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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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Scapegoating Foreigners for Domestic Policy Failures in Housing

I have an op-ed in the SMH on foreign direct investment in the Australian housing market noting that foreigners are being used as scapegoats for what are really domestic policy failures. The House Economics Committee will now inquire into the issue:

According to committee chair Kelly O’Dwyer, the inquiry will consider whether the current restrictions on foreign investment in residential real estate serve to increase supply, as is their stated intention, or raise prices.

This is rather like asking whether foreign tourists increase the production of goods and services or raise consumer prices. The answer depends on how flexibly Australian producers can accommodate changes in foreign as well as local demand through increased output.

It is pointless blaming foreigners for inflexible elements on the supply-side of the Australian economy. For that, we should blame local politicians.

Ironically, the inquiry could result in a bringing forward of foreign demand in anticipation of increased controls on FDI in residential real estate. The inquiry should recommend the abolition of the existing controls on FDI in real estate. My guess is the Committee will instead recommend extra conditions be attached to FIRB approvals, along with some additional quantitative controls.

I am also quoted in this story in today’s AFR on anti-dumping measures on imported tomatoes.

posted on 20 March 2014 by skirchner in Economics, Foreign Investment, Free Trade & Protectionism

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Finsia Industry Lunch Forum on FDI Regulation

I will be speaking at a Finsia Industry Lunch Forum on the regulation of foreign direct investment on 28 February. Other speakers include Ian Harper, Anthony Latimer and Tony Mahar. Details and registration here.

UPDATE 28 February: A write up of my presentation by David Uren. Finsia discussion paper here.

posted on 14 February 2014 by skirchner in Foreign Investment

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‘Australian of the Year’ as Contrarian Sell Signal

In January 2010, The Australian named then Prime Minister Kevin Rudd as ‘Australian of the Year’ ‘because of the way he dealt with the global financial crisis’. From affiliate EWI’s 2014 State of the Global Markets Report:

We correctly called the award a sell signal for Australian stocks - the All Ords would make no net progress for the next three-and-a-half years.

posted on 30 January 2014 by skirchner in Financial Markets

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Nina Munk on Jeff Sachs

Nina Munk’s summation in her Econtalk interview is not at all surprising, but no less devastating for that:

they were now really living in a kind of squalor that I hadn’t seen on my first visit. Their huts were jammed together; they were patched with those horrible polyurethane bags that one sees all over Africa, covered in sort of burlap bags and sort of plastic tarps from the UN refugee service. There were streams of slop that were going down between these tightly packed huts. And the latrines had overflowed or were clogged. And no one was able to agree on whose job it was to maintain them. And there were ditches piled high with garbage. And it was just—it made my heart just sink. And I thought to myself: You know what, Jeffrey Sachs? You came to this village once. That’s not true. I think he came a second time in a helicopter the second time. He’s been to that village twice. And on both times he was received like a welcoming monarchy. All the people come out to greet him, and the local officials come out in their best Sunday suit. And everyone’s out there giving grand speeches on a microphone, and they sing songs and they dance for him and they thank him and they praise him and they pray for him. But you know, when you leave and you go back home to your townhouse on the upper west side of Manhattan and you return back to your comforts, you know, these people are left really with nothing. With nothing. And arguably they are left with something that is more dismal and worse than it was before he tried to impose his ideas of progress on them.

posted on 30 January 2014 by skirchner in Economics

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House Prices Up, Time to Blame Negative Gearing

I have an op-ed in today’s Australian beating the housing supply drum at the expense of the anti-negative gearing brigade. In particular, I address the argument that demand for investment property is largely met through existing rather than newly built dwellings:

This reflects the fact that the flow of new houses is small relative to the existing dwelling stock. But it is about as relevant as noting that investors in the stockmarket mostly buy already held rather than newly issued shares. It is only supply-side constraints that prevent demand for existing dwellings from inducing new construction.

