Category: Equitablog

Let me endorse this:

Ryan Avent: Monetary policy: Sneaky stimulus:

I wrote that the Fed was unlikely to taper because inflation is so low; the choice to go ahead and taper anyway certainly looks like evidence that they’re not that worried about prices. But it has also been clear that the Fed is trying to rely more heavily on forward guidance so as to free themselves from the need to continue with QE. And guidance about inflation changed yesterday in what looks to me like a subtle but important way. The first change comes at the top of the statement, where in October the FOMC said:

The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

Yesterday this became:

The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

Continue reading “The Federal Reserve Puzzles Ryan Avent” →

Was it Larry Meyer or somebody else who said that the Chicago turn in graduate macroeconomics in the 1980s had made him rich–by destroying the inflow into the profession of people competent to compete with him in the private-sector microeconomic forecasting business? A nice piece from Matthew Yglesias this morning:

Matthew Yglesias: Freshwater macroeconomics has failed the market test.:

One curiosity that economists seem too polite to note is that… ‘freshwater’ macroeconomics that focuses heavily on the idea of a “real” business cycle and disparages the notion of either fiscal or monetary stimulus… flopped in the marketplace… [but] lives, instead, sheltered from market forces at a variety of Midwestern nonprofit[s]…. Stephen Williamson, a proponent of freshwater views, reminded me of this recently when he contended that macroeconomics is divided into schools of thought primarily because there’s no money at stake. In financial economics, according to Williamson, “All the Wall Street people care about is making money, so good science gets rewarded.” But in macroeconomics you have all kinds of political entrepreneurs looking for hucksters who’ll back their theory….

It seems very important to freshwater types to contend that their saltwater antagonists aren’t just mistaken or even stupid but actually fraudulent in their views (see Robert Lucas on ‘schlock economics’ or John Cochrane saying Robert Shiller is trying to take the science out of economics)… politically-motivated cheap talk….

Continue reading “Macroeconomic Forecasting and Macroeconomic Methodology: Thursday Focus” →

Nick Rowe: Worthwhile Canadian Initiative: Microfoundations we like vs microfoundations we can solve:

Take just one example… Calvo pricing…. The Calvo fairy visits each firm at random, taps it with her wand, and lets it change its price. The probability of her visiting in any period is 1/n…. Make one very small change…. Assume she visits… each firm once every n periods…. That’s a different model… a nightmare to solve. Both those models are equally microfounded. Or equally not microfounded, because the fairy herself is, well, just a fairy, and not a real person. She’s an ad hoc fairy, who is just a metaphor for our ignorance about why the price of money (the reciprocal of the price level) doesn’t behave like the prices of other financial assets…. The non-random fairy generates inflation-inertia and the random fairy doesn’t. You get a sticky inflation rate, and not just a sticky price level, with the non-random fairy. Trouble is, I can solve the first model, but I can’t solve the second model…. I have three options: 1. I can assume microfoundations I don’t like…. 2. I can assume microfoundations I like… and wave my hands…. 3. I can write down an equation for an ad hoc Phillips Curve with inflation inertia, wave my hands…

Bernanke: "A lot of the unemployment decline really does come from jobs, not from participation." Hmmm.

— Matt O'Brien (@ObsoleteDogma) December 18, 2013

Must-Reads:

1. Jared Bernstein: Budget Deal’s Impact Is Only a Blip:

2. Noah Smith: I love microfoundations. Just not yours: “Check out the debate between Tony Yates and Simon Wren-Lewis…. It was kind of cute that Yates singled out Calvo pricing as an unrealistic, kludgey, hold-your-nose sort of microfoundation…. Lagos-Wright (2005)… is every bit as unrealistic as Calvo pricing, but you don’t hear Freshwater guys like Yates kvetching about that…. In the comments to Wren-Lewis’ post, I wrote ‘YES YES A THOUSAND TIMES YES’. In a follow-up post, Yates caricatures my comment as ‘NO NO GET RID OF ALL THE MOTHER&&&&&&G MICROFOUNDATIONS WHILE YOU ARE AT IT’. But let us ignore that particular flerp-o’-derp for now, and focus on why Wren-Lewis is so very very right….

   “Yates says I just want to get rid of all the microfoundations. But that is precisely, exactly, 180 degrees wrong! I think microfoundations are a great idea! I think they’re the dog’s bollocks! I think that macro time-series data is so uninformative that microfoundations are our only hope for really figuring out the macroeconomy. I think Robert Lucas was 100% on the right track when he called for us to use microfounded models. But that’s precisely why I want us to get the microfoundations right. Many of microfoundations we use now (not all, but many) are just wrong…”

3. Greg Sargent: Prioritize combatting inequality. It’s popular: “Short version: While generic “government” still polls badly, the notion that government should act to combat inequality is popular, even among independents and moderates…. A sizable majority of Americans, 57 percent, believes that ‘the federal government should pursue policies that try to reduce the gap between wealthy and less well-off Americans’…. Only Republicans and conservatives believe government should not act to reduce inequality, but even among them the numbers are surprising…. Among Republicans the numbers are 40-54, and among conservatives they are 45-48…. Though it’s often said Americans reject ‘class warfare’, individual government policies to fight inequality–higher taxes on the rich, strengthening the safety net, funding for education, infrastructure spending to create jobs, hiking the minimum wage–are broadly popular. Also, as Paul Krugman and Alec MacGillis argue, treating inequality as a central challenge is the right thing to do”

