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The Swedish central bank: honest about the origin of its target

October 31, 2014 Leave a comment

Almost all inflation targeting central banks target the consumer price index – remarkable, as consumer spending is only about 40% of total spending. And western central banks generally have a 2% inflation target while the central banks of countries like Indonesia and India have targets of 4-5%. Are these policies based upon carefull deliberation, deep thinking and elaborate economic models? The Central Bank of Sweden (an early inflation targeter and an example for many other banks) is surprisingly honest: it was decided on the fly. They had to do something, the consumer price index was available and inflation was about 2% at the time. Also, the Zeitgeist made them forget about more realistic useful policies aimed at a much broader concept of financial stability, policies which at this moment are being re-discovered (see also this slack wire blogpost): Read more…

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Stress testing households and companies

October 30, 2014 Leave a comment

Last sunday, the ECB published the results of its stress test. Via Janis Varoufakis, the view of Klaus Kastner, a former banker: bankers did take it seriously but it’s not stringent enough. But too much has already been written about banks. Fortunately, central banks do not just publish data on banks but also on households and companies. What kind of financial stress do these data show?

1) The exemplary Irish financial statistics summary chart pack shows that the amount of non-performing mortgages is, though slowly declining, still very high.

2) Italian data show non performing loans, especially of non-financial companies, which despite an already high level are still rapidly increasing. Bad household loans are also increasing, though at a lower rate (look here, p. 30).

3) Spanish data (look here, especially p. 26-28) show a very considerable drop in credit advanced to non-financial companies while there seems to be quite a bit of debt restructuring. Despite this, the amount of non-performing loans is still increasing for all sectors of the economy (data: end of 2013) and the rate of growth of non-performing loans has been 20 to 40% for years in a stretch. interestingly, loans to Portuguese companies and households are much more ‘doubtful’ than loans to South-American countries.

Summary: financial stress for households and non-financial companies in Ireland is still high, in Italy and Spain it’s still increasing.

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Housing market fundamentals

October 30, 2014 1 comment

The Great Financial Crisis taught most of us that private credit matters. Nowadays, for instance Tyler Cowen uses Steve Keen kind of explanations in stead of general equilibrium ideas: there is no great Pareto optimal intertemporal general equilibrium. The crisis also  taught most of us a (to quote Paul Krugman) ‘dirty little secret‘: monetary policy works via the housing market (hmmm… where do these bubbles come from?). Which makes sense: houses are our most important asset. And mortgages are our most important kind of credit.

Anthony B. Sanders has a nice graph which binds private credit and the housing market in the US of A together, using so called ‘deep’ parameters like the employment to population rate, home ownership rates, the rapidly rising share of 20-34 year olds living with their parents (not in this graph but already at 25% in the US of A) and comparable variables. Note that he does not need house prices or volumes of credit to show the housing bubble, which has origins dating back to 1995-1999. Fred Foldvary, who used to be a regular commentor on this blog and who repeatedly emphasized the ‘Georgist’ 18 year USA credit/housing cycle, would not be surprised. In a very real sense, QE served to mitigate the consequences of the debt build up followed by house price decreases caused by the housing cycle. Instead of QE the US of A government could, as  Rogoff argues, have written down more debt but Larry Summers does not agree (about debt in the Euro Area later today some links).

Houses

Aside: note the tight ‘Phillips curve’ co-movement between wage increases and the employment rate which seems to be stronger as well as more stable than the ‘unemployment-wage increase’ Phillips curces.

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Links. Debt. And shrimps. And Mario Draghi.

October 28, 2014 Leave a comment

1) Carmen Reinhart and Christoph Trebesch argue that, looking at the record (which they established), redeeming government debt overhangs generally (no: often) increases prosperity.  Learn their Box 1 by heart! It’s another addition to our rapidly increasing knowledge about the history of ‘really existing capitalism’ (for the young ones: the phrase ‘really existing socialism‘ was used to describe communist systems and served to drive down the difference between rosy communist ideals and the often bland and harsh reality – the rosy ideal in this case being ‘general equilibrium’).

