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Angelo Melino
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Gauti Eggertson has a paper that claims that, at the zero lower bound, higher minimum wages and more monopoly power is a way of implementing economic stimulus. He cites the New Deal experience as evidence. See http://www.econstor.eu/bitstream/10419/60658/1/522100546.pdf
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Frances Yes, I agree it's a global market for PhD students and that hasn't changed since I was a grad student (circa 1981). "As to why your academic placement record has improved - I strongly suspect that what's really happened is that the private sector/think tank/bank/finance placement record has worsened, making teaching at UPEI and hanging out on those beautiful sandy beaches suddenly seem much more appealing." Quite the contrary. Our students have been getting better job offers!
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Your estimate of 71 PhD students at the University of Toronto is a bit high, at least if you are trying to think about how many students are out there compared to the number of jobs. Our website continues to list PhD students until the first July after they have defended their thesis (or notified us that they have decided to abandon their pursuit of the PhD). Most students go on the job market before they have defended their thesis, and at least 8 have moved on from graduate school but are included in your count of 71 (if you follow the link http://www.economics.utoronto.ca/index.php/index/graduate/placement you can see who got a job in a previous year but still is counted in the count of 71). It may be easier to think about flows than stocks. Some of the 71 students in their first or second year will not make it to the PhD job market. We typically graduate about 8-9 PhD students per year (attrition is highest in the first two years of the program--in part because students receive signals about their relative performance or learn more about their preferences). FWIW, although we've had some great PhD graduates in the past (greetings in particular to Stephen, Kevin, and Anindya), our academic placement record has noticeably improved over the last three years. And we're kinda wondering why...
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In late 2008 and early 2009, I could convince myself that support for the auto industry made some sense. Given the obvious need for fiscal stimulus and the difficulty of identifying "shovel-ready" projects, spending some cash to avoid the death (but not bankruptcy) of the large auto companies didn't seem too crazy. However, I don't see any economic justification now for any further government support for the industry. I expect to see more of the production and jobs bleed away over the next decade. Anyhow, manufacturing isn't anywhere near as "special" in the eyes of our politicians as agriculture!
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The IMF forecast for Italy came out today. GDP for the year 2013 is now expected to be 0.7% lower than 2012, which is only modestly worse than it predicted last July. I couldn't find a quarterly forecast, but Dec 2012 to Dec 2013 growth was predicted to be flat. I back out that the IMF expects a decline in Italian GDP in the first half of 2013 followed by growth in the second half of next year--about 9 more months of "winter". The IMF report warns readers that it sees more uncertainty than usual around this forecast, but let's hope it doesn't turn out to be too optimistic.
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I checked the UofT budget. For the 2012-2013 fiscal year, 36% of "Total Operating Revenues" (which looks like it includes all sources of revenue other than loans) are "Provincial Operating Grants". This is in close agreement with your estimate and is the number that matters for the point that you want to make. But 43% (not 26%) come from tuition fees. The UofT has a large graduate school and lots of students enrolled in professional programs, so the fraction of revenue that comes from tuition may be higher than the provincial average. But given the size of the UofT, the share of revenue coming from tuition at other universities would have to be tiny to get a system-wide average of 26%.
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In response to Max's comment, I want to try to clarify my point. In principle, the inflation target (or price level target) doesn't have to be a constant. It can be state contingent and can depend on history. Among the choices available, suppose the Bank of Canada announces that if we're ever again in the situation faced in spring 2009 (or worse) that it would target higher inflation until nominal GDP growth was running at 5% for a few quarters%. How would this differ from NGDP targeting when such bad outcomes occur? . Of course, issues of how it could achieve its targeted higher inflation path or whether it could be expected to keep its word (dynamic consistency) arise, but don't the same problems arise for NGDP targeting? (I focus on the big negative shocks because NGDP targeting seems particularly unattractive in the case of big positive shocks--would we really want deflation if Canada was hit with a positive 6% technology shock?)
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Let's just focus on the bad shocks. How does NGDP targeting differ from announcing ex ante that there will be temporarily a higher inflation target (of a size and duration that depends on the size of the BSS's effects on inflation and output)if we ever hit the zero lower bound on the target rate?
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Debt also played an important role in forging the US federal union. After the revolutionary war, most Americans viewed themselves as citizens of their state, not "America". Against the opposition of a group that came to call itself the "Republicans", Alexander Hamilton, and the other Federalists, lobbied for the creation of a strong unified country. The Federalists pushed for the adoption of a new constitution and the transfer of some power from states to the federal governments Just as it did later in Canada, debt played a key role in the creation of a stronger US federal government. Some states had accumulated large debts to fund their contributions to the war, and had poor prospects to pay it off. The main source of government revenues were custom duties, but not all states could take equal advantage of it (and there was fear that those that could, like New York, would impose a tax on goods that entered its ports destined for other states). Alexander Hamilton helped create a strong central government in the US by having the federal government assume the existing debts of all the states, along with the revenue stream that came from custom duties.