4. C. Northcote Parkinson: Parkinson’s Law: “When first examined under the microscope, the cabinet council usually appears–to comitologists, historians, and even to the people who appoint cabinets–to consist ideally of five. With that number the plant is viable, allowing for two members to be absent or sick at any one time. Five members are easy to collect and, when collected, can act with competence, secrecy, and speed. Of these original members four may well be versed, respectively, in finance, foreign policy, defense, and law. The fifth, who has failed to master any of these subjects, usually becomes the chairman or prime minister…”

Continue reading “Things to Read on the Afternoon of December 18, 2013” →

Greg Sargent: Democrats should prioritize combatting inequality. It’s popular.:

Short version: While generic “government” still polls badly, the notion that government should act to combat inequality is popular, even among independents and moderates…. A sizable majority of Americans, 57 percent, believes that ‘the federal government should pursue policies that try to reduce the gap between wealthy and less well-off Americans’…. Only Republicans and conservatives believe government should not act to reduce inequality, but even among them the numbers are surprising…. Among Republicans the numbers are 40-54, and among conservatives they are 45-48…. Though it’s often said Americans reject ‘class warfare’, individual government policies to fight inequality–higher taxes on the rich, strengthening the safety net, funding for education, infrastructure spending to create jobs, hiking the minimum wage–are broadly popular. Also, as Paul Krugman and Alec MacGillis argue, treating inequality as a central challenge is the right thing to do.

To nobody’s surprise, I am going to side with Paul here…

I do, however, think that a big source of the difference between their takes is a result of the much sunnier climate for technocratic rational policy on the center-left than on the currently-beleaguered center-right…

Paul Krugman: The Facebooking of Economics:

David Brooks has a funny piece… about… Thought Leaders…. [In] my own neck of the woods… the rules of the game in economics are… nothing like what David describes….

Continue reading “Are We Getting the Better Public Sphere That We Need for a Fruitful Intellectual Dialogue About Equitable Growth Issues?: Paul Krugman Is a Happy Camper and Says Yes, But David Brooks Sys No…” →

Jared Bernstein: Budget Deal’s Impact Is Only a Blip:

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Neil Irwin writes: This is how history should judge Ben Bernanke:

The most common knock on Bernanke’s crisis performance was his failure (along with Treasury Secretary Hank Paulson and then-New York Fed chief Timothy Geithner) to prevent the Lehman Brothers bankruptcy…. It’s a fair criticism, except for this: I have interviewed enough people and read enough internal e-mails from that period to conclude that no one at the time had come up with a plan to resolve Lehman that was legal and actionable. The Lehman failure wasn’t a case of Bernanke and his fellow officials facing a choice and deciding wrong. They weren’t able to come up with a better option…

On March 15, 2008, Lehman Brothers was both liquid and solvent.

On September 15, 2008, Lehman Brothers was both illiquid and–so the story goes–too insolvent for the Federal Reserve to be able to claim that its loans to keep Lehman operating were simply providing liquidity to a fundamentally-solvent institution.

By continuity, at some point between March 15 and September 15, there was a last day on which the Federal Reserve had the power to provide the money to force an orderly liquidation of Lehman. On that date, they should have forced its liquidation. They did not.

The first rule of being a lender of last resort is that you do not get yourself into a position where you cannot act as a lender of last resort when a systemically-important financial institution fails. Paulson, Bernanke, and Geithner broke that rule when they let Lehman slide into insolvency at some date between March 15 and September 15, 2008, and they have never explained why they let their last opportunity to resolve Lehman pass by.

And then Neil Irwin says that it did not matter, anyway:

If they had found a way to save Lehman, soon enough there would have come another breaking point, with another institution on the brink and deep-seated demand to let it fall…

And that makes no sense at all. If letting Lehman fail didn’t hurt things, why take over AIG two days later? Why set up the TARP? Either these policies matter–in which failure to take the right policy steps at the right time is a mistake. Or these policies don’t matter–in which case why take any policy steps at all?

Christina Romer, I think, gets it right:

Christina Romer: Summerlin Lecture:

Let me close with a final, more general lesson for monetary policy from history. That lesson is: Don’t fight the last war. Just as generals sometimes go very wrong by focusing too strongly on not repeating past mistakes, so do monetary policymakers…. Monetary policymakers in 2009 and 2010 were so worried about not repeating the inflation of the 1970s, that they almost repeated the 1930s.

The current generation of policymakers came of age when inflation was the greatest problem. Though central bankers throughout the world took dramatic action in 2008 to stop the financial panic, by the summer of 2009, they were ready to be done.

I remember vividly being at a meeting of central bankers at the Jackson Hole Symposium in September 2009. All of the talk was:

We have stopped the crisis. Now what we need to do is go back to prudent monetary and fiscal policy, and to worrying about inflation.

Yet unemployment was still rising—it would hit 10% in October of 2009. Every inch of my body wanted to scream to the monetary policymakers at the symposium: “Oh no, you are not done!” Monetary policymakers, unfortunately, did take a break from aggressive action in 2010 and 2011. And this likely slowed the economy’s return to normal.

Today, I worry that guilt over letting asset prices reach the stratosphere in 2006 and 2007 has made some policymakers irrationally afraid of bubbles. As a result, they focus on the slim chance that another bubble may be brewing, rather than on the problems we know we face—like slow recovery, falling inflation, and hesitancy on the part of firms to borrow and invest…

Continue reading “Assessing Ben Bernanke’s Tenure…” →