Macro Issues

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…...

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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…...

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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…...

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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…...

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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…...

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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,…...

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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…...

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The nominal GDP forecast has held north of 4.1% since our last update, though it has not risen with stock prices. This is because stocks are only one input into the system, and other inputs: yield spreads, TIPS spreads, commodities, have held steady or even retreated somewhat. Bond spreads that compare a short maturity to a longer maturity (such as the 5 or 10-year yield) have tended to move lower, as very short term spreads (3-month/1-month say) have moved higher in anticipation of a Fed rate hike on March 15th. Long-short bond spreads, or measures of yield curve steepness at…...

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Cashhoardus Americanus

The old style, Milton Friedman monetary analysis proved a reliable and straightforward way of understanding macroeconomic movements. The basic idea was you looked at changes in the M2 money supply (basically everything you think of when you ask someone “how much readily available money do you have?) and used that to forecast near-term inflation and GDP growth. If money growth rose, spending would rise and inflation would follow in turn. The converse held if money growth fell. For various reasons, probably including the gradual adoption of credit cards, and the greater ease of selling liquid financial assets for bank deposits,…...

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Irish lessons in GDP accounting and GDP per capita

Many times, it has been argued that you cannot assess the nominal growth of the economy by looking at one sector or one region within a monetary bloc. And this is correct. Money gets everywhere inside the monetary bloc, accounting for half of all transactions – by definition. The same goes for inflation, which cannot be measured by looking at one sector or region’s inflation rate. In fact, an “inflation rate” for one sector or region within a monetary bloc is a classic oxymoron. Inflation can only refer properly or usefully to the price of money inside a monetary bloc.…...

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