"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Tuesday, September 28, 2010

Really good links - Housing bubble - Interest on reserves - Currency blocks - Mistake-based discrimination

Adam Ozimek - House price volatility makes people want to buy a home even more? - "This is an under-explored causal mechanism for the bubble: house price risk went up, people bought homes to insure against that risk, which drove prices up, which increased perceived house price risk, etc. The cascading nature of this is clear, and it’s not hard to see how this could create a bubble. So housing risk makes people want housing even more."

Stephen Williamson - Charlie Plosser does not understand interest on reserves - "I think this is goofy. First, we know that paying interest on reserves in general increases economic efficiency. The ECB and the central banks of Canada, Australia, and New Zealand, have been paying interest on reserves for some time. Second, the fact that paying interest on reserves has implications for the revenue that the Fed returns to the Treasury makes this element of policy no different from another other dimension of monetary policy. Actions by the Fed consist of changing administered interest rates (the discount rate and the interest rate on reserves) and buying or selling assets. All of these actions will make a difference to the Fed's income statement, and will matter in some way for fiscal policy. Monetary policy and fiscal policy are intertwined, and paying interest on reserves does not make the monetary and fiscal arms of policy any less or more interdependent."

Gavyn Davies - Two currency blocs — same problem, different solutions - "The eurozone is beset by problems which are typical of fixed rate blocs in the past, with the main surplus country (Germany) refusing to increase aggregate demand, thus forcing the deficit countries to reduce demand in order to stay within the currency arrangement. This, they appear willing to do, or at least to try.
        Meanwhile, the China/US bloc also has a (nearly) fixed exchange rate, and once again the surplus country (China) is refusing, or is unable, to expand domestic demand enough to eliminate the trade imbalance. But, in this case, the deficit country (the US) is increasingly unwilling to accept the consequences, and is adopting policies which are designed to break up the bloc altogether. Two blocs with somewhat similar problems, but very different responses and outcomes for the deficit countries."

Justin Wolfers - Mistake-based discrimination - "The standard neoclassical approach doesn't fully allow for what I think most people really believe discrimination to be: a mistake. With mistake-based discrimination, imagine that you go to evaluate the future profitability of a firm. One of the things that you are going to look at is the quality of the CEO. You probably have a mental picture of a tall white guy in a pinstripe suit, and if the CEO doesn't fit that image you may have a less positive opinion of that firm. If that is true, firms headed by women should systematically outperform the market's expectations. The first paper was somewhat inconclusive; it wasn't clear whether the firm overall outperformed expectations. Alok Kumar and I are working on a follow-up paper that uses quarterly earnings announcements, which gives us a lot of observations. It turns out that female-headed firms beat analysts' expectations each quarter much more frequently than similar male-headed firms. If you look at which analysts are getting things wrong, it's disproportionately male analysts who have inaccurately low expectations of female-headed firms. That's not true of female analysts; female-headed firms actually do not beat the expectations of female analysts. This, then, suggests what we see are mistakes, not tastes. These analysts do not want to get a reputation for poor forecasts; they are not trying to lose money. In fact, one of the ways you can test whether what we observe are mistakes is to ask people if they would be willing to change their behavior when presented with the data. And whenever I teach this paper to my MBA students, many of whom are former analysts, they say that they are going to change their behavior when they get back to the real world."

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