On his blog, John Cochrane discusses the possibility of an alternative monetary policy regime in which the Fed tightly controls expected inflation. He states, repeatedly, that given our current understanding of the matter he would refrain from implementing such a regime if he became Fed chair (rather than stating that he would not currently advise to move in that direction). Given that Janet Yellen is expected to retire next year and John Cochrane is mentioned as a possible successor, I find the statement remarkable.Read More »
Articles by Dirk Niepelt
Shop window in Turin.Read More »
On Bloomberg, Yuji Nakamura and Lulu Yilun Chen report about conflicting views in the Bitcoin community on how to address capacity limits in the blockchain.
Bitcoin Unlimited is essentially a software upgrade to the blockchain. Years ago, bitcoin’s early developers imposed a cap on the amount of data it could process. While that slowed down the network, it was seen as a necessary safety measure against potential attackers who could overload the system. Now, Unlimited supporters say the blockchain is robust enough that it doesn’t need any limit at all.
While most agree the blockchain is stronger, critics … say that removing the data cap is a risky move which will leave bitcoin vulnerable to governments and global banks. Without a limit, large organizations would use their resources to
After nine years, Iceland has lifted its remaining capital controls. In the FT, Richard Milne reports. Exchange rate vis-a-vis the Euro.Read More »
The European Financial Review, February-March 2017. HTML, PDF.
See the VoxEU article.
In his book, Julian Baggini points out that materialism, not determinism, undermines the notion of free will. He accepts that man is subject to the laws of nature but simultaneously seems to argue for a holistic model of man and human choice. He concludes that the concept of free will is consistent with predetermined causes; with unconscious choice; and that it does not require that a choice could have been different.
Discussion in The Guardian.
Journalist and business school professor Miriam Meckel describes how, when forced to slow down in a burnout clinic, she discovers yoga, meditation, and family constellations (Familienstellen). She also thinks about prejudice, the role of workers, and hand written letters.Read More »
In Douglas Adams’ book (volume one in the trilogy of four) we learn, among other things:
Towels are particularly useful for interstellar travelers on a shoestring.
It’s not clear whether humans conduct experiments on mice or vice versa.
The answer to Life, Universe, and Everything is “forty-two” as Deep Thought found after an extended period (seven and a half million years) of number crunching.
But what is the question? To find out, an even more powerful computer was built: The Earth. “Deep Thought designed the Earth, we built it and you lived on it.”
Unfortunately, the Vogons destroyed the planet just five minutes before the program was completed. The badly timed intervention was communicated as follows: “This is Prostetnic Vogon Jeltz of the Galactic Hyperspace Planning Council. As
On VoxEU, Luca Benati, Robert Lucas, Juan Pablo Nicolini, and Warren Weber argue that long-run money demand in many countries is rather stable.
… using a specific, narrow monetary aggregate, M1, we study a dataset comprising 32 countries since the mid-19th century (Benati et al. 2016). The main finding of this large-scale investigation is that, contrary to conventional wisdom, in most cases statistical tests do identify with high confidence a long-run equilibrium relationship between either M1 velocity and a short-term interest rate, or M1, GDP, and a short rate – that is, a long-run money demand.
In the NZZ, Michael Schaefer reports on a study about the performance of Swiss portfolio managers in 2016.
The median portfolio returns in all investment strategies except those not investing in stocks fell short of the corresponding benchmark returns.
Only a fifth of the portfolios generated returns in excess of their benchmark.
These numbers do not yet account for management fees.
No portfolio manager generated high returns across all strategies.
But some managers consistently generate high returns in certain strategies.
In Commentary, Nicholas Eberstadt recounts how low employment, deteriorating health, and declining social mobility in the United States foreshadow a “Miserable 21st Century.”
Between 2000 and 2016, the work rate for Americans aged 20 or older fell by almost 5 percentage points, to 60 percent.
In the “prime working age” group, it fell by almost 4 percentage points.
While work rates for men had been falling for much longer, a similar decline for prime age women set in in 2000.
Death rates for white men and women aged 45–54 rose slightly since 2000; they increased sharply for the subset with high school or lower education.
In 2016, life expectancy at birth in the US fell for the first time in decades.
By 2013, more Americans died from drug overdoses than from either traffic fatalities or
In The Great Leveler, Walter Scheidel argues that over thousands of years, only mass violence and catastrophes have triggered significant reductions in inequality.
