Hartar Blog

Claudio Borio (BIS) and Piti Disyatat write about the dangers of low interest rates at VoxEU . Using an argument that has been put forward many times by the BIS (Claudio Borio and co-authors), low interest rates during booms and expansions can create bubbles and financial instability. Central banks need to be aware of the costs of low interest rates. The authors, while accepting the idea that low real interest rates might be the outcome of low growth and secular stagnation,  argue that central banks cannot simply be seen as passive agents adapting their policies to the macroeconomic environment; they are responsible for low interest rates. In their words "money and finance are not neutral". Quoting from the article: "Not only can financial factors – especially leverage – amplify cyclical fluctuations, but they can also propel the economy away from a sustainable growth path. By influencing decisions to invest, variations in financial conditions affect the evolution of the...

Last week the ECB announced new monetary policy actions to help restore growth in the Euro area and bring inflation closer to its 2% target. Interest rates were reduced and further provision of loans to commercial banks were announced. In addition, there is a plan to implement purchases of asset based securities. The effectiveness of recent monetary policy actions by central banks has been met with some skepticism because it does not deliver the necessary increase in lending to the private sector. While liquidity is introduced, it seems to get stuck in the accounts that the commercial banks hold at the central bank (reserves). Because of this, both the Bank of England and now the ECB are implementing injections of liquidity that are linked to increased lending to the private sector by the financial institutions that are borrowing that liquidity. The role that reserves play in the recent monetary policy actions by the ECB leads some times to confusion. Some seem to think that the high l...

In a recent post Paul Krugman looks at the dismal performance of US labor markets over the last decade. To make his point, he compares the employment to population ratio for all individuals aged 25-54 for the US and France. The punch line: even the French work harder than the Americans! And this is indeed a new phenomenon, it was not like that 13 years ago [Just to be clear, there are other dimensions where the French are not working as hard: they retire earlier, they take longer vacations,... but the behavior of the 25-54 year old population is indeed a strong indicator of how a society engages its citizens in the labor market. ] So are the French the exception? Not quite. Among OECD economies, the US stands towards the bottom of the table when it comes to employment to population ratio for this cohort (#24 out of 34 countries). What is interesting is that most of the countries of the top of the list are countries with a large welfare state and very high taxes (including on labor). S...

For the last months the press conferences of Mario Draghi at the ECB have felt very repetitive. The argument has always been the same: inflation is below target and this might be a risk. But there is uncertainty and there are other risks so let's wait for more data. But when more data arrives, confirming that inflation is below the target, there is no action being triggered and we simply start a new period of waiting for yet more data. Here is my quick search for this pattern in the speeches and Q&A from the last eight months press conferences. October 2013: ... and are ready to consider all available instruments. November 2013 ... but there are a whole range of instruments that we can activate, if needed. December 2013 ... and are ready to consider all available instruments. January 2014 ... and to take further decisive action if required. February 2014 ... and to take further decisive action if required. March 2014 ... and to take further decisive action if required. April 20...

A quick chart-of-the-day post motivated by some articles I was reading today about differences in country performances during the global financial crisis. Which economic policies worked best? How bad (or good) membership in the Euro area was to fight back the crisis? These are important questions to understand the effectiveness of different economic policies (monetary, fiscal, exchange rate). When comparing performance across countries it is quite common to use a variety of indicators: GDP growth, unemployment, productivity,... They all tend to move together but they can sometimes provide a quite different view of the economic performance during a number of years. I decided to look at GDP growth but adjusting is by changes in demographics: GDP divided by working-age population (between 15 and 64 years old, as it is measured by the OECD). What I do is to compare the 2013 number with the 2007 number (which I use as the beginning of the crisis). [Click on the chart for a larger image] Wha...

Increases in stock prices over the last years combined with bond prices that remain high (yields are low) have raised the possibility of mispricing in assets, potential bubbles and future crashes. Are all assets too expensive? Some think so and refer to the current situation as a " gigantic financial asset bubble " where all assets (bonds, stocks, commodities,...) are priced too high. Others see trouble just in stock markets where valuations seem to be growing much faster than the real economy. But there are also those who think the stock market still offers a good return . Here are two perspectives that can hopefully help understand such diverging views on asset prices: 1. How can it be that all asset prices are overvalued? When all asset prices look too high, we are making a statement about the disappointing returns these assets offer. The key question is whether we are really taking about mispricing or simply about surprisingly low (equilibrium) returns that saving is off...

Via Mark Thoma I read an interesting article about how the mainstream economics curriculum needs to be revamped  ( Wren-Lewis also has some nice thoughts on this issue). I am sympathetic to some of the arguments made in those posts and the need for some serious rethinking of the way economics is taught but I would put the emphasis on slightly different arguments. First, I  am not sure the recent global crisis should be the main reason to change the economics curriculum. Yes, economists failed to predict many aspects of the crisis but my view is that it was not because of the lack of tools or understanding. We have enough models in economics that explain most of the phenomena that caused and propagated the global financial crisis. There are plenty of models where individuals are not rational, where financial markets are driven by bubbles, with multiple equilbria,... that one can use to understand the last decade. We do have all these tools but as economics teachers (and resea...

