Monthly Archives: March 2011

Taylor Rules on the Taylor Rule

The rule for nominal interest rate setting that John Taylor proposed in his 1993 paper “Discretion versus Policy Rules in Practice“, Carnegie-Rochester Conference Series on Public Policy 39, 195-214, has had an enormous influence in the macroeconomics profession.  It is safe to say that numerous economists, practitioners and academics alike, since that paper have evaluated monetary policymaking using the Taylor rule as some kind of reference point. Empirically, a plethora of papers have estimated coefficients of Taylor-type rules for different countries during different periods. Theoretically, paper after paper on monetary policymaking adopt some form of the Taylor rule as a default specification of monetary policymaking (even undergraduate text books routinely … Continue reading

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Temporary and Permanent Ricardian Confusion: Going Comfortably Numb

Spurred by the heated debates about the need for fiscal stimulus in the US, the issue of Ricardian Equivalence has taken center stage in the economic blogging sphere recently. While it is an impossible task to identify any exact line of events on the net (and possible also irrelevant), this round appears to have been initiated by an article by Justin Yifu Lin (pdf), Chief Economist of the World Bank, who got criticized here by a balanced Antonio Fatás. Fatás notes, among other things, that Lin’s fears that fiscal stimulus could be caught by the “Ricardian trap” (i.e., neutralized by offsetting increased private savings) are unwarranted. While Lin’s endorsement of … Continue reading

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The Fed and the ECB: “Spurious Bedfellows”

Some days ago, I wrote about an interesting post by Gavin Davies on his Financial Times blog, where he argued that European monetary policy, through the actions of the German Bundesbank and now the European Central Bank, follows the US Federal Reserve’s interest rate decisions with some delay. An observation leading him to label the FED and ECB “strange bedfellows”. The data behind the argument is seen in the following figure: The Federal Reserve’s policy intentions are throughout the period measured by the target value for the Federal Funds Rate (formally, this time series is discontinued as of December 2008, and I show the upper value of the 0-0.25% target … Continue reading

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Freakonomics: The Movie Review

In 2005, economist Steven D. Levitt and journalist Stephen J. Dubner published the book Freakonomics, which in a remarkable lucid manner demonstrated the power of economic thinking to a wide audience. Focusing on the importance of incentives, the authors guided the reader through a range of Levitt’s research on diverse topics as cheating in sumo wrestling, price setting in real estate markets, living habits of drug dealers, the potential importance of naming conventions for children’s future, and the probably most controversial topic (in practically any aspect): the potential impact of legalized abortion on crime rates. The book provided new and provocative insights into what economists can do with their toolboxes, … Continue reading

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Brady replaces Woods in Principles

From N. Gregory Mankiw’s description of the new material in the new edition of his “Principles of Economics“: “Chapter 3 Tiger Woods changed to Tom Brady in in-text example.” This must be the final blow to Tiger Woods’ status as a respectable sports icon.

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Gavin Davies on the Fed and the ECB

Gavin Davies has an interesting post on his Financial Times blog. It is entitled “Strange bedfellows – the Fed and the ECB” and it discusses the co-movements between the Federal funds rate and the Deutschmark/Euro policy rate since 1987. There seems to be a leader-follower pattern, in the sense that Europe has followed the Fed with a 6-12 month lag. Davies concludes that this “is one of the most well established rules in the analysis of monetary policy making“. This is perhaps a somewhat strong statement, and I would, based on visual inspection (upon which one should be VERY careful), conjecture that most of this correlation is driven by the … Continue reading

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ECB, SMP (II): Direct vs. secondary purchases

In my recent post on the ECB’s Securities Market Programme (SMP), I noted that the programme was in violation of the Treaty of the European Union. I based this on Article 21.1, which states: “. . . overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.” – Article 21.1 of “ON THE STATUTE … Continue reading

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ECB, SMP, ETC. Who pays for what?

After the financial crisis hit in 2008, new acronyms have been appearing at a rapid pace around the globe. These mainly describe the various measures taken by the world’s central banks to offset the troubles caused by the crisis. Many took the form of liquidity provisions to aid “frozen” banking markets. The European Central Bank launched on May 14, 2010 a so-called Securities Market Programme (SMP), under which it – temporarily – allows itself to purchase Euro denominated government bonds. In its decision, the ECB motivated the move by “ . . . in view of the current exceptional circumstances in financial markets, characterised by severe tensions in certain market … Continue reading

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