"The natural rate of interest" is a theoretical construct. It is a theoretical construct that only has a defined meaning within a certain class of economic models. And even within that class of models, the exact definition may vary from one model to the next.
The class of economic models I [...]
The David Suzuki Foundation and the Pembina Institute recently sponsored a study that concludes that the economic effects of a significant reduction in greenhouse gas emissions would be relatively small. Since its release, any number of journalists have dutifully cut-and-pasted bits from the summary report into their commentaries. But [...]
If you buy a house, the risk is minus the covariance between the price of the house and the present value of the rents of the house you would desire to live in.
I disagree with Felix Salmon. Strangely, Felix seems to have misplaced the significance of an idea [...]
I don't insure my car. Well, I have liability insurance, but I don't insure the car itself. So if I drive it into a ditch, or it gets stolen, I have to pay to repair or replace it, out of my own pocket.
Why did I take this decision? I could [...]
The Globe and Mail's Kevin Carmichael called me yesterday to talk about the idea that Canada's recovery won't be fully underway until exports started to increase at a significant rate. My comments didn't make the cut for the print edition, but they are in the online version of the [...]
Some numbers to consider:
Percentage of Canadians who tell pollsters that "Climate change is mankind's defining crisis, and demands a commensurate response": 65. In the 2008 federal election, percentage of votes cast for political parties that acknowledged that any meaningful climate change policy would affect consumer prices: 33. In the 2008 federal [...]Several recent items have been brought to my attention, providing additional confirmation - if any was needed - that the recession is over:
Last Friday's Labour Force Survey for November (more below); Today's release for building permits in October; and Garth Turner has stopped selling survivalist merchandise.It's time to [...]
I'm going to put forward two perspectives on why bad banks might be important in understanding the recession: an orthodox perspective; and a heterodox perspective.
Banks are financial intermediaries. A financial intermediary is a firm whose (primary) business is borrowing and lending. (They intermediate between the ultimate borrowers and the ultimate [...]
Canada doesn't have a counterpart to the NBER's Business Cycle Dating Committee, so we don't have a reference set of dates for previous business cycles. I'm pretty sure that most analysts would agree that the most recent expansion hit its peak in October of 2008, but picking a trough' [...]
The rebound in the sales and prices of houses in Canada has been making quite a few headlines. That's not bad news, but for those of us looking for signs of recovery, what really matters is whether or not it is being translated into real economic activity.
Calculated Risk noted [...]
Today I taught basic finance to my first year economics class. We don't have time to cover all the micro chapters, so have to skip some. In the past we skipped the finance chapter. This year we decided to include the basic finance chapter, and skipped consumer choice (indifference curves [...]
There's been a certain amount of commentary on today's GDP release. An annualised growth rate of 0.4% for 2009Q3 is better than zero - and it's at the 80th percentile of the predictive density generated by my toy predictor - but it's not what you'd call a strong [...]
Most macroeconomists take a Ricardian regime as their unspoken assumption; and, if pressed, would recommend a [...]
I went. And apparently it's being sold as a Big Deal; here's the speech. Here are the points I was curious about last week:
Is this a real policy proposal, or a recital of Conservative failures? A healthy dose of the latter, and some generalities. No details, though. [...]Ed Broadbent had an op-ed in Tuesday's Globe on a plan to reduce child poverty, and he offers this proposal:
In the next budget, let's impose a six-point increase in income tax on those earning more than $250,000 a year (whose average taxable income is $600,000). While leaving them with very high [...]Similarities:
S1. Both do general equilibrium analysis, trying to understand the interaction between parts of a whole system, with lots of positive and/or negative feedback loops.
S2. Both have got time-series data that show how different variables are correlated. We try to explain those correlations by building models. Sometimes we can use [...]
It's hard to believe that I've managed to run a blog on the Canadian economy for more than four years without having a go at what is Canada's most fragrant example of bad economic policy. Happily, the Conference Board has just published a paper summarising the sorry state of [...]
MM Veldhuis and Lammam respond to my post on their op-ed in the National Post last week, and Kevin Milligan summarises a couple of their points:
1. The PBO would not be exactly like the CBO therefore no parallels to the CBO may be drawn.When we last left this story, inflation was drifting further and further below the Bank of Canada's inflation target, and the CAD was up to 0.97 USD. The case for intervening in the forex market to slow the appreciation of the CAD - and hence slow the drift to [...]
