Escaping the Liquidity Trap

November 10, 2009 at 4:30 pm (Economics) (, , , )

Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others, Lars E.O. Svensson

Abstract
Existing proposals to escape from a liquidity trap and deflation, including my “Foolproof Way,” are discussed in the light of the optimal way to escape. The optimal way involves three elements: (1) an explicit central-bank commitment to a higher future price level; (2) a concrete action that demonstrates the central bank’s commitment, induces expectations of a higher future price level and jump-starts the economy; and (3) an exit strategy that specifies when and how to get back to normal. A currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations. Furthermore, an intentional currency depreciation and a crawling peg, as in the Foolproof Way, can implement the optimal way and, in particular, induce the desired expectations of a higher future price level. I conclude that the Foolproof Way is likely to work well for Japan, which is in a liquidity trap now, as well as for the euro area and the United States, in case either would fall into a liquidity trap in the future.

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The long term behaviour of NGDP

November 10, 2009 at 2:56 pm (Economics) (, , , , )

Click graphs to enlarge.  From Global Nominal Spending History, by David Beckworth.

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In which we learn about the relationship between profits and bonuses on Wall Street…

November 5, 2009 at 12:03 pm (Economics) (, , , )

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Reasons to be cheerful: the continuing decline of world poverty

October 27, 2009 at 4:09 pm (Economics) (, , )


Parametric Estimations of the World Distribution of Income, by Maxim Pinkovskiy and Xavier Sala-i-Martin

Abstract

We use a parametric method to estimate the income distribution for 191 countries between 1970 and 2006. We estimate the World Distribution of Income and estimate poverty rates, poverty counts and various measures of income inequality and welfare. Using the official $1/day line, we estimate that world poverty rates have fallen by 80% from 0.268 in 1970 to 0.054 in 2006. The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. Our estimates of the global poverty count in 2006 are much smaller than found by other researchers. We also find similar reductions in poverty if we use other poverty lines. We find that various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145%. We analyze poverty in various regions. Finally, we show that our results are robust to a battery of sensitivity tests involving functional forms, data sources for the largest countries, methods of interpolating and extrapolating missing data, and dealing with survey misreporting.

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A dancer dances

October 27, 2009 at 2:45 pm (Uncategorized)

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“What ended the Great Depression?”

October 22, 2009 at 2:09 pm (Economics) (, , , )

This paper examines the role of aggregate-demand stimulus in ending the Great Depression. Plausible estimates of the effects of fiscal and monetary changes indicate that nearly all the observed recovery of the U.S. economy prior to 1942 was due to monetary expansion. A huge gold inflow in the mid- and late 1930s swelled the money stock and stimulated the economy by lowering real interest rates and encouraging investment spending and purchases of durable goods. That monetary developments were crucial to the recovery implies that self-correction played little role in the growth of real output between 1933 and 1942.

Christie Romer, What ended the Great Depression?

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On the Origins of Political Violence

October 20, 2009 at 11:00 am (Quotations) (, , )

The first origins of all social processes of any importance should be sought in the internal constitution of the social group.

Durkheim

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Street bass for beginners

October 14, 2009 at 11:59 am (Music) (, , , , )

New Starkey mix up at FACT Magazine.

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New paper by Obstfeld & Rogoff

October 12, 2009 at 3:05 pm (Economics) (, , , , )

Global Imbalances and the Financial Crisis: Products of Common Causes, by Maurice Obstfeld and Kenneth Rogoff

Introduction

Until the outbreak of financial crisis in August 2007, the mid-2000s was a period of strong economic performance throughout the world. Economic growth was generally robust; inflation generally low; international trade and especially financial flows expanded; and the emerging and developing world experienced widespread progress and a notable absence of crises.

This apparently favorable equilibrium was underpinned, however, by three trends that appeared increasingly unsustainable as time went by. First, real estate values were rising at a high rate in many countries, including the world’s largest economy, the United States. Second, a number of countries were simultaneously running high and rising current account deficits, including the world’s largest economy, the United States.

Third, leverage had built up to extraordinary levels in many sectors across the globe, notably among consumers in the United States and Europe and financial entities in many countries. Indeed, we ourselves began pointing to the potential risks of the “global imbalances” in a series of papers beginning in 2001. As we will argue, the global imbalances did not cause the leverage and housing bubbles, but they were a critically important codeterminant.

In addition to being the world’s largest economy, the United States had the world’s highest rate of private homeownership and the world’s deepest, most dynamic financial markets. And those markets, having been progressively deregulated since the 1970s, were confronted by a particularly fragmented and ineffective system of government prudential oversight. This mix of ingredients, as we now know, was deadly….

Update: See also this useful discussion of the paper at David Beckworth’s blog.

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Antiquated COIN

October 9, 2009 at 4:04 pm (COIN) (, , )

Whatever happens, we have got
The Maxim gun, and they have not.

Hilaire Beloc

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