Category: Equitablog

David Cay Johnston: State’s Job Growth Defies Pessimistic Predictions After Tax Increases: “Dire predictions about jobs being destroyed…

…spread across California in 2012 as voters debated whether to enact the sales and, for those near the top of the income ladder, stiff income tax increases in Proposition 30. Million-dollar-plus earners face a 3 percentage-point increase on each additional dollar.

It hurts small business and kills jobs,” warned the Sacramento Taxpayers Association, the National Federation of Independent Business/California, and Joel Fox, president of the Small Business Action Committee.

So what happened?… Last year California added 410,418 jobs, an increase of 2.8 percent over 2012, significantly better than the 1.8 percent national increase in jobs. California is home to 12 percent of Americans, but last year it accounted for 17.5 percent of new jobs, Bureau of Labor Statistics data shows…. Eleven California counties, including Sacramento, accounted for almost 1 in every 7 new jobs in the U.S. last year…. Only three California counties lost jobs…. The empirical evidence also shows that the best-paying jobs tend to be clustered in states (and countries) with high taxes. The same tends to be true of wealth creators, including the most money-motivated among scientists, and existing wealth holders not actively engaged in business…. So next time someone tries to tell you that raising income taxes will destroy jobs, tell them the evidence just does not support that claim.

The intelligent Lars P. Syll depresses me by reminding me of some of the many economists of note and reputation who simply have not done their homework–or, rather, either they or I have not done our homework, and I am pretty confident it is not me–by linking to Robert Lucas:

Robert Lucas: Modern Macroeconomics: “I was convinced by Friedman and Schwartz…

…that the 1929-33 down turn was induced by monetary factors (declined is money and velocity both) I concluded that a good starting point for theory would be the working hypothesis that all depressions are mainly monetary in origin…. As I have written elsewhere, I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks…

With respect to impulse and propagation mechanisms for macroeconomic shocks, when I think about impulses I think about:

1. “Real” shifts in technologies and tastes–like the invention and diffusion of microprocessors, the invention and diffusion of the pill, or sociological changes in what kinds of activities are broadly thought to be appropriate for the sexes.

2. “Supply shocks”–like a catastrophic harvest, or a decision by a swing organization like OPEC with a lot of market power over an important commodity to triple or halve the world price of oil.

3. “Demand”–shifts in the stock of money or in other assets supplied by governmental actors like central banks, and shifts in attitudes toward risk and liquidity on the part of those who hold such assets in their portfolios.

With that in mind, take a look at the U.S. time series on real GDP per capita:

(1) by necessity must diffuse firm by firm and individual by individual, and so take quite a while on the business-cycle time scale to affect real GDP per capita. To such factors we can possibly attribute the relatively rapid trend growth of the 1990s and early 2000s as the internet takes hold, and the maintenance of trend growth in spite of adverse supply disruptions in the 1970s and 1980s as the proportion of the population in the labor force rises sharply. But what evidence, let alone what overwhelming evidence, is there that the business-cycle fluctuations at frequencies higher than 15/π were driven by such factors? I see none at all.

(2) by necessity are the results either of identifiable decisions by actors with market power or of very sharp increases in the relative prices of commodities with important economic weight. To such factors we can plausibly attribute a share of the mid-1970s and the cusp-of-the-1980s downturns (and the late-1980s advance). But such impulses ought to leave a particular signature on the macroeconomic time series: production will be less and prices will be higher than was confidently expected a couple of years before. We do indeed see such a signature in the mid-1970s and cusp-of-the-1980s downturns (and, less clearly, in the late 1980s advance). But what evidence, let alone what overwhelming evidence, is there that the other business-cycle fluctuations at frequencies higher than 15/π were driven by such factors? I see none at all.

