Why Rate Expectations Dominates Bond Yield Fair Value Estimates — Brian Romanchuk

Although there are various attempts to downplay rate expectations as an explanation for bond yields. the reality is that they dominate any other attempt to generate a fair value estimate by using "fundamental data". (Since we cannot hope to explain every last wiggle of bond yields without having a largely content-free model, we need to look at fair value estimates.) The reasoning is rather straightforward: so long as the risk free curve slope is related to the state of the economy, bond yields are pinned down by the front of the curve, and the slope....

Bond Economics
Why Rate Expectations Dominates Bond Yield Fair Value Estimates
Brian Romanchuk

Scott Baker, Lorenz Kueng, Leslie McGranahan, Brian T. Melzer — The interaction of household finances and unconventional fiscal policy

The period of low demand and low interest rates during the Great Recession has prompted economists to consider new policies to stabilise the business cycle. The ‘zero lower bound’ on nominal interest rates prevented the use of interest rate reductions to stimulate consumption and investment in many developed economies. Researchers have proposed an alternative policy tool, ‘unconventional’ fiscal policy. This is a commitment to raise consumption taxes in the future (Feldstein 2002, Hall 2011, Correia et al. 2013).

Anticipation of higher consumption taxes can incentivise intertemporal substitution in the same way as traditional monetary policy, by raising the price of future consumption relative to current consumption. Households expecting higher future taxes move consumption to the present, increasing current demand.

But unconventional fiscal policy may not be effective in practice:...

vox.eu
The interaction of household finances and unconventional fiscal policy

Scott Baker, Lorenz Kueng, Leslie McGranahan, Brian T. Melzer

Myles Udland — A major psychological shift is occurring across markets and the economy

Markets and the economy are increasingly being characterized by one word: certainty.

This is likely to worry some investors and market watchers who see over-confidence in the future as a sign that things are about to change.

On Wednesday, the latest consumer sentiment survey from the University of Michigan indicated that while overall confidence in the economy is sitting right near a 13-year high, “what has changed recently is the degree of certainty with which consumers hold their economic expectations.”...

Yahoo Finance
A major psychological shift is occurring across markets and the economy
Myles Udland | Markets Reporter

Brian Romanchuk — Science And Economics

I had largely managed to avoid writing about the latest angst in the economics blogosphere regarding mathematics, science, and economics. I am not a fan of mainstream economics, but at the same time, I question some of the broad brush attacks on economics. The quest to pretend that economics can be a science like physics is doomed, and does not take into account the nature of what is being studied.

Bond Economics
Science And Economics
Brian Romanchuk

Bill Mitchell — There is nothing much that Milton Friedman got right!

“If we want to ensure more people are well-employed, central banks alone will certainly not suffice” is a quote I am happy to republish because I consider it to be 100 per cent accurate. The only problem is that the way I think about that statement and construct its implications is totally at odds with the intent of its author, who claimed it was “an important lesson of Friedman’s speech”, which “remains valid”. The quote appeared in a recent Bloomberg article (July 17, 2017) – What Milton Friedman Got Right, and Wrong, 50 Years Ago – written by journalist Ferdinando Giugliano. It celebrates the Presidential Speech that Friedman gave to the American Economic Association on December 29, 1967 at their annual conference in Washington D.C. In terms of the contest of paradigms, the speech is considered to be the starting point proper of the Monetarist era, even though it took at least another 5 or 6 years (with the onset of the OPEC oil crises) for the gospel espoused by Friedman to really gain ground. The problem is that Friedman was selling snake oil that became the popular litany of the faithful because it suited those who wanted to degrade the role of government in maintaining full employment. It was in step with the push by capital to derail the Post War social democratic consensus that had seen real wages growing in proportion with productivity, reduced income inequality, jobs for all who wanted to work and a strong sense of collective solidarity emerge in most advanced nations. This consensus was the anathema of the elites who saw it as squeezing their share of national income and giving too much power to workers to negotiate better terms and conditions in their work places. Friedman provided the smokescreen for hacking into that consensus and so began the neo-liberal era. We are still enduring its destructive consequences.

Friedman’s speech was subsequently published in the American Economic Review as ‘The Role of Monetary Policy’ in the 1968 volume 58(1) (pages 1-17). 