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Thanks for a very interesting post. I recently asked a former student, who works on Bay St, why we hear so little discussion about the LFS hours worked number. I was told that it's not taken very seriously because of measurement error. The US releases its version of the LFS and SEPH surveys at the same time, and the establishment survey is viewed as a more reliable measure of both hours worked and employment. But your correlation matrix with GDP makes it look like the LFS numbers in Canada, especially for hours worked, are pretty informative (even if they are measured with error). At least for monthly GDP.
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Each quarter, you post a forecast of GDP based on two monthly GDP numbers and the employment number for the last month of the quarter. Do you use the LFS or SEPH number for the latter? Have you ever investigated which works better?
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Out of curiosity, I put the Bank's forecast for inflation and the output gap into the policy rule used in ToTEM to proxy for the future path of the overnight rate. This rule gives very little weight to the output gap but puts a high weight on the deviation of expected core inflation (two quarters ahead) from target. Interestingly, because the Bank expects core inflation to decline in the first half of 2012, the ToTEM rule would call for a CUT in the overnight rate to 0.50 by the middle of the year, and then return to 1.00 by the end of 2012, followed by a very gradual increase thereafter.
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Have you ever decomposed your forecast error into (i) your error in forecasting the last month's GDP using your model, (ii) the revision of the first two month's estimate of GDP, (iii) the difference between the three monthly estimates of GDP and the quarterly value?
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I don't think the current UK experience is a good example of the failure of divine coincidence. Think about it: Would you rather have had the UK experience with inflation or that of the US over the last two years? The Bank of England isn't facing a conflict between different objectives--it should admit that it is not upset but in fact should take credit for generating higher inflation in the current environment. At the zero lower bound for the policy rate, there are good arguments for raising expectations of inflation (and hence realizations of inflation) above the usual target. This lowers the real rate at short maturities and should help the UK exit the recession more quickly. Unfortunately, by apologizing rather than taking credit for the higher inflation, it looks like the BoE has lost control of inflation and that hit to its credibility is going to make a return to a lower inflation target more costly.
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It would be interesting to see how the evolution of the Bank of Canada's forecasts compared to those of the big banks.
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Determinant: I think you're right. I did a bid of surfing and lots of other central banks have had to deal with the issue of retiring archaic currency. (For example, see the Riksbank page http://www.riksbank.com/templates/Page.aspx?id=15374 ). The first step seems to be to remove their status as legal tender. And after a while, you have to send your currency to the central bank to have it redeemed. It looks like some central banks (eg. Bank of France) gave a fixed deadline of 10 years to turn in the archaic currency. Others give a window after which there is a charge for verifying the currency. Some sort of penalty for not redeeming the currency within a few years would help to drive out the $1K bills from circulation, as well as older series bills that don't have the recent security features. After some further thought, I do think, however, that it makes sense for the Bank to give itself a credit for a fraction of the archaic currency that will never be returned (This would be like the mirror image of the bad loan provisions that private sector banks make). The Bank's Directors decided to increase its equity during the crisis, just in case it took a loss on any of its liquidity initiatives. This was a response to a fairly ridiculous accounting restriction imposed on it (although the Bank only had about $25million in equity to support a greater than $55B balance sheet, when you print money you don't really have to worry about becoming insolvent. Apparently those who set the accounting standards for government agencies have a hard time with that...). Declaring a credit on the archaic currency that won't be returned to the Bank could be kept as an addition to its equity without changing the Bank's holding of government debt. And this could allow the Bank to forward to the government the funds that were unnecessarily kept back during the crisis to increase its stated equity. So maybe we could solve a silly (but annoying) accounting problem with a silly accounting trick.
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Sorry for the delay in responding (I've been fighting the flu). Determinant is right. If the Bank wrote off a liability of say $1 Billion and passed this along to the government, then it would have to reduce the asset side of its balance sheet by $1 Billion as well. So it would be giving up the stream of earnings from its $1 Billion of Government of Canada debt in exchange for booking a "one-shot" $1 Billion profit that it would realize more or less right away. In present value terms, it's a wash. But the government of the day gets to take credit for the entire present value if the old notes are written off. That's the "accounting trick" that I referred to. I know, I know, it sounds like the sort of stuff the Greek government used to do to balance its books... The real issue is that we have a bunch of archaic currency floating around. It must be next to impossible to pass notes of the various withdrawn denominations without taking them to a bank for redemption (if sales clerks need to be trained to detect forgeries on recent issue notes, how can we expect them to recognize valid archaic currency from the real thing?). Many of these archaic notes must be held by collectors or are lost. They can't be serving a role as money. And the older series of the remaining denominations don't have the various safeguards that are now available and having them floating around leaves us vulnerable to counterfeiting. Isn't it time to do some housecleaning?
