Working Papers

My Review of Sebastian Mallaby’s Bio of Alan Greenspan

The latest issue of CIS Policy includes my review of Sebastian Mallaby’s biography of Alan Greenspan. Here is a sample:

Far from being a tragedy, Greenspan’s tenure at the Fed was a spectacular success, as Mallaby for the most part acknowledges. This is not to say that US monetary policy could not have been improved by a more rules-based and transparent approach. Mallaby briefly mentions nominal gross domestic product targeting as an alternative to inflation targeting, but does not elaborate on its significance. Greenspan could have moved the Fed in these directions at the expense of his own authority and influence. While one can fault Greenspan’s highly discretionary approach to monetary policy on procedural and other grounds, the results were far better than could reasonably be expected and this is in no small part due to Greenspan’s judgement, which was spectacularly right more often than not. Had Greenspan gone against his own free market instincts and sought to second-guess financial markets on asset prices, as Mallaby suggests, the results would almost certainly have been disastrous and his biography would relate a different type of tragedy. The counter-factual in which someone other than Greenspan was Fed Chair (and we largely know who the alternatives might have been) is one that is worth contemplating.

Full article here.

posted on 28 March 2017 by skirchner in Economics, Financial Markets

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The G20 and Global Governance

The latest issue of The Cato Journal includes my article on The G20 and Global Governance, a critique of state-sponsored global governance scholarship.

posted on 26 September 2016 by skirchner in Economics

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High Frequency Trading: Fact & Fiction

The latest issue of the CIS journal Policy includes my article on High Frequency Trading: Fact and Fiction.

posted on 14 March 2016 by skirchner in Centre for Independent Studies, Economics, Financial Markets

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Too Much Finance?

I have an op-ed in the AFR looking at the long-run relationship between financial sector size and living standards that addresses the ‘too much finance’ critique. Full text below the fold.

continue reading

posted on 10 January 2016 by skirchner in Economics, Financial Markets

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Capital Gains Tax Reform in Canada: Lessons from Abroad

The Fraser Institute has released a new volume on international experience with capital gains taxes. I wrote the chapter on New Zealand, with some reference to Australia. Australia was deemed too similar to Canada to warrant a chapter in its own right.

posted on 06 November 2014 by skirchner in Economics

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I am leaving CIS and returning to financial markets

This is my last week at CIS. I will be returning to financial markets from whence I came back in 2008. Thanks to Greg Lindsay for giving me a platform to participate in the public policy debate over the last few years. Thanks also to those who contributed to Policy while I was editor over the last 18 months. Policy will continue under a new editor.

My new employer won’t be paying me to blog or tweet during business hours, so you will be hearing even less from me on what is already a very low frequency blog. I will still post material here from time to time and link to what I am doing when appropriate. Needless to say, nothing on this web site should be attributed to current or previous employers.

This blog has followed me around in various roles since 2003, back when economics blogs were a rarity. The economics blogosphere is now a very over-crowded space. Since 2009, Scott Sumner has been saying much of what I wanted to say, only better. It is more efficient for me to send him a link and have him blog on it than to do it myself. So go read him if you don’t already.

posted on 28 August 2014 by skirchner in Centre for Independent Studies, Economics, Financial Markets

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Wayne Swan on Monetary Offset and the GFC

Former Treasurer Wayne Swan is releasing some of his briefing notes from the GFC ahead of the launch of his upcoming memoir, The Good Fight. The first instalment from a meeting at the Prime Minister’s residence with the Prime Minister, Treasury Secretary and other senior officials on 4 August 2008 is remarkable for its acknowledgement of monetary offset. Indeed, the notes could just as easily have been written by Scott Sumner:

There are three broad considerations the Government would need to keep in mind in taking a decision to engage in discretionary [fiscal] action:

• The Reserve Bank through its control over interest rates, determines the overall level of aggregate demand in the economy, and the Bank would likely take account of any fiscal stimulus in its monetary decisions – that is, more spending would keep interest rates higher than otherwise…

The bottom line is that in the event of a shallow downturn, discretionary [fiscal] action may not achieve any noticeable outcomes in terms of growth and unemployment, but would leave rates higher, erode the [budget] surplus and put at risk the Government’s fiscal credibility.

These costs of course need to be weighed against the potential political costs of being seen to do nothing…

Needless to say, the ‘political costs’ argument won in the end, with the first discretionary fiscal stimulus announced in October 2008.

posted on 11 August 2014 by skirchner in Economics, Fiscal Policy, Monetary Policy

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The Financial System Inquiry and Macro-Pru

I have an op-ed in Business Spectator endorsing the sceptical approach to macro-prudential regulation taken in the Murray inquiry’s interim report:

Macro-prudential policies are seen as providing policymakers with a more targeted set of policy instruments that might complement or even substitute for changes in official interest rates. However, these instruments also implicate policymakers in making much finer judgements about risks to financial stability as well as the more traditional concern of monetary policy with price stability.

