Dangling epsilons

Whenever I look at an estimation equation like this: from this paper, I wonder what’s in that dangling epsilon term. In this equation we have Y’s on the left hand side. And I think to myself, “what kinds of things produce Y’s (or changes in Y’s)”. Now, Y is GDP and from my intro macro […]

Increase inflation AND combat structural issues

Inflation is below target. Increasing output and decreasing or stagnant inflation is an indication that inflation expectations are becoming unanchored. That’s bad. Inflation should not spend too long, too far from its implicit target of 2%. Structural unemployment is high right now. Instead of just dumbly extending UI benefits and scratching our heads on why […]

Setting expectations

Evans and Honkapohja’s work on learning in macro is important. Watch this to get a sense for what they’re doing: But learning dynamics are not well understood empirically. Prof. Evans describes the dynamics under adaptive learning. Under rational expectations the economy would just pop to the good equilibrium. Under other learnings schemes the dynamics would […]

Quit picking on Japan!

Here’s the per capita GDP for the G8 countries (relative to the USA): You can take two lessons from this chart. 1) Japan hasn’t had bad monetary policy relative to, say, the continental European countries or 2) Monetary policy just doesn’t matter in the long-run Also, the more you stare at these real GDP per […]

What is structural unemployment?

There seems to be a disconnect between how economists (and Fed economists in particular) use this term and how bloggers (and left bloggers in particular) use it. Some definitions: “The unemployment resulting from wage rigidity and job rationing is sometimes called structural unemployment.” — Mankiw’s intermediate text “Frictional unemployment [w.a. where the only other kind […]

A DSGE primer

Here.

Isn’t or Shouldn’t?

Sumner argues that if Krugman’s claim is true that the Fed is too conservative, that they will do whatever to curb inflation, then fiscal policy won’t work either. Fiscal policy moves the AD curve right, but the Fed will just move it back left. Sumners argument only works if policy is not limited by the […]

“Zero Rate Bound, RIP”

I’m filling this one under “William Wallace Watch” (ref). Is there a difference between level targeting and Taylor rules if there’s no zero bound?

“My beef with Scott Sumner” OR “Dude, you’ve already won the debate!”

Pleasantries: brilliant blog. Anyone remotely interested in monetary policy, a.k.a. “the only remotely possible technocratic method to manage an economy”, should read it. Ok. Prof. Sumner is absolutely right that the Fed made a mistake in fall of 2008. This is illustrated by the sharp decline in inflation expectations as illustrated in this graph (stolen […]

Great Moderation, RIP?

Yuriy Gorodnichenko does some of the funnest research in macroeconomics. I’ve seen him talk about the Finnish Great Depression (subtitle: “From Russia with Love”) and his test of some theories of informational rigidity. His work is very empirically oriented, but takes theories seriously. Today on voxeu he explores the question of whether the most recent […]