Tag: Monetary Policy

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Bank of England should leave forecasting to Ladbrokes « The Market Monetarist

The Market Monetarist makes a novel suggestion as to how to avoid central banks from making biased forecasts:

“…..even better as I have suggested numerous times that the central bank simply set-up a prediction market. In Britain that would be extremely easy – I don’t think there is a country in the world with so many bookmakers. The Bank of England could simply ask a company like Ladbrokes or a similar company to set-up betting markets for key macro economic variables – such as inflation and nominal GDP. It would be extremely cheap and the forecast created from such prediction market would likely be at least as good as what is presently produced by the otherwise clever staff at the BoE.”

That could work …..until punters learn that the bets they place indirectly influence central bank monetary policy. It might pay market participants to place large bets on low or high inflation if they stand to benefit from the central bank response.

via Bank of England should leave forecasting to Ladbrokes « The Market Monetarist.

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The Output Gap: A “Potentially” Unreliable Measure of Economic Health?

Excerpt from a newsletter by Elise A. Marifian, Research Analyst at the St. Louis Fed, describing problems with calculation of the hypothetical output gap and how this can lead to incorrect monetary policy:

Some economists question the reliability of potential output and, therefore, output gap measures. For instance, as James Bullard noted in 2009, if calculations had considered the housing boom and bust, then potential GDP and output gap measurements would have been smaller than they appeared…….. Gavin (2012) shows that the output gap calculations for 2003-12 are reduced significantly when 2011 estimates of potential GDP are used in place of 2007 estimates. If our economy is improving faster than current output gap measurements suggest, then monetary policy intended to boost the economy could produce too much stimulation, thereby fueling inflation once the economy begins to pick up steam.

via Page One Economics – St. Louis Fed.

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IMF: Coping with high debt and sluggish growth [video]

The World Economic Outlook (WEO) presents the IMF staff’s analysis and projections of economic developments at the global level, in major country groups (classified by region, stage of development, etc.), and in many individual countries.

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[time: 38 minutes]

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Bernanke attempts to justify screwing savers

This extract from Joe Weisenthal lauds Ben Bernanke’s defense of monetary policy and its effect on savers.

I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve’s monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation’s financial system since the 1930s. Interest rates are low throughout the developed world, except in countries experiencing fiscal crises, as central banks and other policymakers try to cope with continuing financial strains and weak economic conditions.

He [Bernanke] then goes onto note that saving isn’t just “having money in a bank” and that the main way to benefit everyone (including savers) is to induce growth:

A second observation is that savers often wear many economic hats. Many savers are also homeowners; indeed, a family’s home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and—through pension funds and 401(k) accounts—they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.

The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.

In layman’s terms, Bernanke is saying that if the Fed didn’t act, everyone, including savers, would be in deep **** (trouble) …….so savers should be happy they are being screwed.

via Bernanke: Federal Reserve & Monetary Policy – Business Insider.

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No End To Long-Term Unemployment – Business Insider

J BRADFORD DE LONG, professor of economics at University of California at Berkeley, argues for expansionary monetary and fiscal policy.

At its nadir in the winter of 1933, the Great Depression was a form of collective insanity. Workers were idle because firms would not hire them; firms would not hire them because they saw no market for their output; and there was no market for output because workers had no incomes to spend.

I have been arguing for four years that our business-cycle problems call for more aggressively expansionary monetary and fiscal policies, and that our biggest problems would quickly melt away were such policies to be adopted. That is still true. But, over the next two years, barring a sudden and unexpected interruption of current trends, it will become less true.

But private sector deleveraging means expansionary monetary policy is as effective as pushing on a string. And fiscal policy needs to focus on productive infrastructure investment, not just stimulus spending that runs up public liabilities without any assets to show for it on the other side of the balance sheet.

via No End To Long-Term Unemployment – Business Insider.

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EconoMonitor » Distributional Impacts of Monetary Policy

…Higher than expected inflation will indeed create some winners and losers:

However, the biggest losers are creditors who are almost by definition wealthy, since people owe them money. If a creditor has lent out $100 million at 2 percent interest (e.g. buying a 10-year U.S. or German government bond) and the inflation rate rises from 2 percent to 4 percent, this creditor has lost an amount equal to 100 percent of his expected income or 2 percent of his wealth. This is a far larger loss than any worker could experience as a result of this increase in the inflation rate.

