Fernanda Nechio of FRBSF has this amazing and timely research on the issue. It estimates Taylor rule for Euroarea as a whole and then calculates it separately for Euro-core and Euro-periphery economies. Needless to say, one size does not fit all.
The paper responds to the recent ECB rate hike in Apr-11 and one more expected in July. Are these rate hikes in line with Taylor Rule?
David Andolfatto and Marcela M. Williams of St Louis Fed have written a superb essay in Annual Report -2010 of the Regional Fed.
They look at this labor market as a whole and then disaggregate it to show different patterns in the market post-crisis.
Disagreements over what should be done to stimulate the labor market stem, in part, from its complicated nature. The labor market has many moving parts, and policies frequently have unintended consequences. The purpose of this essay is to describe a few of these moving parts and to explain why it is sometimes difficult to interpret the ups and downs we experience in the labor market. One theme that emerges is that the big picture, as seen in the aggregated data, is not always representative of what is happening up close, as seen in the data that have been dissected.
We begin by looking at the timeline of U.S. employment since World War II. Employment, measured as a ratio of population size, remains relatively stable over time. This overall behavior, however, masks several underlying trends. For example, employment rates have generally been rising for women and falling for men. We look next at the share of employment across different sectors of the economy. Again, we see sharp differences in the evolution of employment over even relatively short periods of time. These different behaviors suggest, among other things, a degree of caution in the use of a “one size fits all” policy affecting the labor market.
We will then turn to the issue of unemployment. Contrary to common belief, unemployment is not technically a measure of joblessness. It is, instead, a measure of job search activity among the jobless. Millions of unemployed people find jobs every month, even in a deep recession. Millions of workers either lose or leave their jobs every month, too, even in a robust expansion. The large and simultaneous flow of workers into and out of employment suggests that the labor market plays an important role in reallocating human resources to their most productive uses through good times and bad.
The authors say – Labor Markets = Employed + Unemployed + Non participants. It is important to look at each of these three markets.
The categories of employment, unemployment and nonparticipation represent snapshots of labor market activity at a point in time. But workers belonging to a given category will not necessarily remain in that category for long. Over a given interval of time, a number of workers will make transitions from one labor market category to another. These transitions are called “worker flows.”
An analogy may be of some use here. Imagine a bathtub of water, with its drain unstopped, and the faucet turned on. The level of water at a point in time corresponds to the level of employment. The water draining from the tub corresponds to the flow of workers losing or leaving their jobs. The water pouring in from the faucet corresponds to the flow of workers finding jobs. Whether the water level rises or falls depends on the relative size of the inflow and outflow. And so it is with the level of employment, unemployment and nonparticipation.
They look at average US labor flows between 1996-03 and find people move quite a bit across the three. This is pretty natural as US economy is dynamic. Such flows are natural process. The problem is if people remain unemployed longer than earlier times. In 2007 recession this is what has happened. % of people unemployed for 27 weeks and more has increased from 17% in 2007 to 42% now:
The right-hand panel in Figure 7 depicts the distribution of unemployment spells in August 2010. It still remains true that the majority of unemployment spells are of short duration, but the fraction is now much lower than it was prior to the recession. The fraction of unemployed workers who have been out of work longer than 26 weeks has risen to 42 percent. For policymakers, this post-recessionary increase in the fraction of long-term unemployment is disconcerting. If unemployment durations are short, at least the pain of unemployment is short-lived. But long-duration unemployment is more of a concern. This will certainly be the case if, as some fear, long unemployment spells lead to a deterioration of skills, rendering workers unemployable when the job market recovers.
Then there is a superb essay at the end comparing labor markets of G-7 economies. US unemployment is unusually bad in most aspects:
Employment normally contracts during a recession. Moreover, real GDP usually declines proportionately more than employment. The implication is that labor productivity—measured as output per worker—tends to decline during a recession. This commonly observed behavior was evident among all the G-7 economies during the past recession, with the notable exception of the U.S.; see Figure 4.
