Switzerland ends its peg fest

Sokrates and Friends in Davos, or, the SNB and the Berne Whale: The Honest Broker for the Week of January 18, 2014 by DeLong

If you do it they will believe by Scott Sumner

Minsky

Minsky on the Non-Neutrality of Money by J.W. Mason

Fed Fail

When will they learn? by Ryan Avent

Kocherlakota

Kocherlakota 

Why do I see symmetry as important? Without symmetry, inflation might spend considerably more time below 2 percent than above 2 percent. Inflation persistently below the 2 percent target could create doubts in households and businesses about whether the FOMC is truly aiming for 2 percent inflation, or some lower number. This kind of unmooring of inflation expectations would reduce the effectiveness of monetary policy as a mitigant against adverse macroeconomic shocks. 

Second, I believe that the FOMC should consider articulating a benchmark two-year time horizon for returning inflation to the 2 percent goal. (Two years is a good choice for a benchmark because monetary policy is generally thought to affect inflation with about a two-year lag.) Right now, although the FOMC has a 2 percent inflation objective over the long run, it has not specified any time frame for achieving that objective. This lack of specificity suggests that appropriate monetary policy might engender inflation that is far from the 2 percent target for years at a time and thereby creates undue inflation (and related employment) uncertainty."

(via Thoma)

Charles Evans

Weekend Reading: Charles Evans: Patience Is a Virtue When Normalizing Monetary Policy by DeLong

Woodford

Minneapolis interview with Michael Woodford

The Fed

The Fed and Inequality by Dean Baker

Obama's biggest economic policy mistake by Yglesias

Blame Obama for bad monetary policy, not Republicans by Ygelsias

Federal Reserve resists hawkish signal, continues to view economy as needing their monetary support…and that’s as it should be. by Jared Bernstein

The Fed is out with their statement and the words “considerable time” live to see another day!

DeLong on Rowe and QE, monetary policy

THE TAPER, NICK ROWE, QUANTITATIVE EASING, AND INTELLECTUAL COORDINATION FAILURES: OVER AT EQUITABLE GROWTH: WEDNESDAY FOCUS FOR AUGUST 27, 2014/THE (NOT SO) HONEST BROKER FOR THE WEEK OF AUGUST 30, 2014 by DeLong

Fed and poverty reduction

A photo for Kervick

NYT on the Mark on the Fed and Interest Rates by Dean Baker

First, the Fed's actions on interest rates swamp the importance of almost every government spending program designed to help low and moderate income people. There were big battles in Washington in the last couple of years over Republican proposals to cut food stamps by $4 billion a year. If the Fed keeps the unemployment rate one percentage point higher than a level it could reach without triggering an inflationary spiral then it would be preventing close to 3 million people from working. (A rule of thumb is that for the number of people not currently in the labor force who find a job is roughly equal to the number of unemployed people who find a job.)
...
We have been here before. Back in the mid-1990s the absolute consensus in the economics profession was that the unemployment rate could not get much below 6.0 percent without triggering inflationary pressures. This was a view held not only by conservative economists, but by liberals like Janet Yellen, Alan Blinder, and Paul Krugman. Fortunately, Federal Reserve Board Chair Alan Greenspan was not a mainstream economist. He argued there was no evidence of inflationary pressures, therefore he saw no reason to keep the unemployment rate from falling below the 6.0 percent threshold.

The unemployment rate fell below 5.0 percent in 1997 and was at 4.0 percent as a year-round average in 2000. Not only were millions of people to get jobs who would not have otherwise been able to work, workers at the middle and bottom of the wage ladder saw sustained real wage growth for the first time since the early 1970s. And, there was a huge swing from budget deficits to budget surpluses, giving the country the budget surpluses that the Clintonites always celebrate.

monetary policy

NYT on the Mark on the Fed and Interest Rates by Dean Baker

We have been here before. Back in the mid-1990s the absolute consensus in the economics profession was that the unemployment rate could not get much below 6.0 percent without triggering inflationary pressures. This was a view held not only by conservative economists, but by liberals like Janet Yellen, Alan Blinder, and Paul Krugman. Fortunately, Federal Reserve Board Chair Alan Greenspan was not a mainstream economist. He argued there was no evidence of inflationary pressures, therefore he saw no reason to keep the unemployment rate from falling below the 6.0 percent threshold.

