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Wednesday, April 25, 2018

Job Guarantee In The News

The Job Guarantee -- a key part of Modern Monetary Theory (MMT) -- is back in the news. Unfortunately, I am tied up with other projects, so I am not about to launch an in-depth analysis of the proposal. I would instead point the interested reader to the report: "Public Service Employment: A Path to Full Employment," by  L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina R. Tcherneva, and Stephanie A. Kelton. (As an immediate disclaimer, I have not had a chance to read the report, but I assume it would give the best detailed introduction to the concept. There are other simplified FAQ articles available.)

Monday, April 23, 2018

Triviality Of Parameter Uncertainty And Measurement Noise For Forecasting

In earlier articles, I discussed the notion of forecastability (link to previous article): is it possible to forecast the future values of variables in an economic model? This article will begin an extended analysis of the simplest stock-flow consistent (SFC) model: model SIM. Based on what we know about linear system theory, we can that two standard sources of uncertainty (measurement noise and parameter uncertainty) are not forecasting challenges if we assume that we are working with the correct economic model. Other sources of uncertainty present greater problems, and will be discussed in later articles.

Sunday, April 22, 2018

Why We Should Be Concerned About The Forecastability Of Economic Models

Although it might be possible to find dissenters, the apparent consensus among financial market practitioners is that mathematical economic models provide terrible forecasts. One response is to keep searching through the set of all possible models, hoping to find something that works. The author's suggested response is to accept that forecasting is an inherently impossible task. However, in order to advance beyond nihilism, we need to quantify why mathematical models are terrible. My argument is straightforward: the models that provide the best fit to observed behaviour cannot themselves be forecast with the type of information that we have available in the real world.

Wednesday, April 18, 2018

Forecastability And Economic Modelling

When most people think about macroeconomics, what they want is the ability to forecast economic outcomes. However, economists' (of all stripes) reputation as forecasters is not particularly high. My view is that this is not too surprising: what we want forecasters to accomplish is probably impossible. (I am hardly the first person to note this, as variants of this idea go back at least to Keynes; I could not hope to offer a history of this idea.) However, I think if we want to approach macro theory formally, we need to formalise the notion that outcomes cannot be forecast, which means we need to define non-forecastability formally.

This article gives one potential definition of forecastability, and then applies the concept to a simple stock-flow consistent (SFC) model. It should be noted that these are my preliminary thoughts, and I believe that the definition will need to be refined.

Sunday, April 15, 2018

Australian Fiscal Surpluses And Functional Finance

Chart: Australian General Government Fiscal Balance (IMF)

The chart above shows the (annual) fiscal balance for the general government sector of Australia (the general government sector includes sub-sovereign governments as well as the central government), taken from the IMF World Economic Outlook. As can be seen, there was a lengthy period of surpluses from the late 1990s - 2000s. This is somewhat unusual, and raises some questions about some interpretations of functional finance and Modern Monetary Theory (MMT). If we look at the situation more carefully, the fact that there were surpluses then was not too surprising, and is entirely consistent with functional finance principles.

Wednesday, April 11, 2018

Can We Estimate The Inflation Risk Premium?

(NOTE: This article is an unedited first draft of a section of my upcoming book on inflation breakeven analysis.)

This section article continues the discussion in the previous section [in the book], focussing on our ability to calculate the inflation risk premium. The tendency among central bank and academic researchers is to focus on the answers provided by affine term structure models. I am highly skeptical about that approach, and prefer the simpler approach of analysing historical returns data. The problem with historical data analysis is the limited volume of inflation-linked returns data.

Tuesday, April 10, 2018

MMT Versus "Structural Keynesianism"?

Professor Thomas Palley has once again launched a critique of Modern Monetary Theory (MMT) in "Modern Money Theory (MMT) vs. Structural Keynesianism." One could argue that there are some useful nuggets in his argument, but they are arguably behind the times. His critique is of how he perceives MMT -- which has only a limited relationship to MMT as it exists now.

I probably should have ignored his article, but too many people have discussed it, and so I do not want to leave the impression that his arguments actually represent weak points of MMT.