Worthwhile Canadian Initiative

When should the Bank of Canada raise interest rates?

The strong-ish November GDP number has revived the debate about when the Bank of Canada will start increasing its target for the overnight rate. On one hand, we have this:

Recovery points to summer rate hike: With the North American economy growing significantly faster than expected at the end of 2009, and with mounting evidence that Canada is pulling clear of recession, economists are increasingly of the view that central bank Governor Mark Carney will pull the trigger on an interest-rate hike this summer, rather than wait until later in the year.

David Rosenberg has staked out the contrarian territory:

Interest hike this summer?: The history of the Bank of Canada is such that - outside of when it had to defend the Canadian dollar - it typically does not embark on its tightening phase until the output gap is close to closing... If such a strategy is replicated this time around - and the cause for being on pause longer in the context of a historic deleveraging cycle is certainly quite strong - then the very earliest the bank will move is the second quarter of 2011.

A question that business journalists might do well to ask

I have a question that I wish some enterprising business journalist would ask on a regular basis. When various private sector institutions produce their forecasts, could you please ask where those numbers came from? And perhaps ask for some error bands?

Because it is my understanding that private sector forecasts are not produced by teams of econometricians working independently. Instead, they are generated by calling some consulting firm, providing a few subjective judgment calls about various imponderables (US economic growth, oil prices, etc) and asking for a spreadsheet suitable for publication on the following Monday.

Do I understand badly? If so, please reassure me in the comments.

Infinite equilibrium asset prices?

Could there ever be conditions under which the equilibrium (real) prices for some assets are infinite? What would happen to an economy as it approached those conditions? Would those prices keep climbing to the skies heavens, then collapsing in waves of fear and panic? I'm trying to figure it out.

A preliminary estimate for Canadian 2009Q4 GDP growth

This is an update to my series of posts (2009Q1, 2009Q2, 2009Q3) that uses Statistics Canada's estimates for monthly GDP estimates (available for the first two months of the previous quarter) and the LFS data for the last month of the quarter to provide an estimate for GDP growth in the previous quarter. Statistics Canada will be releasing their numbers on March 1.

 

The mean of this distribution is 4.0%, its standard deviation is 0.5%, and the interquartile range is [3.7 , 4.4].

This is lower than the preliminary US estimate, and since this model doesn't provide a breakdown of aggregate demand, I don't know to what extent this projected increase may be driven by the replenishment of inventories.

Why does anyone care about the distinction between convergence in probability and almost sure convergence?

I'm teaching two econometrics classes this term (master's and PhD), and I just covered the parts on asymptotic theory. In both lectures, I stumbled badly at explaining the difference between these two forms of convergence: my heart simply isn't in it.

I've never heard of empirical study where the distinction between the two forms of convergence made a difference. Heck, I can't even come up with an example a sequence that converges in probability but not almost surely. And don't get me started on quadratic convergence, convergence in r^th mean and other exotica.

Why do we force our students to learn these things?

Is Barter Countercyclical?

The Wall Street Journal (H/T Peter Gordon) says that barter is countercyclical. Barter increases in recessions, like now, and decreases in booms. Can anyone confirm this? Because that fact (if it is a fact) is really important in understanding the nature of business cycles and recessions. Countercyclical barter is exactly what one would predict from a monetary (deficient aggregate demand) theory of recessions. It makes no sense from a real business cycle or recalculation theory of recessions. And the very existence of barter, even in normal times and booms, is evidence in favour of doing macroeconomics with monopolistic competition.

"Dispelling Canadian myths about foreign direct investment"

That's the title of a nice survey for the Institute for Research on Public Policy by Walid Hejazi, available here. After being a hot-button topic for the past half-century or so (note to non-Canadians: yes, really), FDI has accumulated a thick crust of myths that could do with some dispelling:

The debate around foreign direct investment is too often framed around two caricatures: that outward FDI is synonymous with exporting Canadian jobs and inward FDI is synonymous with excessive foreign control of Canada’s economy.

The supply and demand for (belief in) EMH

The extent to which the Efficient Market Hypothesis is true, and the extent to which EMH is believed to be true, are co-determined in simultaneous equilibrium by "supply" and "demand". Here's the picture:

Two perspectives on EMH: Biz Skool vs. Econ Dept

A theory is like a tool: whether it is right or wrong depends on what job you want to use it for. From the Econ Dept perspective, watching the players play, the Efficient Market Hypothesis makes a lot of sense. From the Biz Skool perspective, as one of the players playing, the EMH makes much less sense.

The tennis ball theory of the Canadian housing market

From Nick's absolutely wonderful post:

Real bubbles are unstable; they burst when you prick them. They don't spontaneously revert to their original size. Soap bubbles aren't like tennis balls. If the bubble metaphor means anything, it has to mean that. If asset price bubbles aren't unstable, and don't burst when you prick them, or re-inflate immediately, then the bubble metaphor is useless.

