: Syllabus for Monetary Theory and Policy): “Everyone seems to be posting the syllabus…
…for the graduate courses they are teaching this fall. Mine is simple. In my Monetary Theory and Policy course we are going to go through this book by Jordi Gali (don’t tell anyone I actually know this stuff): : Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework
Must-Read: : Not “Too Simple”. Just Wrong: “Simon Wren-Lewis has a nice post discussing…
…Paul Romer’s critique of macro. In Simon’s words:
It is hard to get academic macroeconomists trained since the 1980s to address [large scale Keynesian models] , because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems … But DSGE models as a guide for policy are also fatally flawed because they are too simple. The unique property that DSGE models have is internal consistency … Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.’
Nope! Not too simple. Just wrong!
I disagree with Simon. NK models are not too simple. They are simply wrong. There are no ‘frictions’. There is no Calvo Fairy. There are simply persistent nominal beliefs.
Must-Read: : The Long Shadow of History: Roman Legacy and Economic Development–Evidence from the German Limes: “This paper contributes to the understanding of the long-run consequences…
…of Roman rule on economic development. In ancient times, the area of contemporary Germany was divided into a Roman and non-Roman part. The study uses this division to test whether the formerly Roman part of Germany show a higher night- light luminosity than the non-Roman part. This is done by using the Limes wall as geographical discontinuity in a regression discontinuity design framework. The results indicate that economic development—as measured by luminosity—is in- deed significantly and robustly larger in the formerly Roman parts of Germany. The study identifies the persistence of the Roman road network until the present as an important factor causing this development advantage of the formerly Roman part of Germany both by fostering city growth and by allowing for a denser road network.
The on-demand media provider Netflix Inc. made the surprise announcement last month that it will provide its employees with one year of paid, unlimited leave policy following the birth of a child. Call the frenzied media response “maternity-leave madness,” except that it applies to men and women alike. Some saw the policy as an encouraging step forward for working parents, while others declared that the “unlimited” nature of the leave will cause guilty employees taking less time off than they would otherwise.
Yet there is little discussion of Netflix’s failure to extend this policy to their non-salaried, low-skilled workers who labor at the company’s DVD distribution centers. Such a policy in many ways mirrors what is happening nationally: the exclusion of workers who have the fewest resources and would most benefit from such policies.
U.S. federal law mandates 12 weeks unpaid leave through the Family and Medical Leave Act, yet 40 percent of U.S. workers are ineligible for this benefit. According to the U.S. Bureau of Labor Statistics, only 12 percent of private-sector workers have access to paid parental leave. Among the lowest earners, that number drops to 4 percent. So Netflix, in extending its policy exclusively to its salaried employees, is adhering to a national phenomenon: Having the resources to take adequate time off after the birth of a child, with all the benefits for parent and baby alike, is becoming the exclusive domain of the professional class.
That leaves too many workers forced to go back to work too quickly because they cannot afford to take the time off as unpaid leave. But rushing back to work has consequences. Studies show that insufficient maternity and paternity leave is associated with lower rates of immunization and health visits for the new child, lower rates of breastfeeding, and an increased risk of depression for the mother. And accumulating evidence is increasingly showing that such poor care early in life can have negative effects on that child’s skills, health, and development far into the future, costing our society and hampering our economy.
In contrast, access to paid leave raises the likelihood that a new mother will remain in the labor market, and continue to contribute to the economy’s productivity overall. And, a parent’s ability to care full-time for their baby during those early months has a lasting impact on the health and development of their child.
And, as many of these tech companies have discovered, paid parental leave can make it easier to recruit and retain talented workers, which is good for their bottom line. But wealthy companies like Netflix are not the norm. Many smaller businesses cannot afford such an expense, and covering an employee’s salary while they are on leave for an extended amount of time could be disastrous for small companies with modest annual profits. That is where government policy comes in. Many other countries finance their parental leave systems through their social security systems. Among U.S. states, California, Rhode Island, and New Jersey have extended their temporary disability insurance programs to provide paid leave for new parents, although not at full salary.
These programs benefit employers and employees alike. A survey of California employers by Center for Economic and Policy Research’s Eileen Appelbaum and Ruth Milkman of CUNY Graduate Center overwhelmingly reports no noticeable or a positive effect on profitability, turnover, and morale. And a study done by the Council of Economic Advisors at the White House finds that paid family leave as implemented there and in Rhode island and New Jersey “can benefit employers by improving their ability to recruit and retain talent, lowering costly worker turnover and minimizing loss of firm-specific skills and human capital, as well as boosting morale and worker productivity.”
