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The fantasy world of conventional central bankers where money has no role

Lawrence Christiano writes “The Great Recession: A Macroeconomic Earthquake”. The summary reads: The Great Recession was particularly severe and has endured far longer than most recessions. Economists now believe it was caused by a perfect storm of declining home prices, a financial system heavily invested in house-related assets and a shadow banking system highly vulnerable to bank runs or rollover risk. It has lasted longer than most recessions because economically damaged households were unwilling or unable to increase spending, thus perpetuating the recession by a mechanism known as the paradox of thrift. Economists believe the Great Recession was not foreseen… Read More

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What is the stance of UK monetary policy?

Many top economists are showing much confusion over the current state of the UK economy. There was near unanimity that a vote for Brexit would bring disaster. Clearly, the only “disaster” has been the fall in the currency, something that wreaks havoc only on foreigners owning assets denominated in GBP. A lot of havoc has been wreaked on the brains of the top economists too, from both right and left. They teach in their macroeconomics courses that devaluations lead to a shift in the AD curve to the right. Even in countries with awful politics, currency weakness continually protects the local economies from… Read More

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What do markets believe?

The November 2016 election gave “birth” to the “reflation story”. There was a lot of excitement, with long-term yields, the dollar, stocks and inflation expectations all rising. But this is illusory. Since mid-2014, the economy was testing new depths. Soon after Janet Yellen took the helm, the Fed embraced the “tightening talk”. In late 2015, it even went ballistic, raising rates for the first time in 10 years and saying it expected rates to increase at least four times during 2016. The market reaction was a “bloodbath”. That forced the Fed to turn tail, so in the spring the markets… Read More

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Missing the forest for the trees

In commenting on the GDP release, James Hamilton writes: But I’m struck by the fact that the low levels of business fixed investment are mirrored by low spending on new home construction and autos, two consumer-based components of GDP that historically usually exhibit similar cyclical dynamics to non-residential fixed investment. Shows these charts: And continues: Business investment, housing construction, and auto purchases are categories of spending that have always been very vulnerable to cyclical downturns. They’re the prime target when firms and consumers feel they need to cut spending and are apprehensive about the future. In many ways, what we… Read More

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As David Glasner recently noted, no plank of orthodox macroeconomics is more sacred today than that international free trade is good, and that even large and chronic trade deficits don´t matter. But an overlooked 2012 paper from the New York Federal Reserve, entitled House Price Booms, Current Account Deficits, and Low Interest Rates, raises serious concerns about chronic trade deficits, particular given the deeply entrenched ubiquity of property zoning. The paper posits, “One of the most striking features of the period before the Great Recession is the strong positive correlation between house price appreciation and current account deficits, not only… Read More

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Lambda, the measure of Central Bank discretion

Recently, Carney gave a speech at the LSE titled “Lambda”. Lambda is the coefficient on the output gap. If the coefficient is zero, the policymaker gives no weight to the stabilization of real activity, all that matters is inflation stabilization. On the other hand, a positive lambda indicates that the policymaker is willing to strike some trade-off between output and inflation stabilization. Carney argues that “discretion” (balancing a series of challenging trade-offs) has become more important after the crisis, because the crisis brought shocks to both demand and supply. I think he misses the point. Before the crisis, the stabilization… Read More

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UK Nominal GDP growth jumps even more post-Brexit vote than thought

The dramatic easing of monetary policy that we observed when the GBP fell in response to Mark Carney’s clear messaging about the BoE response to a Leave vote, had an even more dramatic effect on Nominal GDP than we had earlier commented upon. Revisions to UK macro data released with the 2016Q4 RGDP figures today show that the proxy for NGDP, Nominal Gross Value Added, surged well over 4% in 2016Q3, and again in 2016Q4. Although the rally in NGDP mostly reflects a rise in the implied GDP deflator, it has also prevented a drop in RGDP growth, and even a modest… Read More

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All so obvious to Wren-Lewis but, really, all so poor

A recent blog by Simon Wren-Lewis Attacking economics is a diversionary tactic was so muddled it nicely illustrated just what is wrong with (macro)economics today. I have followed his numbered points in replying: 1. The UK imported the financial crisis from overseas due to the collapse in the US subprime market. That “collapse” just happened, exogenously. This is typical of most modern macro that is unable or unwilling to see monetary policy as an endogenous cause of the business cycle. There does not have to be a business cycle. Central banks are as not all-seeing, always wise, nearly infallible, independent responders… Read More

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“Now, it’s fair to say, the economy is near maximum employment and inflation is moving toward our goal,” U.S. Federal Reserve Chair Janet Yellen said in a speech Wednesday in San Francisco. Therefore, Yellen, America’s No. 1 orthodox macroeconomist, promised multiple rate hikes through 2018, with hardly a flutter of concern on the part of the U.S. economic policy-making establishment. Yellen even went further, suggesting that if the Trump Administration runs big deficits, the Fed would be even more aggressive in rate hikes. In a Parallel Universe… But here is the headline on another story about inflation from the Nikkei… Read More

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The Fed and the inflation obsession

From Yellen´s latest speech: Speaking on the eve of Donald Trump’s inauguration as the 45th U.S. president, she said the economy remains constrained by multiple long-term forces. “Economic growth more broadly seems unlikely to pick up markedly in the near term given the ongoing restraint from weak foreign demand,” rising interest rates, an aging population and other factors, she said. Still, she said, the Fed doesn’t want to wait too long to raise rates and let inflation get out of control. So, it will likely be “prudent to adjust the stance of monetary policy gradually over time,” she said, repeating… Read More

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