Wednesday, September 17, 2014

Follow or Break the Rule?

Lars Christensen plots with recent data a version of the Taylor rule I proposed some years ago (published here).  I suggested this rule as an approximate description of Alan Greenspan's monetary policy in the 1990s. Here is Lars's plot:

Click on graphic to enlarge 
I based this rule (the green line) on data only from the 1990s, but notice that it does reasonably well until 2009.  The red line is the rule with parameters estimated from the later period.

Taken at face value, the rule suggests that it is time for the Fed to start raising the federal funds rate.  If you believe this rule was reasonably good during the period of the Great Moderation, does this mean the Fed should start tightening now, as the economy gets back to normal? 

Maybe, but not necessarily. There are two problems with interpreting such rules today.

The first and most obvious problem is that odd things have been happening in the labor market for the past several years. The unemployment rate (one of the right hand side variables in this rule) may not be a reliable indicator of slack.

The second and more subtle problem is the nagging issue of the zero lower bound.  For several years, the rule suggested a target federal funds rate deeply in the negative territory.  We are out of that range now, but should the past "errors" influence our target today?  An argument can be made that because the Fed kept the target rate "too high" for so long (that is, at zero rather than negative), it should commit itself now to keeping the target "too low" as compensation (that is, at zero for longer than the rule recommends).  By systematically doing so, the Fed encourages long rates to fall by more whenever the economy hits the zero lower bound. Such a policy might lead to greater stability than strict adherence to the rule as soon as we leave negative territory.

The time for the Fed to raise the target rate may be soon, but I don't think we are quite there.

Update: Ricardo Reis writes to me the following useful observation:

There is another (related) argument for not raising rates now to offset shortfalls in the past. It is not about the interest rate. It is about the price level, the ultimate goal of monetary policy and measure of its performance.

If you plot the PCE deflator, there is a clear shortfall relative to a 2% price-level target. A 2% price level target fits very well during Greenspan's time.  By the end of 2008, we were exactly on the 1992-target. But when I look at that plot starting in 2009 until the most recent data I see a gap.

A price-level target rule is optimal in normal times (Ball, Mankiw, and Reis) but is also an optimal policy in response to the dangers of the zero lower bound (Woodford). We have to catch up for the shortfall in the price level right now. And if you look at inflation expectations from surveys or markets, there seems to be no catch up expected, indicating that policy is still too tight.

Saturday, September 13, 2014

The Case for Civility

Noah Smith puts it well:

most of our arguments are over things like Obamacare, or antipoverty programs, or financial regulation-- issues on which reasonable people can and do disagree. If you’re uncivil in this sort of situation -- if you call your opponent an idiot, or a liar, or a nastier name simply because you think his or her argument is bad -- you’re basically being overconfident. You’re assuming that there’s essentially no chance that you’re in the wrong, so it’s in the public interest for you to rail against your opponent and score points with the crowd. If you do this, there’s no chance that you yourself will learn anything from the encounter.

Friday, September 12, 2014

Just for Fun

A friend sends the following puzzle.  Find the X that fits in this sequence:

16  06  68  88  X  98

For those who don't get it, I will post a hint in a few days.

Hint: Try looking at the problem upside down.

Monday, September 08, 2014

Grading Textbooks on Climate Change

Sunday, September 07, 2014

On Education

I much enjoyed this article by Steven Pinker.  An excerpt:

It seems to me that educated people should know something about the 13-billion-year prehistory of our species and the basic laws governing the physical and living world, including our bodies and brains. They should grasp the timeline of human history from the dawn of agriculture to the present. They should be exposed to the diversity of human cultures, and the major systems of belief and value with which they have made sense of their lives. They should know about the formative events in human history, including the blunders we can hope not to repeat. They should understand the principles behind democratic governance and the rule of law. They should know how to appreciate works of fiction and art as sources of aesthetic pleasure and as impetuses to reflect on the human condition.

On top of this knowledge, a liberal education should make certain habits of rationality second nature. Educated people should be able to express complex ideas in clear writing and speech. They should appreciate that objective knowledge is a precious commodity, and know how to distinguish vetted fact from superstition, rumor, and unexamined conventional wisdom. They should know how to reason logically and statistically, avoiding the fallacies and biases to which the untutored human mind is vulnerable. They should think causally rather than magically, and know what it takes to distinguish causation from correlation and coincidence. They should be acutely aware of human fallibility, most notably their own, and appreciate that people who disagree with them are not stupid or evil. Accordingly, they should appreciate the value of trying to change minds by persuasion rather than intimidation or demagoguery.