As usual, there are several ways to interpret the data. First, it may be possible that the productivity of labor rose in the U.S. and that this event allowed U.S. firms to economize on labor. It is hard, however, to imagine a recession being the consequence of some random force that increased economy-wide labor productivity.
An alternative explanation is that low-skilled workers are affected disproportionately during a typical recession: They are the first ones to be let go. If this is the case, then the average quality of employed workers tends to rise during a recession. Perhaps this accounts for the increase in measured average labor productivity in the U.S. If this hypothesis is correct, then to explain the data, one must be willing to entertain the idea that business managers are somehow more willing or able to lay off lower-skilled workers (or workers in general) in the U.S. relative to other G-7 economies.
Hmmm…What was seen as the strength of US labor market- its flexibility has become its weakness in this recession.
Superb research. Very well done. A primer on US labor markets…
Which way is China headed? This post looks at both optimists and pessimists over China issue…
Stephen Roach is a China optimist and has been highlighting how China is expected to grow and balance its growth process.
Recent GDP figures along with Apr-11 IIP figures (and all that changes in IIP base year; a report comparing the two soon) would have provided some hope for RBI. Finally one is seeing some impact of rate hikes.
RBI’s recent inflation expectations survey also provides some respite to RBI.
The current round of the survey shows that inflation expectations of households for the next three-month and for next one-year ahead are lower at 11.9 per cent and 12.7 per cent respectively, from 12.4 per cent and 13.1 per cent assessed during the earlier round of survey. The survey findings, however, indicate that households expect inflation to rise further by 40 and 120 basis points during next three-month and next one-year, respectively, from the perceived current rate of 11.5 per cent. Households’ expectations of general price rise were mainly influenced by movements in food prices. The percentage of respondents expecting price rise has gone down for all product groups (viz., general prices, food products, non-food, household durables, housing and services). On category-wise inflation expectations, daily-wage workers and housewives expected higher inflation rates compared to other categories. Across the cities, Bangalore registered the highest inflation expectations and Patna registered the lowest expectations.
So what it means is this:
So basically, in MAr-11 inflation was lower than expected (11.5% vs 12.4%). Based on this, HH have revised their overall inflation lower. They still expect it to rise but overall figures are low.
So a mixed message….People’s expectations remain elevated and despite seeing lower inflation in last few months, continue to revise expectations upwards.
I came across this very useful piece from Dr Rangarajan and Dr Subbarao (when he was secretary of Prime Minister’s Economic Advisory Council). The piece must have been written around 2006 but is still very relevant.
The authors say:
Dr. Geeta Gouri, Member, Competition Commission of India (CCI) has a nice speech on the topic. (Infact one should check other speeches/presentations/reports by CCI and its members as well. Pretty good stuff)
She begins the speech giving how CCI is different from MRTP and tries to work into areas of the new India.
This is an amazing paper and nicely timed as well.
It talks about fiscal data revisions in European economies. This is an ignored aspect but came to limelight when Greece just kept revising its deficit upwards. So much so, revision of targets was the trigger for the European crisis. The deficit for 2009 was revised from 3.7% of GDP to 12.5% of GDP and then further to 13.6% of GDP.
EU policymakers shrugged this upward revision to a Greece problem and not applying to EU as a whole. The paper looks at past data since 1999 and says well this is a broader European problem. Fiscal deficit data is mostly reported lower and revised higher later. This helps in Europe as Stability and Growth pact rules apply on first data reporting not on revised data later.
Findings are:
David Marsh at OMFIF Blog comments on recent Trichet speech. The speech is titled as “Building Europe, building institutions” and Trichet gives a kind of vision statement on building Europe by making strong institutions.
The speech is given on the occasion of Trichet receiving the prestigious prize – Karlspreis – given by German city of Aachen to people who contributed to the ideals upon which it has been founded.
Marsh says Trichet should have remembered Houdini as well in his speech:
CBO is one of the finest institutions around. Its non-partisan reviews on so many aspects of US economy is something so rare to see. I had pointed to it amazing history some days back at Hungary Fiscal Council Conference. I am unable to locate the speech mentioned in the post as the council website has gone.
