Friday, September 26, 2014

Predicting the Nobel

Thursday, September 25, 2014

Monetary Policy Rules

Here is a website that gives up-to-date graphs of several policy rules.

Wednesday, September 24, 2014

Grading in Ec 10

An instructor in introductory economics asks:
I have a question that may be of interest to the students and faculty who read your blog. In searching the archives of your blog, I did not see a blog post on the following: 
How do you assess and evaluate those students? 
I have a colleague who administers only one assessment - a final. Most of the rest of my department uses a variety of activities, assessments and evaluations - homework sets, reading quizzes, writing, midterm and final.
Here is the weighting we use to grade each semester in ec 10 at Harvard: 40 percent on the final exam, 20 percent on each of two midterm exams, and 20 percent on work done with section leader (mostly grades on problem sets done as homework, though class participation may be given some weight as well).  In addition, we have an optional "unit test program" in which students can take practice tests throughout the semester and, if they pass, earn extra credit.

Sunday, September 21, 2014

Correlation is not causation

Wednesday, September 17, 2014

Follow or Break the Rule?

Lars Christensen plots with recent data a version of the Taylor rule I proposed some years ago (published here).  I suggested this rule as an approximate description of Alan Greenspan's monetary policy in the 1990s. Here is Lars's plot:

Click on graphic to enlarge 
I based this rule (the green line) on data only from the 1990s, but notice that it does reasonably well until 2009.  The red line is the rule with parameters estimated from the later period.

Taken at face value, the rule suggests that it is time for the Fed to start raising the federal funds rate.  If you believe this rule was reasonably good during the period of the Great Moderation, does this mean the Fed should start tightening now, as the economy gets back to normal? 

Maybe, but not necessarily. There are two problems with interpreting such rules today.

The first and most obvious problem is that odd things have been happening in the labor market for the past several years. The unemployment rate (one of the right hand side variables in this rule) may not be a reliable indicator of slack.

The second and more subtle problem is the nagging issue of the zero lower bound.  For several years, the rule suggested a target federal funds rate deeply in the negative territory.  We are out of that range now, but should the past "errors" influence our target today?  An argument can be made that because the Fed kept the target rate "too high" for so long (that is, at zero rather than negative), it should commit itself now to keeping the target "too low" as compensation (that is, at zero for longer than the rule recommends).  By systematically doing so, the Fed encourages long rates to fall by more whenever the economy hits the zero lower bound. Such a policy might lead to greater stability than strict adherence to the rule as soon as we leave negative territory.

The time for the Fed to raise the target rate may be soon, but I don't think we are quite there.

Update: Ricardo Reis writes to me the following useful observation:

There is another (related) argument for not raising rates now to offset shortfalls in the past. It is not about the interest rate. It is about the price level, the ultimate goal of monetary policy and measure of its performance.

If you plot the PCE deflator, there is a clear shortfall relative to a 2% price-level target. A 2% price level target fits very well during Greenspan's time.  By the end of 2008, we were exactly on the 1992-target. But when I look at that plot starting in 2009 until the most recent data I see a gap.

A price-level target rule is optimal in normal times (Ball, Mankiw, and Reis) but is also an optimal policy in response to the dangers of the zero lower bound (Woodford). We have to catch up for the shortfall in the price level right now. And if you look at inflation expectations from surveys or markets, there seems to be no catch up expected, indicating that policy is still too tight.

Saturday, September 13, 2014

The Case for Civility

Noah Smith puts it well:

most of our arguments are over things like Obamacare, or antipoverty programs, or financial regulation-- issues on which reasonable people can and do disagree. If you’re uncivil in this sort of situation -- if you call your opponent an idiot, or a liar, or a nastier name simply because you think his or her argument is bad -- you’re basically being overconfident. You’re assuming that there’s essentially no chance that you’re in the wrong, so it’s in the public interest for you to rail against your opponent and score points with the crowd. If you do this, there’s no chance that you yourself will learn anything from the encounter.

Friday, September 12, 2014

Just for Fun

A friend sends the following puzzle.  Find the X that fits in this sequence:

16  06  68  88  X  98

For those who don't get it, I will post a hint in a few days.

Hint: Try looking at the problem upside down.

Monday, September 08, 2014

Grading Textbooks on Climate Change

Sunday, September 07, 2014

On Education

I much enjoyed this article by Steven Pinker.  An excerpt:

It seems to me that educated people should know something about the 13-billion-year prehistory of our species and the basic laws governing the physical and living world, including our bodies and brains. They should grasp the timeline of human history from the dawn of agriculture to the present. They should be exposed to the diversity of human cultures, and the major systems of belief and value with which they have made sense of their lives. They should know about the formative events in human history, including the blunders we can hope not to repeat. They should understand the principles behind democratic governance and the rule of law. They should know how to appreciate works of fiction and art as sources of aesthetic pleasure and as impetuses to reflect on the human condition.

On top of this knowledge, a liberal education should make certain habits of rationality second nature. Educated people should be able to express complex ideas in clear writing and speech. They should appreciate that objective knowledge is a precious commodity, and know how to distinguish vetted fact from superstition, rumor, and unexamined conventional wisdom. They should know how to reason logically and statistically, avoiding the fallacies and biases to which the untutored human mind is vulnerable. They should think causally rather than magically, and know what it takes to distinguish causation from correlation and coincidence. They should be acutely aware of human fallibility, most notably their own, and appreciate that people who disagree with them are not stupid or evil. Accordingly, they should appreciate the value of trying to change minds by persuasion rather than intimidation or demagoguery.

I believe (and believe I can persuade you) that the more deeply a society cultivates this knowledge and mindset, the more it will flourish. The conviction that they are teachable gets me out of bed in the morning.

Thursday, September 04, 2014

Is inflation dead?