Today's National Post has an op-ed written by a couple of Fraser Institute types entitled "Scrap the Parliamentary Budget Office". It's a remarkable piece of rhetoric. Although its stated purpose is to make the case for eliminating the PBO, it ends up demonstrating once again why an effective PBO [...]
To paraphrase Churchill, accountants and economists are divided by a common language. We seem to be using the same words to talk about the same things, but we don't understand what the other is saying. This is my attempt to provide an economist's perspective on the relation between accounting and [...]
It's not often that the internal Laval e-mail listserve grabs my attention. I guess I have to go, if only to satisfy my curiosity about the following points:
Is this a real policy proposal, or a recital of Conservative failures? Cap-and-trade, or a carbon tax? How much material can he cover in [...]Don Martin loses it in today's National Post:
Clock tallies IOU to next generation: Stephen Harper will join Jean Chretien as only the second prime minister in history to enroll Canada in the half-trillion-dollar national debt club.This is silly. Nominal debt figures from 1995 - when the federal debt first went above [...]
Bryan Caplan asks the question of why more academic economists don't use Bayesian methods. It's a question academic Bayesian economists ask ourselves pretty often.
One part of the answer is that many already are informal Bayesians. For example, the whole DSGE literature would be uninteresting (or even more uninteresting, depending [...]
The Department of Finance publishes monthly data for expenditures, revenues and the deficit. These numbers don't necessarily correspond to the annual numbers (for example, various items are sometimes booked to a fiscal year after it's over), but it gives us a good idea of where the government's finances are [...]
Last night I was chatting with someone who works for a think-tank. I work for Carleton University. We both work for charities. Like households, firms, and governments, charities have income and expenses, and a net worth. Consumer choice theory tells us, at least in principle, how much people should save, [...]
In an upcoming post, I'm going to try to thrash out some of the details about the origins of the federal budget deficit, with an idea to figuring out how to make it go whence it came. But first, I'm going to set out some historical background, now that the [...]
We always knew that interest rate targeting could never work in theory, because it left the price level indeterminate. But it seemed to work well in practice, and kept inflation close to target, so we eventually learned to overcome our theoretical squeamishness and embrace it as part of the reality [...]
Cuban blogger Yoani Sanchez reports being beaten up and abducted by Cuban...quasi-authorities, for being a "counter-revolutionary" (i.e. having an independent blog). Check out her blog Generation Y.
I normally stick to economics, but have decided to make a rare exception here. I follow Yoani's blog, to help keep me in [...]
Scott Sumner argues that nominal interest rates are near zero because monetary policy (specifically expected future monetary policy) is too tight. He argues that tight (expected future) monetary policy makes expected inflation low, which makes nominal rates low. He also argues that tight (expected future) monetary policy makes real [...]
I am going to start with an orthodox monetarist approach, make one trivial semantic change, and see how far I can get in deriving Neo-Chartalist results. The semantic change is to change what I mean by "fiscal policy". It's an unconventional definition of fiscal policy, from a monetarist [...]
If a social scientist wanted to understand what happens in church, he could ask the churchgoers themselves for an account of what they do in church. But the social scientist's account of what happens in church need not be the same as the churchgoers' account.
If an economist wanted to understand [...]
The most recent issue of Canadian Public Policy has this short note:
Minimum Wage Increases as an Anti-Poverty Policy in Ontario: In this article, we consider the possibility of alleviating poverty in Ontario through minimum wage increases. Using survey data from 2004 to profile low wage earners and poor households, [...]If you look at the balance sheet of a central bank, you will see it has liabilities (mostly currency) and assets (normally mostly government bonds/bills). Why do central banks have assets? Do they need them?
The wrong answer is that central banks need assets to "back" the value of the [...]
The idea is simple: if you must retreat, leave nothing behind that could be useful (h/t to Support the OPBO).
Tories unload 4,476 pages of stimulus details: The Harper government has dumped three box-loads of information about its efforts to stimulate Canada's sputtering economy on Parliament's independent budget watchdog. [...]
Both central banks and commercial banks issue liabilities that function as media of exchange. Why do we say that it is central banks, rather than commercial banks, that determine monetary policy; setting interest rates in the short run, and inflation in the long run? What makes a bank a central [...]