2) On Voxeu, S. M. Ali Abbas, Laura Blattner, Mark De Broeck, Asmaa El-Ganainy andMalin Hu show a decomposition of 100 years of government debt in 13 advanced economies. Who owned the debt, what kinds of debts were issued? Less and less of the debt is held by commercial banks and more and more by institutional investors (pension funds and the like) which leads to internationalization of the debt (though governments owe less debt denominated in foreign currencies – which in the Eurozone however does not matter as the Euro can, in a sense, be considered to be a foreign currency). The amount of debt on the balance sheets of central banks is nowaday way lower (as a % of total debt) than in the 1950-1980 period. Part of these debts were (and are) currency, the authors do not show the amount of this kind of ‘debt’.  Read more…

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Links, the Levy Institute was right edition

October 27, 2014 1 comment

The Levy institute is a Post-Keynesian think tank. What did these economists, before 2007, write about financial stability and the role of the central bank? Should we have listened to the economist their warnings?

1) In 2006, Dimitri Papadimitriou, Edward Chilcote and Genarro Zezza warned about the detrimental macro-economic consequences effects of the unavoidable end of the (credit driven) US of A housing bubble. In hindsight: things turned out better than they expected because in the autumn of 2008 the current account deficit of the US of A declined, almost overnight, from -6% of GDP to -2% of GDP (a combination of lower oil prices and lower imports).

2) Also in 2006, Eric Tymoigne argued that central banks should watch asset prices more closely and should concentrate on their core business, i.e. financial stability, instead of focusing solely on low and stable consumer price inflation. In hindsight: this is exactly what the ECB is increasingly doing.

3) In 2003 L. Randall Wray and Dimitri Papadimitriou argued that deflation is not just about consumer prices or even the GDP price level (which also includes investments in new fixed assets, government consumption like expenditures on primary education and export prices)  but also and especially about prices of existing assets. We should however understand deflation as a (toxic) symptom – if we want to remedy the consequences of deflation we should look at its origins, i.e. severe and chronic lack of demand which can’t be easily cured by just flooding the economy with money. Profound social, political and economic changes may be necessary (like the post 1937 variant of the New Deal). In hindsight: read the whole thing.   Read more…

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Saturday morning musing: market prices, sticky by nature?

October 25, 2014 1 comment

In 1998 Fieke van der Lecq published her dissertation ‘Money, coordination and prices‘. In a hazelnutshell: ‘money does not enable (market) transactions because it lowers transaction costs but because it enables sticky prices’. The study sets out to investigate the consequences of ‘radical uncertainty’ and ‘historical time’ for the nature of prices as defined in general equilibrium theory. As I understood it: human society uses many kinds of coordination systems. When it comes to the division of labour families are one kind. Markets are another. A special thing about markets: participants agree on, among other things, monetary prices before a transaction is ‘completed’.  The special thing about market prices is that these are not ex post ‘shadow prices’  but real prices, which are known ex ante. People do this to solve (or try to solve) some of the problems connected with radical uncertainty and historical time. In a family situation, the ‘in good times and bad times’ wedding vow is also used to handle this situation but in a totally different way: a promise to, ex post, accept whatever happens. Market contracts work the other way around. And to be able to do this, they use monetary prices. The essence of money is, in this view, not its function as a means of exchange but its ‘accounting’ function to reduce uncertainty by enabling sticky prices, sometimes in the short run (super markets) and sometimes in the long run (twenty year fixed mortgages).  There is a reason why general equilibrium models, which use the concept of ergodicity (i.e. there is, at the most, only stochastic uncertainty and this uncertainty is predictable) and which do not use the concept of historical time, have no place for money: the essential functions of money are not needed. There is of course a difference between stickiness of individual prices and the stickiness of average market prices. And in the case of wages there is overwhelming evidence that social conventions and interpersonal relations play an important role, too (see among many others Akerlof and Shiller). But even then, monetary prices are needed as a focal point for these conventions – while, the other side of the coin, these conventions and the ex ante specifications do define the value of money. In this sense, prices – and therewith money – exist because they are sticky.

