inflation rates do not mix. As in, there is more than $7,000 in cash (yen equivalent) in circulation for every resident of Japan. The Nikkei Asian Review recently reported home-safe sales are booming. A growing business! “Japan’s cash in circulation is growing at the fastest rate in 13 years as ripples from the Bank of Japan’s negative interest rates push consumers’ money… Read More

Share

Stop trying to change the x in the x% target. Get rid of it

In “Rethinking the Widely Held 2% Inflation Target”, we read: Inflation has finally returned to the Federal Reserve’s 2% goal after undershooting it for nearly five years. Now, just as the central bank has inflation where it wants it, economists and central bankers are starting to think such a rigid goal is a mistake. After that long period of exceptionally low inflation and interest rates, central banks are talking about alternatives to the target, many of which involve the option of letting inflation rise above 2%, either permanently or for a time. Economists Cecchetti and Shoenholtz also weigh in: For several years,… Read More

Share

All productivity analyses miss the "wood for the trees"

All economists agree that productivity is very important. It is a remarkable failure of economics that economists understand so little about what causes it to grow, or atrophy. In yet another exhaustive examination Bank of England Chief Economist and MPC Member Andy Haldane again shows how even the most intelligent people continue to miss the wood for the trees. The Great Stagnation is the period after the financial crisis of 2008 in which productivity growth has been weak. Numerous explanations have been put forward for the slow growth, but the most simple and obvious one has not gained much traction. Trend nominal… Read More

Share