(3) would leave a signature in the decisions of central banks to reduce or increase the supply of liquidity relative to the demand they expect, in the decisions of governments to borrow-and-spend more or less, and in large fluctuations in the intertemporal and cross-risk price structure as fads and fashions and waves of optimism and pessimism and trust and distrust of financial intermediaries transmit themselves via sociological contagion through the financial sector. We do appear to see strong signatures of all of these. What evidence, let alone what overwhelming evidence, is there that these signatures of demand impulses at business-cycle fluctuations at frequencies higher than 15/π are not causes but rather consequences of real shocks? I see none at all.

What is Lucas talking about?

If you go to Robert Lucas’s Nobel Prize Lecture, there is an admission that his own theory that monetary (and other demand) shocks drove business cycles because unanticipated monetary expansions and contractions caused people to become confused about the real prices they faced simply did not work:

Robert Lucas (1995): Monetary Neutrality: “Anticipated monetary expansions…

…are not associated with the kind of stimulus to employment and production that Hume described. Unanticipated monetary expansions, on the other hand, can stimulate production as, symmetrically, unanticipated contractions can induce depression. The importance of this distinction between anticipated and unanticipated monetary changes is an implication of every one of the many different models, all using rational expectations, that were developed during the 1970s to account for short-term trade-offs…. The discovery of the central role of the distinction between anticipated and unanticipated money shocks resulted from the attempts, on the part of many researchers, to formulate mathematically explicit models that were capable of addressing the issues raised by Hume. But I think it is clear that none of the specific models that captured this distinction in the 1970s can now be viewed as a satisfactory theory of business cycles…

And Lucas explicitly links that analytical failure to the rise of attempts to identify real-side causes:

Perhaps in part as a response to the difficulties with the monetary-based business cycle models of the 1970s, much recent research has followed the lead of Kydland and Prescott (1982) and emphasized the effects of purely real forces on employ- ment and production. This research has shown how general equilibrium reasoning can add discipline to the study of an economy’s distributed lag response to shocks, as well as to the study of the nature of the shocks themselves…. Progress will result from the continued effort to formulate explicit theories that fit the facts, and that the best and most practical macroeconomics will make use of developments in basic economic theory.

But these real-side theories do not appear to me to “fit the facts” at all.

And yet Lucas’s overall conclusion is:

In a period like the post-World War II years in the United States, real output fluctuations are modest enough to be attributable, possibly, to real sources. There is no need to appeal to money shocks to account for these movements…

In would make sense to say that there is “no need to appeal to money shocks” only if there were a well-developed theory and models by which pre-2008 post-WWII business-cycle fluctuations are modeled as and explained by identified real shocks. But there isn’t. All Lucas will say is that post-WWII pre-2008 business-cycle fluctuations are “possibly” “attributable… to real shocks” because they are “modest enough”. And he says this even though:

An event like the Great Depression of 1929-1933 is far beyond anything that can be attributed to shocks to tastes and technology. One needs some other possibilities. Monetary contractions are attractive as the key shocks in the 1929-1933 years, and in other severe depressions, because there do not seem to be any other candidates…

as if 2008-2009 were clearly of a different order of magnitude with a profoundly different signature in the time series than, say, 1979-1982.

Why does he think any of these things?

Paul N. van de Water: New CBO Long-Term Budget Projections Tell Familiar Story: “The Congressional Budget Office (CBO)’s new long-term budget projections…

…show that the nation’s fiscal outlook is stable for the rest of this decade and then worsens gradually…. Beyond the first ten years, CBO has made some small revisions in assumptions that, on balance, leave the projected path of debt largely unchanged. When we released our long-term estimates in May, we said:  ‘No deficit or debt crisis looms, and the weak labor market remains the nation’s most immediate economic concern. But policymakers and the public should not ignore the long-run budget problems, which remain challenging’.  That conclusion still holds…

Should-Reads:

