A discussion on quora.com on the topic.
Alex Tabbrok of MR blog sums it up really well:
Bernanke joins the quorum of econ bloggers, was bound to be a splashy event.
The blog is here. The introductory post says:
When I was at the Federal Reserve, I occasionally observed that monetary policy is 98 percent talk and only two percent action. The ability to shape market expectations of future policy through public statements is one of the most powerful tools the Fed has. The downside for policymakers, of course, is that the cost of sending the wrong message can be high. Presumably, that’s why my predecessor Alan Greenspan once told a Senate committee that, as a central banker, he had “learned to mumble with great incoherence.”
On January 31, 2014, I left the chairmanship of the Fed in the capable hands of Janet Yellen. Now that I’m a civilian again, I can once more comment on economic and financial issues without my words being put under the microscope by Fed watchers. I look forward to doing that—periodically, when the spirit moves me—in this blog. I hope to educate, and I hope to learn something as well. Needless to say, my opinions are my own and do not necessarily reflect the views of my former colleagues at the Fed.
Civilian again is an important lesson for Indian policymakers. They either remain policymakers forever or join some university in US remaining in the news circuit. Most keep coming back into some commission/report.
Anyways, the second post is on low interest rates:
Why are interest rates so low? Will they remain low? What are the implications for the economy of low interest rates?
If you asked the person in the street, “Why are interest rates so low?”, he or she would likely answer that the Fed is keeping them low. That’s true only in a very narrow sense. The Fed does, of course, set the benchmark nominal short-term interest rate. The Fed’s policies are also the primary determinant of inflation and inflation expectations over the longer term, and inflation trends affect interest rates, as the figure above shows. But what matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate). The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.
To understand why this is so, it helps to introduce the concept of the equilibrium real interest rate (sometimes called the Wicksellian interest rate, after the late-nineteenth- and early twentieth-century Swedish economist Knut Wicksell). The equilibrium interest rate is the real interest rate consistent with full employment of labor and capital resources, perhaps after some period of adjustment. Many factors affect the equilibrium rate, which can and does change over time. In a rapidly growing, dynamic economy, we would expect the equilibrium interest rate to be high, all else equal, reflecting the high prospective return on capital investments. In a slowly growing or recessionary economy, the equilibrium real rate is likely to be low, since investment opportunities are limited and relatively unprofitable. Government spending and taxation policies also affect the equilibrium real rate: Large deficits will tend to increase the equilibrium real rate (again, all else equal), because government borrowing diverts savings away from private investment.
If the Fed wants to see full employment of capital and labor resources (which, of course, it does), then its task amounts to using its influence over market interest rates to push those rates toward levels consistent with the equilibrium rate, or—more realistically—its best estimate of the equilibrium rate, which is not directly observable. If the Fed were to try to keep market rates persistently too high, relative to the equilibrium rate, the economy would slow (perhaps falling into recession), because capital investments (and other long-lived purchases, like consumer durables) are unattractive when the cost of borrowing set by the Fed exceeds the potential return on those investments. Similarly, if the Fed were to push market rates too low, below the levels consistent with the equilibrium rate, the economy would eventually overheat, leading to inflation—also an unsustainable and undesirable situation. The bottom line is that the state of the economy, not the Fed, ultimately determines the real rate of return attainable by savers and investors. The Fed influences market rates but not in an unconstrained way; if it seeks a healthy economy, then it must try to push market rates toward levels consistent with the underlying equilibrium rate.
Lot of mumbo jumbo here. If markets determine so called real rates why does Fed intervene?
A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates “artificially low.” Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by “the markets.” The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere. So where should that be? The best strategy for the Fed I can think of is to set rates at a level consistent with the healthy operation of the economy over the medium term, that is, at the (today, low) equilibrium rate. There is absolutely nothing artificial about that! Of course, it’s legitimate to argue about where the equilibrium rate actually is at a given time, a debate that Fed policymakers engage in at their every meeting. But that doesn’t seem to be the source of the criticism.