I wonder if Yellen, Blinder and Krugman preferred more government spending in comensation for rising rates, i.e. they wanted more government.

Better late than never but early is better still by Scott Sumner

OMO

DeLong retweets Harless

Conventional def'n of monetary policy (OMOs) imparts fiscalist bias by defining mon. pol. as something that inherently works against itself

get real wages up

Adam Posen on Japan’s Recovery: Going Right, Just Not Going Well

A lot of us came out early in 2013 and tried to tell the public and the government that they had to get wages up … And the government tried. It didn’t happen. So of course things are worse than they would have been if they had … There has to be renewed pressure on corporate Japan to give decent wage increases in the next year.

(via Thoma)

Bundesbank shifts stance and backs unions’ push for big pay rises

Jens Ulbrich, the Bundesbank’s chief economist, told Spiegel, a German weekly, that recently agreed pay rises of more than 3 per cent were welcome, despite being above the European Central Bank’s inflation target of below but close to 2 per cent. 

In an article published on Sunday, Mr Ulbrich said that recent wage trends were “moderate” given Germany’s relative economic strength and low levels of unemployment. His comments echo the views of Jens Weidmann, Bundesbank president, according to a senior central bank official.

Janet Yellen: The Sixteen Trillion Dollar Woman

"I'd like to see real wages going up," Yellen says, adding that the average American male worker's inflation-adjusted wages have been flat or down for the past 20 years."

reverse repurchase agreement facility

The ON RRP Facility and Post-Liftoff Fed Policy by Stephen Williamson

(via Thoma)

Simon Wren-Lewis and Nick Rowe Annoy Each Other…: Friday Focus for August 1, 2014 by DeLong

...In the case of (2), the key shortage is not of the stock of the liquid medium exchange per se or an elevation of the entire risk spectrum of real interest rates above the Wicksellian natural rate because of the zero lower bound, but rather the inability of financial intermediaries to raise enough capital and trust to do the risk transformation. The consequence is safe interest rates at or below their first-best Wicksellian natural values and risky interest rates well above their first-best Wicksellian natural values. In this case a resort to monetary expansion–even if the economy is away from its zero interest-rate lower bound–provides incentives to invest too much of society’s wealth in long-duration assets, with the added complication that the financial sector has a difficult time distinguishing A valid long-duration asset from a Ponzi scheme because neither requires the investors be shown the money in any serious way.

open market operations

The continuum from monetary to fiscal by Nick Rowe

We normally think of open market operations, where the central bank buys government bonds, as a purely monetary policy. But if a government just happened to have a very small debt/GDP ratio, the central bank would soon run out of government bonds to buy, even if the shock were very small, or even if there were no shock at all. And if the inflation target were lower, or if the NGDP level path growth target were lower, that would also mean the central bank would run out of government bonds to buy sooner. What then? Maybe the central bank should buy (an index fund of) commercial bonds as well, or/then commercial shares, or/then land, or/then existing capital goods, or/then newly-produced capital goods, like bridges. 

Where exactly do you draw the line between monetary and fiscal? Does it matter? 

It might matter on micro public finance/public choice grounds (is this the sort of asset we would want the government-owned central bank to own?). But if you don't want the government-owned central bank owning all that stuff, then maybe you need to increase the inflation target or NGDP level path growth target, so you get a smaller central bank. (Too dedicated a pursuit of low inflation and the optimum quantity of money leads to communism, with government ownership of everything.)

