Must-Reads: For the Morning of November 12, 2015
Must-Read:
- Neel Kashkari confuses an unsustainable level of investment, a sectoral maldistribution of demand, with an unsustainable level of output…
- Mark Thoma and company on live questions for monetary policy…
- Noah Smith and company on the reading list for bubbles and panics…
- And…
- Plus…
Sorry Japan, printing money is morphine. makes u feel better but doesn't cure. BOJ Unveils Bold Bid to End Deflation http://t.co/9G9mnAOdOq — Neel Kashkari (@neelkashkari) April 5, 2013 And in January 2014, arguing that U.S. real GDP in 2007 was unsustainably high, and thus that the economy needed a recession: @delong @pswagel How's this? Growth was artificially fast due to leveraging of econ. Trying to return to that rate thru def spend is futile. — Neel Kashkari (@neelkashkari) January 10, 2014 In response, quotes himself from 2011: A Note on Aggregate Demand and Aggregate Supply: “One thing that keeps appearing in comments is the notion that… …because we had a bubble, in which some people were borrowing too much, the economic growth of 2000-2007 wasn’t [sustainable]…. This is confusing demand with supply. We really did produce all the goods and services… because we had willing workers, a sufficient capital stock, the right technology, and so on…. Some… spending… was debt-financed, and those [particular] debtors can’t continue to spend…. But that doesn’t say… the capacity has somehow ceased to exist; it only says that… someone else has to spend instead…. Past growth wasn’t an illusion, or a fraud[, or unsustainable]; but we need policies to sustain aggregate demand. And yes, I have a model. Paul Krugman’s model: : Debt, Deleveraging, and the Liquidity trap: A New Model: “Debt is the crux of advanced economies’ current policy debates… …Some argue for fiscal expansion to avoid recession and deflation. Others claim that you can’t solve a debt-created problem with more debt. This column explains the core logic of a new model by Eggertsson and Krugman in which debt shocks and policy reactions can be examined. Relying on heterogeneous agents, the model naturally produces the paradox of thrift but also finds new supply-side paradoxes, those of toil and flexibility. The model suggests that most economists have been misthinking the issues and that actual policy in the US and EU is misguided. These are must-reads because Neel Kashkari’s views of potential output and monetary policy are, Milton Friedman would say, profoundly wrong. Friedman would say: the way you tell whether a boom is artificial and unsustainable or not is whether it generates unexpected and rising inflation. Friedman would say: When employment and production are below their sustainable supply-side trends, the right monetary policy is for the central bank to boost the money stock. Milton Friedman would say: Friedrich von Hayek was a great economist–but his greatness was definitely not in the field of business-cycle theory. Also: Charles Steindel (2009): Implications of the Financial Crisis for Potential Growth: Past, Present, and Future; (2010): The Financial Crisis and the Measurement of Financial Sector Activity. And, if you wish: : Neel Kashkari to Replace Narayana Kocherlakota at the Minneapolis Fed? The second must-read is one from the estimable : Questions for Monetary Policy: “James Bullard, president of the St. Louis Fed… says there are five questions for monetary policy…. “What are the chances of a hard landing in China? Have U.S. financial market stress indicators worsened substantially? Has the U.S. labor market returned to normal? What will the headline inflation rate be once the effects of the oil price shock dissipate? Will the U.S. dollar continue to gain value against rival currencies?” I would add: Will wage gains translate into inflation (or something along those lines)? Anything else? I would add: if the Federal Reserve starts raising interest rates, will there be wage gains? Third, presents his “Panics and Bubbles” reading list: “There are a lot of good non-macro and empirical papers out there on the topic of ‘Panics and Bubbles’… …Harrison and Kreps (1978)… [on] overconfidence can lead to asset price volatility. Scheinkman & Xiong (2003) follow up. Barber and Odean (2001) provide some evidence…. Heterogeneous beliefs… a good overview by Xiong… Morris… David Romer… Barsky talking about the Japanese bubble…. Learning… Zeira…. Noise trader models… DeLong et al. (1990)… Abreu & Brunnermeier (2003). Mendel and Shleifer (2012) is yet another good one… Brunnermeier and Nagel (2004) on hedge funds and the technology bubble for some evidence…. ‘Information cascades’… Avery and Zemsky (1998), Chari and Kehoe (2003), and Park and Sabourian (2009)…. Variance bounds… other kinds of bubble tests… Refet Gurkaynak… surveys… by Brunnermeier and by Scherbina and Schlusche…. The finance theory literature has developed in parallel to the macro literature, with incomplete communication between the two… Noah is responding to : If I was devising a panics and bubbles course…: “Looking through the reading list for the [proposed] PCE Manchester course… …it seemed to miss… mainstream financial macro and microeconomics. If I were teaching a course on panics and bubbles… I would take them through Diamond and Dybvig’s classic model of banks runs… And I would take them through the analyses of moral hazard in the provision of public deposit insurance to stop these runs [for example, see the references in Sargent’s LSE lecture, or indeed Andy Haldane’s speeches]… Geanakoplos’ work on how leverage and bouts of optimism creates booms and busts in asset prices…. Karaken and Wallace…. Angelotos and co-authors, Morris and Shin and Shleifer and Vishny… have sought to model how beliefs (eg about the value of an asset, or the likelihood of a future event) can spread and become self-fulfilling…. Roger Farmer…. I would stuff the reading list with reams of papers I hadn’t even properly read myself… Brunnermeir and Sannikov… Shin, and John Moore… Kiyotaki-Moore… Lucas, Svensson, Mehra and Prescott, Campbell and Cochrane, Epstein and Zin, Fama, Shiller…. Banking and finance in macro [due to Bernanke, Gertler, Gilchrist, Carlsrom, Fuerst, and others]…. I don’t really know why the proposal for the Manchester course on panics and bubbles was rejected. But, if it were me, I would have ditched it too, in favour of a course that looked more like the above. Who is responding to : Students’ hopes dashed over ‘crash’ course in economics teaching: “Students from the birthplace of the Industrial Revolution have had their hopes for a course on financial crashes… …dashed after the University of Manchester refused to put it on next year’s syllabus…. The University of Manchester said: ‘We have decided not to run the Bubbles, Panics and Crashes module next academic year, but will launch other new economics-run modules to address broader areas of the economics curriculum.’ : The Euro Was Pointless: “It’s easy to forget now, but… many economists in the 1980s and 1990s… …thought monetary union would encourage cross-border investment and trade by eliminating the risk premiums associated with the supposedly destabilising devaluations of the past. The net effect would be converging living standards, dampened business cycles, slower inflation, and faster productivity growth for everyone. This was a laudable goal, but unfortunately it’s not how things worked out. The policy mistakes that exacerbated the eurozone crisis, while deeply destructive, can’t be blamed. A stimulating conference recently hosted by the Centre for European Reform made it clear to us the euro had already failed to meet the expectations of its architects before the crisis. : When US intergenerational income mobility vanished: 1900-1920: “Intergenerational income mobility is currently not very high in the US… …compared to other developed countries…. US intergenerational income equality was high in the 19th century but plummeted between 1900 and 1920. The income-mobility ladder was thus pulled up during the so-called Great Gatsby era.