The Bloomberg article goes along with the view that Friedman’s speech represented a “paradigm shift” in economics....

Bill Mitchell – billy blog
There is nothing much that Milton Friedman got right!
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Peter Cooper — The Confidence Fairy and Formation of Demand Expectations Under Uncertainty

From a broadly Keynesian viewpoint, output is demand determined. This suggests that fiscal policy, by affecting demand, can affect output and employment. At the same time, however, many Keynesians emphasize fundamental uncertainty. Firms’ output decisions depend upon expectations of future demand, and these expectations must be formulated under conditions of uncertainty. It can be wondered how the efficacy of fiscal policy squares with the presence of uncertainty....

heteconomist
The Confidence Fairy and Formation of Demand Expectations Under Uncertainty
Peter Cooper

Jason Smith — Angels dancing at the end of time

This should be considered some notes for a future blog post/paper. I've strung together a series of papers to form an argument. The basic idea is that if expectations far out in the future matter in your model, and you use a model where the actual future value enters (or at least the actual future model value -- model consistent expectations, e.g. rational expectations), then your model violates the central limit theorem (in the sense that it requires you to be able to invert the process). In order for the expected future value in the model to lead to a specific present state, you'd have to be able to distinguish which present distribution lead to the distribution of future expected values. However since a random walk derived from any of the distributions with the same well-defined mean and variance lead to a single normal distribution (universality of the normal distribution), this is impossible.…

Information Transfer Economics
Angels dancing at the end of time
Jason Smith

Jason Smith — "Economics is a social science"

Economists (and everyone else out there in the econoblogosphere): time to stop hiding behind theory and qualitative analysis and start addressing the empirical data out there.

Theory versus Big Data? Maybe not.

Economic theory plays an important role in the analysis of large data sets with complex structure. It can be difficult to organize and study this type of data (or even to decide which variables to construct) without a simplifying conceptual framework, which is where economic models become useful. Better data also allow for sharper tests of existing models and tests of theories that had previously been difficult to assess.

Brad DeLong — Larry Summers on How We Know More than We Write Down in Our Lowbrow (or Highbrow) Economic Models

Larry Summers on monsters under the bed.

LS: Paul asserts that a damaging confidence crisis in a liquidity trap country without large foreign debts is impossible, because if one developed the currency would depreciate, generating an export surge.

Paul is certainly correct in his model, but I doubt that he is in fact. Once account is taken of the impact of a currency collapse on consumers’ real incomes, on their expectations, and especially on the risk premium associated with domestic asset values, it is easy to understand how monetary and fiscal policymakers who lose confidence and trust see their real economies deteriorate, as Olivier Blanchard and his colleagues have recently demonstrated. Paul may be right that we have few examples of crises of this kind, but if so this is, perhaps, because central banks do not in general follow his precepts.

I do not think this is a pressing issue for the US right now. But the idea that policymakers should in general follow the model and not worry about considerations of market confidence seems to me as misguided as the view that they should be governed by market confidence to the exclusion of models.

WCEG — The Equitablog
(Early) Monday DeLong Smackdown: Larry Summers on How We Know More than We Write Down in Our Lowbrow (or Highbrow) Economic Models
Brad DeLong

Scott Adams — Blog Economics and Expectations (with a Trump point)

When I was studying economics in college, the most surprising thing I learned is that economics is what happens when you combine psychology with resources. I had assumed economics was more of a math/formula sort of discipline. There is plenty of that too, but the core of economics is human psychology.

Let’s talk about that.

The reason I say economics is psychology plus resources is that every transaction is based on human expectations. Businesses will invest heavily today if they believe customers are optimistic and likely to spend. If the mood is pessimism, and people are saving their pennies, those expectations stifle business investment.

I could go on for an hour about how your expectations are what creates value in this world. For example, you only make deals with people that you expect to perform. You only hire people you expect to do the job well. You only spend money if you expect to someday make more. You only buy a home when you expect real estate values to be strong in the future. And so on.

Economies run on expectations. And expectations are the result of our complex human psychology.…

Scott Adams' Blog
Economics and Expectations (with a Trump point)

Scott Adams, creator of Dilbert

Robert Skidelsky — Messed-Up Macro

Economics is a science? Really?

