Worthwhile Canadian Initiative

Random Thoughts

Sometimes my brain can't concentrate on any one topic long enough to write a serious post. Or maybe I just don't know enough to give a good answer to some question I want to answer. So here is a random collection of thoughts:

Why do (bad) banks (really) matter?

I'm going to put forward two perspectives on why bad banks might be important in understanding the recession: an orthodox perspective; and a heterodox perspective.

Today's GDI release: both GDP and the terms of trade are improving

There's been a certain amount of commentary on today's GDP release. An annualised growth rate of 0.4% for 2009Q3 is better than zero - and it's at the 80th percentile of the predictive density generated by my toy predictor - but it's not what you'd call a strong recovery.

Happily, there's better news about GDI. The rebound in commodity prices has generated in a recovery in our terms of trade, resulting in an increase of our buying power of 3.3% at annual rates.

(See this post for an explanation of the difference between GDP and GDI).

With any luck, this will be the last post filed under the 'current recession' category.

In praise of (a little bit of) fiscal dominance

Who makes sure the long run consolidated government-central bank budget constraint balances? Is it the government? Or is it the central bank? The former gives us a Ricardian regime; the latter gives us fiscal dominance.

Most macroeconomists take a Ricardian regime as their unspoken assumption; and, if pressed, would recommend a Ricardian regime, as is required, in the long run, by central bank independence. If the central bank is to have the independence to pursue its own objectives (be it inflation targeting or whatever), the government must take long run responsibility for its own deficits, grateful for whatever profits from seigniorage revenues the central bank deigns to hand over. Worries about the "coordination of monetary and fiscal policies", heard often in Canada until the mid-1990's, were code for the desire for a Ricardian regime.

Promising to keep nominal interest rates low for too long

I was lucky enough to be invited to a Bank of Canada conference on Thursday and Friday. The topic was "New Frontiers in Monetary Policy Design". One recurring theme in particular has stuck in my mind: that a credible promise to keep interest rates low for too long can help an economy escape a liquidity trap. (I apologise for not remembering which presenter or commenter expressed the point so clearly in this way that it stuck in my mind.)

Deflationary death-spirals and the social construction of monetary policy

I present a simple macro model and use it as a vehicle to explore the idea that it matters how monetary policy is framed. One framing leads to a deflationary spiral, which an alternate framing can avoid or escape. The model is an otherwise bog-standard New Keynesian/Neo-Wicksellian model, but with a minor modification in the financial sector.

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?