Topic 6


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Covered in the 621 course: Topic 6: Monetary policy in the US

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Topic 6

  1. 1. htpp://econ621.wordpress.comECON621Topic 6Policies to improve competitiveness anddevelopment
  2. 2. htpp://econ621.wordpress.comIntroduction• One big hairball of risk (an institutional crisis?): • China • Europe • The US is the most perplexing • The comeback kid? • Or heading for a growth-destroying fiscal cliff?• Only the Fed can do more. • Can they, should they? • "open mouth operations"? • This weekend Bernanke is at Jackson Hole…
  3. 3. htpp://econ621.wordpress.comThe US economy• Backsliding since March, deleveraging continues.• Growth is slow, or slowing.• Employment growth is slow and unemployment high.
  4. 4. htpp://econ621.wordpress.comThe latest numbers• Chicago purchasing managers index (PMI) rose slightly.• National factory orders have been rising 2.5% in July.• The S& P/Case-Shiller home prices index rose in the second quarter.• The National Association of Realtors pending home sales index at a 2-year peak.• The Conference Boards August consumer confidence index declined in August.• Revised gross domestic product (GDP) figures show that the economy expanded at an annualised rate of 1.7% in the second quarter.• And some expectations: Weekly jobs claims flat at 370 000, Julys personal incomes rising 0.3% and consumer spending rising 0.5% in July.
  5. 5. htpp://econ621.wordpress.comThen there is the fiscal cliff• It is a fiscal policy story: • Bush-era tax cuts are set to expire in January, and • Automatic spending cuts are due in December – part of the 2011 debt ceiling deal.• This would push the US into recession.• Even if the cliff is avoided, there is still a clifflet: • the expiration of the payroll tax cut, • the expiration of extended unemployment insurance benefits, • imposition of a new 3.8% Medicare investment tax on the wealthy.• ISI Group projects $220 billion of fiscal tightening in 2013, or 1.4% of GDP.• JPMorgan, puts the hit at a slightly higher $266 billion, or 1.7% of GDP.
  6. 6. htpp://econ621.wordpress.comThe viewsDeLong has "been arguing for four years that our business-cycle problems call for moreaggressively expansionary monetary and fiscal policies, and that our biggest problemswould quickly melt away were such policies to be adopted. That is still true. But, overthe next two years, barring a sudden and unexpected interruption of current trends, itwill become less true.The current balance of probabilities is that two years from now, the North Atlantic’sprincipal labor-market failures will not be demand-side market failures that could beeasily remedied by more aggressive policies to boost economic activity andemployment. Rather, they will be structural market failures of participation that are notamenable to any straightforward and easily implemented cure".
  7. 7. htpp://econ621.wordpress.comCan / should the Fed do more?• What do we mean "do more"?• How would they "do it"?• Will it work?• Should they do it?
  8. 8. htpp://econ621.wordpress.comMore…• Monetary stimulus.• Demand-siders, like Krugman, sees the slump as being caused by inadequate spending: thanks largely to the overhang of debt from the bubble years, aggregate demand fell, pushing the US into a classic liquidity trap.• Stimulus should increase investment, (also in housing), consumer spending.• a higher general inflation ratefacilitates relative priceadjustments
  9. 9. htpp://econ621.wordpress.comHow to do it…• The aim would be to keeplong-run rates low: • Open-ended QE3• Ryan Avent makes the casefor "inflation targeting plus" • NGDP targeting • Conditional inflation targeting.• The key is to set benchmarks for the stabilisation process and set expectations for which policy levers will be used to push the economy toward the benchmark. • "the easiest way to accomplish that will often be to convince everyone that theyre serious about coordinating expectations for stable demand growth".
  10. 10. htpp://econ621.wordpress.comWill it work…• It will depend on the actions of consumers and markets.• And to the extent that there is in fact, already, a liquidity trap.• Some argue: • Since bond yields are already at record lows, could it be that Fed officials have concluded that the only transmission mechanism they have left between monetary policy and the economy is the stock market? • With QE2: “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. … And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending."
  11. 11. htpp://econ621.wordpress.comBut not everyone agrees• But many people insist that the slump was actually some kind of supply shock instead. • Either they have an Austrian story in which the economy’s productive capacity was undermined by bad investments in the boom, • or they claim that Obama’s high taxes and regulation had undermined the incentive to work.• Their fear is that monetary stimulus will fuel inflation – leading to hyperinflation. • (Have a look at the blogs and tweets of Zerohedge, or in SA: Chris L Becker, Russell Lamberti and the Mises blog.)
  12. 12. htpp://econ621.wordpress.comBut…• Even with substantial QE, there has not been much inflation.• "If we’d had 2% inflation over the past 4 years, I believe the recession would have been far milder. I don’t favor a 2% target, but we aren’t failing because the Fed is targeting inflation at 2%, we are failing because they are running 1.1% inflation at a time when the dual mandate and the Taylor Principle suggest they should be temporarily overshooting their 2% flexible inflation target."
  13. 13. htpp://econ621.wordpress.comConclusions• These are interesting times.• Keep an eye on the news this weekend to see what happens at Jackson Hole.• And remember, what happens in the US are linked to what happens in the EU and China.• Next week: • The International Trade students take a road trip. • The rest of us have a class debate: This house holds that the banks caused the Financial crisis and should be held accountable The Prof takes all comers.