Tag: Optimal Control

Must-Read: Timothy B. Lee: The Economy Just Got Its Worst Job Report in Years

Posted on by Brad DeLong

Must-Read: The way to bet is that two-thirds of the surprising component of this month’s employment report will be reversed over the next quarter or so.

Nevertheless: does anybody want to say that the Federal Reserve’s increase in interest rates last December and its subsequent champing-at-the-bit chatter about raising interest rates was prudent in retrospect? Anyone? Anyone? Bueller?

And does anybody want to say–given that the downside risks we are now seeing were in the fan of possibilities as of last December, and given that the Federal Reserve could have quickly reacted to neutralize any inflationary pressures generated by the upside possibilities in the fan last December–that the Federal Reserve’s increase in interest rates last December and its subsequent champing-at-the-bit chatter about raising interest rates was sensible as any form of an optimal-control exercise?

And we haven’t even gotten to the impact of the withdrawal of risk-bearing capacity from the rest of the world that happens in a Federal Reserve tightening cycle…

NewImage NewImage

Timothy B. Lee: The Economy Just Got Its Worst Job Report in Years: “The US economy created 38,000 jobs in May, the slowest pace of job growth in five years…

…Not only did job growth fall well short of economists’ expectations in May, the Labor Department also revised its estimates for March and April job growth downward by a total of 59,000…. One factor is the strike among Verizon workers, which cost the economy about 34,000 jobs. Those jobs should reappear in future reports…. There’s other bad news…. Over the last six months, the economy had started to reverse a years-long decline in the labor force participation rate…. But the latest report shows the economy has given most of those gains back, with the labor force participation rate falling from 63 percent in March to 62.6 percent in May…

I Really Really Do Not Understand the Mental Universe of Today’s Federal Reserve

Posted on by Brad DeLong

I suppose my big problem is I keep getting hung up on the following optimal control principle: If you know in which direction your next turn of the wheel is going to be, then either you are steering around an immediate obstacle, or you are headed in the wrong direction. And if you are headed in the wrong direction, you should already have turned your wheel so that you are headed in the right direction.

At the zero lower bound, this principle does not directly apply. You are trying to steer around an immediate obstacle. Thus you know in which direction your next turn of the wheel is going to be. But a corollary to this general principle does apply, and applies very clearly: Optimal-control tells you to stay at the zero lower bound until you are confident that the economy is strong enough. Then you quickly move to point the economy in the right direction–to an interest rate where you are not sure whether your next turn of the wheel will be left or right.

The’s “lift off and pause”–turn the wheel a little bit right, and then wait for a while even though you know your next turn is going to be to the right–seems to me to make absolutely no sense at all. I cannot write down any optimal control exercise in which it does. I cannot even do so if I put my thumb on the scale via assuming an unmotivated substantial aversion to ever making 50 basis-point meeting moves in interest rates…