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Home / Tag Archives: Macroeconomics

Tag Archives: Macroeconomics

Why has the natural rate of unemployment fallen to such a low level?

We don’t know the precise natural rate of unemployment, but according to most estimates the natural rate has fallen from roughly 5%-6% during the 1980s to below 4% today. In Germany, the natural rate has fallen much more dramatically. We also don’t know all of the reasons for this decline. Perhaps the rise of the “gig economy” has made it easier for the unemployed to find jobs. The Wall Street Journal suggests another possible factor: The share of jobless people...

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Why does Australia have mini-recessions?

Both here and at MoneyIllusion I’ve occasionally done posts on the odd lack of mini-recessions in the US. I define these as periods where unemployment rises by between 1.0% and 2.0% and then falls back, although you could set the lower bar at 0.7% if you removed the brief 1959 steel strike. If you smoothed the unemployment series with a three-month moving average you could also get a wider range. In other words, when unemployment starts rising in America, it rises by...

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The China (manipulation) shock and the (mostly) Trump fiscal shock

During the 2000s, China was accused of currency manipulation. Many observers claimed that this policy hurt America’s tradable goods sector, boosting our current account deficit. Some argue that this led to a net loss of jobs, and/or de-industrialization. Here I’d like to point out that the same models that suggest China’s currency manipulation hurt our tradable goods sector also imply that America’s recent fiscal policy hurts this sector even more, indeed by much,...

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Stall speed and mini-recessions

Over the past few years, I’ve done a number of posts discussing the mystery of “mini-recessions”. The mystery is the complete lack of mini-recessions in the US. After all, mini-earthquakes are much more common that big earthquakes, so why isn’t the same true of recessions? Why is it that when the unemployment rate jumps by more than a very small amount, it eventually rises by more than 2%. Why not increase by 1%, or 1.5%? As far as I know, none of the major macro...

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Monetary offset is more mainstream than you think

I frequently argue that the fiscal multiplier is roughly zero in an economy where the central bank targets some variable linked to aggregate demand, such as inflation or NGDP. I don’t claim it is precisely zero, just that zero is a good baseline assumption to start the analysis. This claim is often viewed as being quite heterodox. In fact, at the upper levels of economics it is a quite mainstream view of how things work when the economy is not at the zero bound (like...

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Rational expectations isn’t the problem; it’s the solution.

Edward Luce has a very misleading piece in the Financial Times. Here’s an excerpt: Why do economists continue to get it so wrong? One answer is that not all of them do. David Blanchflower, who was on the Bank of England’s monetary policy committee during the 2008 crash, insists that evidence of an impending crash was hidden in plain view long before it happened. Blanchflower, whose book Not Working: Where Have all the Good Jobs Gone? is a stinging rebuke to his...

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Killing two birds with one stone

Over the past 10 years, there’s been increasing support for NGDP targeting in academia, the media, and among policymakers in DC. But there seem to be two sticking points that prevent it from being adopted as the Fed’s new policy target: 1. What if trend GDP growth changes? Won’t inflation become unanchored?2. Isn’t inflation targeting much easier to communicate? Most people don’t even know what NGDP is. It turns out that both of these objections can be easily...

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What the Saudi oil shock tells us about monetary policy

When I do PowerPoint presentations on monetary policy, I often explain level targeting with an analogy from the oil industry. Suppose oil output was suddenly reduced by technical problems in Saudi Arabia, but the disruption was expected to be temporary. In that case, oil prices would rise by much less than if the exact same reduction is supply was expected to be permanent. If oil production declines for only a brief period, the producer can commit to restoring oil...

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Everyone’s a monetarist (except when it comes to money)

Why does the value of strawberries change over time? How about the value of houses? How about gasoline? Most people use some form of a supply and demand model to explain changes in the value of goods. These models actually explain “relative prices”, not nominal prices. Thus in EC101, a 3% increase in the price of strawberries occurs when the nominal price rises 5% at a time of 2% overall inflation. It’s the relative price that is explained in basic S&D models....

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The curse of size

Small countries have numerous advantages. For instance, they are less likely to get drawn into a trade war. The Netherlands and Germany have roughly the same size current account surplus (as a share of GDP), and yet it’s Germany that attracts all the criticism. Singapore’s current account surplus is far larger than China’s (as a share of GDP), but the US goes after China. Yes, there are now other issues with China beside trade, but at the beginning it was the Chinese...

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