From the book’s introduction:
For thousands of years, civilization did not lend itself to peaceful equalization. … stability favored economic inequality. This was as true of Pharaonic Egypt as it was of Victorian England, as true of the Roman Empire as of the United States. … Four different kinds of violent ruptures have flattened inequality: mass mobilization warfare, transformative revolution, state failure, and lethal pandemics.
… there is no compelling empirical evidence to support the view that modern economic development, as such, narrows inequalities. There is no repertoire of benign means of compression that has
In another excellent post on Moneyness, J P Koning likens the monetary system to the plot in the movie Inception, featuring
a dream piled on a dream piled on a dream piled on a dream.
Koning explains that
[l]ike Inception, our monetary system is a layer upon a layer upon a layer. Anyone who withdraws cash at an ATM is ‘kicking’ back into the underlying central bank layer from the banking layer; depositing cash is like sedating oneself back into the overlying banking layer.
Monetary history a story of how these layers have evolved over time. The original bottom layer was comprised of gold and silver coins. On top this base, banks erected the banknote layer; bits of paper which could be redeemed with gold coin. The next layer to develop was the deposit layer; non-tangible book entries
In his blog A Fine Theorem, Kevin Bryan discusses the history of economic thought leading from the classical economists and Walras to Arrow and Debreu.
My read of the literature on GE following Arrow is as follows. First, the theory of general equilibrium is an incredible proof that markets can, in theory and in certain cases, work as efficiently as an all-powerful planner. That said, the three other hopes of general equilibrium theory since the days of Walras are, in fact, disproven by the work of Arrow and its followers. Market forces will not necessarily lead us toward these socially optimal equilibrium prices. Walrasian demand does not have empirical content derived from basic ordinal utility maximization. We cannot rigorously perform comparative statics on general equilibrium
In the FT (Alphaville), Marcello Minnena explains what type of currency denominations of Euro area sovereign debt constitute credit events; and how markets assess the risk of such denominations.
After the Greek default in 2012
new ISDA standards entered into force: contracts made since 2014 protect against euro area countries redenominating their debt into new national currencies [unless the debt is redenominated] into a reserve currency: the US dollar, the Canadian dollar, the British pound, the Japanese yen, or the Swiss franc. In all other cases, the only way to avoid the triggering of a credit event is if the switch to the new currency does not result in a loss for the investor: “no reduction in the rate or amount of interest, principal or premium payable”.
Since 2014 two types of
In the FT, David Pilling reports about Somalia which has managed without central bank issued money for decades.
… up to 98 per cent of local banknotes are fake … With the help of the International Monetary Fund, Mogadishu plans to print official banknotes for the first time in more than a quarter of a century … No official Somali currency has left the presses since the Horn of Africa nation descended into clan warfare after the collapse of the government in 1991.
… warlords, businessmen and breakaway regions printed counterfeit notes or shipped them in from abroad. … several important issues, including what the government would use to back its new currency, were still being discussed. So was the question of what the conversion rate would be of fake Somali shillings for the new official
A blog post on Random Critical Analysis argues that high wealth (proxied by high consumption) rather than GDP explains US health care expenditures.
Total per capita health care spending increases as wealth increases because people actually demand more goods and services (volume) per capita and because it is relatively labor intensive sector that does not enjoy the productivity gains found in some other sectors of the economy, i.e., overall costs increase through both volume and price together (volume * price). GDP per capita is a relatively weak measure for these purposes and those few other high GDP countries happen to be much more export dependent (which does not independently predict significant increases in expenditures). If you use a better measure like Actual Individual
In separate blog posts, Russ Roberts and John Cochrane have called for humility on the part of economists. Asking “What do economists know?,” Roberts and Cochrane point out—correctly—that economics is not as strong on quantification as some economists and many pseudo economists pretend, and as is often expected from economists.
Economics is not the same as applied statistics although the latter can help clarify, at least to some extent, the empirical relevance of economic theories. Correlation does not imply causation. Identifying assumptions that aim at establishing causal claims based on correlation analysis deserve skepticism, especially when the process that led to the empirical results remains in the dark (see notes on replicability here, here, here).
Sound economics heavily
In the FT, Mehreen Khan reports about the resurgence of deposit flight.Read More »
The Economist reports about the fintech revolution in China.
