Tuesday, October 2, 2012

Assorted Musings

Here are some assorted musings:

1.  I owe Fed chairman Ben Bernanke an apology.  Based on David Wessel's book, Larry Ball's paper, and the inconsistencies between Bernanke's old and new work, I was convinced that Bernanke was being too nice of a guy at the Fed.   Jon Hilsenrath, however, shows in a recent piece that I was wrong.  Bernanke, in his own way, manned up and convinced the FOMC to do QE3.  Yes, a few years too late and not quite a a NGDP level target, but it is a start.  Bernanke now needs to finish his job by convincing the FOMC to now adopt a NGDP level target.  See Matt O'Brien for more on how Bernanke transformed the FOMC.

2. Matt Yglesias reminds us that the Reserve Bank of Australia is probably the best central bank in the world.  Australia has not had a recession in over 20 years, an outcome Yglesias attributes to sound monetary policy. A related question that has vexed me is how Australia has been able to run almost 60 years of current account deficits. Josh Hendrickson thinks that given the relatively stable macroeconomic environment in Australia, foreigner investors have come to view the Australian dollar as a reserve currency of sorts and are glad to hold Aussie assets.  What do you think?

3.  Apparently many observers, like CNBC's Rick Santelli, were upset that Ben Bernanke claimed in  a recent Q&A that Milton Friedman would endorse his views.  Joe Weisenthal reports:
[Bernanke] pointed out that Friedman advocated QE for Japan during its struggle against deflation and weak growth. He also recalled one of  Friedman's most important lessons, that low interest rates...Bernanke said specifically, when citing the lesson of Milton Friedman: "We didn't allow the fact that interest rates were very low to fool us into thinking that monetary policy was accommodative enough."
As I have noted before, Milton Friedman probably would have advocated systematic, rules-based polices that would have restored aggregate nominal income to its pre-crisis path. 

4.  Andy Harless explains that the Fed is the one institution that could meaningfully respond to the worst case outcome for the fiscal cliff:  
[I]t’s hard to think of any feasible monetary policy action that would both be strong enough and have a sufficiently quick impact to offset the fiscal cliff directly.  But what matters more for monetary policy is not the direct effect but the effect on expectations.  Surely the Fed could alter expectations of future monetary policy in such a way that the resulting increase in private spending would be enough to offset the decreased spending due to fiscal tightening. 
He goes on to argue that the Fed adopting a NGDP level target that aims to put nominal spending back on its pre-crisis path would be just such a policy.  However, he is not hopeful it will happen.  Scott Sumner agrees.  This discussion highlights the Fed's ability to offset adverse fiscal policy shocks.  It is also highlights why it is hard to measure the size of the fiscal policy multiplier if the Fed is offsetting such fiscal policy shocks.  However, if Harless is correct, we will have a natural experiment of sorts later this year that will allow us to get a better glimpse of the size of the fiscal policy multiplier.

6 comments:

  1. David
    Australia´s CA deficit has been going on for much longer, more like 150 years, being quite high at times!

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    1. That is simply amazing! Your thoughts on it? I think I am coming around to Josh's point. Just like the US is a bank to the world, it makes sense that Australia is regional financial intermediary whose assets are valued by its neighbors.

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  2. Australia is hardly a reserve currency -- if it was, you would have expected it to appreciate or hold its forex value during the 2008 crisis the same way the major reserve currencies (dollar, euro, yen). Instead it fell alongside the other minor currencies like the Swedish krona, Canadian dollar etc.

    Australia's advantage in avoiding recession is precisely because it is not a major reserve currency and therefore monetary policy can address the domestic economy with little influence for international money flows. This in unlike the United States, where a great deal of international financial capital is domiciled and foreign holdings are a large source of U.S. dollar demand.

    Also, if I'm not mistaken, the long running Australian CA deficit is more concentrated in Australian real estate holdings than in financial assets (when compared to the US CA deficit) and is greatly tied to the nation's historic relationship to the UK.

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  3. TheNumeraire, do you have some references on the long-running Australian CA deficit?

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    1. David
      Here´s one
      http://www.rba.gov.au/publications/rdp/2007/pdf/rdp2007-02.pdf

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  4. Prior to WWI, the US mostly ran current account deficits too. It means you are a capital importer, obviously. But if the imported capital is well invested so the entire asset base (and thus income) grows, why could not one be a capital importer indefinitely? On similar reasoning to Evsey Domar's 1944 article on fiscal deficits.

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