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Tag Archives: Macroeconomics

Does price stickiness explain “lowflation”?

Here’s The Economist: A forthcoming paper by Diego Aparicio and Roberto Rigobon of the Massachusetts Institute of Technology helps make the point. Firms that sell thousands of different items do not offer them at thousands of different prices, but rather slot them into a dozen or two price points. Visit the website for h&m, a fashion retailer, and you will find a staggering array of items for £9.99: hats, scarves, jewellery, belts, bags, herringbone braces, satin...

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Using monetary policy as a political weapon

Former New York Fed President William Dudley has received a great deal of well-deserved criticism for these remarks: “I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that untenable,” Dudley wrote, referring to Fed Chair Jerome Powell. “Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a...

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There’s no reason to go heterodox

Commenter Michael Sandifer had this to say: Seeing so many developed economies at negative nominal rates, with others trending there, as the global economy slows down, with those economies never having enjoyed even the nominal growth rates of the past, it is tempting to think there’s something very wrong with standard economic theory. And, perhaps there is. By standard economic theory, I mean Mishkin’s pre-Great Recession treatment of the subject. I bought an old copy...

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How soon we forget

The NYT has a piece discussing the Fed’s gradual reduction in bank capital requirements: Some of the changes, seemingly incremental and technical on their own, could add up to a weakening of capital requirements installed in the wake of the crisis to prevent the largest banks from suffering the kind of destabilizing losses that imperiled the United States economy. Another imminent change will soften a rule intended to prevent banks from making risky bets with customer...

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How has Keynes’s liquidity trap theory held up over time?

It’s worth revisiting this issue in a world with $17 trillion in negative yield bonds. Keynes was a complex thinker, who looked at issues from many different perspectives.  Unfortunately, that means his views were not always internally consistent. Thus it’s foolish to try to pin him down, as if sticking a pin in a butterfly. You’ll always find other passages that contradict your interpretation. Consider the following, from the General Theory: There is the...

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Easy credit and tight money

The title of this post is the shortest description I could come up with for the global economy circa 2019. Because these two concepts get confused, a short explanation is in order. The best way to judge the stance of monetary policy is by looking at the growth rate in “M*V” aka nominal GDP. By that criterion, money has been tighter than average in America, and even more so in Europe and Japan. That helps to explain low nominal interest rates, but it’s not the whole...

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Blind faith in government

I recently participated in Alternative Money University at the Cato Institute. It was nice to see so many young students who are interested in exploring monetary ideas beyond New Keynesian DSGE models. Presentations by Larry White and George Selgin had the effect of slightly changing my views of the gold standard. On balance, I’m still opposed to going back to the gold standard, but the reasons have more to do with likely government interference in the regime, rather...

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Think of low interest rates as an outcome, not a tool

Tyler Cowen has a Bloomberg column discussing negative interest rates in the Eurozone. As with virtually all discussion of negative rates, the article doesn’t quite get to the essence of the issue: Most economists and central bankers view negative interest rates as an acceptable tool of macroeconomic management. Maybe so. But in an era when trust, including trust among nations, is much lower than previously thought, it probably isn’t a good idea to place a punishing...

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Consumption and GDP

Robert Barro argues that GDP is mismeasured: That is, the standard concepts of national income and net product count net investment once when it occurs and include the same present value again when adding up the future returns realized on this investment. Therefore, in the steady state, national income involves precisely double-counting of net investment. Thus suppose Tesla builds a battery factory that costs $1 billion, which lasts for 20 years.  They hire workers...

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Recent studies of QE

I see more and more academic studies confirming that Federal Reserve QE policies were effective during the Great Recession. Here is the abstract of a 2018 paper by Eric Swanson: I survey the literature on monetary policy at the zero lower bound (ZLB) and effective lower bound (ELB) to make three main points: First, the Federal Reserve’s forward guidance and large-scale asset purchases are effective monetary policy tools at the Z/ELB. Second, during the 2008–15 U.S....

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