Heritable Privilege

The Economist argues that with the importance of intellectual capital “privilege has become increasingly heritable.” As contributing factors the newspaper lists

  • assortative matching
  • more stable homes of highly educated parents
  • more stimulation of children of highly educated parents: “children of professionals hear 32m more words by the age of four than those of parents on welfare”
  • high cost of higher education
  • teachers’ unions
  • a school system that aggravates disparities

The background articles are here and here.

Quantitative Easing by the ECB

The ECB announced the long-awaited expansion of asset purchases. The press release lists these main points:

  • ECB expands purchases to include bonds issued by euro area central governments, agencies and European institutions
  • Combined monthly asset purchases to amount to €60 billion
  • Purchases intended to be carried out until at least September 2016
  • Programme designed to fulfil price stability mandate

Less expected is the arrangement for the sharing of “hypothetical losses”. The ECB will directly be exposed to only 20% of the risk of the additional asset purchases.

Another ECB website provides an overview over the ECB’s open market operations.

“Reserves For Everyone—Towards a New Monetary Regime?,” VoxEU, 2015

VoxEU, January 21, 2015. HTML.

New proposals to phase out cash are set to revive an old debate. Contributions to this debate focus on two related but independent issues: granting the general public access to central bank reserves; and phasing out cash.

Abolishing cash is neither necessary nor sufficient. But allowing the public to hold reserves at the central bank could have substantial benefits. Technical questions need careful consideration.

1.20 No Longer—Buiter Critique

In a Citi research note, Willem Buiter discusses the SNB’s decision to discontinue the exchange rate floor of the Swiss Franc vis-a-vis the Euro. His main points are:

  • The removal of the 1.20 floor on the CHF-euro exchange rate was a mistake.
  • Superior policy alternatives existed.
  • The old regime was indefinitely sustainable.
  • Removing the lower bound on nominal interest rates would have been the best choice. This can be done one of three ways.
  • The economic damage can be limited by restoring the exchange rate floor at a level not below the old one, and/or by eliminating the lower bound on nominal interest rates.
  • The rest of the world can learn from the SNB’s experience with a -0.75% deposit rate.

Buiter refers to his earlier work on removing the lower bound on nominal interest rates that I have discussed elsewhere (here and here).

Longhand Note Taking

Pam Mueller and Daniel Oppenheimer argue in a paper in Psychological Science that taking notes by hand is more productive than laptop note taking.

Many researchers have suggested that laptop note taking is less effective than longhand note taking for learning. Prior studies have primarily focused on students’ capacity for multitasking and distraction when using laptops. The present research suggests that even when laptops are used solely to take notes, they may still be impairing learning because their use results in shallower processing.

1.20 No Longer

The Swiss National Bank announced that it discontinues the exchange rate floor of CHF 1.20 vis-a-vis the Euro and lowers interest rates, to -0.75%. Markets are surprised. Michael Hunter writes in the FT:

The move came as a surprise since Thomas Jordan, SNB chairman, said as recently as December that Switzerland’s defence of the SFr1.20 rate against the euro was “absolutely necessary”.

A graph of the exchange rate series (source):

chfeur

Secular Stagnation at the ASSA meetings 2015 in Boston

Robert Hall’s session on “The Economics of Secular Stagnation” featured talks by Robert Gordon, Larry Summers and Barry Eichengreen as well as comments by Hall, William Nordhaus and Gregory Mankiw.

Not surprisingly, both Gordon (on the supply side) and Summers (on the demand side) identified signs of stagnation. Eichengreen didn’t; in his view only the price of investment goods displayed an unusual trend. Hall argued that the year 2000 marked a turning point: Since then, income per household stagnates as a consequence of falling labor supply by rich families and in particular, the teenagers in those families (they play video games instead). Nordhaus expected not stagnation but acceleration, due to breakthroughs in artificial intelligence. And Mankiw pointed out that negative real interest rates are the most normal thing in many economic models and not necessarily related to stagnation. Moreover, he argued that the job market pointed to the end of secular stagnation. He predicted the topic would no longer be debated a year from now.

Update (Feb 2015): Webcasts of this as well as other sessions (including on Piketty’s “Capital in the 21st Century”) are available here.

Fed and Treasury Maturity Policies

In a recent paper, Robin Greenwood, Sam Hanson, Josh Rudolph and Larry Summers discuss the joint effect of Fed and Treasury policy on the maturity structure of government liabilities in the hands of the private sector. John Cochrane commends the paper in a blog post.

Greenwood, Hanson, Rudolph and Summers make several points. First, “monetary and fiscal policies have been pushing in opposite directions in recent years.” In spite of QE, long-term government debt held by the private sector increased, mostly due to government deficits but also because the government lengthened the maturity of its debt. Second, Fed and Treasury policies largely are uncoordinated. They argue that this is suboptimal, in particular when the Fed strongly intervenes as it did in the recent QE episodes.

The Federal Reserve has focused purely on the effects that its bond purchases were expected to have on long-term interest rates and, by extension, the economy more broadly. … it completely ignored any possible impact on government fiscal risk, even though the Federal Reserve’s profits and losses are remitted to the Treasury. Conversely, Treasury’s debt management announcements and the advice of the Treasury Borrowing Advisory Committee (TBAC) have focused on the assumed benefits of extending the average debt maturity from a fiscal risk perspective, and largely ignored the impact of policy changes on long-term yields. To the extent that the Federal Reserve and Treasury ever publicly mention the other institution’s mandate, it is usually in the context of avoiding the perception that one institution might be helping the other achieve an objective. Specifically, the Fed does not want to be seen as monetizing deficits, while the Treasury has been reluctant to acknowledge the Fed as anything more than a large investor.

