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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.

Sunday, April 8, 2018

Trade War Complacency

The escalating rounds of tariffs between the United States and China is an interesting point of economic debate. However, from the perspective of the interest rate markets, it appears to be one of those subjects that generates a great deal of economist commentary, but with limited market impact. This view is arguably complacent; whether it is too complacent is left for the reader to judge.

Tuesday, April 3, 2018

The Curious Governmental Accounting Of DSGE Macro

This article finishes off my series on DSGE macro models. I think I have cracked the code for DSGE mathematics, which uses a variant of existing mathematical conventions. What we see is that the model definition ends up being somewhat arbitrary, which is most apparent when we discuss governmental operations within the models.

Saturday, March 31, 2018

Fiscal Crisis Sighted! Break Out The Popcorn!

Apparently we are due for some excitement in Treasury market, as per the analysis in "A Debt Crisis is on the Horizon," penned by the luminaries Michael J. Boskin, John H. Cochrane, John F. Cogan, George P. Shultz and John B. Taylor. As a regular reader might suspect, I am somewhat skeptical about the claims in said article. That said, one may note that the discussion therein is not totally incompatible with a Functional Finance framework, although we would need to paraphrase what they wrote. However, the interest rate determination part of the article is pretty weak.