07-11-2002 21:25									#451
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I have never had an OCA debate with you lot.

I meant asymmetric, not symmetric, of course, since the target is a ceiling for the ECB not a symmetric target like at the fed or the boe. You are forgiven for being confused by my blunder.

The democratic deficit comment was meant to convey my disbelief that the ECB's implementation of a modern inflation target would survive in the face of high profile criticism (every economist whose opinion is worth anything knows an asymmetric 2% target is inappropriate) if attempted by a national central bank.

	07-11-2002 21:32									#452
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"I have never had an OCA debate with you lot."

I know, just I've had lots of those....

"I meant asymmetric, not symmetric"

Ok, still: what exactly do you mean by it, esp opposed to the BoE (forget the Fed) ?

"The democratic deficit comment was meant to convey my disbelief that the ECB's implementation of a modern inflation target would survive in the face of high profile criticism"

Well what do you think would be changed ? Would the ECB become the bank of bailouts like the Fed ? The fed's ultra-easy money policy has brought America into the current dilemma....

	07-11-2002 21:45									#453
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I said, for the ECB 2% is a ceiling. In the BOE and the Fed the target is a symmetric one, which means the interest rate is set to hit the target with a deviation of 0.1% either side being equally bad.

Since we are always talking about distributions (central bankers, whilst considerably more clever than Roland thinks, are not gods ) a ceiling is a bad idea. What is more, even without a ceiling 2% is a strange target.......every estimate of costs of inflation show little or no extra cost to 2.5% inflation than 2%.

Also one must consider the adverse effect of having to build credibility after the founding of a new CB. I don't know how much you guys know about the problem of dynamic inconsistency of monetary policy.....but it is the main reason we have CB at all. The ECB was always going to set slightly tight monetary policy early on.........it is the optimal thing to do when building credibility. This makes the 2% all the more unjustifiable.

	07-11-2002 22:35									#454
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"The fed's ultra-easy money policy has brought America into the current dilemma.."

The market better accommodate my upcoming new mortgage at new historic low interest rates!

What are the chances, Sten? Looking to close end-of-month or mid next month.

On other topics, productivity still looks strong at 4%...

	07-11-2002 22:40									#455
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Poly ate my reply....

Short version:

"I said, for the ECB 2% is a ceiling."

The ECB was quite easy when HICP approached 1 %. With the other factors in deciding policy, it turns out like a symmetric policy around 1.5 %...

"even without a ceiling 2% is a strange target...."

What is the point for a higher target ? Deflation fears ?

"The ECB was always going to set slightly tight monetary policy early on.........it is the optimal thing to do when building credibility. This makes the 2% all the more unjustifiable."

It's about 2.5-3 % by US CPI standards, is it not.... do you think a symmetric policy around 2 or 2.5 % HICP would have a benefit ?

	07-11-2002 22:42									#456
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Dan: Buying real estate or refinancing ?

	07-11-2002 22:49									#457
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Buying. I got a reasonable offering price for my condo (~$187.50/ft^2), so I'm gonna go for it.

Edit: To be clear, I'm buying the condo that I'm currently renting.

Last edited by DanS on 07-11-2002 at 23:15

	07-11-2002 23:16									#458
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If Poly eats this as well I will perform a Heimlich maneouvre.

Why is inflation costly?

Seems a silly question, but most people cannot answer this satisfactorily. Menu and shoe leather costs (costs associated with changing price levels for producers and consumers respectively) are a factor, but the biggie is misallocation of resources due to shifting relative prices. There is also a key redistribution between borrowers and lenders.

Now what do economists know about the size of these costs?

Well a fair bit. They aren't large at low and stable levels of inflation........economies have developed defences like indexation......but the costs get _very_ large should inflation get out of control.

What do economists know about the cost in terms of GDP of reducing inflation?

Again a lot. It's big, and gets bigger more quickly (positive 2nd derivative) as inflation gets small.

