## Wednesday, September 17, 2014

### Notable pictures: Dissent (or lack therof) within the FOMC

What explains dissent within the FOMC? Daniel Thornton and David Wheelock contribute a fascinating research note (pdf) to this quarter's issue of the Federal Reserve Bank of St. Louis Review. (A 2013 article by Mark Wynne at the Dallas Fed also touches on dissent and FOMC communications.)

A few highlights (selection and emphasis mine):

1) Ninety-four percent of all votes by FOMC members were cast in favor of the policy directive adopted by the Committee.

2) There have been relatively few dissents since the early 1990s.

3) Since 1936 overall dissents are roughly evenly split between presidents and governors (215 were issued by presidents of the regional Federal Reserve banks, and 194 by members of the Board of Governors). But since 2006, all of the dissents have been issued by presidents of the regional Federal Reserve banks, and none by governors. Moreover, since 1994, only four dissents were issued by governors, and about 70* by presidents (see chart below).

In Thornton and Wheelock's research note, the bit of statistical analysis focuses on the relationship between the dissent rate and inflation and unemployment. And in the note's introductory paragraphs, the authors say that, trying to explain the variation of dissent rates over time:
Our study suggests two main reasons for such variations: (i) differences in macroeconomic conditions and (ii) the level of disagreement among the Committee members about how to judge the stance of policy and how best to achieve the Committee’s ultimate objectives.
When I read the note, however, I get a feeling that institutional factors are behind the lion's share of those variations. The way the FOMC operates has changed dramatically over the decades. Let me show you a few examples, with quotes from the research note itself:

1930s and 1940s: The Fed cooperates with the Treasury

There were only a handful of dissents during FOMC policy votes between 1936 and 1956, all of which occurred between 1938 and 1940. 5 During World War II, the Federal Reserve pledged to cooperate fully with the Treasury Department to finance the war effort.

1950-1955: The executive committee

Federal spending and budget deficits increased when the Korean War began in 1950. Inflation began to rise and the Fed found it increasingly difficult to prevent interest rates from rising. With the support of key members of Congress, the Fed successfully negotiated an agreement with the Treasury Department, known as the Fed-Treasury Accord, in March 1951.

[...]

Differences among FOMC members soon arose over how to implement monetary policy to achieve the Committee’s macroeconomic objectives. However, until 1957, no member ever dissented on a policy vote. The absence of dissents in the early post-Accord years may have reflected, at least in part, how the Committee was organized and the nature of the policy directives issued by the Committee. The Banking Act of 1935 required the FOMC to meet at least four times per year. At that time, directives issued by the full Committee were vaguely worded statements that members may have found little to disagree with. An executive committee consisting of the Chairman and Vice Chairman and three other members met biweekly to issue operating instructions to the manager of the Open Market Desk at the New York Fed. Presumably, those instructions were in line with the desires of the full Committee.
1956-...: Full committee
FOMC procedures changed in 1955. In that year, the FOMC voted to abolish the executive committee and to meet more frequently—every three to four weeks, instead of just once per quarter. Beginning in 1956, at each meeting the full Committee voted on the operating directive to the manager of the Open Market Account, resulting in about 18 policy votes per year instead of the usual four votes in preceding years. The FOMC maintained this schedule until the early 1980s, when the number of scheduled meetings was reduced to eight per year.
1978-2000: Money stock targets
In 1977, the FOMC began to set annual targets for the growth rates of various money stock measures. Although the Committee’s operating directives continued to express policy in terms of money market conditions, they also specified the Committee’s long-run objectives and near-term expectations for growth of the monetary aggregates and an “operational objective” for the federal funds rate, which was usually a range of either 50 or 75 basis points.

[...]

The explanation given for dissenting votes in FOMC records indicates that dissenters sometimes disagreed with the Committee’s chosen growth rate targets for monetary aggregates, the tolerance range for money market conditions or the funds rate, or some other element of the broader directive.
1983-...: Forward guidance
In 1983, the FOMC began to include information in the directive about the likely direction of future changes in policy. Subsequently, some dissents were against the signaling statement rather than the current policy stance.
Unconventional policy
The frequency of dissents has at times been associated with the use of unconventional policy measures. For example, in the early 1960s, the FOMC abandoned its long-standing policy of conducting open market operations solely in Treasury bills. Some members opposed the move, as well as explicit efforts to simultaneously lower long-term interest rates while raising short-term rates—a policy sometimes referred to as “Operation Twist.”More recently, after the FOMC lowered its target for the federal funds rate to the zero lower bound in 2008, some members expressed skepticism about the use of certain unconventional policy measures, including “credit easing,” “forward guidance,” and “maturity extension programs” to ease monetary conditions further.