Who would be the winners?

Also, most workers are debtors to some extent. They are likely to have mortgage debt, credit care debt, student loan debt and or car debt. A higher rate of inflation means that they can repay this debt in money that is worth less than the money they borrowed.

via EconoMonitor : EconoMonitor » Distributional Impacts of Monetary Policy.

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Westpac: RBA Statement on Monetary Policy

It appears that the objective of this Statement is to emphasise that without a significant deterioration in global financial conditions policy should remain unchanged. When you assess the various pieces of the Bank’s description of the domestic economy – weak employment; rising unemployment rate; subdued retail spending; soft housing market; below trend growth outside mining; scaling back of public investment; building construction subdued; inflation to remain around the mid-point of the target range; policy at neutral, not stimulatory – we see a fairly clear case for policy to move into the stimulatory zone immediately. Of course our forecasts as contrasted with the Bank’s forecasts clearly suggest that the qualitative descriptions provided in this statement are understating the need for a policy response.

It has been and remains our view that a further 50bps in policy easing can be justified immediately although our forecast is that this adjustment is likely to occur over a three to four month period. We find the use of the requirement that demand conditions need to weaken materially before a rate cut can be delivered overly conservative and expect that the Bank’s policy will change more rapidly than we assess is their current intention.

Consequently at this stage we maintain our view that the next rate cut in this cycle can be expected in March to be followed by a move in May but recognise that we are currently dealing with a central bank that while acknowledging all the reasons policy needs to be stimulatory appears to have no immediate intention to move.

Bill Evans
Chief Economist

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Asset prices, financial and monetary stability

If financial imbalances can build up in an environment of low inflation it stands to reason that a monetary policy reaction function that does not respond to these imbalances when they occur can unwittingly accommodate an unsustainable and disruptive boom in the real economy. The result need not take the form of inflation, although latent inflationary pressures would normally exist. Rather, it would be a contraction in economic activity, possibly accompanied by outright deflation, amplified by widespread financial strains. Accordingly, one could argue that the more serious “bubble” was in the real economy itself.

In this scenario, the consequences of failing to act early enough can be serious. If the contraction in economic activity is deep enough and prices actually decline, they can cripple the effectiveness of monetary policy tools and undermine the credibility of institutions. The Japanese experience is very instructive here. Moreover, reaction functions that are seen to imply asymmetric responses, lowering rates or providing ample liquidity when problems materialise but not raising rates as imbalances build up, can be rather insidious in the longer run. They promote a form of moral hazard that can sow the seeds of instability and of costly fluctuations in the real economy.

This paradigm sees the financial imbalances as contributing to, but, more importantly, as signaling distortions in the real economy that will at some point have to be unwound. In other words, the behaviour of prices of goods and services is not a sufficient statistic for those distortions. This runs contrary to the standard macroeconomic models used nowadays.

Asset prices, financial and monetary stability: exploring the nexus
by Claudio Borio and Philip Lowe
July 2002

Colin Twiggs: ~ Extract from BIS Working Paper No.114, co-authored in 2002 by Dr Philip Lowe, who has been appointed as the new RBA deputy governor. Looks like a good choice.

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BOE’s Monetary Gamble Nears Its Endgame – WSJ.com

So where once investors worried that it [the Bank of England] had got policy plain wrong, there’s now a chance they’ll start to fear that the bank has got things all too right, after all, and that the U.K. really does need policy settings appropriate for an economic ice age……

And a government focused on austerity measures is in no position to offer fiscal support even if it wanted to, and, according to the treasury’s pronouncements, it doesn’t. It’s sticking with the deficit-cutting plan A, come what may.

So this is clearly an economy with huge problems anywhere you might care to look. Its remaining cardinal virtue, perhaps, is that it isn’t in the euro zone, so the bloc’s more pressing concerns have shielded it from harsher scrutiny. It can’t rely on that shield for all time.

via BOE’s Monetary Gamble Nears Its Endgame – WSJ.com.

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