Negative gearing is first and foremost a tax policy issue and should be addressed as such as part of a broader tax reform effort. I could live with the Henry review’s proposed discount for income derived from saving, although ideally it would be much larger than his suggested 40%.

posted on 22 January 2014 by skirchner in Economics, House Prices

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De-Risking the RBA

I had an op-ed in the AFR over the break on the federal government’s injection of funds into the RBA’s Reserve Fund. The article notes that the public policy issue is not the subtraction from the budget bottom line from the injection, but whether the benefits of holding foreign exchange reserves are worth the risk of potential valuation losses and forgone income on higher yielding domestic assets. Foreign exchange reserves are not necessary for the effective conduct of monetary and exchange rate policy in Australia. An alternative policy approach is to hold smaller reserves. Full text below the fold (may differ slightly from published AFR text).

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posted on 12 January 2014 by skirchner in Economics, Financial Markets, Monetary Policy

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Bob Shiller Still Can’t Define a ‘Bubble’

John Cochrane reviews Bob Shiller’s Nobel lecture and notes that he still can’t define the idea for which he is most well known. Moreover:

In an entire lecture, Bob did not give a single concrete example of how “listening to psychologists” produces one concrete positive step to understanding “bubbles.”

Cochrane then tries to rehabilitate Shiller by suggesting he is doing something terribly profound:

I realized just how deep and audacious Bob’s project is. He is telling us to abandon the “scientific” pretense. He wants us to adopt a literary style, where we look at the world, are inspired by psychology, and write interpretive prose as he has done.  When he says that the definition of a a bubble is a fad, he isn’t being sneaky and avoiding the argument. He means exactly what he says and wants us to think and write this way too. A bubble, to Bob, is defined as any time a time that he, writing about it, informed by psychology, and reading newspapers, thinks a “fad” is going on. And he invites us to think and write like that too. A model is, to Bob, wrapped up in one person’s judgement and not an objective machine. If I complain that this is ex-post story telling, he might say sure, stop pretending to be physics, write ex-post stories. If I complain that there are no rules and that this is no better than “the gods are angry,” he might say, no, read psychology not ancient theology, and the rules are you have to couch your story telling in their terms. He does not want us to try to construct models, either psychological or rational, that make quantitative predictions.

This is consistent with my observation that much of Shiller’s work is simply assertion rather than science. It is audacious, but not in a good way. While Cochrane means to praise Shiller, I think he effectively buries him.

posted on 19 December 2013 by skirchner in Economics, Financial Markets

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Strengthening Australia’s Fiscal Institutions

I have a new paper in the CIS Target 30 series, Strengthening Australia’s Fiscal Institutions, that re-states the case for legislated fiscal rules to be monitored and enforced by an independent statutory Fiscal Commission.

It is often argued that fiscal rules are unlikely to serve as an effective discipline on fiscal policy in the absence of political will. This is undoubtedly true, but fiscal rules can be seen as a mechanism through which the political will to tackle issues in relation to long-run fiscal sustainability can find more effective expression. If politicians are unwilling to put into law what they say they are committed to doing, then it is less likely that they will deliver on these commitments. The willingness to adopt fiscal rules can thus be seen as a test of the degree of political commitment.

Measures to strengthen Australia’s fiscal institutions should be a key recommendation of the Abbott government’s Commission of Audit.

posted on 11 December 2013 by skirchner in Economics, Fiscal Policy

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Debt Limits and Fiscal Rules

This week’s abolition of the local federal debt limit is a welcome development, but only because a debt limit in absolute dollar terms is not a well specified fiscal rule and was never intended to serve as such. The US debt limit, from which Australia’s took its inspiration, was also never intended to be a binding constraint on government borrowing, although threatened to become one on the back of poor fiscal outturns.

The US debt ceiling was first put in place in the 1930s. Its purpose was to alleviate the US Treasury from having to seek Congressional authorisation for each individual debt issue. Instead, Treasury was given discretion to issue debt within the overall limit specified by Congress, but not in the expectation that it would serve as a binding constraint on government borrowing. Since 1960, the US debt limit has been amended by Congress 78 times. More recently, the US debt limit has been politicised and used a proxy fiscal rule, but is unfit for this purpose. Government borrowing is ultimately a product of government spending in excess of revenue and it is government spending that needs to be controlled.

