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Sunday, December 23

23rd Dec - Weekender: Economics

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Headwinds Vs. Tailwinds: The Macroeconomic HeatMapZH
Barclays shows a heat-map that represents their subjective assessment of the relative balance of forces from 2012 into 2013 and beyond. In 2013, the fiscal headwind continues to loom large and is an important basis of caution despite the strong improvement in financial conditions. The fiscal headwind is unlikely to abate by much in the US and Europe until 2014, possibly later. Other sources of ‘headwind’ are likely to continue during 2013; these include private sector de-leveraging in the highly indebted parts of Europe, as well as political uncertainty (in this context, we observe the elections in Italy (Q1) and Germany (Q4)). Monetary policy, policy reforms, and the financial markets themselves are the main tailwinds as vol suppression continues.

Hooray for GDP! GDP as a measure of
The idea of having GDP growth as the main target of economic policy has been under attack in recent years. This column addresses some of the criticisms and argues that continued GDP growth would be good for the UK and other European countries – and not just in the short term to reduce high levels of unemployment.

Why negative interest rates are a bad idea, by Capital Economicsalphaville / FT

Macro, what have you done for me lately?noahpinion

The dirty secret of economics educationWorthwhile

An Economics Masterpiece You Should Be Reading NowView / BB
The most valuable new book I’ve read this year is Justin Yifu Lin’s “The Quest for Prosperity.” George Akerlof, a Nobel laureate in economics and a man not given to reckless overstatement, calls it “a masterpiece.” I’d say that’s right.

The surprise end game in global trade
Free trade agreements are now the centre of gravity in global commerce. This column says they are also the likeliest pathway to multilateral trade liberalisation. With the US negotiating two mega deals – the Trans-Pacific Partnership and a US-EU free-trade agreement – China and other emerging economies will have no choice but to play by common rules of the game. It concludes that with all heavyweights joining the charmed circle, multilateral talks in Geneva will no longer be needed.

The Measurement and Behavior of Uncertainty: Evidence from the ECB Survey of Professional ForecastersNY FED

Today’s challenges go beyond KeynesThe A-list / FT
Jeffrey Sachs: For more than 30 years, from the mid-1970s to 2008, Keynesian demand management was in intellectual eclipse. Yet it returned with the financial crisis to dominate the thinking of the Obama administration and much of the UK Labour party. It is time to reconsider the revival.

Macro heresy: Rethinking policy options to avoid a lost
Five years after the subprime bubble burst, the self-correcting nature of business cycles is being questioned and, subsequently, orthodox macroeconomic policy is starting to be challenged. This column introduces a radical rethink of options open to macroeconomic policymakers, suggesting that in order to simultaneously achieve economic stimulus without increasing debt, new money creation should be used to directly finance on-going budget deficits.

Financial Globalisation and the CrisisBIS
The global financial crisis provides an important testing ground for the financial globalisation model. We ask three questions. First, did financial globalisation materially contribute to the origination of the global financial crisis? Second, once the crisis occurred, how did financial globalisation affect the incidence and propagation of the crisis across different countries? Third, how has financial globalisation affected the management of the crisis at national and international levels?

The great leveraging BIS
What can history can tell us about the relationship between the banking system, financial crises, the global economy, and economic performance? Evidence shows that in the advanced economies we live in a world that is more financialized than ever before as measured by importance of credit in the economy. I term this long-run evolution "The Great Leveraging" and present a ten-point examination of its main contours and implications.

Global safe assetsBIS
Will the world run out of 'safe assets' and what would be the consequences on global financial stability? We argue that in a world with competing private stores of value, the global economic system tends to favor the riskiest ones. Privately produced stores of value cannot provide sufficient insurance against global shocks. Only public safe assets may, if appropriately supported by monetary policy. We draw some implications for the global financial system.

Capital Flows and the Risk-Taking Channel of Monetary PolicyBIS
This paper examines the relationship between low interests maintained by advanced economy central banks and credit booms in emerging economies. In a model with crossborder banking, low funding rates increase credit supply, but the initial shock is amplified through the "risk-taking channel" of monetary policy where greater risk-taking interacts with dampened measured risks that are driven by currency appreciation to create a feedback loop. In an empirical investigation using VAR analysis, we find that expectations of lower short-term rates dampen measured risks and stimulate cross-border banking sector capital flows.