A blunt instrument like monetary policy encourages caution in making such judgements. By contrast, more targeted counter-cyclical quantitative controls are a standing invitation to micro-manage credit allocation, but do not in themselves improve the ability of policymakers to make appropriate judgements about the implications of such policies. It can also create a false impression that a central bank’s price stability mandate has been subordinated to other objectives, such as house price inflation.

Macro-prudential policies are also more politically fraught than traditional monetary policy. Quantitative controls designed to be selective in impact are more likely to provoke opposition. In Britain, macro-prudential policies are at cross-purposes with the government’s ‘Help to Buy’ mortgage guarantee scheme. Macro-prudential regulation is often a second-best approach to dealing with the inflationary implications of supply-side rigidities in housing markets. It may also push borrowing and lending activities outside the regulatory perimeter altogether.

posted on 25 July 2014 by skirchner in Economics, Financial Markets

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Rent or Buy: Does it Matter?

A RBA Research Discussion Paper on whether Australian housing is over-valued attracted considerable media attention. The (unsurprising) bottom-line was that Australian housing is currently fairly valued based on the user-cost approach, but that the average household might be better off renting now if, ‘as many observers have suggested,’ future real house price growth is less than the historical annual average rate of around 2.5% since 1955.

As it turns out, the ‘many observers’ actually referenced in the paper are the RBA itself, which makes one wonder whether the RDP’s conclusion is part of the RBA’s broader jaw-boning effort directed at expectations for future house price appreciation.

In fact, the RBA’s RDP makes an excellent case for the view that we should be indifferent between renting or buying ex ante. The user costs of owner-occupation and renting are subject to a long-run equilibrium relationship. The RBA’s RDP shows how close this relationship has been historically using matched data on house prices and rents, despite some short-run volatility. In principle, one could use deviations from this equilibrium relationship to profitably arbitrage the user cost of owner-occupation and renting, but it is likely that these deviations reflect the transaction costs associated with buying/selling and moving. The deviations arise precisely because this arbitrage is difficult in practice.

So don’t sweat on the rent-buy decision.

posted on 17 July 2014 by skirchner in Economics, House Prices

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Eight Housing Affordability Myths

I have published a new Issue Analysis with the Centre for Independent Studies, Eight Housing Affordability Myths. In the paper, I show how a number of highly persistent myths about the nature of housing markets, the dynamics of house prices and the drivers of housing affordability condition public policy to focus on excessively on housing demand at the expense of housing supply.

posted on 09 July 2014 by skirchner in Centre for Independent Studies, Economics, Foreign Investment, House Prices

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Is John Edwards a Ricardian?

John Edwards’ ‘Beyond the Boom’ is a welcome follow-up to his 2006 ‘Quiet Boom’, which I reviewed at the time in conjunction with Ian Macfarlane’s Boyer Lectures.

I agree with the argument that economic reform should not be sold on the basis of a faux crisis or economic failure narrative. If proposed reforms are worth doing they are worth doing regardless of where we sit in relation to the business cycle or the budget outlook.

John notes that households saved the Howard government’s tax cuts and that household saving would have been lower in their absence. This is an important observation, because it demonstrates the private saving offset to changes in public saving. Possibly to spare his readers the jargon, John didn’t mention this as an example of Ricardian equivalence, but it is clearly relevant here. I made much the same argument at the time.

It is perhaps worth noting that John was rather more sympathetic to tax cuts in ‘Quiet Boom,’ where he says that:

It may well be worthwhile to reduce the top marginal income tax rate, or to encourage more workforce participation by older Australians or to increase the incentives to move from social security support to paid employment.

Those arguments remain valid, regardless of the state of the budget. While balancing the budget over time is important, this should not come at the cost of reducing incentives for labour market participation.

John also notes that during the financial crisis, the increase in private sector saving more than offset the decrease in public sector saving from the fiscal stimulus. He doesn’t mention that this is at odds with the dominant narrative around the stimulus, which is that it worked because we ‘went early, went large and went households.’ If the stimulus worked, John’s analysis implies that it was not through household consumption spending. I would like to have seen John spell out these implications in more detail (my take is here).

John maintains we should limit the current account deficit to 3.3% of GDP to contain growth in external liabilities. This is close to the average since 1960 and so is certainly achievable based on historical experience. However, in ‘Quiet Boom’ John shows how conditioning macro policy on a view about the appropriate size of the current account deficit got us into a lot of trouble. Tim Geithner’s attempt to get the G20 to sign up to a 4% of GDP limit on current account imbalances was similarly mistaken in my view. We cannot know in advance the appropriate rates of saving and investment, from which it follows that the appropriate current account deficit is also unknown.

John maintains that the government has a revenue rather than a spending problem, but this is necessarily a joint problem. The normative issue is to define what government should be doing and raise revenue accordingly.  In that sense, the expenditure side is analytically prior to the revenue side, regardless of what is driving changes in the budget balance over any given period. The test both revenue and expenditure measures need to pass is whether they improve incentives to work, save and invest. Higher average tax rates do not pass that test and would be at odds with the aims of the tax reform process and raising labour force participation. Balancing the budget is important, but should not come at the expense of microeconomic incentives. Balancing the budget and stabilising net debt as a share of GDP will be a somewhat hollow achievement if it comes at the expense of a smaller economy that yields less revenue for government in absolute terms.