At the state level, paid leave also reduces the burden on government assistance programs. Women who take paid family leave in the year after their child’s birth are less likely to rely on welfare or supplemental nutrition assistance. There is no reason to think that a national program would not boast similar results.
Netflix’s new policy is undoubtedly in response to a growing sentiment among many working Americans that it feels impossible to balance work and family life. But, at Netflix and nationally, policies that could alleviate that stress are concentrated among the economic elites. This imbalance will increase income inequality and hurt the country’s future economic potential overall. Company-based solutions, while an encouraging first step, will not ensure our long-term success. Updating our policies to allow everybody, rich and poor, to balance work and caregiving responsibilities will strengthen families and our economy alike.
The U.S. Federal Reserve’s Open Market Committee faces lots of crosswinds as it ponders whether to start raising short-term rates off of zero percent at its mid-September meeting. Turbulence in global financial markets alongside currency devaluations and plummeting commodity prices could mean the Fed will stay its hand, as University of Oregon economics professor Tim Duy points out on his Fed Watch blog. But as the central bank also considers “measures of labor market conditions,” how are developments going on that front?
When it comes to the labor market, the Federal Reserve is looking to see how close unemployment is to what the Fed calls its long-run rate, or the long-run rate consistent with full employment. Remember part of the Fed’s mandate is to promote “maximum employment.” This means the central bank needs to consider how low the unemployment rate can fall before the economy starts to overheat. High and accelerating inflation would be a sign of such overheating, but there are few signs of that happening.
Another way to determine the Fed’s long-run unemployment rate is to look at wage growth. Accelerating wage growth has yet to show up. Therefore the long-run unemployment rate is lower than the current 5.3 percent. The Fed projects the long-run unemployment rate is somewhere between 5.2 and 5.0 percent, which means the labor market is quite close to that mark. Yet the central bank has been moving down its estimate of the long-run unemployment rate since 2012 because employment gains haven’t turned into wage gains. The Congressional Budget Office has been doing the same, moving down their estimate to 5.0 percent for the 2017-2018 period in a recent report.
How low could unemployment get? In a recent interview, Columbia University economist Joseph Stiglitz said he thinks it could get below 4.5 percent, maybe even down to 3.0 percent.
Translating a 3 percent unemployment rate into another measure of labor market health, the employment-to-population ratio, may be helpful to see how feasible a target that could be. To make such a calculation, we have to make an assumption about the future path of the labor force participation rate, which is key in calculating the unemployment rate. A large chunk of the decline in that participation rate is due to the aging of the U.S. population. The President’s Council of Economic Advisers pegs its effect at about half of the decline from 2007 to 2014.
To make our calculation, then, let’s assume that the participation rate moves up to its current “potential” rate of 63.4 percent, according to the Congressional Budget Office. This 0.8 percentage point increase would grow the labor force by about 1.3 million workers. In addition, if we reduce the unemployment rate to 3 percent, this would mean 5.5 million more workers would be employed. (This calculation assumes that the increase in employment doesn’t affect the potential labor force participation rate.)
The end result would be an employment-to-population ratio of 61.5 percent. Currently, the ratio is 59.3 percent. 2.2 percentage points might not seem like that much, but consider that it took from January 2010 to July 2015 for the ratio to increase 0.8 percentage points. The increase of 2.2 percentage points to 61.5 percent is also more than twice as large as the 0.9 percentage point increase that would result from assuming we only hit an unemployment rate of 5%, as the Fed and CBO suggest our target should be.
Of course, some of the recent decline in the employment-to-population ratio is due to the workforce aging as the Baby Boom generation—now 51 to 69 years of age—enters retirement. But a 3 percent unemployment rate produces an employment-to-population ratio well below levels seen before the two recent recessions and the aging of the labor force.
This isn’t to say the U.S. unemployment rate can go as low at 3 percent. Wage growth might kick up and the Fed may raise interest rates before the economy could get to that level. Still, this exercise shows how much room there could be for the U.S. labor market to continue its recovery.