Explaining the break in the early 1990s

Another institutional change is the publication of the votes of the individual members of the FOMC--and this change might help explain the decline of dissent after the early 1990s, and the stark difference in the dissent rate between governors and presidents, also after the early 1990s.

I'm no expert on the institutional details of the FOMC, but I do know that the Fed started issuing statements announcing the outcomes of its meetings in February 1994. Prior to that, when the committee changed the monetary policy stance, it didn't announce it to the public. Instead, market participants had to figure out the change in stance by watching what the open markets desk did in securities markets after a meeting.

On February 4, 1994, under Greenspan, the FOMC issued its first statement. The statement consisted of three terse paragraphs, and it didn't identify who voted for or against the FOMC decision. Starting. however, with the meeting of May 17 of that year, the statement disclosed which presidents had submitted requests for a change to the discount rate, which at the time was a main operational target of the FOMC. For example, that month the statement revealed that the Board of Directors of the Cleveland Fed had not requested to raise the discount rate, whereas the other eleven regional banks had done so. That was, then, the first time the FOMC had published any hint of internal dissent immediately after a meeting.

On March 19, 2002, the FOMC started including in its immediate announcements the roll call of the vote on the FOMC decision, including the identities and preferences of dissenters, which I believe has been the custom ever since.

Could this increased transparency on the FOMC's internal disagreements explain (1) the decline of dissenting votes since the early 1990s, and (2) the almost total consensus among governors? Thornton and Wheelock themselves offer a hint to an explanation:
District Bank presidents are appointed by their local boards of directors (with approval by the Board of Governors), and Federal Reserve governors are appointed by the president of the United States and confirmed by the Senate. Some researchers argue that governors are thus more responsive to the desires of politicians (who must consider reelection)...
Thornton and Wheelock point to this institutional feature to suggest why presidents are more hawkish than governors. But I think the difference in how presidents and governors are appointed affects their incentives to dissent publicly. Governors (who face reelection by Washington) may be less willing to dissent if disagreement is frowned upon by politicians--who face an asymmetric information problem when assessing the performance of the governors. The regional presidents, on the other hand, might be closer to their boards of directors than governors are to politicians, or perhaps the regional boards of directors are more knowledgeable about monetary policy than Washington politicians are, reducing the information asymmetry between appointee and "appointer."

A second difference between governors and presidents is that the former are appointed for 14-year terms, throughout which they get to vote at the FOMC meetings. Governors have a lot at stake if they ruffle feathers often, or if they're perceived as "eccentric" or "self-centered". The regional presidents, on the other hand, vote at the meetings for just one year, after which they're replaced in the rotation by the president of a different regional bank. (Except for the New York Fed president, who always votes.)

A slightly different answer is that this consensus among governors is an endogenous response to the increased transparency about dissent: Governors not only say they agree more with each other, but genuinely agree more with each other. Fear of "sticking out one's neck" publicly might persuade governors to listen more to each other and to the chairman, which results in less dissent. This hypothesis begs the question of why the regional presidents, who aren't based in DC, don't try as hard as the governors to communicate with other FOMC members between meetings--unless you buy my previous hypotheses on varying costs of dissent.

All these hypotheses, however, require a measure of inattention, as the minutes have always disclosed dissent, but they're published weeks after the meeting.

*I don't have the dataset, so I'm reading off the charts on the research note.

## Friday, September 5, 2014

### Inflation in the eurozone: goods versus services

Giulio Zanella (hat tip to John Cochrane) writes a post suggesting that Italy’s deflation is mostly imported. He supports his idea with two observations. First, the price index of goods has declined, but the price index of services has increased (coincidentally, by the same percentage). Second, among goods, those whose price has declined are: unprocessed food, energy, tobacco, and consumer durables. The first three have in common, Zanella says, that they’re traded in global commodity markets.

Assume that goods are tradable in international markets, whereas services are non-tradable—a good approximation for a country like Italy, Zanella says. Then, he concludes, the origin of Italy’s deflation is international and on the supply side, whereas the contribution of weak domestic demand is “modest.”

