Grasping Reality with All Six Feet: "It is important to note that effective expansionary fiscal policy requires two things:
*Lots of people need to be involuntarily unemployed--to have a productivity of zero--so that when the government hires people to do things, a substantial chunk of the people it hires do have their productivity go up by a lot. Otherwise--if there aren't a lot of involuntarily unemployed people--you are going to boost the flow of nominal spending but not production (or employment).
*The bonds that the government sells to finance its hiring program need to have only a small effect on interest rates--if they have a large effect on interest rates, then private businesses that were hiring people to expand their productive capacity will lay them off, their productivity will drop to zero, and we won't have gotten anywhere."
Tuesday, February 23, 2010
Sunday, February 14, 2010
Economist's View: "The Invincible Markets Hypothesis"
Economist's View: "The Invincible Markets Hypothesis": "There are two versions of the efficient markets hypothesis, a strong version and a weak version. According to the strong version prices accurately reflect the underlying intrinsic value of financial assets, but the weak version only requires that prices be unpredictable, they don't have to accurately reflect fundamental values.
The strong version is, well, too strong and it seems clear that this condition is not satisfied in asset markets, at least not on a continuous basis. The weak version, however, does have support (though even here there is not universal agreement). The distinction between the strong and weak versions, and the assertion that the weak version holds even if the strong version does not, is often used as a defense of the efficient markets hypothesis.
Rajiv Sethi asks a good question. If the strong version of the efficient markets hypothesis does not hold, in what sense does satisfying the weaker form constitute 'efficiency'? He argues that 'it makes little sense to say that markets are efficient, even if they are essentially unpredictable in the short run. In light of this, he proposes a new name for the weak form of the hypothesis:"
The strong version is, well, too strong and it seems clear that this condition is not satisfied in asset markets, at least not on a continuous basis. The weak version, however, does have support (though even here there is not universal agreement). The distinction between the strong and weak versions, and the assertion that the weak version holds even if the strong version does not, is often used as a defense of the efficient markets hypothesis.
Rajiv Sethi asks a good question. If the strong version of the efficient markets hypothesis does not hold, in what sense does satisfying the weaker form constitute 'efficiency'? He argues that 'it makes little sense to say that markets are efficient, even if they are essentially unpredictable in the short run. In light of this, he proposes a new name for the weak form of the hypothesis:"
Thursday, February 4, 2010
Macroeconomic effects of Chinese mercantilism - Paul Krugman Blog - NYTimes.com
Macroeconomic effects of Chinese mercantilism - Paul Krugman Blog - NYTimes.com: "For something I’m working on: we know that China is pursuing a mercantilist policy: keeping the renminbi weak through a combination of capital controls and intervention, leading to trade surpluses and capital exports in a country that might well be a natural capital importer. We also know, or should know, that this amounts to a beggar-thy-neighbor policy — or, more accurately, a beggar-everyone but yourself policy — when the world’s major economies are in a liquidity trap.
But how big is the impact? Here’s a quick back-of-the-envelope assessment.
Start with the Chinese surplus. It has been temporarily depressed by the world trade collapse, but seems to be on the rise again. Blanchard and Milesi-Ferretti, at the IMF but speaking for themselves, project a Chinese current account surplus for 2010-2014 of 0.9 percent of gross world product.
You can think of this as a negative shock to rest-of-world net exports. (Technically, that’s not quite correct — because the shock depresses res-of-world GDP and hence rest-of-world imports from China, the realized trade surplus is smaller than the shock. But that’s a small correction.)
In turn, this negative shock is like a negative shock to government purchases of goods and services. So it should have a similar multiplier. Multiplier estimates are all over the place, but tend to cluster around 1.5. So we’re looking at a negative impact on gross world product of around 1.4 percent. Not huge — China isn’t the principal obstacle to recovery — but significant.
And, if we think of the United States as bearing a proportionate share, and also use the rule of thumb that one point of GDP = 1 million jobs, we’re looking at 1.4 million U.S. jobs lost due to Chinese mercantilism."
But how big is the impact? Here’s a quick back-of-the-envelope assessment.
Start with the Chinese surplus. It has been temporarily depressed by the world trade collapse, but seems to be on the rise again. Blanchard and Milesi-Ferretti, at the IMF but speaking for themselves, project a Chinese current account surplus for 2010-2014 of 0.9 percent of gross world product.
You can think of this as a negative shock to rest-of-world net exports. (Technically, that’s not quite correct — because the shock depresses res-of-world GDP and hence rest-of-world imports from China, the realized trade surplus is smaller than the shock. But that’s a small correction.)
In turn, this negative shock is like a negative shock to government purchases of goods and services. So it should have a similar multiplier. Multiplier estimates are all over the place, but tend to cluster around 1.5. So we’re looking at a negative impact on gross world product of around 1.4 percent. Not huge — China isn’t the principal obstacle to recovery — but significant.
And, if we think of the United States as bearing a proportionate share, and also use the rule of thumb that one point of GDP = 1 million jobs, we’re looking at 1.4 million U.S. jobs lost due to Chinese mercantilism."
Wednesday, February 3, 2010
What Happened to the Phillips Curve?
What Happened to the Phillips Curve?: "truth be told, the Phillips Curve has not worked well outside
America. Economists Doug Staiger, Mark Watson, and Jim Stock pointed out in the _Journal of Economic Perspectives_ that even in the United States the Phillips Curve relationship was never as strong or as good at forecasting inflation as was taught in intermediate macroeconomics. And only in the United States has there been a relatively stable natural rate of unemployment to serve as a reliable indicator of when demand pressure is about to raise inflation. Elsewhere the causes of rising inflation have
always been too complex to be summarized by simply comparing unemployment to even a semi-stable 'natural rate.'
Thus perhaps the surprising thing is not that Phillips Curve-based
forecasts of inflation have gone awry in the past half decade. Perhaps the surprising thing is that the complicated economic processes determining changes in inflation could be summarized for so long by such a simple relationship as the standard Phillips Curve. In any event one thing is very clear: the simple theory of the relation between inflation and unemployment that economists have peddled for a quarter century no longer works; if economists are to be of any use, they need to come up with a better - and in all likelihood more sophisticated - approach to understanding why inflation rises."
America. Economists Doug Staiger, Mark Watson, and Jim Stock pointed out in the _Journal of Economic Perspectives_ that even in the United States the Phillips Curve relationship was never as strong or as good at forecasting inflation as was taught in intermediate macroeconomics. And only in the United States has there been a relatively stable natural rate of unemployment to serve as a reliable indicator of when demand pressure is about to raise inflation. Elsewhere the causes of rising inflation have
always been too complex to be summarized by simply comparing unemployment to even a semi-stable 'natural rate.'
Thus perhaps the surprising thing is not that Phillips Curve-based
forecasts of inflation have gone awry in the past half decade. Perhaps the surprising thing is that the complicated economic processes determining changes in inflation could be summarized for so long by such a simple relationship as the standard Phillips Curve. In any event one thing is very clear: the simple theory of the relation between inflation and unemployment that economists have peddled for a quarter century no longer works; if economists are to be of any use, they need to come up with a better - and in all likelihood more sophisticated - approach to understanding why inflation rises."
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