The state of the economy, not the Fed, is the ultimate determinant of the sustainable level of real returns. This helps explain why real interest rates are low throughout the industrialized world, not just in the United States. What features of the economic landscape are the ultimate sources of today’s low real rates? I’ll tackle that in later posts.
Being a historian, he would obviously know that things did work without Fed/central banks around. With central bank not even knowing what the rates are and just guessing their way, most of the time things only go wrong.
Interesting posts to follow. ..
It nicely lists the several policy committees in India from 1998 onwards. He says lot of these committees had interesting ideas to begin with but met dead ends later:
Janet Yellen was off the Christmas list at Van Eck Global this year.
The asset manager Van Eck helped the Federal Reserve chairwoman to her caricature debut on the their central bank-themed holiday ties—riding a white dove, no less. This year, the $30 billion firm cast off in a rather more literal direction.
This year’s ties (and matching tote bags) show a boat called the “QE III” sailing into the sunset. The boat appears to be empty, though there are queasy waves ahead.
As we reported last year, Van Eck’s ties have earned somewhat of a cult following. Prior iterations have featured “Helicopter Ben Bernanke” and a “Super Mario” version ofMario Draghi, the president of the European Central Bank. This one, of course, is referring to the end to the third round of the Fed’s stimulus measures, called quantitative easing. The massive bond buying program ended earlier this year.
Memorable holiday gifts are a way to get noticed in the financial world, and the Van Eck ties–va neckties, if you will–aren’t the only game in town. Among the competitors:Berkshire Hathaway Inc. Chairman Warren Buffett sends out a goofy picture with a box of chocolates from Berkshire-owned See’s Candies. And the effort that Kingsford Capital Management, a small Northern California-based hedge fund, puts into its oddball gifts earned it a front-page story in the Wall Street Journal in 2013.
Van Eck sends out thousands of its custom-made ties to its clients every holiday season. As always, the ties are made by Vineyard Vines, a preppy favorite in the Northeastern financial world.
Click on the post to see the previous design and the current one as well..
There has been some hot and stirring debate on free banking in the blogosphere.
Ueasymoney blog sums up the debate and provides links on who said what on the topic. For those interested in history of money and banking, studying free banking is a must as this is how it all started. Adam Smith wrote on free banking in his wealth of nations tome. Also read this website where leading free bajmking scholars are writing some really fab and interesting stuff.
There are two schools of free banking — Currency school led by Hume and Banking school led by Smith:
He looks at how these countries are faring and data shows nothing much has happened. The hyped convergence to west has been an illusion for most. Only in case of Poland has some kind of development and convergence happened:
Understanding the causes and consequences of the rise of finance is a first order concern for macroeconomists and policymakers. The increasing size and leverage of the financial sector has been interpreted as an indicator of excessive risk taking1and has been linked to the increase in income inequality in advanced economies,2 as well as to the growing political influence of the financial industry (Johnson and Kwak 2010). Yet surprisingly little is known about the driving forces behind these trends.
In our recent research we turn to economic history. We build on our earlier work that first demonstrated the dramatic growth of the balance sheets of financial intermediaries in the second half of the 20th century and how periods of rapid credit growth were often followed by systemic financial crises and severe recessions (Schularick and Taylor 2012, Jordà, Schularick, and Taylor 2013).
They say that main reason has been shift of bank credit towards mortgage lending or for home buying. Banks over the years have become like a housing fund:
WSJ Blog explains:
Unlike the U.S. Federal Reserve and other western central banks, the People’s Bank of China isn’t independent of the government. It reports to the State Council, the Chinese government’s top decision-making body and as a result, the PBOC has no real control over China’s monetary policy.
But on inflation front, China has had low inflation for a while. So even if the central bank is not so called independent, it has managed to keep govt at bay:
Fixing the economists Blog has this interesting post on the topic.
This is one of the most important philosophical questions regarding economics- is it a science? Econs surely believe and have tried to model their ideas as Science like with laws and theories etc. This is met with criticism as these laws are not universally applicable and are inconsistent.
