Hartar Blog

Gavyn Davies at the Financial Times reflects on the growing pessimism of Central Banks regarding the growth potential of advanced economies. In the US, the Euro area or the UK, central banks are reducing their estimates of the output gap. They now think about some of the recent output losses as permanent as opposed to cyclical. It output is not far from what we consider to be potential, there is less need for central banks to act and it is more likely that we will see an earlier normalization of monetary policy towards a neutral stance. Why did they change their mind? Is this evidence consistent with the standard economic models that we use to think about cyclical developments? Measuring potential output or the slack in the economy has always been challenging. One can rely on models that capture the factors that drive potential output (such as the capital stock or productivity or demographics) or one can look at more specific indicators of idle capacity, such as capacity utilization or...

Mario Draghi showed great skills in handling all questions in yesterday's press conference . When pressed about why the ECB is not doing more in the presence of low inflation and possibly deflationary pressures he answered that they are are doing enough and that there is no deflation in the Euro area but simply a period of "low inflation from a protracted period of time". Technically he is right, inflation is low but remains positive and expectations of inflation do not point in the direction of immediate deflation. But what remains unclear is the message that he is giving about future actions. How low should inflation be and for how many months before the ECB considers that it is necessary to have more expansionary monetary policy? And why is the ECB ignoring the second pillar of its strategy (the money supply) when the numbers show growth rates that are clearly below target? [I am not a fan of the monetary pillar but it is always fascinating to see how the ECB feels com...

Chris House has an interesting post on why economists tend to be more conservative than academics in other fields. His argument is that many economic facts have a conservative bias (e.g. when you look for evidence on politically loaded questions such as the effects of the minimum wage or high taxes). Noah Smith replies and argues that there is no such bias in economic facts, quite the opposite, the evidence is weak for some of these questions. So where is the bias coming from? My sense is that it is coming from models to which most economists feel very attached to. And this is partly the case because these models and their economic logic is the one that allows us to show the value that our profession adds. Let me explain. Economists do not have a great reputation when it comes to forecasting. Given the number of jokes about the inability of economists to forecast anything, about how we assume away any interesting real world phenomena, many macroeconomists stay away from practical que...