Blog

“Great Misunderstandings of the Great Moderation”

Alex Tabarrok is just the latest, but softer, example. He writes: …Yet it is now clear that the great recession interrupted but did not end the great moderation. Since the great recession ended, growth in real GDP has been much less volatile than in the 1950s to 1980s. Indeed, volatility has been lower even taking into account the great recession. In the graph, for example, I simply bound the peaks and valleys. More sophisticated measures show the same thing. My version of his graph also shows the big (50%) reduction in real output growth volatility. Tabarrok continues: Of the possible… Read More

Share

Another Disappointing Fed Beige Book, Labor And Property Markets, And Myopic Ossification In American Macroeconomics

The U.S. Federal Reserve’s Beige Book came out this week, with a fresh cover but the contents increasingly tired and dog-eared. Fedsters want you to know this: Labor markets are “tight,” and have “shortages,” but housing markets are “strong.” In what is becoming a laughably recurrent refrain, the Fed continuously contends labor markets have been drum-tight to the ripping point and are getting tighter and tighter (but oddly wages are flat). From the Fed’s Oct. 18 rendition: “Labor markets were widely described as tight. Many Districts noted that employers were having difficulty finding qualified workers, particularly in construction, transportation, skilled… Read More

Share

Dumb & Dumber in monetary policy circles

That´s the feeling you get when reading stuff with titles such as: Central bankers have one job and they don’t know how to do it Or How should recessions be fought when interest rates are low? Further, it seems central bankers are quick to fall prey to an old and discredited theory and think inflation is “always and everywhere a cost phenomenon”. It is either of the “cost-push” variety, as was popular in the 1960s and 1970s, or of the “cost-pull” variety in vogue today. The former, through oil producers, oligopolies and unions, was the wisdom behind high/rising inflation. The… Read More

Share

UK monetary policy is too tight: easing required

Not quite the line you will see across most of the market or amongst so-called monetarist economists. In fact, implied by actual nominal growth and expectations for nominal growth monetary policy is too tight. Nominal GDP growth is running at 3.7% YoY and falling, while the best measure of inflation around, the implied GDP deflator is running just below 2%. The screaming about the headline inflation rate derived from today’s CPI of 3% are totally missing the point. Consumer price inflation is not controllable by the central bank. It is a mere partial view of inflation, for consumers only and not well… Read More

Share

When the famed Harvard macroeconomist Martin Feldstein nailed his theses to the door of the Federal Reserve on April 19, 2009, the great monetary theologian tellingly entitled his missive, “Inflation is Looming On America’s Horizon.” Feldstein foretold of a dark future. The “outlook for the longer term is more ominous. The unprecedented explosion of the U.S. fiscal deficit raises the specter of high future inflation.” The federal H-bomb of red ink was nearly catastrophic on its own, warned Feldstein, but was being amplified by a floodtide of wanton Federal Reserve money-printing. “The link between fiscal deficits and money growth is… Read More

Share

Bernanke proposes a “temporary back-up” to inflation targeting

Bernanke has presented a paper at Brookings titled “Temporary price-level targeting: An alternative framework for monetary policy”: Low nominal interest rates, low inflation, and slow economic growth pose challenges to central bankers. In particular, with estimates of the long-run equilibrium level of the real interest rate quite low, the next recession may occur at a time when the Fed has little room to cut short-term rates. As I have written previously and recent research has explored, problems associated with the zero-lower bound (ZLB) on interest rates could be severe and enduring. While the Fed has other useful policies in its toolkit such as quantitative… Read More

Share

Low wage growth is no mystery

The Fed wants to see wage growth pick up on the heels of a low unemployment rate so that inflation rises towards 2%. That´s twisted logic, but never mind. The chart below, depicting a “wage Phillips Curve”, indicates that at low unemployment rates (unemployment below 6%, say), there´s a wide range of wage growth rates. If the Fed favored a monetary model of inflation, instead of relying on the Phillips Curve/Slack framework, it would immediately understand why wage growth is low despite the low unemployment rate. The chart below shows that nominal spending (NGDP) growth during this expansion is significantly… Read More

Share

The myth of “low inflation” debunked

Yellen and the Fed seem surprised that inflation remains below target even with unemployment at historically low levels. With that view coming from the Fed we get pieces with “novel” titles such as The New Fed Team Will Inherit Inflation Miss That’s Mystifying Yellen Nobody seems to know why there’s no US inflation Even absurdly titled papers as one recently presented by former Board Member Tarullo: Monetary Policy Without a Working Theory of Inflation The list is almost endless… Why is that a concern today? Why wasn´t it a concern in the eleven years from 1994 to 2005. In the… Read More

Share

The worldwide bond market tops $100 trillion, and we live in a world (as we are incessantly told) of global capital markets.  All told, there is more than $217 trillion in global debt outstanding, and that figure rises by many trillions every year, reports the Institute of International Finance. The U.S. Federal Reserve, as widely reported, plans to start reducing its balance $4.5 trillion sheet, often described as massive or even “yuge.” But it turns out due to rising piles of U.S. paper cash in circulation, there is not that much bond-selling the Fed can do. Indeed, as noted by… Read More

Share

By embracing the wrong framework, the Fed has difficulty understanding low inflation

Low inflation has bothered the Fed no end. Two years ago, Yellen “crunched” inflation in a speech titled Inflation Dynamics and Monetary Policy. She concludes: I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by… Read More

Share