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August 31, 2011

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links for 2011-08-30

Posted: 30 Aug 2011 10:04 PM PDT

More Dovish Than We Thought?

Posted: 30 Aug 2011 02:07 PM PDT

There is news from the Fed. First, from Narayana Kocherlakota of the Minneapolis Fed:

Fed's Kocherlakota Suggests Dissent Won't Be Repeated, by Michael S. Derby, WSJ: One member of the troika who opposed the Federal Reserve's recent decision to keep rates at rock bottom levels for two years suggested he won't be repeating his disagreement at coming central bank gatherings.
In a speech, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Tuesday "I see no reason to revisit the decisions" made last month, and added "I plan to abide by the August 2011 commitment in thinking about my own future decision."
The reason? With the Fed having made its pledge, "I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future." ...
That said, the official spent a considerable amount of his speech — his comments came from remarks prepared for delivery before the National Association of State Treasurers in Bismarck, N.D. — explaining why he did not think the Fed made the right decision on its forward interest rate commitment. He indicated there was even a case to be made for going the other way on policy and tightening it. ...

Brad Delong comments here, and also notes (approvingly) remarks by Charles Evans of the Chicago Fed:

Fed official makes plea for more stimulus, by Robin Harding, FT: A leading Fed policymaker made an aggressive call for more monetary stimulus on Tuesday as it emerged that staff of the US central bank have permanently cut their growth forecasts. In an interview with CNBC, Charles Evans of the Chicago Fed said that he would "favour more accommodation" and became the first policymaker on the rate-setting Federal Open Market Committee to explicitly countenance letting inflation rise above the Fed's target of 2 per cent in the short-term. ...

I don't think it's a secret that I favor more accomodative policy as well. Finally, the minutes from the last FOMC meeting were released today, and they showed a divided committee, but more dovishness than most people expected:

Participants discussed the range of policy tools available to promote a stronger economic recovery should the Committee judge that providing additional monetary accommodation was warranted. Reinforcing the Committee's forward guidance about the likely path of monetary policy was seen as a possible way to reduce interest rates and provide greater support to the economic expansion; a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to guidance that named specific spans of time or calendar dates. Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates. Others suggested that increasing the average maturity of the System's portfolio--perhaps by selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities--could have a similar effect on longer-term interest rates. Such an approach would not boost the size of the Federal Reserve's balance sheet and the quantity of reserve balances. A few participants noted that a reduction in the interest rate paid on excess reserve balances could also be helpful in easing financial conditions. In contrast, some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery, either because the headwinds that the economy faced would unwind only gradually and that process could not be accelerated with monetary policy or because recent events had significantly lowered the path of potential output. Consequently, these participants thought that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment. Participants noted that devoting additional time to discussion of the possible costs and benefits of various potential tools would be useful, and they agreed that the September meeting should be extended to two days in order to provide more time.

The last part where they say they need more time to discuss "the possible costs and benefits of the various potential tools" is a bit worrisome. We all know what the policy options are, and they should have been prepared with that information coming in. I think what they're really saying is that thay've gone as far as they're willing to go for now, and they want to wait to see what happens to the economy and then discuss it further. Should things get worse, they want to make sure that they have enough time to thoroughly review their options. But they're hoping things stabilize or get better so they don't have to seriously confront the question.

The release of the minutes seems to have raised the expectation that more action is coming, so it will be interesting to see if Fedspeak tries to reduce expectations in coming days.

Help Households Not Banks

Posted: 30 Aug 2011 07:29 AM PDT

Here is my contribution to The New Republic's symposium "Is There Anything That Can Be Done?"

Help Households Not Banks

I was asked to answer relatively specific questions, so if you've been hanging around here for awhile you will have heard some of these arguments before.

For all contributions (they are still adding to the collection) click here. Here's the collection so far:

DeLong: Ben Bernanke’s Dream World

Posted: 30 Aug 2011 07:20 AM PDT

Brad DeLong is unhappy with Ben Bernanke:

Ben Bernanke's Dream World, by Brad Delong, Commentary, Project Syndicate: US Federal Reserve Board Chairman Ben Bernanke is not regarded as an oracle in the way that his predecessor, Alan Greenspan, was before the financial crisis. But financial markets were glued to the speech he gave in Jackson Hole, Wyoming on August 26. What they heard was a bit of a muddle. ...[continue reading]...

