Links (5/13/19)

• Evolution or revolution: An afterword - Blanchard and Summers The changes in macroeconomic thinking prompted by the Great Depression and the Great Inflation of the 1970s were much more dramatic than have yet occurred in response to the events of the last decade. This column argues that this gap is likely to close in the next few years as a combination of low neutral rates, the re-emergence of fiscal policy as a primary stabilisation tool, difficulties in hitting inflation targets, and the financial ramifications of a low-rate environment lead to important changes in our understanding of the macroeconomy and in policy judgements about how to achieve the best performance.
• Killing the Pax Americana - Paul Krugman O.K., they weren’t supposed to start the trade war until I got back from vacation. And I really have too many kilometers to cover and hills to climb to weigh in on a regular basis or at great length. But since I’m currently sitting in an outdoor café with my coffee and croissant, I thought I might take a few minutes to address two misconceptions that, I believe, are coloring discussion of the trade conflict. By the way, I don’t mean Trump’s misconceptions. As far as I can tell, he isn’t getting a single thing about trade policy right. He doesn’t know how tariffs work, or who pays them. He doesn’t understand what bilateral trade imbalances mean, or what causes them. He has a zero-sum view of trade that flies in the face of everything we’ve learned over the past two centuries. And to the (small) extent that he is making any coherent demands on China, they’re demands China can’t/won’t meet. But Trump’s critics, while vastly more accurate than he is, also, I think, get a few things wrong, or at least overstate some risks while understating others.
• The Fault in R-Star- Federal Reserve Bank of Richmond In a 2018 speech at the annual Economic Policy Symposium in Jackson Hole, Wyo., Fed Chairman Jerome Powell compared monetary policymakers to sailors. Like sailors before the advent of radio and satellite navigation, Powell said, policymakers should navigate by the stars when plotting a course for the economy. Powell wasn't referring to stars in the sky, however. He was talking about economic concepts such as the natural rate of unemployment and the natural real interest rate. In economic models, these variables are often denoted by an asterisk, or star. The natural rate of interest in particular sounds like the perfect star to guide monetary policy. The real, adjusted-for-inflation interest rate is typically represented in economic models by a lowercase "r." The natural rate of interest, or the real interest rate that would prevail when the economy is operating at its potential and is in some form of an equilibrium, is known as r* (pronounced "r-star"). It is the rate consistent with the absence of any inflationary or deflationary pressures when the Fed is achieving its policy goals of maximum employment and stable prices. Since the financial crisis of 2007-2008, Fed officials have often invoked r-star to help describe the stance of monetary policy. But lately, r-star seems to have lost some of its luster. "Navigating by the stars can sound straightforward," Powell said in his Jackson Hole address. "Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly." Even New York Fed President John Williams, who helped pioneer estimating r-star, recently bemoaned the challenges of using the natural rate as a guide for policy. "As we have gotten closer to the range of estimates of neutral, what appeared to be a bright point of light is really a fuzzy blur," he said in September 2018. Why did r-star become so prominent in monetary policy discussions following the Great Recession, and why have its fortunes seem to have waned?
• Is There a Connection Between Undocumented Immigrants and Crime? - The New York Times A lot of research has shown that there’s no causal connection between immigration and crime in the United States. But after one such study was reported on jointly by The Marshall Project and The Upshot last year, readers had one major complaint: Many argued it was unauthorized immigrants who increase crime, not immigrants over all. An analysis derived from new data is now able to help address this question, suggesting that growth in illegal immigration does not lead to higher local crime rates.
• The Return of Fiscal Policy - Barry Eichengreen Public debt is not a free lunch in an economy close to full employment. But when investment demand tends to fall short of saving, as it does when monetary policymakers are unable to push inflation higher to reduce real interest rates, there is a risk of chronic underemployment – and a stronger argument for deficit spending.
• The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices - Richard Clarida I am pleased to attend this Fed Listens event providing a New England perspective for the Federal Reserve's review of our monetary policy strategy, tools, and communication practices.1 We are bringing open minds to our review and are seeking a broad range of perspectives. To us, it simply seems like good institutional practice to engage with a wide range of interested individuals and groups as part of a comprehensive approach to enhanced transparency and accountability.2 Motivation for the Review The Congress charged the Federal Reserve with achieving a dual mandate—maximum employment and price stability—and this review will take this mandate as given. We will also take as given that a 2 percent rate of inflation in the price index for personal consumption expenditures is the operational goal most consistent with our price-stability mandate. While we believe that our existing strategy, tools, and communications practices have generally served the public well, we are eager to evaluate ways they might be improved. That said, based on the experience of other central banks that have undertaken similar reviews, our review is more likely to produce evolution, not a revolution, in the way we conduct monetary policy.
• Joseph Schumpeter (1927): The Explanation of the Business Cycle - Brad DeLong The childhood of every science is characterised by the prevalence of "schools," of bodies of men, that is, who swear by bodies of doctrine, which differ toto caelo from each other as to philosophic background and fundamentals of methods, and aim at preaching different "systems" and, if possible, different results in every particular—each claiming to be in exclusive possession of Truth and to fight for absolute light against absolute darkness. But when a science has "gained man's estate," these things, whilst never ceasing to exist, tend to lose importance: the common ground expands, merits and ranges of "standpoints" and "methods " become matter of communis opinio doctorum, fundamental differences shade off into each other; and what differences remain are confined within clear-cut questions of fact and of analytic machinery, and capable of being settled by exact proof...
• Understanding the Bad News for IV Estimation - No Hesitations In an earlier post I discussed Alwyn Young's bad news for IV estimation, obtained by Monte Carlo. Immediately thereafter, Narayana Kocherlakota sent his new paper, "A Near-Exact Finite Sample Theory for an Instrumental Variable Estimator", which provides complementary analytic insights. Really nice stuff.
• On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint - NBER The zero lower bound (ZLB) irrelevance hypothesis implies that the economy's performance is not affected by a binding ZLB constraint. We evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. We can reconcile our empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule.
• How to design a stimulus package - VoxEU Academics and policymakers alike have debated how to structure an optimal stimulus package since the Great Recession. This column revisits the arguments related to the size of the multiplier and the usefulness of public spending, and offers a blueprint for future stimulus packages. It finds that the relationship between the multiplier and stimulus spending is hump-shaped, and that a well-designed stimulus package should depend on the usefulness of public expenditure. The output multiplier is not a robust statistic to use, and instead the ‘unemployment multiplier’ should be used.