In this post I look at the questions of whether eurozone deflation is really “imported,” and of how big the deflation threat is.

For the currency area as a whole, disinflation is a lot faster for energy and unprocessed food than for the other components of the HICP:

Within the “core” inflation rate, durable and semi-durable non-energy goods are in outright deflation, whereas non-durable goods are not:

The identification of the tradable component of the HICP with goods, and the non-tradable component with services is not accurate, but I’ll accept it for the sake of simplicity. (After all, the main drivers of services inflation should be domestic factors.) Extending this simplification to prices, goods deflation is “imported,” whereas services deflation is “homegrown.”

The distinction is important, among other things, because the optimal monetary policy response depends on the type of deflation. If deflation is imported, the ECB should do nothing, because commodity prices and the exchange rate are outside the set of things it can (or wants to) control. Let’s look, then, at the split of the HICP between goods and services.

The sub-index for all goods was falling at an annual rate of 0.3% as of July, whereas the price index of the basket of services was increasing 1.2%:

(Goods account for about 57.2% of the eurozone-wide HICP, and services for 42.8%.)

Services inflation appeared to be declining from 2011 up until April 2013, and since then it’s been more or less flat around 1.2% (to zoom in, adjust the dates on the chart above).

It appears, then, that a large part of the eurozone’s current disinflation might be “imported.” Another, smaller part of this disinflation is “homegrown,” but it doesn’t seem to be getting worse.

What’s the evidence across countries?

Goods inflation has declined in every single of the 15 countries I consider*. In all but two countries, prices are falling outright.

Services inflation has declined overall, but slightly (from 1.4% in July 2013 to 1.2% one year later). In five countries services inflation rose: Belgium, Ireland, France, Portugal, and Finland. In one country, Greece, deflation became less pronounced. In two countries, Germany and Austria, the services inflation rate didn’t change. And in the remaining six countries inflation declined: Estonia, Spain, Netherlands, Italy, Slovakia, and Slovenia.

So far, then, I’d say the jury is still out on whether disinflation, for services, is continuing.

Clemente De Lucia, economist at BNP Paribas, just published a research note taking a deep look at services inflation. This is what I see, from the first section of his note (“Inflation decomposition”):

1. Services inflation in core countries (Netherlands, Austria, Luxembourg, Belgium, Finland, Germany, France) is higher than in periphery countries (Greece, Spain, Portugal, Ireland, Italy). In the “core” region, services inflation shows no apparent trend since early 2011, whereas in the “periphery” services inflation has been roughly flat since late 2013:

 Source: Clemente De Lucia (BNP Paribas), July-August 2014.
De Lucia mentions how, in the core, the current inflation rate is “slightly below its historical average,” and that in Germany and the Netherlands the services inflation rate is below the eurozone aggregate (although barely so):

 Source: Clemente De Lucia (BNP Paribas), July-August 2014.

2. "Lowflation” is spreading across services sub-categories, but deflation is less pervasive. To gauge the diffusion of disinflation and deflation, De Lucia looks at the percentage of the 39 sub-components of the services HICP that had an inflation rate between 1% and 2%, between 0% and 1%, and below 0%.

For the eurozone as a whole, the share of services sub-categories with inflation between 1% and 2% has shot up, but the share of services in deflation has declined (from a percentage that was never higher than 20%):

 Source: Clemente De Lucia (BNP Paribas), July-August 2014.
The evidence by country varies. De Lucia focuses on the total proportion of services sub-categories with inflation below 2%. That statistic is rising, De Lucia notes, in Spain, Portugal, Greece, Netherlands, and France. From that he concludes that deflationary pressure is mounting in those countries.

(Beware that, in those charts, the three categories are nested. That is, the category of "below 2% inflation" includes the category of "below 1%" inflation, and so forth. I checked.)

De Lucia's data end in May 2014. I gathered my own data to see what's happened over the past 12 months, for the eurozone aggregate. The proportion of service categories with inflation below 2% reached a maximum in February (70%), and has declined since then. The diffusion of deflation reached 18% in December 2013, and has fallen to about 5% in July.

It will be interesting to see a breakdown by country. So far, though, I'm not convinced that "domestic deflationary pressures" are mounting.

One interpretation of the ECB’s recent policies is that the bank is not reacting to today’s decline in the price of goods. Most of that is due to past declines in commodity prices—which the ECB has no control over— and to the past rise of the exchange rate—which the ECB doesn’t target. The ECB, instead, is reacting to the disinflation of services, and the risk (or expectation?) that it might turn into outright deflation. How serious is that threat?