Aside: the Chicago-endeavour to call every situation where ex post shadow prices can be calculated a ‘market’ shows imo a blatant disregard for the true nature of markets. And human society.

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Banks first. And second. And third. Three little ECB economists about the function of Eurozone households.

October 23, 2014 4 comments

Three ECB economists, Miguel Ampudia, Has van Vlokhoven and Dawid Żochowski, presenting their personal opinions, have written a paper titled: Financial fragility of Euro Area households. It should however have been titled: Lend till they bend. They establish a metric to gauge the financial vulnerability of Euro Area households – but not to help these households in any way. No. And their mothers are not proud of them. They learned nothing, nothing at all from the housing bubble and the Great financial Crisis. Quotes (and note the casual, unsuspecting, naieve way in which they use the phrases ‘efficient’ and ‘good credit’ in a totally bank centered way):

In the case of the house price shock, countries with high loan ‐ to ‐ value (LTV) ratios are affected the most. Nevertheless, one caveat requires due consideration: low LGDs as calculated using our metric heavily depend on the value of the collateral (i.e. the house, M.K.). Hence, any factors hindering the seizure of the collateral or lowering its value, such as an inefficient legal system, moratoria on foreclosures, deadlocks in the courts, may significantly increase losses to the banking sector … We also demonstrate how the framework could potentially be used for macroprudential purposes, in particular the calibration of optimal LTV ratio caps. We show that the reduction of losses for the banking sector from the imposition of LTV ratio caps can be substantial and exhibits a non‐linear pattern. For instance, setting LTV ratio caps at a too‐low level may fully outweigh the benefits of higher cushion against possible defaults by reducing banking sector revenues, due to trimming good credit, by more than the amount of losses that the banks could suffer without the restriction on the LTV ratio cap.

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Statistical links. UK R@D, German sustainability, French innovation, Italian austerity, tourism, spanish jobs.

October 23, 2014 Leave a comment

1) In the UK, manufacturing counts for 8% of jobs – but 72% of research and development spending.

2) Germany published, as part of its national accounts, sustainability accounts (Umweltökonomische Gesamtrechnungen ). These show that the amount of (real) GDP per unit of energy and per unit of ‘Rohstoff’ (a-biotic  commodities) is increasing rapidly. The study contains a lot of information about health, education and the like. Financial sustainability is calculated by using the structural government deficit while the report does mention how (very large) financial transfers to the banks increased German government debt. No information about private debts however.

3) France: ‘Les sociétés exportatrices sont plus innovantes que les autres’ : exporting companies are more innovative.

4) Italy: the trade balance is improving, but industrial turnover and orders are down  as domestic sales are dwindling.

5) Irish and Greek tourism do well

6) Spanish employment is increasing (+ 274.000 in one year, mainly males, almost only Spanish nationals, all private employment, more flexwork, less self-employed (YoY)). Just like in other countries (UK, Ireland, the Netherlands), there seems to be a very large ‘capital city bias’. As, despite the increase in the number of jobs, many people are leaving the labour force (net -241.700 in one year, mainly migrant workers returning to Romania, Morocco and South America), unemployment is going down quite fast. The flow estimates show that already before the labour market reforms the Spanish labour market was highly dynamic. Part-time jobs are decreasing.

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Graph of the day: Exports ‘de la haute technologie’

October 23, 2014 Leave a comment

When it comes to high-tech exports France does best. Source.

The French share of high-tech exports, expressed as a percentage of total exports, is higher than the German and the UK share and increases faster and in a more dynamic, contra-cyclical way. There are very marked differences between the south and the north of europe, France clearly belongs to the ‘north’, Germany is somewhere in between.

Greek exports deteriorate, possibly because plunging domestic sales disabled exporting companies to innovate or even to continue ‘business as usual’. Spanish high-tech exports are increasing, Irish high-tech largely consists of pharmaceutical products. Mind that total German exports are larger than total French exports. Mind that producing and exporting low tech products like food in a high-tech way does not count (and a case can be made that no biological product is ‘low tech’!).  Read more…

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Rogoff on Wolf. Some comments or: empowering households made all the difference

October 19, 2014 8 comments

Update: Summary: in times of balance sheet recessions and secular stagnation Keynesian policies should not just aim at the level of aggregate demand and income but also at the composition of aggregate demand and income.