Third, they argue that from a consolidated government policy perspective, the optimal debt maturity structure is rather short. This saves on interest payments to the private sector (on average) and reduces “liquidity transformation” by the financial sector with dangerous consequences for financial stability. They downplay the risk sharing benefits of longer-term debt and argue that short-term debt has additional advantages at the zero lower bound.

Pages 11-12 contain the following figure, among others:

11

“Austerity,” CEPR, 2014

CEPR Discussion Paper 10315, December 2014, with Harris Dellas. PDF. Also published as CESifo Working Paper 5146, Study Center Gerzensee Working Paper 14-07. PDF, PDF.

We shed light on the function, properties and optimal size of austerity using the standard sovereign debt model augmented to include incomplete information about credit risk. Austerity is defined as the shortfall of consumption from the level desired by a country and supported by its repayment capacity. We find that austerity serves as a tool for securing a more favorable loan package; that it is associated with over‐investment even when investment does not create collateral; and that low risk borrowers may favour more to less severe austerity. These findings imply that the amount of fresh funds obtained by a sovereign is not a reliable measure of austerity suffered; and that austerity may actually be associated with higher growth. Our analysis accommodates costly signalling for gaining credibility and also assigns a novel role to spending multipliers in the determination of optimal austerity.

Pareto and Piketty

In an NBER working paper, Charles Jones discusses Piketty’s famous r-g term in light of several simple and transparent macroeconomic models. Jones emphasises the role of the Pareto distribution and the difference between partial and general equilibrium reasoning. Importantly,

… exponential growth that occurs for an exponentially-distributed amount of time leads to a Pareto distribution.

The Auditing Business

The Economist reviews history and performance of auditing firms. The tone is rather downbeat. Thirteen years after Enron, both the business model and auditors’ performance remain questionable. Independence, reputation risk and legal risk do not suffice to align auditor and investor incentives. Regulation has helped, for example in the form of the Public Company Accounting Oversight Board (PCAOB), due to the Sarbanes-Oxley act. Fundamental change could take the form of nationalisation of audit firms; “financial statements insurance;” or scrapping the legal requirement for audits.

Some quotes from the article:

But such frequent scandals call into question whether this is the best the Big Four can do—and if so, whether their efforts are worth the $50 billion a year they collect in audit fees. … But because the profession was historically allowed to self-regulate despite enjoying a government-guaranteed franchise, it has set the bar so low—formally, auditors merely opine on whether financial statements meet accounting standards—that it is all but impossible for them to fail at their jobs, as they define them. … investors disregard auditors and make little effort to learn about their work, value securities as if audited financial statements were the gospel truth, and then erupt in righteous fury when the inevitable downward revisions cost them their shirts. …

The modern audit does not even provide an opinion on accuracy. Instead, … merely provides “reasonable assurance” that a company’s statements “present fairly, in all material respects, the financial position of [the company] in conformity with generally accepted accounting principles (GAAP)”.

Argentina’s Costless Default

Werner Marti reports in the NZZ that in contrast to events in 2001, Argentina’s latest default has not generated significant additional costs for the typical Argentinian household. Additional, that is, to the costs that households had to bear because their country had already mostly been excluded from international capital markets at affordable rates.

Laut allen unseren Gesprächspartnern ist dieses Ereignis an den Argentiniern weitgehend folgenlos vorbeigegangen, denn das Land hatte bereits zuvor keinen Zugang zu internationalen Krediten mit zahlbaren Zinssätzen. Dies heisst natürlich nicht, dass sich mittel- und langfristig das Investitionsklima nicht weiter verschlechtern wird, falls die Präsidentin den Konflikt mit den von ihr als «Geierfonds» bezeichneten Gläubigern nicht doch noch löst.

Marti also reports about new trains that take commuters from Buenos Aires to the Tigre-Delta. They are imported from China, and financed with Chinese credit.

Income-Group Specific Trends in CPI Inflation

Tyler Cowen points out in a blog post that price increases adjusted for changes in quality have differed substantially across product categories. Depending on the basket of goods and services one wishes to consider this gives rise to large differences in measured CPI inflation. Cowen suggests that low-income households experienced much stronger CPI increases for their relevant basket than high-income households. In other words, the commonly reported increase in income inequality severely underestimates the effective rise.

“Fiscal and Monetary Policies,” Bern, Spring 2015

MA course at the University of Bern.

The classes follow section 5 in these notes and build on the material covered in section 2. Uni Bern’s official course page.

Update (April 22, 2015)—Main contents of lectures:

  1. Concepts. RA model with government spending and taxes.
  2. RA model: Equilibrium with lump sum or distorting taxes.
  3. Government debt in RA model.
  4. Government debt and social security in OLG model.
  5. Consolidated government budget constraint [2 lectures].
  6. Neutrality results in CIA model.
  7. Game of chicken. FTPL. Active and passive policies.
  8. Tax smoothing (Barro 1979).
  9. Tax smoothing (Lucas and Stokey 1983) [2 lectures].
  10. Time consistent tax policy (Lucas and Stokey 1983).
  11. Time consistent debt policy: Sovereign debt.
  12. Time consistent monetary policy (Barro and Gordon 1983) [time permitting].

Gold as a Central Bank Asset

Against the background of an upcoming referendum in Switzerland (on the popular initiative to  ‘Save our Swiss gold’) Willem Buiter discusses the role of gold as a central bank asset in a Citi research note.

One of his conclusions is that “[c]entral bank fiat paper currency and fiat electronic currency are socially superior to gold and Bitcoin as currencies and assets.” Accordingly, central banks should not hold gold in his view.