I believe (and believe I can persuade you) that the more deeply a society cultivates this knowledge and mindset, the more it will flourish. The conviction that they are teachable gets me out of bed in the morning.

Thursday, September 04, 2014

Is inflation dead?

Thursday, August 28, 2014

A Nice Application of the Coase Theorem

Wednesday, August 27, 2014

25 Brightest Young Economists

Here is a list.  By the way, six are at Harvard, more than any other school.

Tuesday, August 26, 2014

News from Amazon

In the Business & Money category:

And in all books:

To users of my favorite textbooks: Thank you!  Have a great semester.

Saturday, August 23, 2014

What To Make of Corporate Tax Inversions

Click here to read my column in Sunday's NY Times.

Tuesday, August 19, 2014

Teaching Conference

I will be speaking at the annual conference of the National Economics Teaching Association, which this year is being held on Thursday, November 6th and Friday, November 7th, 2014 in San Diego, CA.  If you want to consider attending, click here for more information.
You can potentially win a free trip to the conference, as well as some cash, by entering this contest.

Saturday, August 09, 2014

Eric Posner and Glen Weyl on Piketty

In The New Republic.  A tidbit:
Only very extreme scenarios, where every wealthy individual does all of the following at the same time can lead to the sort of explosive inequality dynamics Piketty fears:
  1. Marries someone at least as wealthy or bequeaths all wealth to one child.
  2. Consumes very little.
  3. Avoids paying most taxes.
  4. Contributes little to charity or politics.
  5. Invests optimally while avoiding Bernie Madoff and his ilk.
And it is hard to imagine why anyone would care about the existence of such an inbred, self-denying, and politically-removed class, if it could ever exist.

Sunday, August 03, 2014

Wisdom from Thomas Sowell

Larry Kotlikoff's comment on Paul Krugman's debating style in my previous post reminded me of an email I received earlier this summer:

Hi Professor Mankiw,
I'm an entering graduate student at [withheld] and a long-time reader (reading your blog when I was in high school introduced me to and got me interested in economics). I was reading Thomas Sowell's A Conflict of Visions and stumbled upon a passage that immediately reminded me of you, and your debates with Professor Krugman. I think it accurately describes a lot of disputes I've seen among intellectuals.
If you're familiar with the basic premise of the book, you can skip this paragraph. If you aren't (or need a refresher) Sowell creates a spectrum of political visions. At one end, there is the unconstrained vision, which sees a more malleable human nature in which the reason of experts has great efficacy in solving society's problems. At the other end, there is the constrained vision, which sees man's reason as inherently limited to narrow fields, with the best social progress coming through less deliberate and more evolutionary means. Sowell would see you as closer to the perfectly constrained vision, and Professor Krugman as closer to the perfectly unconstrained vision.
Here is the passage that reminded me of your debates with him. I think you'll see what I mean:
Sincerity is so central to the unconstrained vision that it is not readily conceded to adversaries, who are often depicted as apologists, if not venal. It is not uncommon in this tradition to find references to their adversaries' "real" reasons, which must be "unmasked." Even where sincerity is conceded to adversaries, it is often accompanied by references to those adversaries' "blindness," "prejudice," or narrow inability to transcend the status quo. Within the unconstrained vision, sincerity is a great concession to make, while those with the constrained vision can more readily make that concession, since it means so much less to them. Nor need adversaries be depicted as stupid by those with the constrained vision, for they conceive of the social process as so complex that it is easy, even for wise and moral individuals, to be mistaken -- and dangerously so. They 'may do the worst of things without being the worst of man,' according to Burke. (pg 59-60)
You may have already​ seen this and had similar thoughts, but if you hadn't, I thought you would find it interesting.
[name withheld]

Saturday, August 02, 2014

A Plea for Civility

From Larry Kotlikoff. A noble effort that is likely to be in vain.

Tuesday, July 29, 2014

Interview with Larry Summers

Monday, July 21, 2014

What makes a good economist?

Monday, July 14, 2014

Commodity Money

Sunday, July 06, 2014

Some ACA Readings

Monday, June 30, 2014


Sorry that I have been out of touch with regular blog readers.  I have moved to Nantucket for the summer, and the weather here has been too great to spend much time in front of a keyboard.  (The three best reasons to be a professor: June, July, and August.)

The past few days I have been attending the Nantucket Film Festival.  I have had a chance to see some great movies before they are in general release.  Two are worth mentioning: Arlo and Julie, a small quirky comedy/mystery that is a bit Woody Allen-esque. Also, Happiness, a documentary about a boy and his family in Bhutan. 

This morning I am off to see Begin Again, which won the award for Best of Festival.

Monday, June 23, 2014

The Saddest Chart I've Seen Today