Monthly Archives: august 2012

Simon Wren-Lewis om Gordon Browns år som finansminister #hvorforikkekikke

UK debt
Wren-Lewis, Oxford University, jobber med en artikkel som i miste fall inkluderer Storbritannias gjeldssituasjon under Gordon Brown. Det er det han vil dele med sine lesere før artikkelen publiseres.

Gordon Brown begynte med finans- og pengepolitikk før Labor-regjeringen formelt tok over etter valgseieren i mai 1997. Brown som finansminister, Blair som statsminister husker vi.

Brown satt i 10 år før Blair gikk av, og hvilket økonomisk ettermæle han etterlot seg burde være av interesse. Men sist diskusjonen var ute i sollyset var da Brown var aktuell som IMF-sjef.

Wren-Lewis:

…is a chart of UK net debt to GDP from the mid 1970s until the onset of the Great Depression. This post is about the right hand third of this chart, from 1998 to 2007, which was the period during which Gordon Brown was Chancellor.

In general looking at figures for debt can give you a rather misleading impression of what fiscal policy is doing, particularly over short intervals. However, having finished trawling through budget reports and other data for a paper I am writing, I can safely say that this chart tells a pretty accurate story. (For those who cannot wait for the detail that will be in my paper, there is an excellent account by Alan Budd here.) In the first two years of his Chancellorship, Brown continued his predecessor’s policy of tightening fiscal policy. The budget moved into small surplus, so that the debt to GDP ratio fell to near 30% of GDP. Policy then shifted in the opposite direction, with a peak deficit of over 3% of GDP, a period which included substantial additional funding to the NHS. The remaining five budgets were either broadly neutral or mildly contractionary in the way they moved policy, but as this was starting from a significant deficit, the net result was a continuing (if moderating) rise in debt.

Why was fiscal policy insufficiently tight over most of this period? Despite what Gordon Brown said at the end of his term, I do not think this had anything to do with the business cycle. In one sense there is nothing unusual to explain: we are used to politicians being reluctant to raise taxes by enough to cover their spending, which leads to just this kind of deficit bias. However this should not have happened this time because policy was being constrained by two fiscal rules designed to prevent this. So what went wrong with the rules?

The first answer is in one sense rather mundane. The rules, as all sensible fiscal rules should, tried to correct for the economic cycle. However, rather than use cyclically adjusted deficit figures, Gordon Brown’s rules looked at average deficits over the course of an economic cycle. That allowed Brown to trade off excessively tight policy in the early years against too loose policy towards the end, and still (just) meet his rule. As we can roughly see from the chart, debt ends up about where it started under his stewardship, which also roughly coincided with a full cycle.

Was this intended? The answer is to some extent not, which brings us to the second reason policy was too loose, and that is forecast error. One of the striking things about reading through the budget reports is how persistent these errors were. Outturns seemed always more favourable than expected over the first part of this period, until they became persistently unfavourable in the second. The former encouraged forecasters to believe higher than expected tax receipts represented a structural shift, and they were reluctant to give up that view in the second period. Unlucky or an aspect of wishful thinking that is often part of deficit bias?

To their credit, the current Conservative led government learnt from both these mistakes. Most notably, they set up the independent Office for Budget Responsibility with the task of producing forecasts without any wishful thinking. In addition their fiscal mandate is also defined in terms of a cyclically adjusted deficit figure, which does not have the backward looking bias inherent in averaging over the past cycle. Their mistake is in trying to meet that mandate when the recovery had only just begun.

What this chart does not show are the actions of a spendthrift Chancellor who left the economy in a dire state just before the Great Recession. He stopped being Chancellor with debt roughly where it was when he started, and a deficit only moderately above the level required to keep it there. The spin that our current woes are the result of the awful mess Gordon Brown left the UK economy in is a distortion based on a half-truth. The half truth is that it would have been better if fiscal policy had been tighter, leaving debt at 30% rather than 37% when the recession hit. The distortion is that the high deficit and debt when labour left office in 2010 were a consequence of the recession, and commendable attempts to limit its impact on output and employment.

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Sjekket 5829 bilder av akademikere, og funnene er merkelige #ignobel

Vel, det er godt gjennomført i det minste:

It is now standard practice, at Universities around the world, for academics to place pictures of themselves on a personal profile page maintained as part of their University’s web-site. Here we investigated what these pictures reveal about the way academics see themselves.

Since there is an asymmetry in the degree to which emotional information is conveyed by the face, with the left side being more expressive than the right, we hypothesised that academics in the sciences would seek to pose as non-emotional rationalists and put their right cheek forward, while academics in the arts would express their emotionality and pose with the left cheek forward.

We sourced 5829 pictures of academics from their University websites and found that, consistent with the hypotheses, there was a significant difference in the direction of face posing between science academics and English academics with English academics showing a more leftward orientation. Academics in the Fine Arts and Performing Arts however, did not show the expected left cheek forward bias. We also analysed profile pictures of psychology academics and found a greater bias toward presenting the left check compared to science academics which makes psychologists appear more like arts academics than scientists. These findings indicate that the personal website pictures of academics mirror the cultural perceptions of emotional expressiveness across disciplines.