Phil Joyce points to more lessons from CBO on PFM Blog. He has just written a book which is the first ever institutional history of CBO- The Congressional Budget Office: Honest Numbers, Power, and Policymaking.
I am reproducing the lessons in full:
Swaminathan S. Anklesaria Aiyar looks at the current state of Indian reforms from the political economy lens.
He says don’t expect much on reforms. There aren’t any real incentives to reform:
Despite at least two decades of reforms, the liberalization of India’s economy is incomplete. This is primarily a function of politics. Indian political leaders have few incentives to advance the reform agenda given India’s high growth rate, and instead prefer handouts in the form of welfare schemes and employment guarantees. The ruling Congress Party is inclined towards populism. The realities of coalition politics in both houses of parliament further complicate reforms, as they require concessions from partners and, in some cases, the opposition. While some advances are being made, future economic liberalization in India will likely be hesitant, episodic, and half-hearted.
Despite nearly 20 years of reform India lags way behind in most competitiveness rankings.
Is the title of my new paper. In the paper, I look at the ongoing debate on Greece crisis and the various options being discussed. There is a coverage of Greece bailout program and how it has fared so far (needless to say pretty bad).
Suggestions/Comments are welcome..
I posted about Teaching monetary policy after the crisis earlier as well.
FRBSF President John Williams adds more to the topic:
Christian Noyer summarises the lessons so far for central bankers:
This event is mostly going unnoticed and least talked about. Gulf countries are in a process of forming their monetary union.
In Dec 2009, Saudi Arabia, Kuwait, Bahrain and Qatar signed a pact to form a union and will be followed by Oman and UAE in due time. UAE opted out of the union over objections to selecting the Saudi capital, Riyadh as the base for the future Gulf central bank. Oman said it could not meet the union’s prerequisites for joining at this time.
In May 2010, it was decided that Muhammad al-Jasser, Saudi Monetary Authority head would head the Gulf Monetary Council/New Central bank. This was pretty much expected as it is the largest economy in the union by far.
John Whittaker of Lancaster University summarises the lessons Gulf economies need to take from Euro. GMU would be much smaller than EMU. GMU-4 economy would be USD 606.3 bn and population at 32.6 mn. Adding Oman and UAE it would become USD 887.2 bn and 42.2 mn respectively. EMU is at USD 12,266 bn and 320.4 mn.
Although the Gulf-zone will be much smaller than the eurozone both in population and economic size (table 1), there is no doubt that the Gulf rulers are aware of the symbolic prestige of the euro and they are looking to the euro as the model for their own currency. There will be a single central bank, there are plans for entrance conditions which match the ‘convergence criteria’ applied to countries joining the euro, and implementation is to follow similar procedures with detailed planning handled by an independent Monetary Council that will later mutate into the central bank.
It is therefore ironic that the decision to proceed with the new Gulf currency has been made at a time when the euro is suffering its severest strains to date – which prompts consideration of whether the Gulf currency might also be vulnerable. The euro-system is currently threatened by doubt about the sustainability of the debts of several Southern eurozone governments and here is speculation that, without financial support from other governments or the IMF, there may be a return to national currencies. The focus at the moment is on Greece where government debt is 115% of GDP (table 2) and the budget deficit is 2.7% of GDP (an upwards revision from the figure in table 2). Comparable problems also exist in Portugal, Ireland, Spain and Italy, generally compounded by large balance of payments deficits.
He shows overall fiscal balances of Gulf ecos are much better. Out of the joining four, only Bahrain runs fiscal deficits. Other three have both fiscal and current account surpluses:
At present, government debts in the GCC are small and, apart from Bahrain, all government budgets are in surplus (2009; table 2). The contrast with the troubled eurozone governments could hardly be greater. If the Stability Pact conditions of the eurozone are the relevant criteria (government deficits less than 3% of GDP; debts less than 60% of GDP), these are evidently satisfied with ease.