The costs (in terms of foregone GDP) to monetary policy that turns out even to be moderately tighter than necessary to close the output gap at NAIRU are therefore large. And it's not just that.......the ECB handling of some PR issues has been bad........and an unhealthy obsession with monetary aggregates is undesirable.

To conclude, yes, a symmetric target at 2% or 2.5% would, IMO, be superior to the current system.

	07-11-2002 23:34									#459
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"The costs (in terms of foregone GDP) to monetary policy that turns out even to be moderately tighter than necessary to close the output gap at NAIRU are therefore large."

Interesting.

	08-11-2002 13:17									#460
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"The costs (in terms of foregone GDP) to monetary policy that turns out even to be moderately tighter than necessary to close the output gap at NAIRU are therefore large."

I don't believe in NAIRU, but apart from that - those are cycle management issues, or are you talking about a long term impact ?

"......and an unhealthy obsession with monetary aggregates is undesirable."

OBSESSION !?

Just proper consideration.

Do you really think the Fed's leniancy to tolerate 10, 12 or 13 % M3 growth while the economy is getting ever more imbalanced and asset prices inflate was a good idea ?

	08-11-2002 14:07									#461
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Uh..... so should a moron even try to learn macroeconomics and actually understand any of this or it is beyond my reach?

Damn it, why can't everyone play nice and follow the rules of classical economics so I don't get a huge headache.

	08-11-2002 14:32									#462
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Hehe no time, more later.

Moron: Of course........everyone should know some economics, evens morons.

Classical economics is fine for analysing long run issues.......I would far rather people understood classical economics well than had a flawed understanding of neo-classical and new classical/Keynesian economics. More on that later.

	09-11-2002 00:30									#463
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DanS - for what it is worth, I think the Fed ease was counter-productive and almost purely a weaken the dollar move. If that is the case then we are headed for a very steep yield curve and higher borrowing rates. I'd lock in your financing, or wait to bid back the offer.

It has been a while since we discussed it here, but super high M growth during a flight-to-quality with a very steep yield curve may not be stimulative at all. Yield curve arbitrage doesn't make many credit based loans.

	09-11-2002 02:32									#464
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Thanks, Sten. Looks like a 5/1 or 7/1, 30-year loan is in order. Close the deal expeditiously.

	19-11-2002 03:04									#465
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Here's a funny article...

Back to the '50s.

	19-11-2002 20:53									#466
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I love the spin on todays US inflation number... YoY Consumer prices now up 2.1% from 1.5% last month, up 0.3% for the month, core up 0.2% - and its a good thing because the Fed is worried about deflation! Please!

Next month's CPI is projected at 0.2% replacing -0.1% from last Novy, so YoY will be running at about 2.5%, thank goodness, I was begining to get worried about 1.5%, now if we can just get to 3.5% or 4.5% everything will be okay.

Alan, I think we have a NAIRU jacket problem... '92 all over again.

	19-11-2002 23:14									#467
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quote: Originally posted by Sten Sture Alan, I think we have a NAIRU jacket problem... '92 all over again.

Hell no, the situation is very different from '92. The output gap is nowhere near closed.........no NAIRU jacket in sight.

Besides we shouldn't believe in NAIRU anyway - Roland has spoken.

	19-11-2002 23:26									#468
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Edit: answered those questions myself. IMF lists output gaps and the output gap is the % shy (or over) potential output.

Is NAIRU an assumption that once unemployment gets to a certain %, inflation will increase?

Edit again: OK, taking a look at IMF's numbers, for '02 the US has expected growth of 2.2% and an output gap of -2%. Does this mean simply that the potential growth rate of the US for '02 is 4.2%? That seems awfully high.

Last edited by DanS on 19-11-2002 at 23:55

	19-11-2002 23:57									#469
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Yes NAIRU is the rate of unemployment at which inflation is not accelerating.......if output is at its long run trend level then employment is at its 'natural' rate, and there is no output gap.