John is spot on in arguing that Australia’s economic future lies in integration with Asia through trade in services. I would add that there are even larger gains to be had through increased trade in capital and labour. Regional free trade agreements will be important in defining the parameters of our engagement and deserve close attention from policymakers. The G20 would do well to focus on the successful conclusion of regional and multilateral trade deals.

Alex Tabarrok says the Reserve Bank deserves a lot of credit, but I do not think we can attribute Australia’s relative economic outperformance to the conduct of monetary policy. Australia adopted inflation targeting along with the rest of the world. Australia’s senior central bankers largely trained in north America and think much like Ben Bernanke. It cannot be said Australia followed a different intellectual approach or that we know something foreign central bankers do not.

At the onset of the crisis, CPI inflation was running at an annual rate of 5%, nominal GDP at 11% and inflation expectations were coming unhinged. In the absence of a global downturn, the RBA would probably have needed to engineer a severe domestic slowdown to bring inflation back to target. In that sense, the downturn in the world economy did the RBA a favour. Monetary policy is neutral in the long-run, so I don’t think we can give the central bank too much credit for a 23 year expansion.

posted on 03 July 2014 by skirchner in Economics, Monetary Policy

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The 2014 Budget and Monetary Offset

The 2014 Budget is notable for its explicit rejection of monetary offset. According to the government’s fiscal strategy, ‘the pace of fiscal consolidation balances the need for structural fiscal repair with the shorter term impact on the economy.’ Yes, the government still thinks it is in the business of aggregate demand management.

As I have argued in more detail here, this misunderstands the role of fiscal policy in the economy. With an inflation targeting central bank and a floating exchange rate, fiscal policy need not concern itself with demand management. Interest rates and the exchange rates can carry most of the required adjustment to reduced government spending.

The Abbott government proposes a four percentage point turnaround in the budget balance over 10 years.

By way of comparison, the Hawke government’s ‘trilogy’ of fiscal rules led to a fiscal consolidation of similar magnitude in five years during the mid- to late-1980s. The combined efforts of the Keating and Howard governments turned a deficit of 4% of GDP in 1993-94 into a balanced budget by 1997-98 (using today’s measures). These turnarounds were as much cyclical as discretionary, but this only serves to demonstrate that the economy is more important for the budget than the budget is for the economy.

The US has seen a sharp turnaround in its budget deficit from 10% to 4% of GDP over four years, including the sharpest decrease in federal spending since World War Two, without inducing an economic slowdown, because of accommodative monetary policy. As Scott Sumner has argued, it is hard to conceive a better test of monetary offset.

The Abbott government has thus conditioned its fiscal strategy on the same mistaken understanding of the role fiscal policy in the economy that informed the Rudd government’s fiscal stimulus of 2008-09.

posted on 14 May 2014 by skirchner in

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ECB to Adopt QE in H2 2014

I have an op-ed in Business Spectator arguing that the ECB will likely resort to QE in the second half of this year. This will be a vindication of the long-standing criticisms of ECB monetary policy made by the new market monetarists. Inflation outcomes, nominal GDP and the euro exchange rate are all consistent with monetary policy having been too tight rather than too easy. The emerging divergence between ECB/BoJ and Fed monetary policy should set the stage for broad-based USD outperformance.

posted on 11 April 2014 by skirchner in Economics, Financial Markets, Monetary Policy

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Do Financial Markets Care About the G20?

An ECB Working Paper looks at the impact of G20 meetings on financial markets:

In this paper we run an event study to test whether G20 meetings at ministerial and Leaders level have had an impact on global financial markets. We focus on the period from 2007 to 2013, looking at equity returns, bond yields and measures of market risk such as implied volatility, skewness and kurtosis. Our main finding is that G20 summits have not had a strong, consistent and durable effect on any of the markets that we consider, suggesting that the information and decision content of G20 summits is of limited relevance for market participants.

That won’t stop the Australian federal government spending $500 million on a process markets have deemed an irrelevance.

posted on 05 April 2014 by skirchner in Economics, Financial Markets

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Bob Shiller, Ex-Ante and Ex-Post

Scott Sumner has a nice comparison of Robert Shiller’s investment advice with that from one of my favourite supply-side economists, Alan Reynolds. Loyal readers of this blog will not be surprised to see that Scott’s post has my name all over it.

Scott asks, ‘Can people find me the dates where Shiller recommended people buy stocks?’

Sure. In his 2009 book with George Ackerlof, Shiller wrote: ‘there has been one way, at least in the past, in which almost everyone could become at least moderately rich … Invest it for the long term in the stock market, where the rate of return after adjustment for inflation has been 7% per year’ (p. 117).

Unfortunately, Shiller’s ex-post observations on stock market returns in 2009 do not sit well with his ex-ante prediction in 1996: ‘long run investors should stay out of the market for the next decade.’

posted on 25 March 2014 by skirchner in Economics, Financial Markets

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