Based on the (admittedly backward-looking) evidence surveyed here, the risk of "homegrown" deflation is there, but it's not increasing, imminent, or pervasive across countries. (De Lucia’s note continues with a promising, long section on inflation expectations, which I haven’t had time to read yet.)

A different interpretation is that the ECB sees deflation in goods as a problem it can solve—through the exchange rate. The euro appreciated steeply, through May, and that has driven the euro price of commodities lower. The new policies might be aimed at depreciation.

But that will have to wait for another blog.

*For visual clarity, I removed from the chart the three smallest members of the eurozone: Cyprus, Malta, and Luxembourg.

## Thursday, September 4, 2014

### Why QE might be a bad idea for the eurozone

Michael Heise, chief economist at Allianz, is against (FT) quantitative easing by the ECB. He thinks the ECB shouldn't go down the QE route, because:

First, the recent low inflation rates are in part a result of the decline in oil and other commodity prices. They also reflect necessary adjustments in the eurozone periphery. [...] There is no sign of a vicious circle of falling inflation expectations and consumer restraint. Inflation rates will gradually climb again as the economy recovers.

Second, although the ECB has several options when it comes to implementing QE, there are serious objections to all of them. Buying asset-backed securities or corporate bonds would expose the European taxpayer to credit risk.

[...]

Third, the impact of further monetary easing on output and price levels would be negligible. That is because the recession in many parts of the eurozone is caused by the hobbling effect of the unsustainable amounts of debt that were built up by public and private actors during the boom years. Over-indebted households and companies are unlikely to pile up more debt; on the contrary, they are trying to pay it down. This makes monetary policy ineffective.

Fourth, the collateral damage from ultra-loose monetary policy is accumulating. Risks to financial stability are growing as investors are piling into riskier assets in search of higher returns. Already, some assets such as junk bonds are trading at what look like inflated prices.

Fifth, further monetary easing would delay the much-needed adjustments in the balance sheets of European banks and companies. An abundance of cost-free liquidity from the central bank enables commercial lenders to continue propping up weak creditors.
Of those, I agree most with #1. A breakdown of the eurozone's consumer price index suggests that a good chunk of Europe's deflationary pressure is "imported," showing up in the price index of goods with a high component of commodities. The price index of services, on the other hand, many of which are non-tradable, doesn't indicate deflation. (More on this soon.) Yes, demand is weak, and the private sector is deleveraging, but a lot of the "deflation" problem has to do with declining prices of globally traded goods, and the appreciation of the euro between 2012 and 2014, which only started to reverse itself in May.

Of the other reasons offered by Heise, I agree with #4. I'm sympathetic with #3 (further easing will be ineffective), but I stress a different obstacle: banks are under pressure to clean up their balance sheets. In that sense, European policy is schizophrenic. On one hand, the ECB is trying to encourage more lending; on the other, regulators tell banks to improve their equity ratios.

## Friday, August 29, 2014

### The financial cycle*

“Macroeconomics without the financial cycle is like Hamlet without the prince,” says Claudio Borio, Head of the Economic and Monetary Department of the Bank for International Settlements in Basel. Borio has long argued that the business cycle alone can’t explain some features of expansions and recessions. The Great Depression and the prolonged decline of Japan in the 2000s were unusual because financial factors were at play. Likewise, to understand the poor growth of advanced economies since 2007 one must look at the interaction between asset prices, debt, and the real economy. Borio and the BIS have lead this research agenda, tracing the links between financial and business cycles.

The “financial cycle” isn’t a new idea, of course. Hyman Minsky and Arthur Kindleberger became well-known for their work on credit cycles and market manias. Michael Bordo, Guillermo Calvo, Gary Gorton, and Carmen Reinhart, to name just a few, all had done important research on financial vulnerabilities by the early 2000s. Franklin Allen and Douglas Gale did the work for their book “Understanding financial crises” well before 2007.

But, for the best part of the 20th century, mainstream macro models didn’t integrate the financial sector, as Calvo (2013) recounts beautifully. Financial capital in those models was allocated, without a hiccup, in aseptic markets. Most models ignored banks altogether. Only after the earthquake of 2008-2009 have economists rediscovered the role of financial factors in macroeconomics. Today the economics department of every major bank tracks macro-financial risks.