1. Paul Krugman: Addicted to Inflation: “I have some advice for so-called reform conservatives trying to rebuild the intellectual vitality of the right: You need to start by facing up to the fact that your movement is in the grip of some uncontrollable urges. In particular, it’s addicted to… the claim that runaway inflation is either happening or about to happen…. I’ve had conversations with investors bemused by the failure of the dollar to crash and inflation to soar, because ‘all the experts’ said that was going to happen. And that is indeed what you might have imagined if your notion of expertise was what you saw on CNBC, on The Wall Street Journal’s editorial page, or in Forbes. And this has been going on for a long time…. Yet… ‘experts’ never consider the possibility that there might be something amiss with their economic framework, let alone that Ben Bernanke, Janet Yellen or, for that matter, yours truly might have been right…. At worst, inflationistas [like Niall Ferguson and Amity Shlaes] resort to conspiracy theories: Inflation is already high, but the government is covering it up…. Josh Barro… has gone so far as to call market monetarism ‘the shining success of the conservative reform movement’. But this idea has achieved no traction at all with the rest of American conservatism…”

2. Daron Acemoglu and James Robinson: An Application of the Art of Not Being Governed: “John Gallup, Jeffrey Sachs, and Andrew Mellinger elaborate several versions of what we called the geography hypothesis… point out that there is a correlation between the distribution of population in a country and poverty, with countries in Asia and Africa often having populations far from the coast and navigable rivers–a fact which they interpret as a geographical source of underdevelopment. But they do not explain why African countries have populations that are far from the coast. Why could this be? Scott… notes: ‘A final state-thwarting strategy is distance from state centers or, in our terms, friction-of-terrain-remoteness’ (p. 279)…. John Thornton… pointed out that when the Kingdom started to get seriously into slave raiding, people started to move away from roads and anywhere which might give access to slave traders…. The fact that in Africa or Asia population may be distributed in ‘paradoxical ways’ seems to have little to do with geography (a puzzling interpretation in the first place) and everything to do with politics and the historical evolution of institutions…”

3. Eugene Fama (2011): Chicago Follies (IV) John Cassidy: “In the past, I think you have been quoted as saying that you don’t even believe in the possibility of bubbles.” Eugene Fama: “I never said that. I want people to use the term in a consistent way. For example, I didn’t renew my subscription to The Economist because they use the world bubble three times on every page. Any time prices went up and down—I guess that is what they call a bubble. People have become entirely sloppy. People have jumped on the bandwagon of blaming financial markets. I can tell a story very easily in which the financial markets were a casualty of the recession, not a cause of it.” John Cassidy: “That’s your view, correct?” Eugene Fama: “Yeah.” Via Lars P. Syll

Should Be Aware of:

• Nick Bunker: Stock repurchases, economic growth and inequality | Weekend reading | Are employer tax credits the best way to deliver paid leave? | The changing calculus of labor market churn | The importance of CBO’s new interest rate projections
• Carter Price: Who are Today’s Supermanagers and Why Are They So Wealthy? | The Importance of Private Equity Supermanagers among Top Income Earners
• Cosma Shalizi (2012): In Soviet Union, Optimization Problem Solves You
• Robert Farley: Sunday Book Review: Sleepwalkers
• Alan S. Blinder: An Unnecessary Fix for the Fed
• Jared Bernstein: Part-time Work and the Recovery: Some Evidence to Counteract the Noise

And:

1. John Cole: Must See TV: “Watching Bill Maher tonight… you absolutely have to watch the panel with some wingnut from the Daily Caller on the left, Nate Silver in the middle, and Jane Harman on his right, and Silver has not spoken for twenty minutes and looks like he is going through his own personal hell. His facial expressions are alternating between confused as to why these people who know nothing keep talking, perplexed because they are just wrong, and appalled at how much really stupid people like to talk. It was a twenty minute display of silent disdain–as if he was wondering ‘How do these people hold down a job?’ This is the greatest thing I have seen in years. You have to watch him…”

2. Laurence M. Ball and Sandeep Mazumder: Inflation Dynamics and the Great Recession: “A puzzle emerges when Phillips curves estimated over 1960-2007 are used to predict inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and variance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully ‘shock-anchored’ since the 1980s, while ‘level anchoring’ has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.”

