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Greenspan Throws Down the Gauntlet: ‘Prove Me Wrong’

posted on 08 January 2011 by skirchner in Economics, Financial Markets, Monetary Policy

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Glenn Stevens at the National Press Club?

It’s good enough for Ben Bernanke:

Mr. Bernanke will speak to reporters at the National Press Club in Washington Feb. 3 , and take questions there…A month ago, Mr. Bernanke appeared on prime-time television on CBS News’ “60 Minutes” for the second time.

As the linked article notes, even Bernanke lags his European and Japanese counter-parts in holding regular press conferences. I make the case for an increased public profile for the RBA Governor here.

posted on 06 January 2011 by skirchner in Economics, Financial Markets, Monetary Policy

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A Higher Frequency CPI

Not content with a monthly CPI, an article in Slate looks at the prospects for an even higher frequency CPI in the US. According to the article, the US CPI costs $US234m a year to compile at a monthly frequency, which works out at about US$0.75 per capita. The ABS tells us that a monthly CPI in Australia would cost $A25m a year compared to the $A10m it spends compiling the existing quarterly release, which works out at around $A1.11 per capita.  There must be economies of scale in compiling the CPI. Otherwise, the ABS quote looks expensive, even at PPP exchange rates.

I recall a certain market economist in the late 1990s who would embarrass the ABS by pointing out the above-CPI increases in the cover price of the ABS CPI publication.

I make the case for a monthly CPI in Australia here.

posted on 22 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The Year RBA Watchers Got an Involuntary Early Retirement

Ross Gittins, giving his traditional address to the Australian Business Economists’ annual forecasting conference:

It’s become a lot harder for you guys to predict now the nation’s economics editors have retired from the prediction game. But that’s the way the more loud-mouthed of your brethren seem to have wanted it.

A loud-and-proud Chris Joye translates:

Ross Gittins delivered a fascinating speech this week during which he gave me a subtle slap for forcing the RBA to stop tipping-off journos about the internal executive’s rate recommendations prior to its Board meetings, which in and of itself is an acknowledgement that demonstrates how right we were to push this line (our actions also brought about the demise of the former Shadow Governor, Terry McCrann, after the October meeting).

Gittins’ remarks effectively concede that the economic writers in question can’t play the prediction game nearly as well now that they have a more circumscribed relationship with the Bank. Glenn Stevens denies that Board decisions have ever been leaked, but there is a distinction between the outright leaking of a Board decision and the backgrounding and nudging of economics writers that previously took place.

posted on 10 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Should Central Banks Publish an Official Interest Rate Projection?

The case for and against. Since the RBA already produces economic forecasts endogenised to an assumption about the future path of monetary policy, it would make sense to publish the cash rate projection as well. Changes in the projection would heavily condition the expected real cash rate and could even reduce the need for changes in the actual cash rate.

posted on 10 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Inflation Pop Quiz

Take Zimran Ahmed’s pop quiz:

You’re a responsible Brazilian living in your decent Sao Paolo apartment (paid off!). You have a tidy pile of cruzeiros in your local bank, saved from the income your reasonable private sector job generates. But it’s 1979 and you’re worried about inflation looming on the horizon. What do you do?

Nic Rowe re-phrases the question for the benefit of a PhD candidate operating under the constraints faced by an economics blogger:

Using a macroeconomic model with monopolistically competitive firms, explain how an increase in the expected future price level will cause an increase in the current price level. Also explain whether there is an effect on real output.

Your answer must use words only, with no diagrams or equations. Be very precise about all the mechanisms that would be involved in this interdependent system of simultaneous causation. Your answer must assume no previous knowledge of economic theory or familiarity with economic concepts on the part of the reader. Try to make your answer as realistic as possible, using 10 real-world goods as examples. These should be goods that a homeowner with liquid domestic currency assets living in Sao Paolo Brazil in 1979 might want to buy in response to an increase in the expected future price level. Any transactions in your explanation must be shown to be consistent with double-entry bookkeeping. Please write clearly.

You have 2 hours to answer this question.

Of course, this has never been a deterrent to Scott Sumner, who writes blog posts faster than you can read them.

posted on 08 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The Most Pronounced Disinflation Since 1981

Inflation outcomes are the ultimate test of whether monetary policy has been too easy or too tight. With disinflationary pressures in the US at their most pronounced since the Volcker disinflation of the early 1980s, critics of quantitative easing would do well to ponder the counter-factual in which US monetary policy was not as accommodative. The data suggest that the risk of inflation being too low has been greater than the risk of inflation being too high.

posted on 07 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The Conservative Case for Quant Easing

David Beckworth argues that conservatives need QE to work to reduce the risk of more government intervention.

posted on 03 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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What Would Friedman Do III?