Below the fold, I'm going to provide some context to support the claim that the Canadian housing market looks more like a dented tennis ball than a burst bubble.

Don't bubbles burst when pricked?

This is an inchoate post. That's not really an apology. Economists' ideas about bubbles aren't very clear. We can define a bubble theoretically, but we can't explain why they sometimes exist, sometimes don't exist, or why they sometimes start and stop existing. And we are not very good at identifying bubbles, even perhaps in hindsight. And even when we do say something is or was a bubble, all we are really saying is that we can't think of any plausible fundamental explanation of the time-path of prices, as Scott Sumner argues. That doesn't mean there wasn't one; just that we don't know what it is. (Scott's been doing more great posts recently than I can hope to keep track of.)

Can ALL assets be overvalued?

I was going to make the title: "Can ALL assets be overvalued? The Economist (mag) vs. Cambridge(US) vs Cambridge(UK) vs. the Austrians", but it was be too long.

I saw the cover of the Economist this morning. The usual lovely picture, plus the headline "Bubble Warning; Why Assets are overvalued". I think there's a theoretical problem, or maybe a conceptual problem, with saying that all assets are overvalued. It's not quite as bad as saying that all kids are above average, but it's getting close.

The value of unfunded pension liabilities, and interest rates

The C.D. Howe Institute has released a study (pdf) on Federal government pensions, written by Alexandre Laurin and Bill Robson. The bottom line (and what hit the headlines) is that the value of the unfunded liabilities is $58 billion higher than recorded in the public accounts. So the national debt is $58 billion higher than reported. But, contrary to what you might think, that does not mean we will have to raise taxes or cut spending to cover that $58 billion debt we didn't know about.

What is a "structural" deficit?

Macroeconomists like to divide an actual deficit into two components: a cyclical deficit and a structural deficit. It reflects their distinction between automatic stabilisers and discretionary fiscal policy. I don't think that distinction is as clear and useful as macroeconomists think it is. And in ordinary language a "structural" deficit is one that is hard to get rid of. That's something quite different.

How Jim Flaherty can stop the structural deficit meme: Show us the numbers

From the Globe and Mail:

Flaherty dismisses deficit 'speculation': “I see speculation. I don't see a lot of evidence. I see editorial comment without numbers, without analysis,” Mr. Flaherty said.

Of course, that's exactly what we see coming from the Department of Finance. If Finance is so sure of its numbers, it should be publishing the details of the analysis that generated them. It's not complicated. All we need to know is

1. Finance's model for translating macroeconomic variables into revenues, and
2. Finance's projections for those variables.

We're all doing the best we can to figure things out with the meagre resources available to us. If Flaherty thinks we're doing it badly, he could at least explain to us why we're wrong.

The Canadian dollar, the euro and political agendas

Paul Krugman points out that the existence of an independent Canadian dollar - and the fact that Canadians aren't in any hurry to adopt the USD - is something to think about when one ponders the euro project:

[I]t suggests that Europeans made too much of the  need for the euro.

The euro project had much more to do with advancing the goal of promoting an ever-close political union than implementing a sensible monetary policy. As the current crisis has shown, a common currency is hard to sustain without a central government that is able to redistribute income from one region to the other. It seems to me as though the people who pushed the common currency hoped that by the time the euro was put under pressure, the central government with the necessary powers of redistribution would be in place.

In contrast with the euro project, the political obstacles associated with a Canada-US monetary union are pretty formidable:

• The notion of a central authority that could reallocate resources from the US to Canada (or the other way around) is difficult to conceive.
• The notion that the US would let another country have anything at all to say about how it conducts its monetary policy is impossible to conceive.

Finance as Magic

I can't get over the feeling that Finance is magic. We shouldn't be surprised if sometimes the rabbit doesn't come out of the hat, or comes out missing an ear or two. We should be surprised that the rabbit ever comes out of the hat at all.

Statistics Canada needs JOLTS

Here is a graph - stolen from the Wall Street Journal - for which I very much wish I were able to make a Canadian version:

These numbers come from the BLS Job Openings and Labor Turnover Survey; there is no Canadian counterpart to this data source.

Forecasting the Federal Deficit

I wanted to figure out what the federal budget deficit would look like when Canada eventually recovers from the recession. So I did a very crude back-of-the-envelope calculation. Then I looked at the Parliamentary Budget Office's own forecast (pdf). The PBO forecast is more pessimistic than mine. I'm still trying to figure out why.

A policy agenda for every horizon

I think we've seen enough of retrospectives on the past year and decade; it's time to reflect upon the future. So here are some things that we're going to have to think about, organised by time horizon.