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The shape of a “late-cycle cyclical recovery”

That has been misdesignated “synchronized global recovery”. What we observe, however, is simply an “offset” to the previous slowdown. The pattern shows up in the IMF´s world growth data. It is also present in higher frequency global economic activity data – world industrial production & world trade. In both cases, the “recovery” seems to have run its course and danger, in the form of “trade wars” lurks ahead! In the U.S., the pattern also shows up. I´ll posit that the process is driven by nominal spending (NGDP) growth, in other words, by monetary policy. And is reflected in economic activity… Read More

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The sure-fire way of stabilizing the real economy or, “all roads lead to Rome”

At Vox, Walentin and Westermark write, “Stabilising the real economy increases average output”: The intro: The Great Recession has generated a debate regarding the potential effects on the long-run levels of output and unemployment of stabilising the real economy (e.g. Summers 2015). This issue takes on additional importance as the current economic situation in some countries, including the US, imply that there is a monetary policy trade-off between stabilising inflation and the real economy. In particular, the unemployment level is low at the same time as inflation is low. More generally, the question at hand is whether policymakers, in particular… Read More

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Price Level targeting would not have avoided disaster in 2008

Raphael Bostic, Atlanta Fed president, is arguing for a change in the monetary policy framework, from inflation targeting (IT) to price level targeting (PLT) See here, here.& here. What I want to show is that, although PLT differs from IT in that PLT has a “memory”, it suffers from the same weakness, i.e. it is sensitive to supply (for example, oil) shocks. In addition, I argue that an alternative monetary policy framework, NGDP level targeting, also has memory but does not suffer from the supply shock sensitivity of PLT. Ten years ago, the FOMC was “laser focused” on inflation. In… Read More

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Monetary Policy Potpourri

Monetary Policy Framework Raphael Bostic, president of the Atlanta Fed has a three part (so far) series on Thoughts on a Long-Run Monetary Policy Framework. His preferred framework is for the Fed to adopt price level targeting. Bostic writes: [f]ormer Fed chairman Alan Greenspan offered a well-known definition of what it means for a central bank to succeed on a charge to deliver price stability. Paraphrasing, Chairman Greenspan suggested that the goal of price stability is met when households and business ignore inflation when making key economic decisions that affect their financial futures. I agree with the Greenspan definition, and… Read More

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In contrast to the proverbial monkey, there are those that “see, hear & speak” inflation

From Goldman Sachs: “During most of the post-crisis recovery, inflation risks have been subdued. However, concerns with “overheating” and higher inflation are now being raised given a combination of strong global growth and diminishing economic slack, increasing labor market tightness, expansionary fiscal policy vs. only gradual normalization of monetary policy in the U.S., risks from trade protectionism / retaliation, and the potential for higher commodity spot prices as inventories continue to draw down,” writes Goldman Sachs strategist Michael Hinds. “There’s really no question – inflation is rising.” –  @inflation_guy His yardstick: The New York Fed “Underlying Inflation Gauge” (UIG) “Underlying… Read More

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In February, more Americans entered the US labor than gained employment—and by a wide margin. The good news is that a net 313,000 people found jobs in February, becoming productive, earning money and adding to GDP. There are 115.2 million employed in the US. That was the headline news. The largely unreported news is that a net 806,000 people entered the U.S. labor force in February, causing a rise in the labor force participation rate. This is also good news—the more people who want to work the better. Thus, the also largely unreported news is that in February labor markets… Read More

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Milton Friedman remains a touchstone in macroeconomics, even for those who disagree with his policy prescriptions. So it is unfortunate that one of Friedman’s serious stimulus proposals, that of money-financed fiscal programs, is generally recalled in connection with his bantering about “helicopter drops.” But let’s go back, way back, to the Friedman’s 1948 paper “A Monetary and Fiscal Framework for Economic Stability,” published in the American Economic Review. In his article Friedman argued for a balanced national budget at full employment, but for deficits during recessions, and perhaps surpluses in boom times.  Friedman contended issuing debt to finance government outlays,… Read More

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The Fed makes-up reasons to justify their preferred actions

In her recent speech, Lael Brainard ends with the punchline: In many respects, the macro environment today is the mirror image of the environment we confronted a couple of years ago. In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true. The charts indicate that there have been several instances of “mirror images” over the last 8 years. The latest  “cycle” is characterized by the strongest headwind and the weakest tailwind. That becomes more evident when you see that real… Read More

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The “impossibility” of inflation

For the past 25 years, inflation (PCE-Core) has remained low and stable. Nevertheless, many are worried that inflation is about to “take-off”. In a recent piece, Greg Ip writes, “Why an unpleasant inflation surprise could be coming”: Inflation is going to head up this year — on that there isn’t much debate. … If inflation turns up, economists have long assumed it would do so slowly, giving the Fed plenty of time to respond. But Michael Feroli of J.P. Morgan notes this assumption is built on models in which the world behaves in a predictable, linear way. In fact, he… Read More

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Is the Truism, “Money Is Neutral in the Long Run,” Really True?

Surely, merely running a printing press disgorging fiat money cannot truly increase economic output.  It is a truism. But what about historic examples of central banks policies and real economic output? Milton Friedman blamed the Great Depression on tight money. More recently, the 2008 Great Recession, which by some measures still results in crimped output, was caused by tight money.  Japan’s 20-year deflationary slog has been caused by tight money. So, by historical example, many macroeconomists seem to agree bad monetary policy can crimp real output for decades at a time and can persist indefinitely, unless corrected, as may be… Read More

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