Already-Noted Must-Reads:

1. Simon Wren-Lewis: Further thoughts on Phillips curves: “This recent JEL paper by Mavroeidis, Plagborg-Møller and Stock…. As Plagborg-Moller notes in an email to Mark Thoma: ‘Our meta-analysis finds that essentially any desired parameter estimates can be generated by some reasonable-sounding specification. That is, estimation of the NKPC is subject to enormous specification uncertainty. This is consistent with the range of estimates reported in the literature…. Traditional aggregate time series analysis is just not very informative about the nature of inflation dynamics.’ This had been my reading based on work I’d seen. This is often going to be the case with time series econometrics, particularly when key variables appear in the form of expectations. Faced with this, what economists often look for is some decisive and hopefully large event…. The Great Recession… might be just such an event. In earlier, milder recessions it was also much less clear what the monetary authority’s inflation target was (if it had one at all), and how credible it was….. Paul observes that recent observations look like a Phillips curve without any expected inflation term at all. He mentions various possible explanations for this, but of those the most obvious to me is that expectations have become anchored because of inflation targeting…. It would be a big mistake to think that the Ball and Mazumder paper finds support for the adaptive expectations Friedman/Phelps Phillips curve. They too find clear evidence that expectations have become more and more anchored. So in this sense the evidence is all pointing in the same way…. I’m happy to interpret anchoring as agents acting rationally as inflation targets have become established and credible, although I also agree that it is not the only possible interpretation…”

2. Anil Kashyap et al.: Making macroprudential regulation operational: “Do the extant workhorse models used in policy analysis support macroprudential and macrofinancial policies?… A new macroprudential model that stresses the special role played by banks…. Three theoretical channels through which intermediaries can improve welfare… extending credit to certain types of borrowers (e.g. Diamond 1984)… improving risk-sharing… creating liquid claims that are backed by illiquid assets (Diamond and Dybvig 1983)…. It is imperative to start with a general model where the financial system plays all three of these roles…. Regulation to fix potential runs, such as proposals for narrow banking (e.g. Cochrane 2014), also appears to be especially appealing. But if the fragility that creates the possibility of runs is not valuable on its own, of course, eliminating it would be desirable! The more challenging question is what happens if there is a fundamental underlying reason why maturity mismatches create value…. Intermediaries should operate in an environment where the savers who use them are forward looking, and the prices the intermediaries face adjust (endogenously) to the regulatory environment…. We are unaware of any existing models that satisfy these two principles. So, in Kashyap et al. (2014b), we have constructed one….

   “Savers can buy equity in a banking sector and save via deposits… banks choose to invest in safe assets or to fund entrepreneurs who have risky projects… banks and the entrepreneurs face limited liability… a probability of a run… governed by the banks’ leverage and mix of safe and risky assets…. The banks in this world not only offer liquidity insurance with their deposits, but they offer savers a better alternative to making direct loans to entrepreneurs…. This model is that it can be used to explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes alter allocations and change the degree of run-risk and total risk-taking…. It is not correct to conclude that combining any two tools is necessarily enough to correct the two externalities in the model… interactions among the regulations are sufficiently subtle that it would be hard to guess which combinations prove to be optimal…. Finally, coming up with regulations that simultaneously eliminate runs and shrink total lending (and risk-taking) is hard… the usual interventions that make runs less likely either create opportunities for banks to raise more funds or take more risk, or so severely restrict the savers, banks or borrowers that one of them is made much worse-off. We hope that these ideas will lead others to move away from small perturbations of existing DSGE models and instead consider much more fundamental changes…”

