Worthwhile Canadian Initiative

Interest rate targeting as a social construction

We always knew that interest rate targeting could never work in theory, because it left the price level indeterminate. But it seemed to work well in practice, and kept inflation close to target, so we eventually learned to overcome our theoretical squeamishness and embrace it as part of the reality of how modern central banks operate. But now interest rate targeting has failed in practice, and failed badly. It cannot keep inflation, and expected inflation, on target. We want to loosen monetary policy. And because monetary policy is interest rate targeting, we can't, because interest rates on safe liquid assets are already at zero.

Why current AD depends on expected future AD: Scott Sumner in ISLM

Scott Sumner argues that nominal interest rates are near zero because monetary policy (specifically expected future monetary policy) is too tight. He argues that tight (expected future) monetary policy makes expected inflation low, which makes nominal rates low. He also argues that tight (expected future) monetary policy makes real rates low as well.  I want to re-state Scott Sumner's argument in terms of a standard ISLM model. I know Scott doesn't like the ISLM model, but I do. And more economists understand the standard ISLM model than perhaps understand Scott's verbal reasoning.

A preliminary estimate for Canadian 2009Q3 GDP growth

This is an update to my series of posts (2009Q1, 2009Q2) 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 towards the end of the month.

It doesn't seem very likely that we'll be seeing the sort of happy news for 2009Q3 GDP growth that we saw in the US:

 

The mean of this distribution is -0.35%, its standard deviation is 0.5%, and the interquartile range is [-0.7 , 0.0].

Why can't the Fed just buy yuan?

The title really says it all. And it's not a rhetorical question; I don't know the answer. But if the US is really concerned (H/T Mark Thoma) about the US dollar being too high against China's yuan, and it believes China is "artificially" preventing the yuan from appreciating against the dollar by foreign exchange market intervention, why can't the Fed just intervene in the opposite direction, by buying yuan?

Hopefully the last post I'll have to make on the Canada's-housing-market-is-not-the-US-housing-market theme

The National Bank has a summary (pdf) of some numbers comparing how the Canadian housing market has behaved very differently from that in the US:

[W]e compare the housing market correction in Canada with the one that occurred in the United States. The two have absolutely nothing in common. In Canada, the correction got under way much later and lasted nowhere as long. What’s more, it seemed to come about as a consequence of the economic recession; it was not at the source of it as in the United States.

I'm just sayin', I was right.

The September LFS report: Employment and hours worked

Last Friday's LFS release was the best we've seen in a long while. Not only did employment increase for the second month in a row, there was a significant jump in hours worked as well.

Flashbacks to the 1970's: the Bank of Canada and the deficit

Doug Peters and Arthur Donner (names I remember from the 1970s debate over inflation in Canada) have an opinion piece in the Toronto Star on the role of the Bank of Canada in reducing the budget deficit. It starts out fine, but ends in a non-sequitur.

On the role of house prices in the last expansion

I have at various points (here and here) been driven up the wall by lazy journalists who have worked under the assumption that if the US housing market was crashing and burning, then so was Canada's. This premise has led to any number of articles cut-and-pasted from the south with 'US' being replaced by 'Canada'. These pieces were cheap and quick (no research necessary!) and they generated scary headlines. But they were completely stupid and degraded the public's understanding of an important issue.

So it is with a certain amount of satisfaction that I draw attention to a recent Bank of Canada working paper that examines the role of housing prices over the past few business cycles. It turns out that like the US, we have had an episode in which a housing bubble fueled a consumption boom that culminated in a long, painful recession involving significant restructuring. The difference is that our boom-and-bust cycle occurred in the late 1980's and early 1990's:

[R]ising house prices played an important role in consumption growth through the increase in value of housing collateral. This positive effect peaked in late 1986 but continued to have a positive effect on consumption growth until 1989...

Our model suggests that collateral effects contributed as much as 1.0 per cent to yearly consumption growth in 2000 and had a positive effect for most of the remainder of the sample. This contribution is less than in the period from 1986 to 1990, but one simple reason is that the house price increases since 2000 have been more gradual than in the late eighties when they rose to the same level in 3 years rather than 6.

In a previous post, I noted that in many ways, the current US situation resembled what Canada had to deal with in the early 1990's. It would seem that the parallel is even closer than what I thought.

Can rent controls cause a recession? A response to Scott Sumner and Bill Woolsey

There is a perfectly sensible theory that says that rent controls reduce labour mobility and can therefore worsen structural unemployment. I'm going to ignore that sensible theory and put forward a silly theory -- one I believe is wrong. But I'm putting forward a silly theory to make (what I think is) a sensible point, about the importance (or lack thereof) of money's role as a medium of account, and about Walras' Law.

The hub and spoke model of money -- a rejoinder to Arnold Kling

The textbooks say that money serves as: store of value; medium of account; and medium of exchange. Arnold Kling seems to miss the importance of the fact that money is a medium of exchange. Worse, he misunderstands me, thinking that I am one of those economists who makes a big deal of money's role as a store of value. I don't. I'm a medium of exchange nut. Worse still, he claims Clower and Leijonhufvud as intellectual ancestors, on his side of the debate aginst me! Clower especially emphasised the role of money as medium of exchange, and Leihonhufvud followed suit. They are my ancestors, not Arnold's!