Nominal wage growth continues strong; Robert Reich reflects; Romer & Romer on applied Fed-watching; generative AI, First Republic, the mouse strikes back, and the Taylor rule...
Romer and Romer: "Many years ago, someone referred to what we do as the “literary” approach. It was clear they didn’t mean it as a compliment." Whoever said that doesn't know what scientific means and probably thinks that it is the same as scientistic. That person should be made to lick the inside door handle of a local Burger King Washroom and then wash their mouth with soap. After that they should be sent to Deirdre McCloskey for a nice tongue lashing.
Bernstein. Oh for a Republican party that cared enough about growth and innovation to overcome it's nativists. But I don't count on it. Democrats will have to do this.
Stiglitz: Unless Powell is planning to abandon the Fed's targets, the Banking system IS stable. If losses from unwisely having invested short term deposits in longer term fixed rate assets threaten to make banks "unstable," the Fed might have to do a quick U turn to keep that from depressing inflation and employment below target. But that's its job.
Yes, it was a terrible open letter, but it was also terrible that another group didn’t write complaining about Fed refusing to just do what is takes to carry out its mandate. Inflation AND employment were below target and TIPS markets knew it. Why wasn’t the Fed getting pressure from sensible people?
It probably was getting pressure from sensible people as well back then; just not publicly like the Letter. Plus, Ben Bernanke probably understood the issue better than most, for research into just that type of a situation was his life's work. Boy, should we all be thankful! He received the Nobel Prize for that work last year. See the paper that the Nobel Committee cited and see his lecture on the Nobel website.
Well, if he was getting that pressure is did not work. It is a scandal that the Fed allowed both inflation AND employment to be under target for a decade. If there were legal impediments to how much QE the Fed could do, he should have asked for more room. And _I_ never heard him say the Fed intended to get inflation above target temporarily while getting out of the recession and then "doing what it takes: to accomplish that.
Romer and Romer sound pretty common sense. Is anyone disputing for example that the increase in the FF rate in March 22 was and was intended to be anti-inflationary?
As I understand it, the contentious issue was/is whether they've done enough to show that the monetary policy actions can be characterized as exogenous -- like an unexpected meteor strike, if you will -- for them to use the estimation methods that they've used. In my view, they've done enough to show "beyond a reasonable doubt." That is probably as good as it will get in social sciences unless the Fed were actually stationed on the meteor that struck. This time, in particular, there was also a sudden/marked change in the Fed's own guidance between March/April and June 2022. The dot plots moved; the terminal rates jumped; and so on. About your "common sense" part: It looks like common sense because they've made it look that way. They are good writers. Lucid. Nothing etcetera. And especially no hiding behind jargon. That's a big part of why they're persuasive.
Thanks. It’s true that the Fed is sometime accused of just found whatever the administration wants. But it never occurred to me that people thought it was not exogenous. And its instrument setting shouldn’t be exogenous to data on the evonomy
"Unanticipated" might be a better word than "exogenous." An underlying framework says that if the Fed's policy were fully anticipated, people would change behavior before the Fed acts. Especially the financial markets. That could diminish the potency of the Fed's policy, perhaps making the policy ineffective. My rough, perhaps incomplete, understanding is that to establish that X had "moved" Y, Y should not be able to anticipate X's action and move in advance. Romer and Romer study transcripts of past Fed policy meetings. The transcripts were sealed and were not public information when the policymakers had acted. They look for what the policymakers were saying, what actions they were contemplating and for what purpose. Clearly, the Fed was looking at the underlying data itself. But what policy action it would take, and for what purpose, could not have been known, at least widely. Its policy actions were thus "beyond a reasonable doubt" unanticipated, or at least not fully anticipated. You can then measure the effects of that policy change.
If the Fed credibly communicated it's targets and financial markets and the Fed shared the same correct model of the relation of instrument settings to outcomes, then that would be good; the transmission time would be zero. The Fed would not be "exogenous" to the data nor would we want it to be. Of course, those do not obtain, and the Fed will be the transmission mechanism between changes in data and markets.
You are right, but that really is the crux of the matter: Do the financial markets and the Fed share a correct model, if there were one? And both of them are trying to divine where the economy is and may be in the period ahead. The market's assessment may differ from that of the Fed. This is where policy guidance comes into play.
Agree, I was just pushing back that markets being able to predict Fed actions was bad. And I'm all for policy guidance, something like "We aim to return inflation to 2% PCE in a reasonable amount of time. What it should NOT do is announce setting of its policy _instruments_ ahead of time. That should be data driven.
Open Letter To Ben Bernanke: That stirs up bad memories, Brad. On a Friday evening to boot. But something I had not noticed back then caught my eye and made me chuckle a bit. At the bottom of the Letter: "(Institutional Affiliations are for Information Only)". In other words, they can be misconstrued? For what? Anyway: Ben Bernanke 1: Open Letter 0.
This Romer and Romer is as beautifully done -- if not better -- as the original one; had loved it in grad school. Here's how I understand the estimated effect on, say, real GDP. It is the extent of damage that is possible due to a monetary policy shock. But the effect is NOT by how much real GDP will ACTUALLY fall. Other things can move real GDP, even upward, after the shock. An actual contraction of that size may not be guaranteed. If real GDP is found to be expanding in the aftermath for whatever reason, one would say that it did so DESPITE that contractionary impulse it was made to suffer by monetary policy. I hope I got this right.