BIS updates are required reading if you want to keep an eye on the global financial cycle. This year’s Annual Report includes a riveting chapter on it, based on Borio’s research, which forms the basis for this column.

What is the financial cycle?

What is this “financial cycle” anyways? There’s no set definition, but for Borio it stands for medium-term fluctuations in financial variables. Those fluctuations come with “self-reinforcing interactions between perceptions of value and risk, attitudes toward risk, and financing constraints, which translate into booms followed by busts” (Borio (2012)).

In plainer English: Rapid increases in credit lift property prices, which in turn increase the value of collateral and thus potential credit. The rising supply of credit relaxes financing constraints, whereas higher property prices change how investors perceive value and risk. Those interactions aggravate swings of real variables (output, profits, employment, etc.), and distort how capital spending is allocated across industries. The cycle usually ends in financial distress or even a crisis. Asset values plunge, and borrowers reduce their leverage, until the expected return on capital rises enough to lure investors back in.

Five features of the financial cycle stand out. First, it’s much slower than the business cycle. Two or three recessions typically go by, over 15 to 20 years, before a full financial cycle is through. Drehmann, Borio, and Katsaronis (2012), studying seven mature economies between 1960 and 2011, find that the average cycle lasted 16 years. The United Kingdom, for instance, experienced only three financial peaks in that period (in 1973, 1991, and 2009).

The second feature is that peaks in the financial cycle are typically followed by systemic financial stress. After many years of rising asset prices and growing debt, asset values are out of kilter with fundamentals. If a shock then makes credit contract, or leads investors to reassess value and risk, the value of collateral plummets and borrowers can’t service their debt. Severe distress or an outright banking crisis follows.

The third feature —and a direct result of the second— is that recessions are deeper when they coincide with the contraction phase of the financial cycle. Drehmann, Borio, and Katsaronis (2012) find that, on average, gross domestic product drops 50% more than in regular recessions (-3.4% versus -2.2%).

Fourth, the length and amplitude of the financial cycle depend on background conditions. For instance, a lightly regulated financial industry eases financial constraints, which speeds up the loop between investors’ views on value and risk, risk tolerance, and funding conditions. Similarly, if monetary authorities put the emphasis on reigning short-term inflation, interest rates will be too low when financial booms develop in a low-inflation environment. As another example, globalization may have made potential output seem higher, and inflation lower, than their sustainable levels, stoking credit growth and asset prices.

Fifth, and last, financial cycles are often in sync. That’s because common factors drive cycles across countries. Financial capital moves across borders, equalizing risk premia and funding conditions. As a result, financial crises happen in groups. Lowering barriers to foreign investment has only intensified this clustering.

Where are we now?

Where are we in the financial cycle? To trace its path, Borio and his colleagues use the medium-term co-movement of three things: credit to the non-financial sector, the credit-to-GDP ratio, and real housing prices. The medium-term component is extracted from each individual series using a technique called bandpass filtering, which removes fluctuations with a frequency shorter than 8 years, or longer than 30. Then a simple average rolls the three filtered series into one.

Using data through 2013, the BIS Annual Report finds that countries are at different stages (see Figure 1). Southern Europe is in the downswing phase of the cycle. In that region –Spain, Portugal, Italy, and Greece— the global recession was the preamble to the 2010 sovereign debt crisis, when the cycle peaked (a little earlier in Greece). In 2014 I see that real property prices and credit are still falling, but at decreasing rates.

Figure 1
Source: Figure IV.I from the 84th Annual BIS report. Data (xlsx).

Credit and property prices in the United States and the United Kingdom bottomed out recently, and are now clearly recovering. Japan is on the rising phase too, but its current cycle began in 2005. Much further ahead in the expansion are Canada and Australia, where the financial cycle merely took a pause in 2007-2009. Switzerland is in a “boom.”

Clearly booming as well are some emerging markets (EMs): China, Brazil, Turkey, and Asia-Pacific. (Asia-Pacific here includes: Hong Kong, Indonesia, Malaysia, Philippines, Singapore, and Thailand. The report doesn’t include Latin American countries, other than Brazil.) In those countries the current financial cycle started in the early 2000s, after the Asian financial crisis. The cycle continues today, briefly interrupted by the fallout from the 2008-2009 crisis.