How much money should the central bank print and buy things with? As much as is necessary, to hit the NGDP target. And if it runs out of other things to buy, like government bonds, or commercial bonds, or......, then it should buy newly-produced things, if necessary. And if that means it is buying too much, and getting too big, then raise the NGDP target and the implied inflation rate and the implied tax on holding currency.

What particular things should be bought and held on the asset side of the consolidated balance sheet of the government plus central bank? That is a micro public finance question. 

What particular things should be held on the unconsolidated central bank's balance sheet rather than on the government's balance sheet? That is a public choice question. If the central bank runs out of things to buy and needs to buy new bridges to hit its NGDP target, and if the government doesn't want the central bank owning bridges, the government should buy those bridges financed by issuing bonds, and let the central bank buy those bonds. 

I don't think there's anything left to argue about. Except a lot of micro public finance and public choice stuff. 

But I'm sure we will think of something.

yield curve inverting

Fed Watch: When The Fed Starts Raising Rates by Tim Duy

the interest rate

DeLong RTs:

Andy Harless:

"I'm somewhere between neo-Fisherite (all-powerful future policy signal in current rate) & paleo-Keynesian (policy signals useless) extremes"

Sweden and monetary policy

Why leaning against the wind is the wrong monetary policy for Sweden by Lars E.O. Svensson

Swedish Sadomonetarist Setback by Krugman

OK, this is fairly amazing. I’ve written often about sadomonetarism among central bankers — the evident urge to find some reason, any reason, to raise interest rates despite high unemployment and low inflation. The most influential hive of this kind of thinking is the Bank for International Settlements, which for some reason commands great respect even though it offers an ever-changing rationale — inflation! Any day now! Or maybe not! Financial stability! — for its never-changing advocacy of tight money. But the place where policy makers most dramatically gave in to this urge is Sweden, where the majority at the Riksbank decided to indulge its rate-hike vice while freezing out one of the world’s leading experts on deflation risks, my friend and former colleague Lars Svensson. 

Well, guess what: Lars has been proved so dramatically right by events — raising rates didn’t curb rising debt, but it did push Sweden into deflation — that the Riksbank has done an abrupt U-turn, slashing rates (and overruling the governor and first deputy governor). 

Actually, the drama of this U-turn may be a very good thing, since it might convince investors that this is a real regime change.

Yellen

Transcript of Yellen and Lagarde Comments at IMF Event

Chair Yellen's press conference

BINYAMIN APPELBAUM. Binya Appelbaum, New York Times. You’ve spoken about\ the sense that the recession has done permanent damage to the economic output and you’ve reduced gradually over time your forecast of long-term growth. I am curious to know to what extent you think stronger monetary and/or fiscal policy could reverse those trends. Are we stuck with slower growth? Is there something that you can do about it? If so, what? If not, why?

CHAIR YELLEN. Well, I think part of the reason that we are seeing slower growth in potential output may reflect the fact that capital investment has been very weak during the downturn in the long recovery that we’re experiencing. So, a diminished contribution from capital formation to growth does make a negative contribution to growth. And as the economy picks up, I certainly would hope to see that contribution restored. So, I think that’s one of the factors that’s been operative. Of course, we’ve had unusually long duration unemployment. A very large fraction of those unemployed have been unemployed for more than six months. And there is the fear that those individuals find it harder to gain employment, that their attachment to the labor force may diminish over time and the networks of contacts that are—they have that are helpful in gaining employment can begin to erode over time. We could see what’s known as hysteresis, where individuals, because they haven’t had jobs for a long time, find themselves permanently outside the labor force. My hope would be that as—and my expectation is that as the economy recovers, we will see some repair of that, that many of those individuals who were long-term unemployed or those who are now counted as out of the labor force would take jobs if the economy is stronger and would be drawn back in again, but it is conceivable that there is some permanent damage there to them, to their own well-being, their family’s well-being, and the economy’s potential. 

Me: Strong monterary and/or fiscal policy can do a reverese hysteresis.

monetary policy

John Williams on bubbles and monetary policy by Simon Wren-Lewis