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June 19, 2014

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Latest Posts from Economist's View


Fed Watch: Still a Dove

Posted: 19 Jun 2014 12:15 AM PDT

Tim Duy:

Still a Dove, by Tim Duy: The FOMC delivered as expected today, with virtually no change to policy.  The tapering continues with another $10 billion cut to the pace of asset purchases, which was essentially the only change to the FOMC statement aside from the description of the economy.  The Wall Street Journal tracks the changes here.
The Fed downgraded their GDP forecast, as expected given the weak Q1 numbers.  They did not include any upward offsets in subsequent years.  Consequently, the expected trajectory of output falls further short of current estimates of potential:

  FED061814

Expect estimates of potential output to come down even further.  In contrast, the unemployment forecast was revised to the more optimistic side:

  FED2061814

while the inflation forecast was virtually unchanged.  As might be expected given an improving unemployment outlook, the interest rate projections were slightly more hawkish.  Still, Yellen cautioned against reading this as a change in the outlook, instead attributing it to a change in FOMC members.  The unstated implication is that the FOMC has moved in a slightly more hawkish direction, raising the possibility that Yellen could become more isolated in the months ahead in her generally dovish stance, assuming of course that the tension between the Fed's stated policy goals and the stance of policy continues to grow.
And, as Joe Weisenthal at Business Insider notes, Yellen again proves she is indeed a dove.  She dismissed recently higher inflation readings as noise, specifically drew attention to broad measures of unemployment, and said (correctly) that wage growth itself does not necessarily indicate inflation pressures would be far behind.  No indication that she is in any rush to raise rates whatsoever.
Bottom Line:  Policy remains the same - the Fed continues to expect a long-period of relatively low interest rates.  Given current unemployment and inflation numbers, I continue to expect the risk remains on the more hawkish side of that story.  But that is my assessment of the risk, not of the baseline.
Sorry for the quick post - scheduled to be in Portland in a few hours. 

Links for 6-19-14

Posted: 19 Jun 2014 12:06 AM PDT

How Close Are We To Full Employment?

Posted: 18 Jun 2014 09:33 AM PDT

Dear FOMC: Please be patient:

How close are we to full employment?, by Mark Thoma: How far is the economy from a full recovery? When should Federal Reserve policymakers, who are finishing their two-day meeting today, begin raising interest rates? Should the Fed speed the pace of its tapering of quantitative easing?

All of these questions depend critically on a piece of data economists call the output gap...

'Does Culture Matter for Economic Growth?'

Posted: 18 Jun 2014 07:47 AM PDT

Dietz Vollrath at the Growth Economics blog:

Does Culture Matter for Economic Growth?: There's been an increasing number of papers concerned with culture and its relationship to economic growth. I happened to just see this working paper by Di Tella and MacCulloch (2014), but the idea of culture being an important determinant of economic development levels has been hanging out there in the literature for a long time. Weber's theory of the Protestant work ethic is probably the starting point for any discussion of this topic. More recent work tends to try and be more empirical than Weber, often using World Values Surveys as a means of measuring cultural elements. This is what Di Tella and MacCulloch do in their working paper. [If you'd like a good introduction to the culture literature, check out James Fenske's course materials, in particular his "Foundations of Development" course].
I think this is pretty interesting reading, but I'm starting to get a little antsy about the use of the cross-country empirical work. Not in a standard "Identification!!" way, although that's an issue, but in a slightly deeper way. In particular, why bother regressing GDP per capita (or growth, or any measure of economic activity) on cultural variables at all? ...
So here's the issue... If culture leads to different utility functions, which in turn lead to different measurable economic outcomes, then why should we bother with measuring economic outcomes? Let me take this from the opposite angle. If everyone has identical utility functions, then measurable economic outcomes (GDP, average wages) have some information about relative welfare across countries. But if everyone has a different utility function, then measurable economic outcomes don't necessarily provide any information about relative welfare. If one culture derives utility from having massive families with lots of kids, and doesn't really care about consumption goods, then what does their low GDP per capita tell me? Nothing. It doesn't tell me they have lower welfare than a high GDP per capita culture.
If you tell me that culture is important for economic outcomes, then you're telling me that utility functions vary across cultures. But if utility functions vary across cultures, then cross-culture comparisons of economic outcomes don't imply anything about welfare. So aren't the regressions with culture as an explanatory variable self-defeating, even if they are econometrically sound?
I could well be over-thinking this, and I'd be happy to hear a good argument for what the culture/growth or culture/income regressions are supposed to be telling me.

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