But then this is mainly because of oil resources. Once you join a common currency costs are huge:
However, a joint currency is a large commitment and all member countries need to be confident that the other members will continue with responsible fiscal behaviour in the future. In GCC countries, hydrocarbon duties provide the bulk of government revenues and the question has to be raised as to what will replace this when hydrocarbon reserves become depleted. This is a not a concern for Saudi Arabia and Qatar (table 3), provided that oil and gas prices do not fall significantly, but Bahrain and Oman (predicted to join the currency later) are less fortunate.
Diversification into other activities such as tourism and financial services is taking place in all GCC countries and there is discussion about developing new sources of taxation. But, even if sufficient revenue is raised, a potential difficulty arises with monetary policy.
Again just like Euro, there are major political reasons for GMU to succeed. There is no central fiscal policy, the major weakness of Euro. In EMU Germany is the centre and GMU it is going to be Saudi:
These caveats aside, current circumstances seem to be favourable for the establishment of a joint Gulf currency – at least as compared to the euro. GCC government finances are generally healthy, their business cycles are approximately in phase, they share a common culture and language, and co-operation between countries is increasing at several levels. But they do not share a government so the new currency could be vulnerable to the same forces that now endanger the euro. There needs to be enough commitment amongst all members both to abide by the rules and to help other members if they need it. As the largest economy and oil exporter, this responsibility will rest disproportionately on Saudi Arabia, although this would be shared with UAE if UAE and Oman join at a later date.
The author then looks at how the transition would be made and whether the common currency should be pegged or allowed to float? He says it should move towards free float currency to give credibility to the set-up:
The test of any exchange rate policy other than a free float is its credibility, implying that the managed float and the adjustable peg would be poor choices. In the absence of controls on the movement of foreign capital, any arrangement that builds in discretion for the monetary authority over exchange rates invites destabilising foreign exchange flows whenever there is a hint that the parity could be adjusted. Similarly, fixing the new currency to a wider basket is not ideal as it is vulnerable to expectations that the composition of the basket may be changed. For these reasons, a free float is likely to be the appropriate option and it has the additional advantage that it should partially smooth the flow of foreign earnings as the oil price fluctuate
This will be an interesting experiment for sure. The linkage of this union to world oil markets is going to be significant. Any problems in former would lead to problems in latter.
For instance, EMU economies were different and hence suffered differently in the crisis. However, Germany/France emerged stronger and were able to help (reluctantly though) the struggling smaller economies.
GMU economies would mostly be similar and affected by movement of oil prices. In such a case helping each other might not work in case of drop in oil prices. But then the central bank can cut rates without really worrying over inflation etc.
Looking forward to this new union….
There is already a proposed symbol for the new currency.
It is always great to read such papers/case studies.
Sanghamitra Das, Kala Krishna, Sergey Lychagin and Rohini Somanathan have written this nice paper on the topic. Voxeu has a summary (which is what I have read). The paper looks at whether public sector firms change when faced with competition.
We know private sector firms change or die in wake of competition. What about public sector firms?
Peter Diamond finally withdrew his Fed nomination (HT: Mankiw). After not being considered by Senate, despite twice being nominated by Obama, Diamond had enough of it. This blog has always wondered why he would be interested after being opposed by Senate first time.
Being just awarded the Nobel Prize, I am sure he had more important things to do after being rejected once.
Gauti Eggertson of NY Fed has this terrific post.
He says we are back to 1937 when both policymakers and economists erred leading to another round of depression. As most of us know that in 1937 Fed raised rates fearing inflation. The inflation fears arose tracking rise in prices of commodities!:
A nice article from K@W on the topic.
The article says the west model of giving money and talking about it does not really work in Asia esp China and India. As a result, both Buffet and Gates came to these regions and were shocked to see such low acceptance to their ideas of giving:
Wei Li, Taye Mengistae and Lixin Colin Xu of World Bank write this nice paper on India/China comparisons.
They base their analysis on Rodrik-Hausman framework of diagnosing bottlenecks in development. They look at firm specific data based on a World Bank Survey (done in 2003, so could be little dated).