And so it continues. I noted on Wednesday that the Globe and Mail's lead editorial on exchange rate policy demonstrated a singular lack of understanding of the economics of exchange rate policy. A particularly astute commenter noted that it was only a question of time before the zombie [...]
Notes for a panel discussion in Ottawa on Tuesday evening (details below).
200 years ago, economists made a prediction, and we got it wrong. "Big deal" you might say. But it was a big deal; a much bigger deal than some piddling mistake like failing to predict a global financial crisis. [...]
The title really says it all. And it's not a rhetorical question; I don't know the answer. But if the US is really concerned (H/T Mark Thoma) about the US dollar being too high against China's yuan, and it believes China is "artificially" preventing the yuan from appreciating [...]
Why does the Loonie appreciate when the Bank of Canada tightens monetary policy (relative to what was expected)? And depreciate when the Bank loosens monetary policy (relative to what was expected)?
Before you conclude I've lost it, by asking such an easy question, consider the following weird thought-experiment.
Suppose that one night, [...]
I've received a request to update my irregular series of graphs of movements in oil prices in currencies other than the USD. There's been a certain amount of movement in the oil and forex markets over the past few months, so I'm happy to oblige:
The [...]
It turns out that I may have been unfair to Patricia Croft (chief economist of RBC-whatever-it-is) over here. As Erin Weir points out, she's not the only high-profile professional economist to go from remarking on the relatively small quantity of Canada's official reserves to making the clanging error [...]
There are reports that the federal Liberals are going ahead with some sort of conference that is to generate some sort of intellectual infrastructure for an eventual platform for an election, to be held - if things continue to go according to current form - in 2012. So [...]
I've said it before, and I'm saying it again. The CAD is off by about two cents today:
Canada is no Oz, mate: [W]hat seems to have caught currency markets off guard was the Bank of Canada’s commitment to keeping rates unchanged until at least next June and keeping its expected [...]The September CPI report was published last Friday, and the disinflationary trend of the last few months hasn't yet stopped:
As I noted at the last interest rate announcement,
Up until the crash in commodity prices, Canada ran a current account surplus, so an appreciating [...]The economic story du jour is the appreciation of the CAD, and Peter Mansbridge had a panel of economists on The National last Tuesday to discuss it. I get the impression that this is a semi-regular recurring feature. The discussion was - how shall I put it? - unsatisfying. [...]
It has come to the attention of the federal Liberals that ridings who are represented by Conservatives are receiving a disproportionate share of the monies spent under the aegis of the fiscal stimulus:
Ontario was allocated about $1.1 billion in Infrastructure Stimulus Fund money, translating to about $90 for each [...]Perhaps the strongest signal that the recession is over is the fact that the appreciation of the CAD is making headlines, just as it did in the last expansion. But since we're operating at the interest rate lower bound, things are a bit trickier this time around.
In the short term, [...]
Doug Peters and Arthur Donner (names I remember from the 1970s debate over inflation in Canada) have an opinion piece in the Toronto Star on the role of the Bank of Canada in reducing the budget deficit. It starts out fine, but ends in a non-sequitur.
It really does start [...]
Do a google street map walking tour of Old Québec.
You could do worse than start at the building where my wife works:
It's been said before, and I'll say it again: Quebec City is spectacular. [...]Michael Ignatieff has been talking recently about the importance of an independent Parliamentary Budget Office, and Kevin Milligan at Support the OPBO is paying attention:
Ignatieff takes up the cause More support of the PBO from the OLOGo read them; Kevin's doing a great job of commenting on the [...]
Paul Krugman has a flow chart showing flows of savings from ultimate lenders to ultimate borrowers. One arrow goes via the banks. Paul labels it "traditional banking"; that's fine. People deposit their savings in banks, and the banks lend those savings to other people or firms. But a second [...]
Statistics Canada publishes two sets of numbers for employment. The one that makes the headlines is from the Labour Force Survey of households, and it is released on the first or second Friday following the month in question. The other series is the Survey of Employment, Payrolls and [...]
Brad De Long thinks very highly of Greg Ip, even when Brad thinks Greg gets something wrong. Brad thinks Greg is very sharp. So do I. But the other reason why Greg Ip is such a good economic journalist is that he was thoroughly trained in both Journalism and [...]