The 1980s financial liberalization in the Nordic countriesBank of Finland (pdf)
This paper reviews the process of liberalization and discusses the reasons why Finland, Norway, and Sweden drifted into financial and economic crises.

Inside the Brain of the Hard-Money AdvocateView / BB

Gross inflows and the incidence of credit
How can we predict bad credit booms? This column argues that surges in gross private inflows are good predictors of booms in credit markets, especially those booms that end up in a systemic banking crisis. Using quarterly data on gross capital inflows and real credit, gross private inflows remain a useful measure even when accounting for the past history of credit and asset prices The evidence suggests that surges in capital flows may well mean future financial turmoil.

Mistaking models for realitymainly macro

The Dismal State of the Dismal ScienceKrugman / NYT

  2012 REVIEWS
Everything You Need To Know About the Economy in 2012, in 34 ChartsThe Atlantic

2012 in charts: The long road to recovery The Economist

Top 10 Economic Charts of 2012WSJ

Time for Nominal Growth TargetsProject Syndicate
Monetary policymakers in some countries should contemplate a shift toward targeting nominal GDP – a switch that could be phased in gradually in such a way as to preserve credibility with respect to inflation. Indeed, for many advanced economies, in particular, a nominal-GDP target is clearly superior to the status quo.

The Omnipotent Fed ideanoahpinion
I generally support the idea of an activist Fed, unconventional monetary policy, etc. However, I do have a misgiving about a key element of the case made by the aforementioned crop of monetarists. This is the notion of an "Omnipotent Fed" which I mean not that the Fed can create stars and galaxies, but that the Fed can set NGDP to be whatever it wants. If this assumption is wrong, NGDP targeting (or similar policies) may simply not work.

Chronology -Federal Reserve's transparency stepsReuters

How durable is the emerging NGDP consensus?Free exchange / The Economist

Farewell to Inflation Targeting?Project Syndicate
In a four-day period in mid-December, three seemingly unrelated developments suggested that modern central banking is in the midst of an historic change. To the extent that this shift gains momentum – which appears likely – it will affect economic performance, the functioning of markets, and asset-price valuations.

Shrink this e-dollarFree exchange / The Economist
the complete displacement of paper money by electronic money could give central banks the tools to end recessions once and for all by eliminating the problem of the zero lower bound…central banks already have the tools to create a negative interest rate: combining a zero nominal rate with a positive rate of inflation.

Should Central Banks Target Employment? Project Syndicate
US Federal Reserve Chairman Ben Bernanke recently announced that the Fed will keep interest rates at close to zero until the unemployment rate falls to 6.5%, provided inflation expectations remain subdued. It is a welcome breakthrough, and one that should be emulated by others – not least the ECB.

Tracking the 7 Stages of Fed PolicyPragCap

Is the Fed Risking "Dangerous Side Effects"?Economist’s View

Time for Nominal Growth TargetsProject Syndicate

Central banks can phase in nominal GDP targets without damaging the inflation
The time is right for the world’s central banks to rethink how they conduct monetary policy. This column argues that central banks should follow the lead of Mark Carney, the Bank of England’s new Governor, in considering a move to nominal GDP targeting. If nominal GDP targeting is introduced in two distinct phases, its introduction can deliver the advantage of some stimulus now – when it is needed – while satisfying central bankers’ reluctance to abandon their cherished low inflation target.

Blogs review: State-dependent monetary policy guidancebruegel
The Fed announcement to move from a date-based approach to forward policy guidance to quantitative unemployment and inflation targets marks a major evolution in the practice of monetary policy. While there is still no consensus as to how effective this move will be, there has been wide recognition of its intellectual importance. And although similar moves appear to be in the making in the UK and Japan, the ECB has been singled out as behind the curve along this dimension of the crisis response.

How durable is the emerging NGDP consensus?Free exchange / The Economist

In Japan, a Test of Inflation TargetsNYT

The hawkish nature of the Evans RuleMacroMania