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

Wednesday, September 1, 2010

Really good links - Japan - German jobs miracle - Bernanke - Mr. Bean

 Jonathan Allum - The lessons to be learnt from Japanese bonds - "The Japanese experience – over both the long and the short term – suggests something different and rather darker. Despite all the alarmist rhetoric, the bond vigilantes have been perfectly happy with the JGB market, presumably because Japan offered something much rarer than mere fiscal rectitude, namely deflation. If those charged with stewardship of a major economy really see their main task as keeping the bond markets onside, they should be wary. The price of this favour may not lie in slashing the deficit, which may be difficult to achieve, albeit a laudable long-term goal, but in fostering a period of substandard growth and persistent deflation.
        That is not a desirable goal in either the short or long term. The good news is that it may, despite the Japanese example, be difficult for other economies to achieve. The bad news for bond investors is that their markets are already trading at levels that suggest that 1990s Japan is, as they now say, the “new normal”. And this may not even be true of contemporary Japan."

Gavyn Davies - German jobs miracle - "In the past two years, the Merkel government has worked hard to boost part time (or short time) work during the recession, through a programme of subsidies, exhortation to employers, influence on wage bargains, and other measures. As a result, Germany has become the world leader in part time employment, and in many industries, part timers now account for over a quarter of the total workforce.
        This is a two-edged sword. It has certainly spread the cost of the recession much more widely across the population, rather than allowing it to be concentrated on the relatively few who become unemployed. This contrasts sharply with the US, where firms have been particularly eager to cut total jobs during this recession. But is has also greatly depressed the growth of labour productivity. In 2009 alone, GDP per employed person fell by a remarkable 4.9 per cent in Germany, while it rose by 1.8 per cent in the US. And it may have damaged the long term performance of the economy, by locking people into jobs which have become obsolete. One day soon, the German government will have to reduce its subsidies, and the degree of under-employment in the economy will become more visible."

Matthew Yglesias - Bernanke's speech - "Taken literally, I don’t think Ben Bernanke’s speech last week made any sense at all. He described a hypothetical future situation in which the inflation rate gets lower and employment growth continues to be unsatisfactory. He said that in such a situation the Federal Reserve would attempt to increase aggregate demand and that he believed it would be successful in doing so. So far so good. He also said that currently the inflation rate is below what he regards as optimal and that currently real output is below what it could be. Given Bernanke’s stated belief in the possibility and desirability of monetary action to raise aggregate demand in the hypothetical scenario and his description of the current scenario, it’s clear that the Fed should act now to raise aggregate demand. But it’s not going to happen.
        I think the most reasonable way to read the speech is non-literally. Several FOMC members and Regional Fed Presidents who aren’t currently voting FOMC members are clearly agitating for tighter policy or, at a minimum, the status quo. The speech is incoherent because the Chairman is trying to put together a consensus that papers over existing divides"

Charles Bean, Matthias Paustian, Adrian Penalver, and Tim Taylor (Bank of England) - Price level targeting - "Whatever the explanation for the trend‐stationarity of the price level, these results suggest that existing policy frameworks have delivered something quite close to price‐level targeting in practice. That suggests the welfare gains from making the extra step may be limited, particularly when there are costs to changing the framework. The issue is, nevertheless, worthy of further investigation.
        It is, though, worth pointing out that there may be times when having a price‐level target is likely to be unhelpful. For instance, consider the present case of the United Kingdom, where upward shocks to oil prices and indirect taxes and a substantial depreciation of sterling have led to inflation running consistently above the 2 per cent target, but at a time when the economy has also been subject to an adverse demand shock which has opened up a substantial margin of spare capacity. Price‐level targeting would dictate that this excess inflation must subsequently be unwound. Consequently, inflation expectations would be lower and real interest rates higher. That in turn would exacerbate the downward pressure on demand, worsening the constraint of the ZLB (zero lower bound - ed.).
        The theoretical superiority of price‐level targets over inflation targets hinges on the forward‐looking nature of expectations. If expectations are not forward‐looking, then their automatic stabilising feature is lost. And the presence of inertia in the inflation process also reduces the relative superiority of price‐level targets. In particular, if a significant fraction of firms set their prices on the basis of past inflation, then it becomes optimal to permit some drift in the price‐level path in response to shocks. That is because those firms that are able to will raise their price in response to a shock that raises the overall price level relative to target. If the central bank subsequently seeks to bring the overall price level back on to the originally prescribed path, then the relative price of those firms will be too high. It is better instead to allow some base drift in order to reduce the average (squared) distortion in relative prices across the economy as a whole. That suggests that some hybrid of price‐level and inflation targeting may be a good idea; targeting average inflation over a run of years is one way to approximate such a hybrid regime (King, 1999).
        A final issue with price‐level targeting lies in communications. While the public can probably relate to the idea of inflation as the average rate at which prices in the economy are changing, it less clear that they will understand what a consumer price level index means. Such a target for the price‐level would therefore probably need to be portrayed as stabilising average inflation over a very long period."

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