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In monetary-policy circles, hardly a day passes without somebody somewhere declaring, sometimes in the form of a florid proclamation, that a central bank must have “credibility.” Otherwise, it is ominously posited, we slide soon into the Weimar Republic, although some later variants suggest the modern-day Japan scenario. That is, no one trusts the central bank to inflate enough. If this version of monetary policy is true, then at the end of the day the long-faced serious monetary-policy community slides into bed and embraces (this is the G-rated version) the much-ridiculed behavioral economists. An economy will or will not have inflation… Read More

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Chronic and large US current-account trade deficits lead to vulnerable and bloated domestic asset values—no, that it is not the proposition of Trump Administration China-bashers, but rather the conclusion of the globalist International Monetary Fund. The short story: Big and sustained current-account trade deficits axiomatically produce large capital inflows to the US. That Niagara of inflowing capital seeks a home in stocks and bonds, and moreover, can leverage up to buy real estate. But the resulting lofty asset values are unstable, and risk a “Hyman Minsky moment.” That type of moment is economist-talk for when the investment-market decides Fat City… Read More

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Call me “something”

The three charts below depict some alternative situations. The first illustrates the effect on real output and prices of a positive (productivity) supply shock with unchanged (constant AD) monetary policy. The second shows the effect on real output and price of an AD shock, flowing from an expansionary monetary policy that pushes AD up, while the third chart illustrates what has been a frequently used simplifying textbook assumption, to wit, that supply is demand determined. The next charts show the real-world counterparts. They all come from the last quarter of the 19th century when the economy was on a gold… Read More

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Blogger Kevin Erdmann has issued a rarity: an important book that should re-shape the macroeconomic and monetary-policy debates and policies. The book is— “Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy” published by Rowman & Littlefield. In a nutshell, Erdmann argues that the West Coast of the US, New York City and Boston have become powerful generators of jobs, but those same regions have suffocated new housing production through endless regulation, NIMBYism, crony-development schemes, and property zoning. The predictable result is an explosion of housing prices and rents. It was this choking off of… Read More

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Sweden´s Riksbank jumps ahead of the pack and raises the Policy rate

The last time they took the lead in raising rates was in 2010-11. The stated reason was they were worried about high asset (house) prices. Today, they “innovated”: The Riksbank said that its decision follows an assessment that “the employment rate is historically high, companies are reporting major shortages of labor and cost pressures are rising.” As the charts show, in 2010-11 the damage was big. Aggregate nominal spending (NGDP) was on the “road to Nirvana”, but the Riksbank raising rates aborted the process. Note that currently, NGDP has flattened. Maybe the Riksbank wants it to come down a bit!… Read More

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Are there “variability trade-offs”?

John Taylor put it succinctly: Several years ago, in an effort to more clearly delineate the short-run versus the long-run trade-off, I estimated a different type of trade-off between inflation and output (Taylor 1979). Rather than a long-run trade-off between the levels of inflation and output, I defined and estimated a long-run trade-off between the variability of inflation and of output. Because of this trade-off, efforts to keep the inflation rate too stable would result in larger fluctuations in real GDP and unemployment. Conversely, efforts to smooth out the business cycle too much would result in a more volatile inflation… Read More

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The sad state of the economy

Some “conflicting” comments: Federal Reserve Vice Chairman for Supervision Randal Quarles on Monday brushed off criticism of the central bank’s monetary policy choices and plans and said key remarks from the Fed’s leader last week didn’t signal a shift in the interest-rate outlook. According to him: “The data show we are doing a pretty good job of meeting the employment and inflation goal laid out by Congress”. Vice Chairman Richard Clarida is more nuanced: “In recent decades, the asymmetry has been toward disinflation forces,” Vice Chairman Richard Clarida said in an interview with Bloomberg Television. Asked about the price impacts… Read More

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Guided by “potential”: How has that worked?

Here´s Tim Duy writing for Bloomberg: The Economy’s Too Robust for the Fed to Bow to Markets – Growth would need to slow to around 1.8 percent before the central bank considers slowing the pace of interest-rate hikes. But will growth slow enough to ease what the Fed believes are underlying inflationary pressures? In general, central bankers believe the economy currently operates at or beyond full employment… Policy makers are, however, sufficiently concerned about the potential for overheating that they would prefer that unemployment didn’t drift much lower. From the perspective of the Fed, that means growth needs to slow to… Read More

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Timothy Taylor Says Fed Will Resort to QE Early in Next Recession—But Will That Work?

Global interest rates are still near historical lows; indeed 10-year German bunds pay 0.49% interest, and 10-year Japanese government bonds pay 0.12%. The US pays more, a 10-year Treasury offers 3.10% or so. Timothy Taylor of the excellent Conversable Economist pointed out recently that the US Federal Reserve will likely face the zero bound early in the next recession, and will have to resort to QE. Depending on when the next recession is, the Fed may be back to the capital markets buying bonds before it has sold much of its existing $4.0 trillion stockpile of bonds and mortgage-backed securities,… Read More

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That many think the US Federal Reserve should reconsider its plans to raise interest rates and reduce the size of its balance sheet is not surprising. What is eyebrow-raising is that many mainstream, or “establishment” economists are also warning the Fed that it may be going too far in its preemptive strikes against inflation. For example, Joachim Fels, global economic adviser at Pimco (the world’s largest bond manager) said at a Reuters Global Investment 2019 Outlook Summit in mid-November that rate hikes risk pushing 2-year Treasury yields higher than those on longer-term bonds, which many investors regard as a totem… Read More

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