In the U.S., U.K., and other countries where the cycle peaked in 2007, monetary easing cushioned the fall. In countries , on the other hand, that didn’t have a financial crisis, the surge of global liquidity has catapulted borrowing and housing values. And, almost everywhere, low interest rates have inflated equity prices and raised risk tolerance. Monetary stimulus is not a free lunch.

What might kill those booms? Rising interest rates are a prime concern, as seen in the summer of 2013. India, Indonesia, Brazil, and a few other EMs had a mini-crisis on the mere possibility the Federal Reserve would begin tapering asset purchases. In 2015, both the Fed and the Bank of England will likely raise policy rates, although they will loudly telegraph the move well before it happens.

Another worry is a sharp fall of income. That would make debt more difficult to service. Commodity exporters nearing boom-like conditions—Australia, Canada, Norway, Latin America—would be at risk of a financial crisis if China’s demand slowed down quickly.

One more source of fragility, as the BIS report says, is the clout of asset managers. Large investment funds account for a significant share of all EM assets. Even a small reallocation of their portfolios can trigger large price swings. The rise of indexed products makes this matter worse. Also, the shift towards exchange-traded funds (ETF) may have made the market more volatile, as more and more investors view EM ETFs as liquid, short-term positions (Figure 2).

Figure 2
Source: Figure IV.6 from the 84th Annual BIS report. Data (xlsx).

Timing the market is just as difficult as forecasting the peak of the financial cycle. Early warning signals exist, but no dashboard is infallible. Most predictions of financial downturns come months or years too early. Claudio Borio himself warned of financial vulnerabilities in 2003, four years too soon. When the wolf fails to show up, the sheep keep on partying. Next time won’t be different.

References

Allen, Franklin, and Douglas Gale (2007), “Understanding financial crises,” Clarendon Lectures in Finance, Oxford University Press.

Bank for International Settlements (2014), “84th BIS Annual Report, 2013/14,” Bank for International Settlements.

Borio, Claudio (2012), “The financial cycle and macroeconomics: What have learned?,” BIS Working Papers, 395.

Calvo, Guillermo (2013), “Puzzling over the anatomy of crisis: Liquidity and the veil of finance,” Columbia University, mimeo.

Drehmann, Mathias, Claudio Borio, and Kostas Katsaronis (2012), “Characterizing the financial cycle: Don’t lose sight of the medium term!,” BIS Working Paper #380.

*This article was prepared for the October/November issue of Morningstar magazine, my employer's publication.

## Monday, August 25, 2014

### What caught my eye

1. Global bond sales at post-2009 high (from the FT):
Banks and businesses seeking to capitalise on record low borrowing costs in the west have seen worldwide bond volumes increase by 6 per cent to $2.74tn so far this year compared with the same period in 2013. The figure is the highest since 2009, a record year for deals according to Dealogic. [...] The US accounts for the largest number of global bond deals, equivalent to 30 per cent of the global total, but its share has slipped by 5 percentage points from 2013 in the face of resurgent issuance elsewhere, especially in Europe. Overall European issuance increased by 11 per cent to$1.41tn driven by a 69 per cent year-on-year rise in financial institutions’ bonds, while corporate bond issues enjoyed a single-digit rise. Sovereign bond deals decreased slightly.

Eurozone banks, especially those in the periphery countries, have been eager to cash in on investors’ hunt for higher yielding bonds while they have been under regulatory pressure to build their capital buffers.
2. A new book (free!) on the secular stagnation hypothesis. VoxEU summarizes the book. Stephen Williamson writes a critique. David Beckworth says long-term interest rates are not in secular decline.

3. Timothy Taylor (Conversable Economist) relays the conclusions of a new paper on fair trade:
a) Fair Trade and other certification programs affect a relatively small number of workers.

b) Fair Trade does seem to provide higher prices and greater financial stability, at least when farmers can sell at the minimum price.

c) Fair Trade does seem to promote improved environmental practices.

d) While Fair Trade helps producers, the effects on workers and work organizations is more mixed.
4. Dovish Draghi. Comments by Simon Wren-Lewis and Greg Ip.

5. Home ownership for everyone, Swedish edition, from Bloomberg News:
Sweden’s Social Democratic Party, which polls show will oust Prime MinisterFredrik Reinfeldt’s ruling coalition in elections next month, is ready to relax a regulatory limit on mortgage financing.

The party says a rule that prevents Swedes getting loans worth more than 85 percent of property values hurts first-time buyers. According to Magdalena Andersson, the party’s economic spokeswoman, the Social Democrats may seek to ease the loan-to-value cap if the regulator introduces rules that force households to amortize their mortgages. Less well-off households would be exempt from any amortization requirements, she said.