Are Macroeconomists Making Progress?

Posted: 30 Aug 2011 06:03 AM PDT

Some thoughts after attending the 4th Meeting of the Nobel Laureates in Economics:

Are Macroeconomists Making Progress?

Update: I should note that I originally ended the column on a slightly more positive note, but then cut this part to make the word limit (the conference is intended to bring young economists together with the Nobel laureates so that the young economists can benefit from their wisdom):

But I do have hope. The young economists I talked to are eager to move things forward, and refreshingly free of the theoretical and ideological divides that exist in the older generation of economists. I have little faith that the older generation will ever acknowledge the models they spent their lives building are fundamentally flawed. But the disappointment I felt listening to the older and supposedly wiser economists at the conference give conflicting advice based upon failed models was absent in these conversations with the next generation. Some day they too will dig in their heels and defend their lives' work against challenges, but for now it's up to them to forge a new way forward.

Policymakers Need Better Data on the Economy

Posted: 30 Aug 2011 05:40 AM PDT

Binyamin Appelbaum recently highlighted the measurement problems we have with US data. Not only are the data often very slow to arrive, there can be substantial revisions to many series after they are released and the revisions can change the picture of the economy substantially.

As I've written about before, I would like to see resources devoted to improving our ability to understand the state of the economy in (near) real time. The lack of accurate data made it much more difficult to respond to the current recession, e.g. (this was December 2009 and is far from the only example where revisions told a very different story than the initial relase):

When it was announced two months ago that GDP had grown by 3.5 percent in the third quarter of this year, it took the sails out of any movement toward another stimulus package. Now the number has been revised downward to 2.2 percent.

At a growth rate of 3.5 percent, the economy would be growing slightly faster than the long-run trend so that, although progress would be very, very slow, the economy would at least be catching up to the long-run trend (in the recovery from previous recessions, it was not unusual for GDP to grow at 6 or 7 percent...). At a growth rate of 2.2 percent, the economy is not even treading water let alone making up for past losses.

The economy needs more help, but the 3.5 percent initial figure was heralded as the sign that better times were just around the corner. This undermined the case for a new fiscal stimulus package and likely caused the Fed to back off of any further plans it might have had to do more to help the economy recover. ...

This points to the fact that policymakers need better and more timely data. The fourth quarter is almost over yet we are still trying to figure out what happened in the third quarter, and we still don't know for sure. There has been lots of criticism of how policymakers have reacted in this recession, much of it deserved, but little of that discussion has recognized the data problems. ... If we can give policymakers better and more timely guidance about the state of the economy, it could improve policy considerably, and that would be money well spent.

In any case, let me say one more time as loudly as I can that given the data that we do have, it's clear that the economy -- the labor market in particular -- needs more help.

But if we are stuck with what we have, as we are, then this is a sensible suggestion: 

Focus On Unemployment To Measure Output Gap, by Mathew Ygesias: Sveriges Riksbank deputy governor Lars E.O. Svensson, my favorite central banker, delivered a speech a few months ago (it's English title "For a Better Monetary Policy: Focus on Inflation and Unemployment" makes it sound totally banal but it's not) that had bearing on the question of what's a policymaker to do in a world where government statisticians can't accurately measure recessions fast enough to do stabilization policy. He argues that we should forget about the GDP output gap and just pay attention to unemployment:

I believe instead that the unemployment gap is the most appropriate measure of resource utilisation. There are several reasons for this. Unemployment is measured often and is not revised. GDP on the other hand is measured less often and is highly uncertain, and major revisions are made. Unemployment is also directly related to welfare – one of the worst things that can happen to a household is that one of the members of the household loses his or her job. Unemployment is also the indicator of resource utilisation that is best known and easiest for the public to understand. The preparatory works for the Sveriges Riksbank Act state that the Riksbank should support the objectives of general economic policy. One of the main objectives of economy policy in Sweden is to limit unemployment, for example by improving the functioning of the labour market and increasing the incentives to look for work.

Sounds good to me.

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