By just about any measure of size, China is the world’s leader in fintech (short for “financial technology”, and referring here to internet-based banking and investment). It is far and away the biggest market for digital payments, accounting for nearly half of the global total. It is dominant in online lending, occupying three-quarters of the global market. A ranking of the world’s most innovative fintech firms gave Chinese companies four of the top five slots last year. The largest Chinese fintech company, Ant Financial, has been valued at about $60bn, on a par with UBS, Switzerland’s biggest bank.
In the FT, Tim Harford (here) and Martin Sandbu (here) review Kenneth Arrow’s monumental contributions to economics.Read More »
MA course at the University of Bern.
The classes follow chapters 11–13 in this text (to be updated) and build on the material covered in chapters 1–5. Uni Bern’s official course page. The course TA is Christian Myohl.
RA model with government spending and taxes.
Government debt in RA model.
Government debt and social security in OLG model.
Consolidated government budget constraint.
Fiscal effects on inflation. Game of chicken.
FTPL. Active and passive policies.
Primal and dual approach.
Time consistent policy.
Sweden’s tabloid Aftonbladet (in English) about what happened on Friday, 17 February 2017 in Sweden (nothing extraordinary).Read More »
The IMF has released a report with an ex-post evaluation of Greece’s 2012 Extended Fund Facility (Exceptional Access under the 2012 Extended Arrangement under the Extended Fund Facility with Greece).
A critical discussion by Charles Wyplosz on VoxEU.
The Greek authorities are more optimistic than IMF staff about the economy’s outlook.
On Bank Underground, Gene Kindberg-Hanlon criticizes the secular stagnation hypothesis:
Real interest rates have fallen by around 5 percentage points since the 1980s. Many economists attribute this to “secular” trends such as a structural slowdown in global growth, changing demographics and a fall in the relative price of capital goods which will hold equilibrium rates low for a decade or more (Eggertsson et al., Summers, Rachel and Smith, and IMF). In this blog post, I argue this explanation is wrong because it’s at odds with pre-1980s experience. The 1980s were the anomaly … The decline in real rates over the 1990s and early 2000s simply reflected a return to historical norms from an unusually high starting point. Further falls since 2008 are far more plausibly related to the
Topics discussed in the report include:
Support for a “strong leader” as opposed to checks and balances has increased in many countries.
The share of households with flat or falling market incomes during the 2005-14 period has been around 65% in advanced economies, and 97% in Italy. In the preceding decade, it had been negligible.
The Eurasia Group’s top ten risks for 2017:
A weaker Merkel
Technology and the Middle East
Central banks get political
The White House vs. Silicon Valley
More than 60 percent of Americans want to keep or increase US commitments to NATO.
“Europe” could save 30% of its defense investments by cooperating more closely.
“Europe” operates many more weapon systems than the US.
The Federal Council aims at strengthening the deposit insurance system and has asked the ministry of finance to work out new rules. Banks will have to pledge securities as collateral, rather than solely contribute cash ex post. The council rejects the proposal to prefund a deposit fund.Read More »
The Economist reports that implementation gradually changes:
[T]he way in which the People’s Bank of China conducts monetary policy is changing. It is beginning to look a little more like central banks in developed economies as it shifts towards liberalised interest rates. Rather than simply ordering banks to set specific lending or deposit rates—the focus for many years in China—it is altering the monetary environment around them. China does not yet have an equivalent of the federal-funds rate in America or the refinancing rate in Europe, but it has a few candidates for its new benchmark interest rate. The seven-day bond-repurchase rate, which influences banks’ funding costs, is in pole position.
There is also an element of political intrigue in this transition to a more mature
Martin Feldstein, Ted Halstead, and Gregory Mankiw (in the New York Times), as well as George Shultz and James Baker III (in the Wall Street Journal) call for a carbon tax. John Cochrane comments on his blog.Read More »
On the FT Alphaville blog, Mark Weidemaier and Mitu Gulati argue that re-denomination risk in the Euro zone is most prominent in France and Italy. Bonds with CACs trade at higher prices.
Most French and Italian [but not Greek] debt is governed by local law. … the governments could pass legislation redenominating their bonds from euros to francs or lira.
… [But] some French and Italian bonds — bonds issued after January 1, 2013, with maturities over a year — have Collective Action Clauses (CACs). … Importantly, these CACs require a super-majority of investors (in principal amount) to approve any changes to the currency of the bond.
… But it’s also possible a local law bond is no different than a local law bond with a CAC. After all, both are ultimately subject to the whims of the local