The editorial cartoon in yesterday's Le Soleil has the best take I've seen yet on the issue of how to deal with the federal deficit. The target is Michael Ignatieff, but it could just have well have been Stephen Harper, because their positions on this issue are identical. Here [...]
There is a perfectly sensible theory that says that rent controls reduce labour mobility and can therefore worsen structural unemployment. I'm going to ignore that sensible theory and put forward a silly theory -- one I believe is wrong. But I'm putting forward a silly theory to make (what I [...]
The textbooks say that money serves as: store of value; medium of account; and medium of exchange. Arnold Kling seems to miss the importance of the fact that money is a medium of exchange. Worse, he misunderstands me, thinking that I am one of those economists who makes a [...]
Arnold Kling asks: why are mackerels different from money? Why should the M in MV=PY stand for money, and not mackerels?
Why can't an excess demand for mackerel cause a recession? Why can't an excess supply of other goods be matched by an excess demand for mackerel?
Keynesians don't know the [...]
This post is more of a bleg; because I'm sure someone reading this knows more about the answer than I do.
An insurance company doesn't need reserves if it is insuring a large number of short term uncorrelated risks. The Law of Large Numbers ensures that its annual claims will equal [...]
Mike Moffatt asks the right question; and it's the economist's question.
In economics, if we think the price of x is too high, we don't just say "we should lower the price of x". We look for the underlying causes of the price of x being too high. "Where's the [...]
(Or maybe the title should be: "Notes from the Phelps/Lucas Administration"; or "Notes to supplement our fading memories of the late 1970's".)
Is this a Dark Age in macroeconomics? In other words, have we collectively forgotten some (important) stuff that we used to understand?
I want to approach this [...]
There's a certain amount of speculation about the form of the US recovery, based on scenarios of how its economy will work its way out of a balance sheet recession. As I understand it, the main candidates are (in alphabetical order):
U: The US economy grinds along as households deleverage themselves, [...]Adam Smith Lives! (A history of economic thought blog) is back from an administratively-induced hiatus. From her latest post:
David Levy and I are working on the role of experts and expertise in social science. We're much concerned of late -- in the light of the financial meltdown and [...]It is a season in which even the most jaded observers of federal politics can only look on in slack-jawed, googly-eyed wonder. Here is a press release from the NDP web site:
Liberals on board with Conservative tax hikes: Despite publicly opposing the Conservatives’ HST plan, Michael Ignatieff is now endorsing [...]My own memories are similar to Paul Krugman's, but with one important difference. This is the bit I remember differently:
"The Lucas view took the economics profession by storm – not because there was any solid evidence for it, but because it was so clever, because it led to nice math, because [...]
It appears that we will have some sort of modification to Employment Insurance. The main measure involves an extension of benefits to some EI recipients who may be at risk of exhausting their benefits, and that - and the prospect of an election - appears to be enough for [...]
It's not just John Cochrane; it's not just (modern) Chicago; it's (nearly) all of us.
Which economist has not written, said, thought, taught, or learned, the following:
"Let there be n goods (including money, if it exists). Max U(X1,X2,..Xn) subject to SUM over n[P(X-E)]=0. Aggregate over all people. Therefore the sum of [...]
The Charest government is floating the idea of increasing the QST - which has been harmonised with the GST since the very beginning - by another percentage point (in addition to the one-point increase announced in last spring's budget) as a way of dealing with the post-recession deficit. This [...]
Anyone? Kevin Milligan at Support the OPBO would like to know. So would I. The relevant legislation appears to be silent on the matter.
[...]For a whole economy, does planned expenditure on newly-produced goods necessarily equal planned income from the sale of newly-produced goods? That's what I mean by "Say's Law" in this context.
Say's Law is wrong, and the fact that it is wrong is really important for macroeconomics. But it's not obvious why [...]
From today's interest rate announcement:
Persistent strength in the Canadian dollar remains a risk to growth and to the return of inflation to target. In its conduct of monetary policy at low interest rates, the Bank retains considerable flexibility, consistent with the framework outlined in the April MPR.
The Bank has been issuing warnings [...]
The more I look at the US, the more I see unpleasant parallels to Canada's experience of the 1990's - what Pierre Fortin called The Great Canadian Slump. Even after we emerged from the worst of the 1990-91 recession, we still had to deal with a large current account [...]
