Recent Posts

Wednesday, August 20, 2014

Book Review: The Undercover Economist Strikes Back

The Undercover Economist Strikes Back (How to Run - Or Ruin - An Economy) by Tim Harford is an interesting popular introduction to macroeconomics. Tim Harford has written previous popularisations about microeconomics; in this book he takes a stab at trying to explain macro. The book is well written for its target audience, but it glosses over the theoretical divide within the field.

Sunday, August 17, 2014

Understanding Central Bank Control Of Interest Rates

One topic that periodically comes up is the issue of whether bond yields are "controlled" by the central bank, or whether they are set by "market forces". The typical context of the discussion is whether the bond markets can force governments to follow certain policies. I am in the camp that the central bank does "control" bond yields, but there are some subtleties in understanding how that control is defined.

Saturday, August 16, 2014

Canadian Labour Data: Second Time Lucky

Chart: Canadian Aggregate Employment Growth

The do-over for the July Labour Force Survey for July 2014 was much better than the first go - 42,000 jobs were created in this version, instead of just 200. But as the chart above shows, the year-on-year growth rate for employment is still below 1%. And the details of the report are less buoyant the aggregate job number suggests, as growth was dominated by part-time positions.

Wednesday, August 13, 2014

Erratic Linker Carry Means Breakeven Inflation Matters, Not The Real Yield

One of the non-intuitive aspects of the analysis of inflation-linked bonds (also known as index-linked bonds, or even linkers) – is that their “real yield”* is almost a point of trivia for their valuation. Linker valuation is best understood by looking at their implied breakeven inflation rate.

Tuesday, August 12, 2014

Market Update

Chart: 10-Year Government of Canada Bond Yield


Just a short comment today. I was getting some charts together to discuss the ugly Canadian July Labour Force Survey, but it appears the data were so ugly that they were wrong. The data will be re-released on Friday, August 15 (at least my charts are ready). I will instead make some comments about the global bond market rally.

Wednesday, August 6, 2014

Using Nominal Rigidity To Improve An Inflation Model

Chart: Wage Inflation Model
This article is a follow-up to my previous post about the unemployment gap. I explain more formally how incorporating nominal rigidity - the well-documented avoidance of wage cuts - can improve the recent performance of a simple wage inflation model.

Sunday, August 3, 2014

What Does The NAIRU Tell Us About U.S. Inflation?

Chart: U.S. Unemployment Rate And NAIRU

The U.S. Employment Situation report released last Friday was somewhat weaker-than-expected, but the data follow the pre-existing trends. There is no sign that turmoil overseas has yet had an impact on the U.S. labour market, which is not too surprising - there is no reason to expect that U.S. labour market to lead international economic data. If the recovery is not derailed by the various existing imbalances, the unemployment rate would likely follow its post-2010 trend, and crash into the  nonaccelerating inflation rate of unemployment (NAIRU) at some point in 2015. In this article, I discuss various aspects of the NAIRU concept.