3. Ed Glaeser et al.: Unhappy Cities: “There are persistent differences in self-reported subjective well-being across U.S. metropolitan areas, and residents of declining cities appear less happy than other Americans. Newer residents of these cities appear to be as unhappy as longer term residents, and yet some people continue to move to these areas. While the historical data on happiness are limited, the available facts suggest that cities that are now declining were also unhappy in their more prosperous past. One interpretation of these facts is that individuals do not aim to maximize self-reported well-being, or happiness, as measured in surveys, and they willingly endure less happiness in exchange for higher incomes or lower housing costs. In this view, subjective well-being is better viewed as one of many arguments of the utility function, rather than the utility function itself, and individuals make trade-offs among competing objectives, including but not limited to happiness…”

4. John Maynard Keynes (1926): The End of Laissez-Faire: “The disposition towards public affairs which we conveniently sum up as individualism and laissez-faire, drew its sustenance from many different rivulets of thought and springs of feeling…. Locke and Hume… founded Individualism…. The purpose of promoting the individual was to depose the monarch and the church; the effect–through the new ethical significance attributed to contract–was to buttress property and prescriptions…. Suppose… individuals pursuing their own interests with enlightenment in condition of freedom always tend to promote the general interest at the same time! Our philosophical difficulties are resolved…. To the philosophical doctrine that the government has no right to interfere, and the divine that it has no need to interfere, there is added a scientific proof that its interference is inexpedient….

   “Yet some other ingredients were needed to complete the pudding. First the corruption and incompetence of eighteenth-century government…. Material progress between 1750 and 1850… owed almost nothing to the directive influence of organised society…/ The Darwinians could go one better than that–free competition had built man…. Socialist interferences became, in the light of this grander synthesis, not merely inexpedient, but impious, as calculated to retard the onward movement of the mighty process by which we ourselves had risen like Aphrodite out of the primeval slime….

   “These reasons and this atmosphere are the explanations, we know it or not–and most of us in these degenerate days are largely ignorant in the matter–why we feel such a strong bias in favour of laissez-faire, and why state action to regulate the value of money, or the course of investment, or the population, provokes such passionate suspicions in many upright breasts. We have not read these authors; we should consider their arguments preposterous if they were to fall into our hands. Nevertheless we should not, I fancy, think as we do, if Hobbes, Locke, Hume, Rousseau, Paley, Adam Smith, Bentham, and Miss Martineau had not thought and written as they did. A study of the history of opinion is a necessary preliminary to the emancipation of the mind. I do not know which makes a man more conservative–to know nothing but the present, or nothing but the past…”

5. Carola Binder: Thoughts on the Fed’s New Labor Market Conditions Index: “The Fed economists employ a widely-used statistical model called a dynamic factor model…. The LMCI is the primary source of common variation among 19 labor market indicators…. The main reason I’m not too excited about the LMCI is that its correlation coefficient with the unemployment rate is -0.96. They are almost perfectly negatively correlated–and when you consider measurement error you can’t even reject that they are perfectly negatively correlated– so the LMCI doesn’t tell you anything that the unemployment rate wouldn’t already tell you. Given the choice, I’d rather just use the unemployment rate since it is simpler, intuitive, and already widely-used…”

6. Gillian Tett: A peek into the IMF machine: “Liaquat Ahamed, a Washington-based fund manager turned writer flew to Tokyo to participate in the annual meeting of the International Monetary Fund…. Ahamed was not lobbying for policies, cutting business deals or reporting. Instead, for a few days he observed the IMF circus as if he were an ethnographer plunged into a strange tribe… A monograph, Money and Tough Love: On Tour with the IMF, are not just hilarious but shrewdly provocative…. Ahamed lifts the lid on seemingly irrelevant details about the fabric and rhythm of IMF life and on the myriad subtle cultural symbols that are used to signal hierarchy, tribal affiliation and power–and which the IMF economists themselves almost never talk about. Ahamed describes, for example, the dress code patterns, noting that: ‘the men [at IMF meetings are] uniformly dressed in dark suits and ties, apart, that is, for two groups: the Iranians, who have this odd habit of buttoning up their collars but refusing to wear ties, and the hedge fund managers, who [are] young, fit and wear designer suits… [they] no doubt refuse to wear ties for much the same reason as the Iranians–to signal their rather self-conscious freedom from arbitrary social conventions.’ He also tries to explain how policy ideas emerge to dominate the debate–via media platforms…. A serious point. Although policy makers and economists might like to pretend that international governance is all about abstract ideas or quantitative models, it is actually rooted in complex cultural patterns and languages that outsiders struggle to understand. That is no surprise; all institutions have such traits. But I just hope that the experiment that Ahamed has started will now open the door to other ethnographic accounts of how our huge cross-border bureaucracies really work–not simply to spark more reflection among voters but also among the staff of groups such as the IMF too…”