The August LFS release is out, so it's time to update my series of graphs comparing job losses in this recession with those of recessions past. And it's also time for Canadian economic forecasters to take a bow - their predictions for how the recession would proceed out turned [...]
That's the question we ought to be asking right now, but I haven't seen anyone ask it, let alone answer it. I don't know the answer, but I do know it's the right question to ask.
For every dollar borrowed there's a dollar lent, by definition. If there are debtors, who [...]
There are signs of economic recovery. Suppose a year from now it is clear that the economy has indeed recovered. What caused it? Was it: monetary policy; fiscal policy; or did the economy recover by itself?
I don't know the answer to that question; nor does anyone else. If you have [...]
The NDP has traditionally had a certain amount of credibility in its concern for environmental issues, and it can fairly fairly credited for dragging many environmental issues to to the political forefront.
But that's not the same thing as being able to come up with sensible policy prescriptions to deal [...]
This chart is from The Economist:
There is only one country (thanks to sharper-eyed Frances in the comments) are only two countries in this list that have reduced gasoline taxes in the last ten years. Okay, the units are measured in euro cents, and the [...]
The National Post's Full Comment section occasionally links to us. (No, we don't get paid for this; they follow the usual blog convention of copying a couple of paragraphs and sending readers here for the full article. Everyone is free to do so.) My post Economic policy advice [...]
If asked, people might say something along the lines of this Toronto Star editorial:
The rolls of the unemployed in Canada continue to grow... Many or most of them won't be eligible for employment insurance (EI), due to the program's Byzantine eligibility requirements.
Very alarming - especially that word "most". But how do [...]
Here is what I would like some staffer to ask next time NDP strategists are kicking around ideas for goods to subsidise or services that governments to provide at a discount in order to advance their agenda of reducing poverty and inequality:
"Why don't we just give low-income households money and [...]
Via Megan McArdle, I learn that Kevin Drum is puzzled by the drop in day trips by Americans to Canada. Megan is quite right; the exchange rate is the explanation.
I've been teaching from the French translation of Krugman and Obstfeld's International Economics. Unfortunately, it was translated for the [...]
Here is my first recommendation to the NDP on corporate income taxes: accept the fact that previous NDP positions have been - to put it kindly - painfully amateurish and should be discreetly tossed into the Dumpster of Disavowed Doctrines. It's tabula rasa time, and the long path back to [...]
The NDP has never been a fan of the GST, and persuading Canadian progressives of its merits is a never-ending variation on the theme of "but these go to eleven:"
Progressive Person: How do we raise the tax revenues we need for the social programs we want to implement without [...]
I saw an example of the Junker Fallacy recently (it doesn't matter where). You have probably seen it too somewhere.
"Investment is low because people (or firms) spend all their savings on speculation rather than investment -- bidding up the price of houses, shares, land, or in corporate takeovers; there is [...]
A while ago, there was a spurt of articles bemoaning the 'out-of-control' spending of the federal government, making the point that federal spending has been outpacing the rate of growth of GDP over the past five years. We are presumably expected to believe that future federal governments will be [...]
One of the themes being played up in the NDP's convention is its attempt to 're-brand' (up to, but not quite, including dropping the 'New' from its name), and part of this is apparently an attempt to develop a credible economic platform. The NDP has historically been pretty consistent in its refusal [...]
"You and I can only lend money if we've got some to lend; but banks can create money and debt simultaneously at the stroke of a pen". Might commercial banks be the cause of the increase in debt over the last few years?
Maybe partly, but basically no. You can't just [...]
Who owns the Fed? Is the Fed really privately owned?
I don't know, and I don't really care (except perhaps out of idle curiosity). Learning who has really owned the Fed all these years would make little or no difference to how I view the Fed.
I expect someone determined enough to [...]
Could monetary policy have caused the recent rise in levels of debt?
The obvious answer is that loose monetary policy lowers interest rates, which causes people to want to borrow and spend more, and so go deeper into debt. That answer is both obvious and wrong, as I explained in a [...]
No one knows. There is approximately an infinity of exchange rate models out there, and according to the one(s) used at the Bank of Canada, the CAD is over-valued. I don't think anyone will strenuously object to the notion that the CAD is in some sense too high - that [...]