Charles Plossner, Philadelphia Fed, om makromodeller og pengepolitiske analyse #ekstremtnerdete

1 s2 0 S0165188907001984 si192
Alle gjør pengepolitkk likt og forskjellig – samtidig. Metodikken man benytter for å sette renten, beskrive verdensøkonomien, beregne adferdsmønster, sjokk osv. er i sin natur aldri komplett. Det er umulig å sette hele planeten inn i et likningssystem. Men det betyr ikke at man prøver.

En av disse tilnærmingene er DSGE-modeller. Dynamic Stochastic General Equilibrium- modeller.

Charles Possner benyttet en konferanse i mai til å snakke om disse modellene, nettopp fordi det hele tiden må stilles spørsmål ved modellene. Hvis ikke man gjør dette vil finanskriser, boligbobler etc. gjøre det.

Jeg siterer her utdrag, gå hit for hele innlegget. (Irrasjonelt plasserte tall er fotnoter, jeg tar de med.)

After spending over 30 years in academia, I have served the last six years as a policymaker trying to apply what economics has taught me. Needless to say, I picked a challenging time to undertake such an endeavor. But I have learned that, despite the advances in our understanding of economics, a number of issues remain unresolved in the context of modern macro models and their use for policy analysis. In my remarks today, I will touch on some issues facing policymakers that I believe state-of-the-art macro models would do well to confront.
[…]
More than 40 years ago, the rational expectations revolution in macroeconomics helped to shape a consensus among economists that only unanticipated shifts in monetary policy can have real effects. According to this consensus, only monetary surprises affect the real economy in the short to medium run because consumers, workers, employers, and investors cannot respond quickly enough to offset the effect of these policy actions on consumption, the labor market, and investment.1
[…]
But over the years this consensus view on the transmission mechanism of monetary policy to the real economy has evolved. The current generation of macro models, referred to as New Keynesian DSGE models,2 rely on real and nominal frictions to transmit not only unanticipated but also systematic changes in monetary policy to the economy. Unexpected monetary shocks drive movements in output, consumption, investment, hours worked, and employment in DSGE models. However, in contrast to the earlier literature, it is the relevance of systematic movements in monetary policy that makes these models of so much interest for policy analysis. Systematic policy changes are represented in these models by Taylor-type rules, in which the policy interest rate responds to changes in inflation and a measure of real activity, such as output growth. Armed with forecasts of inflation and output growth, a central bank can assess the impact that different policy rate paths may have on the economy. The ability to do this type of policy analysis helps explain the widespread use of New Keynesian DSGE models at central banks around the world.
[…]
In my view, the current rules of the game of New Keynesian DSGE models run afoul of the Lucas critique — a seminal work for my generation of macroeconomists and for each generation since.6 The Lucas critique teaches us that to do policy analysis correctly, we must understand the relationship between economic outcomes and the beliefs of economic agents about the policy regime. Equally important is the Lucas critique’s warning against using models whose structure changes with the alternative government policies under consideration.7 Policy changes are almost never once and for all. So, many economists would argue that an economic model that maps states of the world to outcomes but that does not model how policy shifts across alternative regimes would fail the Lucas critique because it would not be policy invariant.8 Instead, economists could better judge the effects of competing policy options by building models that account for the way in which policymakers switch between alternative policy regimes as economic circumstances change.9
[…]
From a policy perspective, the assumption that a central bank can always and everywhere credibly commit to its policy rule is, I believe, also questionable. While it is desirable for policymakers to do so — and in practice, I seek ways to make policy more systematic and more credible — commitment is a luxury few central bankers ever actually have, and fewer still faithfully follow.

Possner avslutter med seks punkter rundt forbedring av makromodeller:

First, I believe we should work to give the real and nominal frictions that underpin the monetary propagation mechanism of New Keynesian DSGE models deeper and more empirically supported structural foundations. There is already much work being done on this in the areas of search models applied to labor markets and studies of the behavior of prices at the firm level. Many of you at this conference have made significant contributions to this literature.

Second, on the policy dimension, the impact of the zero lower bound on central bank policy rates remains, as a central banker once said, a conundrum. The zero lower bound introduces nonlinearity into the analysis of monetary policy that macroeconomists and policymakers still do not fully understand. New Keynesian models have made some progress in solving this problem,12 but a complete understanding of the zero bound conundrum involves recasting a New Keynesian DSGE model to show how it can provide an economically meaningful story of the set of shocks, financial markets, and frictions that explain the financial crisis, the resulting recession, and the weak recovery that has followed. This might be asking a lot, but a good challenge usually produces extraordinary research.