But then what is science at the first place? There is huge disagreement on the same. The blog defines science and then sees whether economics fits as a science:
Jonathan Rothwell of Brookings has a nice post on the topic.
He puts up US map and looks at earnings of Software professionals across regions. He sees there is a wage premium in Silicon Valley compared to other places. Why this is so? It seems the region requires some typical software skills which lead to the premium:
As I write this post, there is a real proud feeling.
First, this is the 5000th post of Mostly Economics. This is a huge personal milestone as had no clue that would end up writing so much! Thanks to WordPress and the visitors who have encouraged this blog all this while. Huge pat to the blog..
Second, there could be no better way to write this 5000th post than talk about this wonderful book – The Story of the Reliance Cup by Mr. NKP Salve. The blogger has always been a huge fan of cricket and would love to write and think more on the sport. The events of the last few years has led to huge discontentment with the state of affairs. The blogger never cared to figure the man reason behind NKP Salve tournament and this autobiography gives you great insights about many things. As the authorities keep piling shame on Indian cricket, perhaps they should read this book to understand the challenges faced by authorities then to bring this whole cricketmania to India. Given how things stand today, even the guys who brought this whole game to Indian shores would be reflecting on whether they did any wrong?
Things are getting more and more complex. Countries which had recovered post-crisis are slipping. Sweden is the latest entrant to the list. The last reading was at -0.6% fueling debates over deflation in Sweden.
Isha Agarwal (no relation to ME blogger!) a graduate student at Cornell Univ has started this intersting blog and hope we get to read some more posts.
In one of the two posts written so far, the author explains the time-series analysis of Indian macro data.
Macro economic time series are known to display trend growth. For example, if we look at a country’s GDP, it rises over time, i.e. it has a trend growth which can be categorized as a long term feature of GDP, however, in the short term we observe that the GDP fluctuates around the deterministic trend. A substantial literature in macro economics deals with the properties of these business cycles and how the government can come up with policies to counter these business cycles – also know as counter cyclical policies. Whether or not such policies are effective in containing the business cycles is a bigger question and there are different schools of thought (Freshwater and saltwater) which feel differently about this issue.
There is a class of models known as RBC (Real Business Cycle) models which addresses questions such as: what causes business cycles, how persistent is the deviation of any time series from its steady state, what accounts for co-movement between various time series(such as consumption and income). RBC model conjectures that business cycle fluctuations are due to real factors (such as shock to technology) as opposed to monetary factors(such as change in money supply/monetary policy). The macro economic course taught in the spring semester at Cornell revolves around RBC theory which also happens to be my area of interest.
In the first lecture of this course I learnt how to extract the cyclical component from any given time series and some stylized facts about GDP, consumption-income ratios, investment-income ratios, their correlations and persistence. In this post I endeavor to conduct the same analysis for Indian data. I take data on GDP and its components from RBI’s website.The first step is to extract the business cycles from the series of GDP. I use annual data from 1950 to 2012 for this analysis.
Nice stuff. Read the post for details.
Though, the graphs could be better as one can hardly detect the difference between original and cyclically/trend adjusted time-series. And then the author could also explain how does one actually detrend all this. It does share a matlab code but a code is a code.
Overall an interesting effort and looking for more such posts..
ME eventually wants to get into posts like these as econ research via papers is getting boring. Idea is to use simple econometrics (an oxymoron!) to convey basic ideas. There is hardly any dedicated website to doing economic research and helping people do research using basic tools. Especially these time series analysis where we fail to look at basics and keep projecting left, right and centre..
But as ME is still not there yet, so will have to wait. ME hopes to get into this space quickly..Till then hope Isha helps us..
Well the biggest circus/tamasha (whatever you may call it) is about to begin. As ECI announced dates for Elections-2014, we are going to have loads of action for next two months..
Interestingly, just y’day there was this interesting post in voxeu on voting and psychology behind it. The authors conduct the experiment in just one region (Illinois) and one time (2010 Congressional election) so there are limitations: