J. Bradford DeLong's Blog, page 294

Lars Svensson: Can Monetary Policy Still Deliver? A Natur...

Lars Svensson: Can Monetary Policy Still Deliver? A Natural Experiment: "Riksbank policy-rate hikes 2010-2011, from 0.25% to 2%. What happens to inflation and unemployment when the central bank (for no good reason) raise the policy rate by 175 bp?... Monetary policy works like clockwork in Sweden. Neo-Fisherian view rejected. What contributes to powerful monetary policy in Sweden? 1. Strong exchange-rate channel 2. Strong household cash-flow channel...

#shouldread

Our Kate Bahn Reminds us: Kate Bahn: "This needs to be sc...

Our Kate Bahn Reminds us: Kate Bahn: "This needs to be screamed from the rooftops.... We cannot have a substantive conversation about how tight the labor market is without examining demographic disparities..." ands sends us to Equitable Growth alumnus John Schmitt quoting Janelle Jones at: Laura Maggi: Despite Drop in Black Unemployment, Significant Disparities Remain: "The African-American unemployment rate... low���compared to historic numbers. In July, it was 6.6 percent...

...Still, the rate of black workers out of jobs is almost double that of white workers. The white unemployment rate in July was 3.4 percent. And even with a strong job market, significant disparities remain across the country, with some states and the District of Columbia showing very different employment pictures when the race of workers is taken into account. The differences are most stark in Washington, D.C., where a new report by the Economic Policy Institute analyzing employment numbers from the second quarter of 2018 found that the unemployment rate for African Americans was 12.4 percent, while the white unemployment rate was 1.5 percent.... ���These data tell a familiar story. While the national unemployment rate was less than 4 percent throughout the second quarter of the year, unemployment rates for African American and Hispanic workers were, in some states, double that,��� Janelle Jones, the EPI economic analyst who wrote the report, said in a news release. ���It is crucial that policymakers work to drive the unemployment rate even lower if black and Hispanic workers in every state are going to share in our country���s economic prosperity���...

#shouldread
#race
#gender
#labormarket

Adam Ozimek: Wider Labor Market Slack Implies Lower Rates...

Adam Ozimek: Wider Labor Market Slack Implies Lower Rates: "Focusing on wider labor slack helps explain why the Fed remains somewhat accommodative. It also suggests that if labor markets can return to 2001 levels, then rates should remain highly accommodative at the moment...

...Consistent with more hawkish commentators, the unemployment based rule suggests that the effect of labor markets now would be to push the federal funds rate slightly above neutral. However, focusing on prime non-employment suggests why the Fed remains accommodative: Ongoing slack continues to push the optimal funds rate down by around 2% compared with where it would be under full employment. What���s more, it is not clear that 2007 marks the best benchmark for full employment. The prime non-employment rate today remains significantly elevated compared with the early 2000s and is still improving quickly without generating above-target inflation. If we assume full employment is the rates from the end of the first quarter of 2001, the effects on the federal funds rate of wider slack are even more significant. In this case, unemployment is again slightly above neutral, while wider labor market slack is pushing the federal funds rate down 4 percentage points...

#shouldread
#monetarypolicy

Jason Snell: The Dream of Converting Podcasts into Text: ...

Jason Snell: The Dream of Converting Podcasts into Text: "While... machine translations aren���t readable, they are getting good enough to fuel search engines. A great proof of concept is this one from David Smith...

...which covers seven different podcasts. I���m a little baffled why Google hasn���t just indexed the contents of every podcast on the Internet and poured it into the Google search engine. David���s engine works well because the computerized transcript is attached to a time code for that podcast episode, so when you find a search result you can click to hear what was really said, rather than relying on a baffling transcript. This could go a long way to addressing the searchability of podcasts, which is why I���m hoping to (slowly) add automatic transcripts to all my podcasts. They won���t be great reading���which is why in the long term this technology needs to get much better in order to support people who are unable to listen at all���but they will help feed search engines and make it easier to find that moment when I first had Matt Fraction���s ���Hawkeye��� recommended to me...

#shouldread

Joseph E. Gagnon and Brian Sack: QE: A User's Guide: "Cen...

Joseph E. Gagnon and Brian Sack: QE: A User's Guide: "Central banks should characterize QE in terms of the stock of long-term asset holdings and should announce purchases of assets in discrete increments that are designed to deliver macroeconomic stimulus equivalent to the policy rate cut that they would otherwise desire to implement...

...QFor the United States and some other countries, research suggests that a purchase of long-term bonds equivalent to 1.5 percent of GDP [300 billion dollars] has a stimulative effect roughly equal to a cut in the policy rate of 0.25 percentage point. Moreover, central banks should convey that these adjustments will be made under a policy approach that responds routinely to economic developments and displays considerable inertia, as has typically been the case with the conventional policy interest rate...

#shouldread
#monetarypolicy

Scarce: Sharice Davids (D) and Kevin Yoder (R) in KS-03: ...

Scarce: Sharice Davids (D) and Kevin Yoder (R) in KS-03: "It's a bit surprising that the Republicans are pulling out this early in a nominally red district (R+4), but early polling had Davids already up by 8. Yoder, who had been endorsed by Trump, committed the grievous crime earlier this summer of supporting asylum for migrants who were victims of domestic violence. Unforgivable for the cultists...

Bryan Lowry and Lindsay Wise: After Administration Pressure, Yoder Says No to Asylum Plan: "Under intense pressure from his Republican base and the Trump administration, Rep. Kevin Yoder of Kansas now says he no longer supports a... plan to make it easier for migrants fleeing domestic abuse or gang violence to claim asylum in the United States...

...Yoder, who chairs a subcommittee responsible for homeland security funding, is facing a fierce re-election battle in a suburban Kansas City district that Democrat Hillary Clinton narrowly won in 2016. The Republican congressman from Overland Park, Kansas, told McClatchy this week that the asylum proposal ���may be too controversial to make it through the process��� and will be dropped. It���s a striking reversal for Yoder...

#shouldread
#politics

Are there transcripts for the Ezra Klein show?: Ezra Klei...

Are there transcripts for the Ezra Klein show?: Ezra Klein: The Ezra Klein Show: "Patrick Deneen says liberalism has failed. Is he right?... Francis Fukuyama���s case against identity politics... Carol Anderson on the myth of American democracy...

#shouldread

Very clever by Sedl����ek et al.. And this certainly look...

Very clever by Sedl����ek et al.. And this certainly looks right: 2% of GDP as the (ongoing) cost of the Boris Johnson BREXIT clown show: Benjamin Born, Gernot M��ller, Moritz Schularick, and Petr Sedl����ek: ��350 Million a Week: The Output Cost of the Brexit Vote: "The current cost of Brexit... counterfactual... a matching algorithm... combination of comparison economies best resembles the pre-referendum growth path of the UK economy.... The negative drag from the Brexit vote now appears to be roughly ��350 million a week...

...Our approach does not depend on having the right model for the British, the European, or even the global economy. We do not assume a particular Brexit deal, or construct specific scenarios for the outcome of the negotiations. Instead we create a transparent, unbiased, and entirely-data driven ���Brexit cost tracker��� that relies on synthetic control methods.... We let an algorithm determine which combination of other economies matched the evolution of real GDP in the UK before the Brexit vote with highest possible accuracy.... The algorithm choses the economies and weights assigned.... For the UK, our matching algorithm attributes high weights to Canada and the US, but also to Japan and Hungary.... As the doppelganger is not treated with the Brexit vote, it will continue to evolve in a similar way to how the pre-Brexit economy would have evolved if the referendum had never happened....

What are the economic causes of the output decline?... Increased uncertainty, which may temporarily depress investment and consumption spending. Anticipated lower future living standards,��as��the reduction in trade with the continent would be likely to make the UK permanently poorer...

#shouldread

Paul Krugman: @paulkrugman: "The American Economic Associ...

Paul Krugman: @paulkrugman: "The American Economic Association has a new discussion forum set up by Olivier Blanchard. First up is the question of whether low interest rates are leading to excessive risk-taking https://www.aeaweb.org/forum/311/have-low-interest-rates-led-to-excessive-risk-taking...

#shouldread

Is There Any Reason to Fear Low Interest Rates?

Paul Krugman tells us: Paul Krugman: @paulkrugman: "The American Economic Association has a new discussion forum set up by Olivier Blanchard. First up is the question of whether low interest rates are leading to excessive risk-taking https://www.aeaweb.org/forum/311/have-low-interest-rates-led-to-excessive-risk-taking..." So I mossed on over and left three comments: one on the forum, one on secular stagnation, and one on whether there is any reason to fear low interest rates:

Is There Any Reason to Fear Low Interest Rates?: Have low interest rates led to excessive risk taking?: I suspect that the right way to make the accurate point that this line of discussion is hunting for is to focus not on the amount of risk but on, rather, who is bearing the risk...

Think of it this way:

Let me first outline what is the wrong focus���on the quantity of risk being carried: In the financial market there is a demand for risk-bearing capacity by firms and others who want to borrow but who cannot guarantee that they will be able to repay. The higher is the price of risk���the greater the risk premium interest rate spread over short-term Treasuries they must pay--the less they will borrow. There is also a supply of risk-bearing capacity by savers and financial intermediaries who want to lend, and are willing to accept and bear some risk in return from getting more than the short-term Treasury rate. The higher is the price of risk���the greater the risk premium interest rate spread over short-term Treasuries they must pay--the more they will be willing to lend.

When the Federal Reserve undertakes quantitative easing, it enters the market and takes some risk off the table, buying up some of the risky assets issued by the U.S. government and its tame mortgage GSEs and selling safe assets in exchange. The demand curve for risk-bearing capacity seen by the private market thus shifts inward, to the left: a bunch of risky Treasuries and GSEs are no longer out there, as the government is no longer in the business of soaking-up as much of the private-sector's risk-bearing capacity. And this leftward shift in the net demand to the rest of the market for risk-bearing capacity causes the price of risk to fall, and the quantity of risk-bearing capacity supplied to fall as well. Yes, financial intermediaries that had held Treasuries and thus carried duration risk take some of the cash they received by selling their risky long-term Treasuries to the Fed and go out and buy other risky stuff. But the net effect of quantitative easing is to leave investors and financial intermediaries holding less risky portfolios because they are supplying less risk-bearing capacity.

How do we know that they are holding not more but less risky portfolios? We know because we know that supply curves slope up, and if they were holding more risky portfolios in total���supplying more risk-bearing capacity to the market���the price of risk would have not fallen but risen, and interest rate risk spreads would be not lower but higher, wouldn't they? At least, that is the case as long as the supply curve for risk-bearing capacity slopes up, like a good supply curve should.

Perhaps those who claim that there are big risks to quantitative easing regroup. Perhaps they claim that financial intermediaries are perverted, and that the lower is the price of risk the greater is the amount of risk-bearing capacity they supply to the market because they lose their jobs if they don't make at least three cents on every dollar of assets in a normal year in which risk chickens come home to roost. But in that counterfactual world, the Federal Reserve's adoption of quantitative easing policies triggered an enormous expansion of the quantity of risk-bearing capacity demanded by firms and households and a huge private-sector lending boom as firms issued enormous tranches of risky bonds and as firms and households took out risky loans. In that counterfactual world, employment in bond underwriting tripled as 85billionamonthinQEwasmore���than���offsetbyanextra
120 billion a month in private-sector bond issues. In that counterfactual world, we saw a rapid recovery of housing construction and a thorough equipment investment boom as far across the U.S. as they eye could see.

That didn't happen. So what are the risks of QE, really?

Let me now analyze what is the right focus::

Commercial banks traditionally accept deposits, put the deposits in long-term Treasuries or similar low-risk high duration assets, rely on the law of large numbers and on deposit insurance to allow them to always hold their long-term Treasuries or other low-risk high duration to maturity, and so have a profitable business model as long as they focus on what their core competence is: running a commercial banking business with branches, ATMs, and a well-collateralized loan portfolio.

When commercial banks cannot do this profitably, they need to find higher return assets to invest in. The problem is that they have no expertise in judging those higher return assets���hence they are highly likely to get adversely selected as they try to find them.

The result is that they are likely to lose money. And then somebody will have to eat the losses.

To the extent that organizations whose business models become unprofitable as a result of low rates and QE and so take on risks excessive for them because they have no expertise in judging such risks do so by investing government-insured deposits, this is not a source of systemic risk to the economy: it is only a source of financial risk to the Treasury.

To the extent that organizations whose business models become unprofitable as a result of low rates and QE and so take on risks excessive for them because they have no expertise in judging such risks do so by investing non-insured deposits, this could be a source of systemic risk to the economy depending on where the funds are coming from, and how highly leveraged the organizations that these funds are being drawn from are.

At least that is what I think a coherent and possibly accurate worry might be......

#shouldread

Secular Stagnation: What role, if any, does secular stagnation play in the flat growth of wages since the recovery?: I think Ed Lambert is correct. "Secular stagnation" is probably not the best label for the worry. The worry is that financial markets have gotten themselves wedged into a situation in which frequently and for sustained periods of time it is the case that the full-employment real safe short-term Wicksellian neutral rate of interest turns out to be less than the negative of the central bank's inflation target. In a flexible-price full-employment economy, the economy deals with this and maintains full employment by having the price level drop instantaneously and discretely whenever this occurs in order to generate the extra inflation needed to get the market rate at the zero lower bound to its value needed for full employment, the real safe short-term Wicksellian neutral rate of interest. This was one of the major (but I think often overlooked) points of Krugman (1998) https://www.brookings.edu/wp-content/uploads/1998/06/1998b_bpea_krugman_dominquez_rogoff.pdf

But in a sticky-price economy, things get messy when frequently and for sustained periods of time it is the case that the full-employment real safe short-term Wicksellian neutral rate of interest turns out to be less than the negative of the central bank's inflation target...

That worry is correlated with low expected productivity growth, which is correlated with low real wage growth. But they are not the same thing...

The Forum: Olivier Blanchard: Not a question, but welcome to the new forum. Let it be informative and civilized. Its success depends on all of us Andrew Stevens: "I just want to say thank you to AEA leadership for making EconSpark a reality. Between this, the AEA Professional Code of Conduct, and the #EJMinfo movement, I feel that our profession is taking tangible steps to cultivate a respectful, constructive, and transparent professional culture. Let's continue to build upon this momentum as an academic community."

J.BRADFORDDELONG: I second the motion...

#monetarypolicy
#secularstagnation
#publicsphere
#weblogging
#economicsgoneright
#finance

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