In a very readable and insightful review of the new Martin Wolf book (which I haven’t read yet) Kenneth Rogoff plays the revolutionary card:’Let’s get rid of these debts, we’ve got nothing to lose than a deflationary chain of events’. This puts him, in a Eurozone perspective, in the radical left corner of politics (and it’s kind of ironic that he accuses text-book economists like Krugman of being ´hard-left´…). Quote:

Without question the best and most effective approach to the problem would have been to bail out the subprime homeowners directly, forcing banks to take losses but keeping them manageable. For an investment of perhaps a few hundred billion dollars, the US Treasury could have saved itself from a financial crisis whose cumulative cost, counting lost output, already runs into many, many trillions of dollars. Instead of “saving Wall Street,” a subprime bailout would have been targeted, almost by definition, at lower income households. But unfortunately, this approach too would have been politically impossible prior to the crisis.

I agree with almost the whole piece. I can however add some specifics which al point to towards the same conclusion: European austerity is not just about curtailing governments but very much also about disempowering households. For instance the UK recovery can largely be explained because this disempowerment happened to a much lesser extent in the UK, at least when we look at disposable income.

(A) Rogoff states that the German economy is arguably somewhat overheated. It arguably isn’t. Read more…

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Tyler Cowen on German inflation – graph added.

October 18, 2014 2 comments

On his Marginal Revolution blog Tyler Cowen has an interesting post about Germany: historically, German inflation has often been much, much higher than today without anything like the present turmoil about ‘stable money’. Tyler rightly states:

Rightly or wrongly, today’s Germans associate high rates of inflation with wealth transfers away from Germany and toward other nations.
Tyler Cowen’s post could however do with a little more quantitative rigor and after a little searching I found the data on the site of the Statistisches Bundesamt (see the graph). And Tyler is quite right about Germany: historically, inflation has quite often been above the present ECB target – and with more than a small margin! There was however some collateral information in the Bundesamt files: it turns out that there might have been a recent German inflation trauma after all. In former East Germany prices increased steeply just when unemployment exploded and as far as I know wage increases were limited… I agree with the sentence of Tyler Cowen above: aging people who don’t want to see the European equivalent of the post 1991 ‘Elephanten-transfers‘ to East Germany. But the East-German experience may count for something.

Read more…

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The new European Union GDP and national accounts data (1). More crisis, less debt

October 17, 2014 Leave a comment

Today, Eurostat published the new, revised and updated GDP data wich are based upon the new, revised and updated national accounts. What does this teach us?

The aggregate European Union data do not show any kind of dramatic difference with the old data. It is however worhtwhile to look at some individual countries:

Germany had, according to the new revised data, an official double dip (two subsequent quarters of declining GDP)

The 2011-2012 recession in Spain was more severe than originally estimated (2011: GDP decline -0,6% instead of +0,1%; 2012 -2,1% instead of -1,6%)

According to the English British ONS growth in the UK was slightly higher and the growth of employment slightly lower than earlier estimated which means that the unprecedented decline of productivity is still unprecedented – but less large than earlier estimated. Read more…

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Links. Inflation and ergodicity, Greece, Greece, flaring solar, tobacco as subordinating money, ordoneoliberalenergyprices: guess who pays the bill

October 16, 2014 1 comment

1) Thomas Sargent and Timothy Cogely investigate the long run development of USA wholesale prices and discover the obvious (emphasis added):

Major outbreaks of price level instability and unpredictability are associated with the Civil War, the two World Wars and Great Depression, and the Great Inflation and Great Recession. In each instance, a crisis disrupted pre-existing monetary arrangements and created considerable uncertainty about the future. In each case, policy makers eventually found a path back to price stability, but that took a long time: the average time from peak to trough was 30 years.

