Hartar Blog

For some it is clear that the all-time record levels in the stock market are supported by loose monetary and the day policy starts changing, stock markets will suffer a sharp drop. While I also worry about the tendency of stock markets and investors to be overoptimistic, I am less concerned by the fact that we are hitting all-time record levels. First, we keep forgetting that we are talking about nominal variables and they will keep setting record levels as long as inflation remains positive. But I am also less worried because tightening of monetary policy normally happens when growth is picking up so the stock market will have to decide if they like more faster growth than higher interest rates. And the reaction might surprise some. A historical example that I have mentioned earlier and that I find interesting is the period 1993-1996. In 1993 the recovery from the previous recession was slowly taking shape and the stock market was going up and, yes, setting all-time records. What did ...

I did not realize that some of my earlier posts on sudden stops and the Euro area would be so controversial, I thought I was making a simple point. And this time those who disagree with me are the ones that I always agree with so it makes you think even harder about whether the argument that I was making are right! Brad DeLong wrote a post yesterday to show that sudden (capital) stops should not be a concern for countries that have their own currencies. Let me start with all the arguments where I do not have any disagreement: - Taking about the possibility of a sudden stop in the UK or the US makes no sense. I agree. The comparison that some establish to argue that the "US is the next Greece" is idiotic. - Countries with fixed exchange rates that have accumulated a large amount of debt denominated in foreign currency are more likely to be exposed to crisis caused by sudden stops. Correct. Where we disagree is on whether sudden stops are relevant to other countries with flexi...

My post yesterday on how the US economy would have performed if it was going through the crisis as a member of the Euro area was an attempt to explain that the perspective of a small Euro country with limited credibility can be very different from that of the US. Robert Waldmann  at Angry Bear is surprised by the macroeconomic logic I use so let me clarify what I had in mind -- given that what I am saying is quite standard. A country with a current account deficit must have a matching capital inflow to finance the excess of spending above its income (this is an accounting identity). During the financial crisis many European countries faced a sudden stop -- which is defined as a situation where international financial markets are not willing anymore to fund the current account deficit of a country. This is something that any textbook discusses although normally in the context of emerging markets [by the way, it is not easy to use the IS-LM model to deal with sudden stops given that...

Paul Krugman responds to my earlier post about how exchange rate regimes do not matter much (I was referring the work of  Andrew Rose ). Krugman has a different view on the issue and argues that countries in the Euro area have suffered from not having their own currency and this is visible by the higher interest rates that they faced relative to other countries. He makes a good point and the data speaks in favor of his hypothesis. I also think that Euro countries have suffered from being part of the Euro area because of many other reasons (e.g. they ended up adopting the wrong policy mix). Where I am less sure is about how much the ability to control the exchange rate mattered relative to other factors. The only way to understand these effects would be to build a counterfactual: what would life without the Euro have looked like for these countries? I have tried to answer this question before and it less clear than what some might think. As an example, for those who see the cur...

Via Barry Ritholtz I read the analysis of Lacy Hunt about how recent Federal Reserve policies have been a failure to lift growth. I am somehow sympathetic to the argument that Quantitative Easing has had a limited effect on GDP growth -- although one has to be careful when analyzing the effectiveness of QE by comparing it to the alternative scenario (no QE at all) rather than simply measuring the observed GDP growth. But I find that the analysis of the article is not accurate when it come to the working of central bank reserves (and I have made a similar point before ). Maybe it is a matter of semantics but the way the author analyzes the relationship between reserves and the money multiplier is not consistent with the conclusions reached about the lack of effectiveness of monetary policy actions. Let me highlight two pieces of the analysis that I have difficulty understanding. First, there is the argument that increasing the amount of Reserves (deposits of commercial banks at the ce...

The benefits and costs of different exchange rate regimes is one of the most debated topics in international macroeconomics and it is crucial for a very important decisions that policy makers regularly face on how to manage exchange rates. The launch of the Euro gave great impetus to this debate as some countries had to decide whether they wanted to be in or out and the rest of the world was looking at this experiment as a way to think about similar arrangement in other regions of the world. The 2008-09 crisis and the dismal performance of some Euro countries have reopened the debate about what life would have looked like for some of these countries if they had stayed out of the Euro. I have written before my views that run contrary to the conventional wisdom. Many believe that while the Euro might make sense as part of a political process of European integration, it has had clear negative consequences on economic performance, consequences that are obvious when one looks at t...

Marco Buti and Pier Carlo Padoan reply to the criticism that I had raised in an earlier blog post to their previous article on how to strengthen the European economy recovery. I can see that their argument is now more balanced where fiscal policy consolidation is mentioned as a potential factor to explain the dismal recovery. We still probably disagree on how much of a factor it was and whether there were alternatives to the policies that Euro countries implemented but at a minimum it is good to see that it is not included as a possible factor. On the issue of reforms it is hard to disagree with them on the need for further reforms in Europe, the real debate is whether these reforms will pay off fast enough and if they do not, what is the role for traditional demand policies (monetary and fiscal). But there is something else in their article where my reading is quite different from theirs: the role of policy uncertainty. Before I express my views let me state that one of my most cited...

The narrative about the 2008 financial crisis is about the notion that several economies were following an unsustainable path before the crisis started. We talk about excessive spending, exploding debt levels, bubbles in asset prices and the imbalances they create. These imbalances are the seed of the crisis. While the story sounds simple, it is not well understood by standard macroeconomic models and this has led in my view to excessive pessimism about growth and the recovery. In macroeconomics, the notion of "growing too fast" or "producing too much" is normally captured by measures of potential output or the output gap. When GDP is above its potential (or the output gap is positive) we label that situation as unsustainable. But in reality, most times we only see this after the crisis. It is only when we are in the middle of the crisis or even out of it that we recalculate all the measures of potential output to argue that the pre-crisis level were unsustainable. ...