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Any complaint with publishing the interest rate projections with a lag (say six months, or even a year)? I can see several advantages: 1. It forces the Bank to think about the entire path of its response. That's hard, but it's what GC should be doing, even if it only announces one target point at a time. 2. Specialists can pour over the projection errors and provide feedback on the model's forecasting abilities (both the projections provided by staff and the value-added by the modifications made by GC). 3. When we're as far away from "neutral" as we are now, it's important to have some idea of where the nominal interest rate is heading. If the Bank always thinks that the overnight rate should be heading back to 4.5% within a couple of years, then that information that would help households and firms. BTW, the Bank spends a lot of time talking about the evolution of the output gap, developments around the rest of the world, commodity prices, etc. Should it suppress this discussion because it distracts attention and simply report "the Bank will do whatever is required to hit its 2% inflation target"?
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According to Statistics Canada, "Expressed at an annualized rate, real GDP grew 1.0% in the third quarter". How do you get your figure of 1.3% growth?
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In his book, "Making Money", John Crow says that the initiative for inflation targeting came from the Dept of Finance, but it fit in with some of the things the Bank was thinking about.
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You can get an idea of which assets were accepted as part of the "green" securities by looking at the monthly reports entitled "Supplementary Information of Balance Sheet Loans and Receivables" on the Bank's web page http://www.bankofcanada.ca/en/about/index.html CMHC-insured mortgages are not broken out but are included as part of "Securities issued or guaranteed by the Government of Canada". This is the largest single item, but large contributions are also made by provincial securities and, looking at the various there was some corporate and ABCP paper as well.
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Stephen, I don't know why you think that we never really hit the Zero Lower Bound. The Bank determined that 0.25 was the Effective Lower Bound (going any lower would have caused enough damage to the overnight market and the money markets that it was deemed not worth it). But it needed to do more. It gave a list of 3 options that it would pursue once it hit the ELB and enacted one: The conditional commitment to keep the overnight rate at 0.25 until the end of 2010Q2. We may not have crashed into the Zero Lower Bound with the intensity of the US, but we certainly hit it.
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The Economist has an interesting article titled "The other exit strategy" in its Sept 12 2009 edition. It advocates the adoption and expansion of independent budget offices by more countries. From the article: "Countries from Sweden to Chile have rules to limit deficits and enforce transparent budgeting, and independent bodies to assess politicians’ budget decisions. America has the Congressional Budget Office (CBO) and the euro zone has the Stability and Growth Pact (see article). By and large, though, these tools for fiscal credibility have been less well developed, less widely adopted and generally less effective than their monetary equivalents. That must change."
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It isn't fiscal stimulus in the way we normally think about it, but the federal government has played an important role in providing credit directly to market participants, especially through the IMPP. The IMPP was by far the most important liquidity facility set up to help the Canadian banks and financial system. Basically, the government swapped over $50b worth of bundles of mortgages from the banks (that it had already guaranteed through the CMHC) for highly liquid GoC Tbills and bonds. In the US, a similar liquidity facility was set up much later in the crisis but it is run though the Fed's balance sheet. The IMPP was much more important in keeping Canadian banks liquid and lending than any of the liquidity facilities set up at the Bank of Canada. The last federal budget also included timely increases in the lending authority of the EDC, and the BDC. I think the former helped deal with the shortage of trade credit for exporters (but I'm not sure how well the latter has worked out...). And of course, as you mention, we have to somehow keep track of the "loans" to the auto industry in measuring the size of the direct lending.
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I did a bit of arithmetic, and I was surprised at how robust the quarterly growth estimate is to the missing month March GDP number. Using the previous five monthly growth rates (rounded to a single decimal place), I calculate that the growth rate for 2009Q1 satisfies G=-6.65+1.31*gM, where gM is the March monthly growth rate. If you plug in Stephen's estimate of gM=-.12, you get a first quarter growth rate of G=-6.8% (close enough to Stephen's mean estimate of -6.9% that the difference may be rounding error). But even if you let gM range from 0% to -.5%, the first quarter growth rate of GDP only ranges from -6.65 to -7.3. So a horrible first quarter number truly is "baked in".
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