7. Aaron Carroll: The Social Contract and health care reform: “The social contract is an implicit understanding between people and the society in which they live about how society should be organized, how benefits are distributed, and how shared responsibilities are defined for all citizens. The beauty of the social contract is that it conveys many messages, not a singular one. It conveys the message of shared decisionmaking, but equally it conveys a political message of accountability and responsibility…. Rousseau… society organizes itself according to the expectations that people have for human flourishing…. Hobbesian… limited rights and freedoms…. The beauty and the frustration of using social-contract speak is that it can convey political messages across the entire spectrum, from the most conservative to the most progressive…”

Aaron Carroll: The Social Contract and health care reform: “The social contract is an implicit understanding…

between people and the society in which they live about how society should be organized, how benefits are distributed, and how shared responsibilities are defined for all citizens. The beauty of the social contract is that it conveys many messages, not a singular one. It conveys the message of shared decisionmaking, but equally it conveys a political message of accountability and responsibility…. Rousseau… society organizes itself according to the expectations that people have for human flourishing…. Hobbesian… limited rights and freedoms…. The beauty and the frustration of using social-contract speak is that it can convey political messages across the entire spectrum, from the most conservative to the most progressive…

Gillian Tett: A peek into the IMF machine: “Liaquat Ahamed, a Washington-based fund manager turned writer…

…flew to Tokyo to participate in the annual meeting of the International Monetary Fund…. Ahamed was not lobbying for policies, cutting business deals or reporting. Instead, for a few days he observed the IMF circus as if he were an ethnographer plunged into a strange tribe… A monograph, Money and Tough Love: On Tour with the IMF, are not just hilarious but shrewdly provocative…. Ahamed lifts the lid on seemingly irrelevant details about the fabric and rhythm of IMF life and on the myriad subtle cultural symbols that are used to signal hierarchy, tribal affiliation and power–and which the IMF economists themselves almost never talk about. Ahamed describes, for example, the dress code patterns, noting that:

the men [at IMF meetings are] uniformly dressed in dark suits and ties, apart, that is, for two groups: the Iranians, who have this odd habit of buttoning up their collars but refusing to wear ties, and the hedge fund managers, who [are] young, fit and wear designer suits… [they] no doubt refuse to wear ties for much the same reason as the Iranians–to signal their rather self-conscious freedom from arbitrary social conventions.

He also tries to explain how policy ideas emerge to dominate the debate–via media platforms…. A serious point. Although policy makers and economists might like to pretend that international governance is all about abstract ideas or quantitative models, it is actually rooted in complex cultural patterns and languages that outsiders struggle to understand. That is no surprise; all institutions have such traits. But I just hope that the experiment that Ahamed has started will now open the door to other ethnographic accounts of how our huge cross-border bureaucracies really work–not simply to spark more reflection among voters but also among the staff of groups such as the IMF too…

Carola Binder: Thoughts on the Fed’s New Labor Market Conditions Index: “The Fed economists employ a widely-used statistical model…