Romer and Romer: "Many years ago, someone referred to what we do as the “literary” approach. It was clear they didn’t mean it as a compliment." Whoever said that doesn't know what scientific means and probably thinks that it is the same as scientistic. That person should be made to lick the inside door handle of a local Burger King Washroom and then wash their mouth with soap. After that they should be sent to Deirdre McCloskey for a nice tongue lashing.
Is the employment cost index a price index? Same job over time wage? or is t affected by shifts in which jobs are costed?
Bernstein. Oh for a Republican party that cared enough about growth and innovation to overcome it's nativists. But I don't count on it. Democrats will have to do this.
Stiglitz: Unless Powell is planning to abandon the Fed's targets, the Banking system IS stable. If losses from unwisely having invested short term deposits in longer term fixed rate assets threaten to make banks "unstable," the Fed might have to do a quick U turn to keep that from depressing inflation and employment below target. But that's its job.
Yes, it was a terrible open letter, but it was also terrible that another group didn’t write complaining about Fed refusing to just do what is takes to carry out its mandate. Inflation AND employment were below target and TIPS markets knew it. Why wasn’t the Fed getting pressure from sensible people?
It probably was getting pressure from sensible people as well back then; just not publicly like the Letter. Plus, Ben Bernanke probably understood the issue better than most, for research into just that type of a situation was his life's work. Boy, should we all be thankful! He received the Nobel Prize for that work last year. See the paper that the Nobel Committee cited and see his lecture on the Nobel website.
Well, if he was getting that pressure is did not work. It is a scandal that the Fed allowed both inflation AND employment to be under target for a decade. If there were legal impediments to how much QE the Fed could do, he should have asked for more room. And _I_ never heard him say the Fed intended to get inflation above target temporarily while getting out of the recession and then "doing what it takes: to accomplish that.
Romer and Romer sound pretty common sense. Is anyone disputing for example that the increase in the FF rate in March 22 was and was intended to be anti-inflationary?
As I understand it, the contentious issue was/is whether they've done enough to show that the monetary policy actions can be characterized as exogenous -- like an unexpected meteor strike, if you will -- for them to use the estimation methods that they've used. In my view, they've done enough to show "beyond a reasonable doubt." That is probably as good as it will get in social sciences unless the Fed were actually stationed on the meteor that struck. This time, in particular, there was also a sudden/marked change in the Fed's own guidance between March/April and June 2022. The dot plots moved; the terminal rates jumped; and so on. About your "common sense" part: It looks like common sense because they've made it look that way. They are good writers. Lucid. Nothing etcetera. And especially no hiding behind jargon. That's a big part of why they're persuasive.
Thanks. It’s true that the Fed is sometime accused of just found whatever the administration wants. But it never occurred to me that people thought it was not exogenous. And its instrument setting shouldn’t be exogenous to data on the evonomy
"Unanticipated" might be a better word than "exogenous." An underlying framework says that if the Fed's policy were fully anticipated, people would change behavior before the Fed acts. Especially the financial markets. That could diminish the potency of the Fed's policy, perhaps making the policy ineffective. My rough, perhaps incomplete, understanding is that to establish that X had "moved" Y, Y should not be able to anticipate X's action and move in advance. Romer and Romer study transcripts of past Fed policy meetings. The transcripts were sealed and were not public information when the policymakers had acted. They look for what the policymakers were saying, what actions they were contemplating and for what purpose. Clearly, the Fed was looking at the underlying data itself. But what policy action it would take, and for what purpose, could not have been known, at least widely. Its policy actions were thus "beyond a reasonable doubt" unanticipated, or at least not fully anticipated. You can then measure the effects of that policy change.
If the Fed credibly communicated it's targets and financial markets and the Fed shared the same correct model of the relation of instrument settings to outcomes, then that would be good; the transmission time would be zero. The Fed would not be "exogenous" to the data nor would we want it to be. Of course, those do not obtain, and the Fed will be the transmission mechanism between changes in data and markets.
You are right, but that really is the crux of the matter: Do the financial markets and the Fed share a correct model, if there were one? And both of them are trying to divine where the economy is and may be in the period ahead. The market's assessment may differ from that of the Fed. This is where policy guidance comes into play.
BTW. it is such a joy to be able to discuss my somewhat queer ideas with someone knowledgeable. I run the risk of learning something. :)
Agree, I was just pushing back that markets being able to predict Fed actions was bad. And I'm all for policy guidance, something like "We aim to return inflation to 2% PCE in a reasonable amount of time. What it should NOT do is announce setting of its policy _instruments_ ahead of time. That should be data driven.
Open Letter To Ben Bernanke: That stirs up bad memories, Brad. On a Friday evening to boot. But something I had not noticed back then caught my eye and made me chuckle a bit. At the bottom of the Letter: "(Institutional Affiliations are for Information Only)". In other words, they can be misconstrued? For what? Anyway: Ben Bernanke 1: Open Letter 0.
:-)
This Romer and Romer is as beautifully done -- if not better -- as the original one; had loved it in grad school. Here's how I understand the estimated effect on, say, real GDP. It is the extent of damage that is possible due to a monetary policy shock. But the effect is NOT by how much real GDP will ACTUALLY fall. Other things can move real GDP, even upward, after the shock. An actual contraction of that size may not be guaranteed. If real GDP is found to be expanding in the aftermath for whatever reason, one would say that it did so DESPITE that contractionary impulse it was made to suffer by monetary policy. I hope I got this right.
Yes, a parameter estimate should be ceteris paribus. But just which ceteris are being held paribus?