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September 9, 2014

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Posted: 09 Sep 2014 12:06 AM PDT

Fed Watch: Forward Guidance Heading for a Change

Posted: 08 Sep 2014 09:25 AM PDT

Tim Duy:

Forward Guidance Heading for a Change, by Tim Duy: The lackluster August employment report clearly defied expectations (including my own) for a strong number to round out the generally positive pattern of recent data. That said, one number does not make a trend, and the monthly change in nonfarm payrolls is notoriously volatile. The underlying pattern of improvement remains in tact, and thus the employment report did not alleviate the need to adjust the Fed's forward guidance, allow there is a less pressing need to do so at the next meeting. In any event, the days of the "considerable time" language are numbered.
Nonfarm payrolls gained just 142k in August while the unemployment rate ticked back down to 6.1%. In general, the employment report is consistent with steady progress in the context of data that Fed Chair Janet Yellen has identified in the past:

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Arguably the only trend that is markedly different is the more rapid decline in long-term unemployment, a positive cyclical indicator. Labor force participation remains subdued, although the Fed increasing views that as a structural issue. Average wage growth remained flat while wages for production workers accelerated slightly to 2.53% over the past year. A postive development to be sure, but too early to declare a sustained trend.
The notable absence of any bad news in the labor report leaves the door open to changing the forward guidance at the next FOMC meeting. As Robin Harding at the Financial Times notes, many Fed officials, including both doves and hawks, have taken issue with the current language, particularly the seemingly calendar dependent "considerable time" phrase. Officials would like to move toward guidance that is more clearly data dependent.
Is a shift in the language likely at the next meeting? Harding is mixed:
Their remarks could mean a move at the September FOMC meeting in 10 days, although there is little consensus yet on new wording, so a shift might have to wait until next month.
The trick is to change the language without suggesting the timing of the first rate hike is necessarily moving forward. The benefit of the next meeting is that it includes updated projections and a press conference. Stable policy expectations in those projections would create a nice opportunity to change the language. Moreover, Yellen would be able to to further explain any changes at that time. This also helps set the stage for the end of asset purchases in October. A shift in the guidance next week has a lot to offer.
A change in the language would also throw some additional light on Yellen's comments at Jackson Hole. Her typically unabashed defense of labor market slack was missing from her speech, replaced by a much more even-handed evaluation of the data. Was she simply setting the stage for an academic conference, or was she signalling a shift in her convictions? A change in the language at the next meeting would suggest the latter.
Bottom Line: The US economy is moving to a point in the cycle in which monetary policymakers have less certainty about the path of rates. Perhaps they need to be pulled forward, perhaps pushed back. Policymakers will need to be increasingly pragmatic, to use Yellen's term, when assessing the data. The "considerable time" language is inconsistent with such a pragmatic approach. It is hard to see that such language survives more than another FOMC statement. Seems to be data and policy objections are not the impediments preventing a change in the guidance, but instead the roadblock is the ability to reach agreement on new language in the next ten days.

What were they thinking? The Federal Reserve in the Run-Up to the 2008 Financial Crisis

Posted: 08 Sep 2014 09:15 AM PDT

At Vox EU:

What were they thinking? The Federal Reserve in the run-up to the 2008 financial crisis, by Stephen Golub, Ayse Kaya, Michael Reay: Since the Global Crisis, critics have questioned why regulatory agencies failed to prevent it. This column argues that the US Federal Reserve was aware of potential problems brewing in the financial system, but was largely unconcerned by them. Both Greenspan and Bernanke subscribed to the view that identifying bubbles is very difficult, pre-emptive bursting may be harmful, and that central banks could limit the damage ex post. The scripted nature of FOMC meetings, the focus on the Greenbook, and a 'silo' mentality reduced the impact of dissenting views.

Have Economists Been Captured by Business Interests?

Posted: 08 Sep 2014 09:14 AM PDT

Justin Fox:

Have Economists Been Captured by Business Interests?: To be an economist, you kind of have to believe that people respond to economic incentives. But when anyone suggests that an economist's views might be shaped by the economic incentives he or she faces,... it's actually pretty common to hear economists saying things like — this is from the usually no-nonsense John Cochrane of the University of Chicago — "the idea that any of us do what we do because we're paid off by fancy Wall Street salaries or cushy sabbaticals at Hoover is just ridiculous." ...
Happily, Luigi Zingales, a colleague of Cochrane's at Chicago's Booth School of Business, is trying to correct his discipline's blind spot by examining the economics of economists' opinions. ...
Zingales ... subjects his notions to an empirical test: Are there discernible patterns in what kinds of economists think corporate executives are overpaid and what kinds think they're paid fairly? ... The answer turns out to be yes. ...
What Zingales doesn't call for is any kind of blanket retreat by economists from consulting and expert witnessing and board memberships. Which is a good thing, I think. One of the reasons why economics rocketed past the other social sciences in influence and prestige over the past 75 years was because so many economists involved themselves in the worlds they studied. That has surely led to some amount of capture by outside interests, but it also seems to have counteracted the natural academic tendency toward insularity and obscurity. Lots of economists study things of direct relevance to business leaders and government policy-makers. We wouldn't really want to take away their incentive to do that, would we?

'Bold Reform is the Only Answer to Secular Stagnation'

Posted: 08 Sep 2014 09:14 AM PDT

Larry Summers:

Bold reform is the only answer to secular stagnation, by Lawrence H. Summers: The economy continues to operate way below any estimate of its potential made before the onset of financial crisis in 2007, with a shortfall of gross domestic product relative to previous trend in excess of $1.5tn, or $20,000 per family of four. As disturbing, the average growth rate of the economy of less than 2 per cent since that time has caused output to fall ... further below previous estimates of its potential.
Almost a year ago I invoked the concept of secular stagnation... Secular stagnation in my version ... has emphasised the difficulty of maintaining sufficient demand to permit normal levels of output. ...
To achieve growth of even 2 per cent over the next decade, active support for demand will be necessary but not sufficient. Structural reform is essential to increase the productivity of both workers and capital, and to increase growth in the number of people able and willing to work productively. Infrastructure investment, immigration reform, policies to promote family-friendly work, support for exploitation of energy resources, and business tax reform become ever more important policy imperatives.

Econometrics Mini-Course (NBER): Theory and Application of Network Models

Posted: 08 Sep 2014 08:46 AM PDT

Summer Institute 2014 Theory and Application of Network Models, July 22, 2014 Daron Acemoglu and Matthew O. Jackson, Organizers:

Matthew O. Jackson, Stanford University Social and Economic Networks: Backgound

Daron Acemoglu, MIT Networks: Games over Networks and Peer Effects

Matthew O. Jackson, Stanford University Diffusion, Identification, Network Formation

Daron Acemoglu, MIT Networks: Propagation of Shocks over Economic Networks

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