…called a dynamic factor model…. The LMCI is the primary source of common variation among 19 labor market indicators…. The main reason I’m not too excited about the LMCI is that its correlation coefficient with the unemployment rate is -0.96. They are almost perfectly negatively correlated–and when you consider measurement error you can’t even reject that they are perfectly negatively correlated– so the LMCI doesn’t tell you anything that the unemployment rate wouldn’t already tell you. Given the choice, I’d rather just use the unemployment rate since it is simpler, intuitive, and already widely-used…

Anil Kashyap et al.: Making macroprudential regulation operational: “Do the extant workhorse models used in policy analysis…

…support macroprudential and macrofinancial policies?… A new macroprudential model that stresses the special role played by banks…. Three theoretical channels through which intermediaries can improve welfare… extending credit to certain types of borrowers (e.g. Diamond 1984)… improving risk-sharing… creating liquid claims that are backed by illiquid assets (Diamond and Dybvig 1983)…. It is imperative to start with a general model where the financial system plays all three of these roles…. Regulation to fix potential runs, such as proposals for narrow banking (e.g. Cochrane 2014), also appears to be especially appealing. But if the fragility that creates the possibility of runs is not valuable on its own, of course, eliminating it would be desirable! The more challenging question is what happens if there is a fundamental underlying reason why maturity mismatches create value…. Intermediaries should operate in an environment where the savers who use them are forward looking, and the prices the intermediaries face adjust (endogenously) to the regulatory environment…. We are unaware of any existing models that satisfy these two principles. So, in Kashyap et al. (2014b), we have constructed one….

Savers can buy equity in a banking sector and save via deposits… banks choose to invest in safe assets or to fund entrepreneurs who have risky projects… banks and the entrepreneurs face limited liability… a probability of a run… governed by the banks’ leverage and mix of safe and risky assets…. The banks in this world not only offer liquidity insurance with their deposits, but they offer savers a better alternative to making direct loans to entrepreneurs…. This model is that it can be used to explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes alter allocations and change the degree of run-risk and total risk-taking…. It is not correct to conclude that combining any two tools is necessarily enough to correct the two externalities in the model… interactions among the regulations are sufficiently subtle that it would be hard to guess which combinations prove to be optimal…. Finally, coming up with regulations that simultaneously eliminate runs and shrink total lending (and risk-taking) is hard… the usual interventions that make runs less likely either create opportunities for banks to raise more funds or take more risk, or so severely restrict the savers, banks or borrowers that one of them is made much worse-off. We hope that these ideas will lead others to move away from small perturbations of existing DSGE models and instead consider much more fundamental changes…

Simon Wren-Lewis: Further thoughts on Phillips curves: “This recent JEL paper by Mavroeidis, Plagborg-Møller and Stock….

…As Plagborg-Moller notes in an email to Mark Thoma:

Our meta-analysis finds that essentially any desired parameter estimates can be generated by some reasonable-sounding specification. That is, estimation of the NKPC is subject to enormous specification uncertainty. This is consistent with the range of estimates reported in the literature…. Traditional aggregate time series analysis is just not very informative about the nature of inflation dynamics.

This had been my reading based on work I’d seen.

This is often going to be the case with time series econometrics, particularly when key variables appear in the form of expectations. Faced with this, what economists often look for is some decisive and hopefully large event…. The Great Recession… might be just such an event. In earlier, milder recessions it was also much less clear what the monetary authority’s inflation target was (if it had one at all), and how credible it was….. Paul observes that recent observations look like a Phillips curve without any expected inflation term at all. He mentions various possible explanations for this, but of those the most obvious to me is that expectations have become anchored because of inflation targeting…. It would be a big mistake to think that the Ball and Mazumder paper finds support for the adaptive expectations Friedman/Phelps Phillips curve. They too find clear evidence that expectations have become more and more anchored. So in this sense the evidence is all pointing in the same way….

I’m happy to interpret anchoring as agents acting rationally as inflation targets have become established and credible, although I also agree that it is not the only possible interpretation…