Model, model, who's got the (right) model?

Project Syndicate
Messed-Up Macro
Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords
ht Brad DeLong

Jason Smith — Expectations

A physicist looks at expectations in macroeconomics.

Information Transfer Economics
Expectations

Jason Smith

Pew Research — Emerging and Developing Economies Much More Optimistic than Rich Countries about the Future

Emerging countries are developing, and already developed countries are stagnating. Attitudes and expectations reflect this. Lots of charts.

Pew Research
Emerging and Developing Economies Much More Optimistic than Rich Countries about the Future

Brian Romanchuk — Should A Central Bank Care About Loanable Funds?

New Keynesian loanable funds and DSGE modeling following up on Lars Syll and Nick Rowe.

Bond Economics
Should A Central Bank Care About Loanable Funds?
Brian Romanchuk

Matthew Wilson — The economic impact of beliefs

An ancient village witnesses a solar eclipse. No one has ever seen anything like it. The people are worried, and the wise men are summoned. The town waits outside as the wise men confer with the village elders in a council. They emerge and proclaim the conclusion: the town is destined for a great disaster. Everyone returns to their hut, greatly concerned. People dramatically lower their purchases, raising their savings in preparation for the crisis. 

Now the local businesses have to lay off their workers since no one is buying their products. The newly unemployed workers have no choice but to cut their consumption even further. Then the firms keep reducing the numbers of their employees, and the vicious cycle continues. The wise men were right! The solar eclipse was indeed followed by an economic catastrophe. The town learns that solar eclipses cause terrible things to happen.

Self-fulfilling predications corroborated by post hoc, ergo propter hoc, or false cause fallacy.

The suggestion is that policy guidance and "jawboning" can create self-fulfilling expectations.

Lindau
The economic impact of beliefs
Matthew Wilson | doctoral Student at the University of Oregon
*h/t Mark Thoma at Economists View)

Lars Syll — Shackle on uncertainty and expectations in economics

Interview with G. L. S. Shackle on the Keynesian revolution in economics by someone who was there.

Shackle on uncertainty and expectations in economics

Lars P. Syll | Professor, Malmo University

Creating a History of U.S. Inflation Expectations

Central bankers closely monitor inflation expectations because they’re an important determinant of actual inflation. Treasury inflation-protected securities (TIPS) are commonly used to measure bond market inflation expectations. Unfortunately, they were only introduced in 1997, so historical data are limited. We propose a solution to this problem by using the relationship between TIPS yields and other data with a longer history to construct synthetic TIPS rates going back to 1971.

FRBNY — Liberty Street Economics
Creating a History of U.S. Inflation Expectations
Jan Groen and Menno Middeldorp

David Glasner — Hawtrey v. Keynes on the Rate of Interest that Matters [wonkish]

Origins of monetary policy v. fiscal policy, and operation of monetary policy based on transmission, including expectations. Investigates "announcement effect" of the central bank in expectations.

Uneasy Money — Commentary on monetary policy in the spirit of R. G. Hawtrey
Hawtrey v. Keynes on the Rate of Interest that Matters [wonkish]
David Glasner
 | Economist at the Federal Trade Commission (US)

Carola Binder — Potential Costs of Asset Purchases

How insiders think.

Quantative Ease
Potential Costs of Asset Purchases
Carola Binder | graduate student at UCAL Berkeley

Scott Fulwiller — Functional Finance and the Debt Ratio—Part I

This five part series will explore at length (warning!) and in detail (another warning—wonk alert!) the MMT perspective on the debt ratio and fiscal sustainability. While the approach suggests a macroeconomic policy mix and strategies for both fiscal and monetary policies that most neoclassical economists currently believe are unsustainable, ultimately the MMT preference for a significant role for fiscal policy in macroeconomic stabilization is shown to be consistent with traditional neoclassical views on fiscal sustainability.

This first part defines the correct measure of the national debt and then looks at the mathematics of debt service and the debt ratio.

New Economic Perspectives
Functional Finance and the Debt Ratio—Part I
Scott Fulwiller | James A. Leach Chair in Banking and Monetary Economics and an Associate Professor of Economics at Wartburg College