Must-Read: The highly-estimable Mark Thoma turns Stan Fischer’s Jackson Hole Speech into a Q&A:
: U.S. Inflation Developments: “A speech by Stanley Fischer at Jackson Hole turned into a pretend interview…
…Let me start be asking about your view of the economy. How close are we to a full recovery?
Although the economy has continued to recover and the labor market is approaching our maximum employment objective, inflation has been persistently below 2 percent. That has been especially true recently… the drop in oil prices… 12-month changes in the overall personal consumption expenditure (PCE) price index have recently been only a little above zero…. Measures of core inflation have been persistently below 2 percent throughout the economic recovery. That said, as with total inflation, core inflation can be somewhat variable….
Isn’t there reason to believe these numbers are true, i.e. doesn’t the slack in the labor market imply low inflation?
Of course, ongoing economic slack is one reason core inflation has been low…. We started seven years ago from an unemployment rate of 10 percent, which guaranteed a lengthy period of high unemployment. Even so… we might therefore have expected both headline and core inflation to be moving up more noticeably toward our 2 percent objective. Yet, we have seen no clear evidence of core inflation moving higher over the past few years…. [The] role for slack in helping to explain movements in inflation… is… modest… and can easily be masked….
If that’s true, if the decline in the slack in the labor market does not translate into a notable change in inflation, why is the Fed so anxious to raise rates based upon the notion that the labor market has almost normalized? Is there more to it than just the labor market?…
A larger effect comes from changes in the exchange value of the dollar…. A higher value of the dollar passes through to lower import prices… restrains the growth of aggregate demand and overall economic activity….
That argues against a rate increase, not for it….
Commodity prices other than oil are also of relevance for inflation….
So you must believe that all of these forces holding down inflation (many of which are stripped out by core inflation measures, which are also low) that these factors are easing, and hence a spike in inflation is ahead?
The dynamics with which all these factors affect inflation depend crucially on the behavior of inflation expectations…. Longer-term inflation expectations in the United States appear to have remained generally stable since the late 1990s… [and so] movements in inflation have tended to be transitory.
Let’s see, lots of factors holding down inflation, longer-term inflation expectations have been stable throughout the recession and recovery, remarkably so, yet the Fed still thinks a rate raise ought to come fairly soon?
We should however be cautious in our assessment that inflation expectations are remaining stable…. Measures of inflation compensation in the market for Treasury securities have moved down somewhat…. But these movements can be hard to interpret….
I have to be honest. That sounds like the Fed is really reaching to find a reason to justify worries about inflation and a rate increase. Let me ask this a different way. In the Press Release for the July meeting of the FOMC, the committee said it can be “reasonably confident that inflation will move back to its 2 percent objective over the medium term.” Can you explain this please? Why are you “reasonably confident” in light of recent history?
Can the Committee be “reasonably confident that inflation will move back to its 2 percent objective over the medium term”?… There is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further…. Slack in the labor market has continued to diminish, so the downward pressure on inflation from that channel should be diminishing as well…. The Committee has indicated in its post-meeting statements that it expects inflation to return to 2 percent. With regard to our degree of confidence in this expectation, we will need to consider all the available information and assess its implications for the economic outlook before coming to a judgment….
I just hope that information includes… the Fed’s own eagerness to see “green shoots” again and again, far before it was time for such declarations. What might deter the Fed from its intention to raise rates sooner rather than later?…
We are interested also in aspects of the labor market beyond the simple U-3 measure of unemployment, including for example the rates of unemployment of older workers and of those working part-time for economic reasons; we are interested also in the participation rate. And in the case of the inflation rate we look beyond the rate of increase of PCE prices and define the concept of the core rate of inflation.
I find these kinds of statement difficult to square with the statement that labor markets are almost back to normal…. When rates do go up, how fast will they rise?
With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening. Should we judge at some point in time that the economy is threatening to overheat, we will have to move appropriately rapidly….
The Fed has said again and again that it’s 2 percent inflation target is symmetric with respect to errors, i.e. it will get no more worried or upset about, say, a .5 percent overshoot of the target than it will an undershoot of the same magnitude (2.5 percent versus 1.5 percent). However, many of us suspect that the 2 percent target is actually a ceiling… and statements such as this do nothing to change that view…. I wish we had time to hear your response…
Must-Read: The very sharp Michael Burda gets it, I think, completely wrong here.