[...]

The proposal, which would reverse a 2010 limit put in place during Reinfeldt’s tenure to contain record household debt, risks colliding with central bank pleas to slow credit growth. Riksbank Governor Stefan Ingves said last week failure to address consumer indebtedness could force the central bank to tighten monetary policy to protect financial health.
[...]

The government and regulator are exploring more options to address Sweden’s debt burden, which the central bank estimates is about 175 percent of disposable incomes, the highest on record. Swedes’ addiction to borrowing has intensified over the past half decade. Consumers in the AAA-rated country used record-low interest rates during Europe’s debt crisis to take on credit in a cycle that contributed to record housing prices.
6. Tyler Cowen on the interaction between macroeconomic trend and cycle:
Let’s say, as seems to be the case, that wages stagnated, labor market mobility slowed down, and non-outsourcing productivity was slow during 2000-2007 (or maybe longer).  Those are all long-term economic trends and they are all bad news.

During 2000-2007 most Americans acted as if were are on a good trend line when in fact they were on a less favorable trend line.  This influenced spending decisions, borrowing decisions, real estate decisions, and so on.  People overextended themselves and they also created unsustainable bubbles.  Sooner or later the debt cannot be rolled over, the bubbles pop, the crash ensues, AD falls, and so on.  This often takes the form of a discrete cyclical event, as indeed it did in 2008.

One point — still neglected in much of today’s macroeconomic discourse — is that the mis-estimated trend was a major factor behind the cyclical event.  But there is yet more to say about this interrelationship between cycle and trend.

The arrival of the cyclical event, in due time, makes the negative underlying trend more visible.  At first people blame everything on the cycle/crash, but a look at the slow recovery, combined with a study of pre-crash economic problems, shows more has been going on.

The cyclical event itself places greater stress on labor markets, on firm liquidity and thus on R&D, on perceived stocks of wealth, and so on.  As individuals observe the reaction of the economy to this added stress, they start seeing just how wide-ranging and deep the previously existing structural problems have been.

Those observations, and the accompanying economic responses, make the problems worse.  Forecasts become more pessimistic, investment declines, firms will be less keen to commit to workers who are less than the “sure thing,” and so on.  Sometimes this is moving along curves, other times there are shifts in multiple equilibria (“is Greece a European country or a Balkans country?”), toss in some herd behavior too.  In any case these changes are ill-served by the terminology of cyclical vs. structural.  They are cyclical and structural in an intertwined fashion.  And of course this all leads aggregate demand to fall all the more.

## Thursday, August 21, 2014

### Public education as an unemployment subsidy

From Bloomberg News: Eight years of college lets Finns hide from labor market.

“When I tell people I’m a student, it tells them I’m achieving something compared to being jobless,” he said, sipping green tea at a cafe near the university’s main building. “In reality, there might not be such a big difference.”

Finnish students stay in college longer than in any other developed country save Austria, the Netherlands and Denmark, getting their first university degree on average at 29, according to a 2013 report by the Organization for Economic Cooperation and Development. That compares with 24 years for Britons, 26 for Germans and the OECD average of 27 years. Most Finns who graduate from college get a master’s degree.

Easing the long years in college is the fact that students aren’t required to pay tuition. The state also provides grants of as much as 500 euros (\$670) a month plus meal support and loans of as much as 400 euros a month.

[...]

While Finland’s two recessions since 2008 have pushed companies to cut jobs, unemployment has risen less than in many of its European peers. At the same time, so-called hidden unemployment is on the rise. The number of people not seeking work though they’d like to find it increased 10 percent in June from a year earlier.

[...]

Only about 50 percent of all university students graduate in five-and-a-half years or less, Helsinki-based Statistics Finland says. One-third of graduates are 30 years old or more, compared with an EU average of 17 percent, Eurostat says.

“School has traditionally acted as a buffer when the economic situation is bad,” said Ulla Haemaelaeinen, a senior researcher at the Finnish Social Insurance Institution in Helsinki. “It’s a policy choice.”

## Thursday, August 14, 2014

### Notable pictures: Japan's female employment rate

I was surprised by this chart, a version of which I originally saw on FT Alphaville:

It shows the impressive rise of the female employment rate in Japan, both in absolute terms and relative to the U.S. The participation employment-population ratio is now higher in Japan than in the U.S., which is something I didn't expect.