This makes even Thomas doubt the models of Robert Lucas (see the concluding remarks). The really interesting thing is however that, despite the enormous increase and change of the 19th century monetary USA economy (PT in the PT=MV formula) average inflation was about zero. Coincidence? Endogenous gold standard money? Sargent and Cogely still do not explicitly reject ergodocity (or: ‘economic predestination’ – rational expectation economics have a Calvinist streak). But given some time they probably will follow the path of so many former neoclassicals who started to do economic history. Caveat: I do know that this thirty year period fits into Sargent’s ideas about deep social parameters etcetera. It is, however, at odds with Real Business Cycle ideas as these stress very rapid adaptation of economies to ‘shocks’.

2) This makes me desperate: ‘financial markets’ fret about Greece. Again. Help. What were the whizzpersons behind their screens thinking Read more…

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From the comments to the Piketty issue of the RWER: Newtownian is right.

October 11, 2014 4 comments

In the comments to the 69th, Piketty, issue of the RWER, Newtownian states:

Try as I might in 182 PDF pages I could not find a single reference to the natural environment or climate change, peak oil, degrowth, exponential economic growth impacts, some small discussion oil and only a single footnote with the word ‘ecosystem’.

Which I suggest indicates the real natural world is still not seen as relevant to economic thought and critique even for ‘real world’ economists.

This comes concurrently with the release of Naomi Klein’s new book “This changes everything” http://www.theguardian.com/books/2014/sep/19/this-changes-everything-capitalism-vs-climate-naomi-klein-review !!??? which makes this omission even more bizarre.

From a mainstream economics group I would have expected this. But RWER I thought was progressive. This omission is so depressing – for me personally in part after having spent two days last week at a degrowth conference which itemized how bad, bad economics policy is regarding sustainability and future generations and now desperately new economics ideas are needed.

I agree. But the concept of capital used by Piketty is not as bad in this respect as the ‘mainstream’ text book growth concept (which, as shown below, is hugely influential in policy circles). Read more…

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Labour market links, 11/10/14. Germany, Greece, EU, UK, Simon Wren-Lewis

October 11, 2014 Leave a comment

1) Wage rates in Germany: +3%. Which, as the number of jobs is increasing at a 1% rate, means that total wages are up 4%. The only thing they have to do to avoid recession is to lower VAT on labour intensive services, to give an additional boost to purchasing power.

2) An interesting ECB labour market study: employment losses (EU level) had a very strong gender bias (almost 100% of net jobs lost were occupied by males) and a very strong education bias (employment of higher educated people actually increased but employment of lower educated people plummeted). Interestingly, the ECB does not push for ‘structural’ changes anymore. But it’s still trying to turn the Euro Area into a Mundellian optimal currency area: barriers to international mobility have to go down (I agree but not because of the Euro) (p. 67):

While the impact of reforms that have already been undertaken may take some time to produce their full effects, more may be required to achieve the degree of labour market flexibility compatible with membership of a monetary union Read more…

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Broad unemployment indicators in Europe. HIGH.

October 10, 2014 Leave a comment

Official unemployment in Cyprus is ‘only’ 15,4% – and falling! It’s high but nothing like the Spanish and Greek rates which almost touched 30%. A success for austerity? Not really, as Cyprus witnessed (according to the new Eurostat data) the fastest growth of ‘non-official’ unemployment of all EU countries (graph). This is defined as: underemployed part-time workers, jobless persons seeking a job but not immediately available for work and jobless persons available for work but not seeking it.

TheplightofCyprus
Mind that the six countries with the highest increases are all Euro-countries. Mind that many of the countries with the lowest increases are non-Euro countries. Don’t misunderstand the graph: non-official unemployment in Latvia has witnessed a (very welcome) decline last year but is still higher than in 2008. Differences in levels between countries are quite large, especially Italy has a very large amount of people who are available for work but not seeking (12,6% of the working force). Anyway – especially in the crisis countries the increase of broad unemployment (i.e. official and non-official unemployment) was (and is) quite a bit higher than the increase of official unemployment. Germany might be the only country where labour slack is starting to diminish, though Eastern and Northern Germany still know large areas with high unemployment.  No data for France.

