Must Reads:
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Saroj Bhattarai, Gauti Eggertsson, and Raphael Schoenle: Is Increased Price Flexibility Stabilizing? Redux: “In a simple DSGE model… more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained…. Using post-WWII U.S. data… we find that if prices and wages are fully flexible, the standard deviation of annualized output growth more than doubles.”
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Jeffrey Frankel: The Startling Decline of Market-Based Approaches to Regulation: “Markets can fail. But, as has been demonstrated in areas like air pollution, traffic congestion, spectrum allocation, and tobacco consumption, market mechanisms are often the best way for governments to address such failures. So why are such mechanisms now in retreat?… Today, however, politics is killing ‘cap and trade’… cap-and-trade… for sulfur-dioxide emissions has effectively vanished. In Europe, the Emissions Trading System… has become increasingly irrelevant as well…. Market-oriented environmental regulation has in effect been superseded over the last five years by older ‘command-and-control’ approaches…. There is a fascinating parallel between the evolution of American political attitudes toward market mechanisms in environmental regulation and Republican hostility to ‘Obamacare’…. This was originally a conservative approach…”
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Felix Salmon: News Genius: Annotated: Janet Yellen – Semiannual Monetary Policy Report to the Congress: Read the whole thing! For example: “Translation: QE isn’t just about dropping money from helicopters onto rich investors and financial institutions. It also creates jobs!” “Yellen here is going out of her way to draw a distinction between “maximum sustainable employment”, on the one hand, and the unemployment rate, on the other. You can use the latter as a tool to measure how close you are to the former, but it’s not an exact tool, and you want to look at other things too, like the long-term unemployment rate and the underemployment rate. The Fed’s full-employment mandate is not about hitting some unemployment-rate number, it’s about getting as many Americans to work as possible.” “Remember the government shutdown, and all those debt-ceiling antics? Yellen does. And, she’s saying, they hurt the economy hard — specifically, they hurt consumer spending. Which is not surprising, given the number of federal employees who had to live without any income.”
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Ezra Klein: Republicans Discover Evidence of Jobs Crisis: “The U.S. has been in a jobs emergency since at least 2008. The cause of the crisis… isn’t mysterious, and neither are the solutions… invest in infrastructure to create construction jobs… give tax breaks to employers who hire… restore the payroll tax cut… help state and local governments hire back some of the employees they laid off…. But in recent years, these policies have been either blocked or canceled by congressional Republicans…. That’s the proper context in which to view this week’s hysteria about Obamacare…”
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Gavyn Davies: A dose of humility from the central banks: “It is now quite difficult to generalise about what central bankers think. However, a few of the necessary pieces of the jigsaw puzzle slotted into place in the past week…. Ms Yellen… has declared herself… the agent of continuity…. A regime shift designed to shock the US economy back towards the pre-2008 trend line…. Why has she not done this?… She does not seem convinced that a further large dose of asset purchases would be successful anyway, in the context of a large drop in both productivity growth and the labour participation rate… supply-side pessimism… more of the post-2008 output losses are now thought to be permanent. Ms Yellen said on Tuesday that she was not sure how much of the decline in the labour participation rate could be reversed. Her uncertainty about this scarcely supports dramatic policy action either way.”
Continue reading “Things to Read on the Evening of February 13, 2014”