The article is perhaps too quick to chalk up this rise to Abenomics. The timing is right, but I'm skeptical that the handful of policies introduced by Abe have overcome Japan's cultural biases and institutional barriers so quickly.

Among OECD countries in 2013, Japan's female employment rate (62.5) is near the median (60), and clearly above the average (57.5).

How about the gap between the male and female employment rates? The FT article highlights the "20 percentage-point difference" in Japan. Is that normal?

For the OECD as a whole, the male-female gap is 15.7 percentage points; in Japan it's 18.3. The largest gender gaps in the employment ratio are for Turkey (39.8), Chile (22.8), Korea (21), Italy (18.6), and Greece (18.4). Next was Japan. The smallest gaps are in the Nordic countries, followed by Portugal (!), and Canada.

I was also surprised to learn about the low correlation between the male participation employment rate and the gender gap in participation employment rates.

So, the female participation employment rate in Japan is now in line with that of other rich countries, but the gap between men and women is still quite higher.

Edited on 8/14/14, at 4:15pm CT, to replace "participation rate" with "employment-population ratio" (or simply, "employment rate"). They're not the same thing. Sorry about that.

## Monday, August 11, 2014

### What business economists do (?)

Tyler Cowen linked to an article by Lydia DePillis on the Washington Post, a few days ago, about the "new business economist", the articulate professional with a nice suit, a telegenic face, and a masters or a Ph.D. degree, who can explain anything and everything to an audience of non-experts. My favorite passages:

It’s already been quite a couple months. Flying back and forth between Redfin’s Seattle headquarters and its D.C. office, Richardson takes calls from local reporters trying to place their city’s housing markets in context. She talks to Redfin agents all over the country, and helps promote new data products, like one that calculates how likely a home is to sell within a certain period of time.

[...]

The market for consumer-facing economists is certainly getting crowded. Big Internet companies have had chief economists for years now; Google’s Hal Varian is an oft-quoted exponent of his employer’s capabilities and worldview. Microsoft recently hired Yahoo’s former chief economist to push a more “data-driven culture” at the tech dinosaur.

But they’re not just looking for super-wonks. More importantly for Richardson, rival real estate sites Zillow, Trulia, and CoreLogic have offered their chief economists as media-friendly talking heads, always available to explain national trends: Stan Humphries, Jed Kolko, and Mark Fleming have essentially become their companies’ most visible employees, speaking at conferences and testifying on Capitol Hill.

That’s why Apartmentlist.com’s recent listing for a chief economist includes the following in its job description: “Act as the face of the company with key journalists for both print and tv interviews with leading publications,” “work closely with our PR and branding teams,” and have “excellent stage presence.”

In a data-chic world, a chief economist is the new marketing must-have.

Now Neil Irwin at the NYT (hat tip to John Cochrane) compares business economists with academic economists:
There are the academic economists who study the forces shaping the modern economy. Their work is rigorous but often obscure. Some of them end up in important policy jobs (See: Bernanke, B.) or write books for a mass audience (Piketty, T.), but many labor in the halls of academia for decades writing carefully vetted articles for academic journals that are rigorous as can be but are read by, to a first approximation, no one.
Then there are the economists in what can broadly be called the business forecasting community. They wear nicer suits than the academics, and are better at offering a glib, confident analysis of the latest jobs numbers delivered on CNBC or in front of a room full of executives who are their clients. They work for ratings firms like S.&P., forecasting firms like Macroeconomic Advisers and the economics research departments of all the big banks.
The key difference, though, is that rather than trying to produce cutting-edge theory, they are trying to do the practical work of explaining to clients — companies trying to forecast future demand, investors trying to allocate assets — how the economy is likely to evolve. They’re not really driven by ideology, or by models that are rigorous enough in their theoretical underpinnings to pass academic peer review. Rather, their success or failure hinges on whether they’re successful at giving those clients an accurate picture of where the economy is heading.

And how exactly can we judge whether those economists are giving clients an "accurate picture" if their models are not rigorous (or tested, or even internally coherent)?

Is this what "business economists" are? Articulate, attractive faces who can explain things to non-economist ears? And what does "explain" mean in my previous sentence? Re-tell popular stories, or the ones that conform to the audience's views, with minimum jargon and maximum entertainment? How is the success of a business economist measured? How is his value-added measured?