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Bostjan Jazbeck, Slovenian central bank president, misunderstands the ECB mission

October 7, 2014 Leave a comment

mis•un•der•stand (ˌmɪs ʌn dərˈstænd)

v.t. -stood, -stand•ing.

to understand or interpret incorrectly; attach a wrong meaning to.

 

From: Erwan Mahé (guest post). Emphasis added

Speaking of the ECB’s targets, just a quick aside. Would it be possible to name governors to the ECB who are aware of the central bank’s fundamental and institutional founding goals?

Check out this zinger by Mr Bostjan Jazbeck, the president of the Slovenian central bank since July 2013 and former IMF “expert:

“what the ECB is doing is trying to keep its head above water because of the lack of thorough policies needed to support it.”

“the ECB does not have a mandate to support growth.”

As much as his first statement makes sense, and is consistent with those made by the other ECB governors, the second one leaves me stunned.

On the bright side, this gives me the opportunity to re-quote the relevant ECB statutes, as set forth in the Maastricht Treaty and the Treaty on the European Union:

“Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2.” (Treaty article 105.1).

“The objectives of the Union (Article 2 of the Treaty on European Union) are a high level of employment and sustainable and non-inflationary growth.”

Seriously, Mr Jazbeck, given your recent rise to the pinnacles of monetary policy making, your lack of knowledge of the mission that was confided to the institution of which you are now a leading official is inexcusable. Unless this types of statement is, in reality the reflection of an ideological posture (structural reforms! Structural reforms!) combined with bath faith?

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The Eurozone: good money should drive out bad debts

October 5, 2014 4 comments

The European Central Bank is going to buy Asset Backed Securities. The press release contains a remarkable sentence:

To ensure that the programmes can include the whole euro area, ABSs and covered bonds from Greece and Cyprus that are currently not eligible as collateral for monetary policy operations will be subject to specific rules with risk-mitigating measures.

Translation: the ECB will buy junk bonds, too.

Which is the best part of the news (sorry, but the need to drive down broad unemployment rates of 35% in Southern Europe trumps all those ideas about moral hazard and the like. And we’re out of time). But predictably, the Bavarian minister of finance, Markus Söder, has already protested and tried to influence ECB policies as he fears that the ECB runs the risk of becoming a bad bank. He’s wrong. There are valid arguments against thje ECB decision. But his ‘bad bank’ argument is bonkers.  Central banks do not get ‘bad’, as shown by the chart below, from Muhammad Bin Ibrahim (see p. 44). HEY, they print the money…

Bund

Source. Graph slightly updated. Red: source of vulnerability; yellow: constraint on recovery.

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The DSGE emperor has no clothes. But he does have a hat. And a rabbit.

September 29, 2014 5 comments

Via de website of Brad deLong I encountered this wise article about DSGE models from macro-advisors. It’s sometimes rather technical (an AR(1) process is a kind of complicated moving average – or in fact, some weighted moving averages are a simple AR(1) process). It’s important enough to republish it. It starts quiet – but does not end that way.

Much has been made of the failure of modern macroeconomics to predict or understand the Great Recession of 2007–2009. In this MACRO FOCUS, our resident time-series econometrician, James Morley*, explains what is currently meant by “modern” macroeconomics, what is behind its failure, and what can be done to rehabilitate its reputation.

“Modern” Macroeconomics
In a recent essay, Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, acknowledged that modern macroeconomics failed during the recent financial crisis.[1] However, his essay misses the point of why it failed.  Read more…

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Links. Meat, weights, Ireland, Spain. And a man needs a hobby.

September 29, 2014 Leave a comment

1) Peak meat?

2) Time series economics and econometrics is the science of complicated moving averages. It matters a lot which weights are used. Don’t use present day (relative) prices to estimate past economic performance. Or the other way around, as Leandro Prados de las Escosura shows. But where does the past stop and the present begin?

3) It’s starting to dawn upon the Irish what really happened – they did not bail our their banks but foreign creditors.

4) This made the ECB very happy   Read more…

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