The International Comparison Program (hosted at the World Bank) just released its new estimates of Purchasing Power Parity that are used to compare GDP across countries. These estimates are released about every 5 years and they serve as the basis for the PPP-adjusted statistics used by most international organizations or statistical sources. These estimates get updated on an annual basis using inflation rates but it is the 5 year survey that produces the complete data that allows us to compare purchasing power across countries. The release was picked up by all news outlets by emphasizing the fact that China looks bigger than what we thought before and it is likely to become the number one economy by the end of 2014 (e.g. Financial Times ). The news on China makes for great headlines but the reality is that many countries saw significant changes in their PPP estimates, let's look at some magnitudes. Before looking at magnitudes, a clarification on methodology: PPP estimates are done...

Somehow a graduation speech by Tom Sargent (nobel prize in Economics in 2001) from back in 2007 made it to Vox  two days ago and it has been reposted by several bloggers. The article in Vox did not include the full speech but just listed the 12 valuable lessons that economics has taught the world. While some have found those lessons interesting and insightful, others have criticized them as either too simplistic, partial or just wrong (among the critics, Noah Smith , Paul Krugman or Chris Dillow ). I share some of the criticism that have been raised by others but my initial reaction was different. Several of the 12 lessons that Sargent lists are about individual behavior and decision making (not even about how individual behavior affects economic outcomes). For example, "individuals face trade offs" or "many things that are desirable are not feasible" or "people are satisfied with their choices". Why is it that economics is so good at understanding indivi...

The notion that some countries are caught in a long and protracted period of low growth has received an increasing amount of attention and has been labelled "secular stagnation". The pessimism that the idea of secular stagnation has created has been reinforced by the notion the potential for emerging markets to grow is becoming weaker. The point that I want to make in this post is that one of these notions (secular stagnation) is looking backwards at the performance of advanced economies while the other one (potential pessimism about emerging markets) is looking forward and speculating with their inability to do as well as in the last decade. Let's start with a simple chart that summarizes the pattern of annual growth in the world over the last decades. Data come from the World Economic Outlook database (IMF). I have decided to include the last 13 years for the decade that starts in 2000. Two observations: growth (by decades) has been remarkably stable in the world, betwe...

The Euro area inflation came lower than expected in March and this has raised concerns about deflation (or "lowflation" as labelled by the IMF). In today's Financial Times , Jurgen Stark, a former ECB board member argues that deflation or low inflation is not a problem. One of his arguments is that there are benefits for low inflation, in particular: "It is likely we are living in an extended period of price stability. This is good news. It boosts real disposable income and will eventually support private consumption." (By the way, Mario Draghi used the same argument in his last press conference). So low inflation raises real income and it helps boost demand and output. The economic logic behind this statement is at best unclear, at worst completely wrong. Unfortunately, the misconception involved in this sentence is not that uncommon and it reflects the poor understanding of the general public (and public officials) about inflation, nominal and real variables. ...

Mario Draghi press conference yesterday was yet another exercise of creating confusion about what the ECB intends to do. Maybe what he referred to as an unanimous consensus in the ECB council is not really there or maybe the consensus is simply to keep arguing that there are risks to both sides, that the data is not clear enough, that it can be interpreted in so many ways and in the absence of certainty it is better not to act. His answers looked like the perfect parody of an economist that will always play it safe by starting with one argument and them arguing that "on the other hand" we could also be doing the opposite. Here is the best example of this: ".. my biggest fear is actually to some extent reality, and that is the protracted stagnation, longer than we have in our baseline scenario. Right now, it’s pretty severe, with levels of unemployment that – even though they have stabilised, and we see marginal improvements here and there – are very high. And the longer...

Since the global financial crisis started there has been a debate about how much of the increase in unemployment is cyclical versus structural. Arpaia and Turrini summarize the results of their analysis of the EU labor market in a recent Vox post . They start by showing that there has been a significant shift in the relationship between vacancies and unemployment (what is known as the Beveridge curve) in many of the EU countries. This shift, combined with further analysis of how unemployment reacts to changes in labor demand leads them to conclude that there has been a decline in the matching efficiency of the labor market in these countries. From their post: "...a major drop in matching efficiency was recorded in 2009 in most countries. Unsurprisingly, matching efficiency has been falling mostly in the countries that witnessed a marked outward shift in the Beveridge curve, although some signs of stabilisation or even recovery are visible by 2013Q1" They then try to understan...

The difference between interest rate and growth rates appears as an important parameter in many macroeconomic models. It is also a key variable to assess the sustainability of public finances: higher interest rates make the cost of carrying over debt higher while high growth rates help keep the debt to GDP ratio under control. In a recent post Floyd Norris criticizes the assumptions used by the US Congressional Budget Office for its fiscal projections because they are assuming lower growth rates ahead but a return to "normal" interest rates. The point that Norris makes is that we tend to think that interest rates and growth rates are correlated, so if growth is going to be much lower going forward we should also forecast lower interest rates (and this will make the fiscal outlook look more positive). Paul Krugman initially supports Floyd Norris' arguments but later, after checking the data, he realizes that growth and interest rates are not that correlated . Here is the...