Third, we must make progress in our analysis of credibility and commitment. The New Keynesian framework mostly assumes that policymakers are fully credible in their commitment to a specified policy rule. If that is not the case in practice, how do policymakers assess the policy advice these models deliver? Policy at the zero lower bound is a leading example of this issue. According to the New Keynesian model, zero lower bound policies rely on policymakers guiding the public’s expectations of when an initial interest rate increase will occur in the future. If the credibility of this forward guidance is questioned, evaluation of the zero lower bound policy has to account for the public’s beliefs that commitment to this policy is incomplete. I have found that policymakers like to presume that their policy actions are completely credible and then engage in decisions accordingly. Yet if that presumption is wrong, those policies will not have the desired or predicted outcomes. Is there a way to design and estimate policy responses in such a world? Can reputational models be adapted for this purpose?

Fourth, and related, macroeconomists need to consider how to integrate the institutional design of central banks into our macroeconomic models. Different designs permit different degrees of discretion for a central bank. For example, responsibility for setting monetary policy is often delegated by an elected legislature to an independent central bank. However, the mandates given to central banks differ across countries. The Fed is often said to have a dual mandate; some banks have a hierarchal mandate; and others have a single mandate. Yet economists endow their New Keynesian DSGE models with strikingly uniform Taylor-type rules, always assuming complete credibility. Policy analysis might be improved by considering the institutional design of central banks and how it relates to the ability to commit and the specification of the Taylor-type rules that go into New Keynesian models. Central banks with different levels of discretion will respond differently to the same set of shocks.

Let me offer a slightly different take on this issue. Policymakers are not Ramsey social planners. They are individuals who respond to incentives like every other actor in the economy. Those incentives are often shaped by the nature of the institutions in which they operate. Yet the models we use often ignore both the institutional environment and the rational behavior of policymakers. The models often ask policymakers to undertake actions that run counter to the incentives they face. How should economists then think about the policy advice their models offer and the outcomes they should expect? How should we think about the design of our institutions? This is not an unexplored arena, but if we are to take the policy guidance from our models seriously, we must think harder about such issues in the context of our models.

This leads to my fifth suggestion. Monetary theory has given a great deal of thought to rules and credibility in the design of monetary policy, but the recent crisis suggests that we need to think more about the design of lender-of-last-resort policy and the institutional mechanism for its execution. Whether to act as the lender of last resort is discretionary, but does it have to be so? Are there ways to make it more systematic ex ante? If so, how?

My sixth and final thought concerns moral hazard, which is addressed in only a handful of models. Moral hazard looms large when one thinks about lender-of-last-resort activities. But it is also a factor when monetary policy uses discretion to deviate from its policy rule. If the central bank has credibility that it will return to the rule once it has deviated, this may not be much of a problem. On the other hand, a central bank with less credibility, or no credibility, may run the risk of inducing excessive risk-taking. An example of this might be the so-called “Greenspan put,” in which the markets perceived that when asset prices fell, the Fed would respond by reducing interest rates. Do monetary policy actions that appear to react to the stock market induce moral hazard and excessive risk-taking? Does having lender-of-last-resort powers influence the central bank’s monetary policy decisions, especially at moments when it is not clear whether the economy is in the midst of a financial crisis? Does the combination of lender-of-last-resort responsibilities with discretionary monetary policy create moral hazard perils for a central bank, encouraging it to take riskier actions? I do not know the answer to these questions, but addressing them and the other challenges I have mentioned with New Keynesian DSGE models should prove useful for evaluating the merits of different institutional designs for central banks.

Dan Ariely: How Americans view wealth and inequality #adferdsøkonomi

Unequal soup business deskDan Ariely og Mike Norton bruker John Rawls «a just society is a society that if you knew everything about it, you’d be willing to enter it in a random place» som utgangspunkt for å fine ut hvor nye amerikanere kan om samfunnet de lever i.

(Utdrag) So, we took the American society and we asked people to imagine it divided into five buckets, the wealthiest 20%, the next 20%, the next, the next and the poorest 20%.

First of all, we asked people: how much wealth do you think is concentrated in each of those buckets?

It turns out people get it very wrong.

The reality is that the bottom two buckets together, the bottom 40% of Americans, own 0.3% of the wealth; 0.3%, almost nothing, whereas the top 20% own about 84% of the wealth.

And people don’t understand it. They don’t understand how much wealth the top have and in particular, they don’t understand how little the bottom has.

But then we described to people Rawls’ definition, the veil of ignorance, and the idea they could end up anywhere. And we said: What society would you like to create? How much wealth? How would you like to distribute the wealth?

And it turns out people created a society that is much more equal than any society on Earth. It was much more equal than Sweden.

In fact, when we did this experiment another way and we showed people two distributions of wealth, one based on the wealth distribution in the US and the other based on the wealth distribution that is more equal than Sweden, 92% of Americans picked the improved Swedish distribution.

(Hattetipp til @SonyKapoor)

(Illustrasjon: Alberto Ruggieri via Getty Images.)