German failure to make it better for Greece (and Italy, and Spain, and Portugal) to stay in the eurozone and undertake structural adjustment than it would have been for them to have exited the eurozone in 2010 and undertaken the standard IMF-recipe depreciation-plus-structural-reform-and-adjustment recipe is already doing incalculable long-run damage to German’s position within Europe, and indeed to the concept of a European Germany. And Germany desperately needs, for its own sake as well as everybody else’s, to be a European Germany:
: Dispelling Three Myths on Economics in Germany: “The Anglo-American world has been ganging up on Germany long before the financial crisis…
…but the since the onset of the Greek standoff it has gotten notably worse…. Myth #1: Economists in Germany fundamentally reject Keynesian ideas This is nonsense…. Myth #2: German economists feed at the trough of ‘Ordoliberalism’ and worship at the altar of supply side policies…. Germans… have less patience for short-term views of the world that tend to think in terms of chains of Keynesian short runs which at some level need to be consistent with what policy wants to do in the long run. This may be hard to deal with, but it is not voodoo economics…. Myth #3: Economists in Germany obsess on moral hazard and austerity…. It’s hardly surprising that Germany is more interested in sustainable solutions to southern European problems… [than] kicking the can down the road…. In principle, governments should practice austerity in good times, not bad. After seeing the consequences of its failure (with France) to impose the stability rules and sanctions on themselves in 2003… Germany is now wedded to austerity or risks losing all credibility on fiscal discipline in the monetary union….
It is not ordoliberal religion, but a mixture of national self-interest and healthy mistrust informed by experience that guides German economic policy today…. A monetary union imposes a one-size-fits-all monetary policy but is silent on the right substitutes for it…. German economists will tend to peddle economics that serve Germany’s own self-interests, just as we’d expect of the British if and when they decide to leave the EU, or of the US when interest rates are finally raised. If it is to succeed, the European monetary union needs to synchronize national and union interests, or faced being be dashed on the rocks of shocks to come.
Must-Read: : Some Fed thoughts: QE4 and All That: “For months, the mid-September meeting of the Federal Open Market Committee was being telegraphed as the most likely start date of the ‘normalisation’ process…
…the day when short-term interest rates would begin ‘liftoff’ from the current range of zero to 25 basis points…. [But] when you have bond yields plunging, corporate spreads widening (even excluding energy and mining), stock prices falling, and commodities (except gold) collapsing, it’s possible there is useful information for central bankers to consider… [plus] the changes in asset prices amounted to a tightening….
Which brings us to Ray Dalio’s latest missive…. Dalio’s actual position doesn’t strike us as obviously unreasonable… that the dynamics affecting the transmission of monetary policy… are different… [and] the future path of short-term interest rates will be shallower than the dots…. This view isn’t necessarily that different from what’s implied by market prices…. It’s pretty easy to justify the current yield on the 10-year note (a little more than 2 per cent) by imagining a world where 1-year rates top out around 5 per cent by 2019, stay there until 2020, and then plunge back toward zero by 2022…. 1) recessions always happen sooner or later, 2) not having a downturn for a total of 16 years would be basically unprecedented in the American experience, and 3) cutting rates from a peak probably no higher than 4 per cent almost certainly means bumping up against the zero bound relatively quickly….
The pessimistic interpretation, which we believe is consistent with what Dalio wrote and what is implied by market prices, is that most of the rich world just doesn’t grow that much unless households and businesses are boosting their debt and eating into their savings…. Unless we get a 1940s-style reflation that wipes away private debt burdens and makes future releveraging possible… any significant cutback in monetary stimulus will quickly cause the economy to sink from steady but mediocre growth into stagnation and then outright recession…. We have no strong view on who’s right, although if forced to choose, we’d side with market prices over central bankers…. Better, though, to avoid the entire argument by having a responsible fiscal policy that lets the private sector deleverage, as in the 1940s…
Must- and Should-Reads:
Over at Project Syndicate: A Cautionary History of US Monetary Tightening: BERKELEY JACKSON HOLE – The US Federal Reserve has embarked on an effort to tighten monetary policy four times in the past four decades. On every one of these occasions, the effort triggered processes that reduced employment and output far more than the Fed’s staff had anticipated. As the Fed prepares to tighten monetary policy once again, an examination of this history – and of the current state of the economy – suggests that the United States is about to enter dangerous territory. READ MOAR