At present demand growth is temporarily lagging productive potential (productivity growth is a 2 edged sword when a labour market recovery is widely seen as necessary condition for people to generally consider it a recovery), though of course this is not sustainable in the long run.

	20-11-2002 00:00									#470
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Thanks, DrSpike. I'm trying to grok. Could you please be so kind as to answer my math question edited in?

	20-11-2002 00:23									#471
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Does seem a touch high; how is 'expected growth' calculated in the figures you quote? Of course with the way the US calculates productivity trend growth isn't far off of 4.2% IIRC.

	20-11-2002 00:31									#472
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http://www.imf.org/external/pubs/ft...df/chapter1.pdf

Expected GDP growth at pg. 2

Output gap at pg. 16

Putting those 2 together (and assuming I'm doing this correctly), we had potential growth of 2.2% in 2000 and actual growth of 3.8%. Potential growth in 2001 would have only been 1.5%. Hmmm...

Btw, I do note that the UK is in a stellar fiscal situation.

	20-11-2002 01:49									#473
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To see why your calculations don't work consider an economy with a negative output gap. Growth in the next year can be above trend and still not close the output gap, which would still be negative. This means that growth for the last year considered could have been even higher than was observed without generating inflation, but not that trend growth is higher than growth in the past year.

Better?

	20-11-2002 01:56									#474
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Gotcha.

	20-11-2002 13:42									#475
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quote: Originally posted by DrSpike Of course with the way the US calculates productivity trend growth isn't far off of 4.2% IIRC.

Productivity growth got revised down to something about 2 %. Considering two statistical quirks (only non farm business and falling hours per worker) this should translate into something like 2.5 % trend growth.

Now the other interesting things are the cyclical factor in this and hedonic deflators. Whatever you say, my PCs didn't increase their utility to me by 30 % a year....

quote: Originally posted by DrSpike Besides we shouldn't believe in NAIRU anyway - Roland has spoken.

	20-11-2002 15:11									#476
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quote: Originally posted by MORON Uh..... so should a moron even try to learn macroeconomics and actually understand any of this or it is beyond my reach?

Understanding macroeconomics is extreamly important if you want to be an informed voter. Politicans are extreamly fond of offering economic programs which look good to the uninformed public, but will have overall negative results on society as a whole (ie; trade protection)

	20-11-2002 19:18									#477
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I pretty much agree with Roland NAIRU is useless.

In principle it's nice but the problem is that the equilibrum is constantly shifting, which makes it pointless to calculate output gaps or make forecasts based on NAIRU.

	20-11-2002 19:28									#478
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I can empathise with that view, but NAIRU and output gap calculations are far from useless in practical macroeconomics I assure you.

Output gaps and NAIRU are a powerful way of organising your thinking about some key macroeconomics issues......some of the posts in this thread are good examples of the sorts of muddles you can get yourself into quite easily when you have no framework in which to analyse problems.

Ultimately policy decisions need to be undertaken in an uncertain world. Give me a choice between an imperfect tool and no tool at all I know which I will take every time.

	20-11-2002 19:30									#479
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quote: Originally posted by DanS http://www.imf.org/external/pubs/ft...df/chapter1.pdf Expected GDP growth at pg. 2 Output gap at pg. 16 Putting those 2 together (and assuming I'm doing this correctly), we had potential growth of 2.2% in 2000 and actual growth of 3.8%. Potential growth in 2001 would have only been 1.5%. Hmmm... Btw, I do note that the UK is in a stellar fiscal situation.

So France's GDP grew by 4.2% in 2000? Interesting...

The way it is going now, the UK is pretty much frittering away that stellar situation by 'investing' in higher wages in the public sector.

	20-11-2002 19:33									#480
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quote: Originally posted by Colon So France's GDP grew by 4.2% in 2000? Interesting...

I explained in a previous post.

*edit*. 4.2% actual.........hehe..........does that bother you?