Yes, Friedman was a ‘money printer’:

David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

Milton Friedman: Yes, indeed… It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

(HT: Doug Irwin via David Beckworth)

posted on 30 November 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Central Bankers Behaving Badly and Not So Badly

Larry White, George Selgin and William Lastrapes recently argued that the Fed has been a failure by comparing the periods before and after its establishment in 1914. Yet there are enormous differences in the way the Fed has approached monetary and other policies in the period since 1914 that would seem to be more important in explaining these outcomes than the existence of the Fed itself. Charles Calomiris notes that for the period 1914-1951, the Fed was beholden to fallacious economic doctrines, which makes its failures readily explicable. Monetary theory and policy practice have come a long way since then. As Henderson and Hummel note, Fed policy has been far more benign than the critics would suggest.

posted on 24 November 2010 by skirchner in Economics, Monetary Policy

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Why Central Banks Should Not Lean Against the Wind

The Cato Institute held its 28th Annual Monetary Policy Conference on the theme of ‘Is Monetary Policy Responsible for Bubbles?’ Adam Posen (a social democrat rather than a classical liberal) presented a paper titled ‘Do We Know What We need to Know in Order to Lean Against the Wind?’ This was his conclusion:

even the seemingly least controversial assumption required for leaning against the wind to succeed – that central banks can discern destabilizing booms with sufficient notice to pre-empt them – will be invalid. Since this argument is solely about the ability of monetary policymakers to recognize and react to asset price booms, and not about the viability of their means to affect asset prices, this should concern advocates of discretionary macroprudential policymaking as well, even when using non-monetary tools.

Posen wrote an even more thorough critique of using monetary policy to manage asset prices that can be found here. My own effort in this regard can be found here.

posted on 23 November 2010 by skirchner in Economics, Monetary Policy

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The QE Bunnies Meet Jim Hamilton

The non-cartoon version of QE.

posted on 23 November 2010 by skirchner in Economics, Monetary Policy

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Another Small Catch from the FOI Desk at the Oz

Another fishing expedition from the FOI desk at The Australian turned up this, with the following sub-editorial spin:

THE Reserve Bank deliberately intervened in the political debate over the property boom to stop governments releasing more land.

While I’m certainly not above using the FOI process to get a headline, a little more context would have been appropriate for this story. Luci Ellis wrote an RBA RDP in 2006 that argued that it was the combination of a demand-side shock from increased household sector leverage in a low inflation-low interest rate environment and an inflexible supply-side that gave rise to the early 2000s house price boom.

I agree with Chris Joye that the RBA had it wrong in the early 2000s and has now changed its tune. The RBA’s fingering of negative gearing in its 2004 submission to the Productivity Commission inquiry was possibly an attempt to set the government up as a scapegoat in case the early 2000s housing boom had ended badly in the context of a monetary policy tightening cycle. The RBA’s then jaw-boning of a supposedly over-heated market now looks rather quaint.

There has been a change in leadership at the RBA since then. Glenn Stevens’ more recent comments about ‘serious supply-side constraints’ in housing are pretty brave by the standards of an Australian central banker (imagine the reaction to Stevens making an even vaguely critical remark about the NBN and you will see what I mean). They are a damning criticism of policy at all levels of government. The only reason it hasn’t been written up that way is that many in the media simply don’t believe that housing affordability is a supply-side problem requiring supply-side solutions.

posted on 22 November 2010 by skirchner in Economics, House Prices, Monetary Policy

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The Downside of China’s Managed Exchange Rate

Inflation and price controls.  As we have often noted, China’s managed exchange rate is a much bigger problem for them than it is for the rest of the world. Former RBA Governor Ian Macfarlane told the Chinese as much in 2005, when he compared China to Australia in the 1970s:

surpluses may be more difficult to sustain in the long run than deficits are for some other countries. I speak from experience here as Australia faced this problem in the early 1970s and did not handle it successfully. At that time, Australia briefly experienced a current account surplus and also became a favourable destination for capital flows. As the money poured in from both these sources it had to be sterilised or it would flow directly into the banking system and through that into money and credit aggregates, with obvious inflationary results.

The problem we found was that in order to sell the official paper in sufficient volumes to soak up the inflow, interest rates had to be raised, and this induced further inflow. In the end, the monetary aggregates grew too quickly and inflation soon rose to an unacceptable rate. We came to the conclusion then that it was not possible to restrain an over-exuberant and inflation-prone economy only by domestic tightening. Exchange rate adjustment was required in order to take away the ‘one way bet’ aspect of the exchange rate. We eventually did this, but we were too slow and the inflation had already become entrenched.

So far, China has made a much better job of handling this situation than we in Australia did 30 years ago. And, of course, it is made easier by the fact that it is occurring in a world environment of low and stable inflation rather than the rising inflation of 30 years ago. But, ultimately, I think the point will be reached where domestic restraint has to be augmented by action on the exchange rate.

Five years on, Macfarlane’s speech remains highly relevant. He could usefully give the same speech in Washington today.

 

posted on 22 November 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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One More Time, for the Dummies

RBA Deputy Governor Ric Battellino says it again for the hard of hearing:

“People feel there is, or there should be, a rule that says banks can’t actually set any rates more than the official interest rates set by the Reserve Bank,” Mr Battellino said.

“That rule doesn’t exist, it has never existed, and it would be quite risky for the financial system to have such a rule.”...

Mr Battellino said bank margins had not changed in six years, remaining between 2.25 per cent and 2.5 per cent.

 

posted on 19 November 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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