A net debt limit specified as a share of GDP rather than in absolute dollar terms is a better specification and a useful addition to a suite of fiscal rules designed to impose fiscal discipline, as I have argued elsewhere.

A traditional objection to fiscal rules is that they might force a fiscal consolidation or prevent the operation of automatic stabilisers so that fiscal policy becomes pro- rather than counter-cyclical. However, as argued in my AFR op-ed Monday, this is only a problem in the absence of an independent monetary and exchange rate policy. An inflation targeting central bank and a floating exchange rate allows fiscal policy to focus on supply-side issues and long-run fiscal sustainability without being pre-occupied by aggregate demand management and macroeconomic stabilisation.

posted on 09 December 2013 by skirchner in Economics, Financial Markets, Fiscal Policy

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The 30th Anniversary of the Floating of the Australian Dollar

I have an op-ed in today’s AFR on the occasion of the 30th anniversary of the decision to float the Australian dollar. This year also marks the 20th anniversary of the adoption of implicit inflation targeting by the Reserve Bank, although a formal inflation target was not adopted until August 1996. As I note in the op-ed, the combination of these two macroeconomic institutions fundamentally changed the role of fiscal policy in the economy. Yet much of our macroeconomic policy debate remains stuck in the pre-float era. Full text below the fold (may differ somewhat from edited AFR text).

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posted on 08 December 2013 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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The Financial System Inquiry – Dealing RBA Governance Back In

I participated in a roundtable discussion on the Financial System Inquiry’s draft terms of reference organised by federal Treasury. Item 7 of the draft terms of reference states that:

In reaching its conclusions, the Inquiry will take account of, but not make recommendations on the objectives and procedures of the Reserve Bank in its conduct of monetary policy.

This can be read a number of ways. I think the intent is to take RBA independence and inflation targeting off the table, but it can also be read as shutting down any consideration of RBA governance. The RBA is internationally anomalous in failing to separate monetary policy decision-making from the overall governance of the bank. This puts the board in the position of oversighting itself in the conduct of monetary policy, the bank’s most important function.

As I argue in this paper, external board members are also conflicted in being notionally appointed to represent particular interests and perspectives, but their role as monetary policy decision-makers requires them to put aside these interests in favour of the public interest. This results in the contributions of individual board members to monetary policy deliberations being suppressed, reducing transparency and accountability in the conduct of monetary policy. The RBA is also exceptional in affording a government representative voting rights (as opposed to non-voting representation) in setting monetary policy.

I also argued at the roundtable, consistent with my article in yesterday’s AFR, that the role of both the Foreign Acquisitions and Takeovers Act and the Foreign Investment Review Board needed to be explicitly included in the terms of reference because of their implications for the cost of capital and the financial system’s international integration with global capital markets. I briefly canvass reform options for the regulation of foreign direct investment in this article in the December issue of Infinance.

My concern is that unless RBA governance, the role of FATA and the FIRB are explicitly raised in the final terms of reference, these issues will not be adequately examined by the Inquiry.

Submissions on the draft terms of reference close Thursday 5 December. If you think these are important issues, it is not too late to put in a submission.

posted on 04 December 2013 by skirchner in Economics, Financial Markets

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Treasurer Joe Hockey’s Capital Xenophobia

I have an op-ed in the AFR on Treasurer Joe Hockey’s decision to exercise his discretion under the Foreign Acquisitions and Takeovers Act to reject ADM’s bid for Graincorp. Full text under the fold (may differ slightly from edited AFR text). As I note in the op-ed, a re-examination of the FATA and the Foreign Investment Review Board should form part of the terms of reference for the Financial System Inquiry. I will be participating in a roundtable on the draft terms of reference organised by federal Treasury in Sydney tomorrow. I will be arguing, inter alia, for the final terms of reference to address this issue explicitly.

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posted on 02 December 2013 by skirchner in Economics, Foreign Investment

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