Monthly Archives: May 2014

Robin Harding

Andrew Levin, a Fed staffer who worked extensively on Janet Yellen’s communication reforms when she was vice-chair, sets out a set of principles for central bank communications in a paper at today’s Hoover central banking conference.

He calls for press conferences after every Fed meeting and a quarterly, Bank of England-style monetary policy report. Mr Levin is currently at the IMF but this a direction many Fed officials want to go.

Here are Mr Levin’s principles, with my highlights in bold, and comments in italic: Read more

Chris Giles

Professor Thomas Piketty has given a more detailed response to the Financial Times articles and blogs on his wealth inequality data in Capital in the 21st Century (here, here, here and here). He says it is “simply wrong” to suggest he made errors in his data.

There are a few things on which we agree. First, the source data on wealth inequality is poor. I have written that it is “sketchy” and Prof Piketty says it is “much less systematic than we have for income inequality”. Second, it would have been preferable for Prof Piketty to have used a more sophisticated averaging technique than a simple average of Britain, France and Sweden to derive an estimate for European wealth inequality. Third, the available data suggests a broad trend of reduction in wealth inequality during most of the 20th Century. Read more

Emily Cadman

French academic Thomas Piketty has issued a detailed response to criticism by the Financial Times of his work on inequality, saying it is “simply wrong” to suggest he made errors in his data.

The best-selling author of Capital in the Twenty-First Century, which has ignited an international debate on trends in inequality, said “the corrections proposed by the FT to my series (and with which I disagree) are for the most part relatively minor, and do not affect the long run evolutions and my overall analysis”. Read more

How do you measure what prostitutes and drug dealers do for the economy? Britain’s official statisticians have had a go – and decided their inclusion in the UK’s GDP estimates will add about £10bn to the size of the economy in 2009. But how did they get to that number? Read more

 

Drug-dealers and their customers in the UK may be breaking the law, but at least they are making us richer. Illegal activities such as prostitution and drug dealing will add £10bn to the UK economy, the Office of National Statistics said today, as part of an overhaul of how we calculate national gross domestic productRead more

Chris Giles

Ever since the Financial Times wrote articles pointing to data problems in Professor Thomas Piketty’s best-selling book, there has been quite a heated reaction online and in print. In this post, I will give what I hope are some more relevant details, address a few misunderstandings and reply to some of the very legitimate questions that have been raised over the past few days.

For those that do not like lists, I apologise because this is something of a long list. Read more

Claire Jones

During the ECB’s forum on central banking which is taking place in the Portuguese town of Sintra, president Mario Draghi took the opportunity to discuss his views on how to breath new life into the eurozone’s market for securitisation. Read more

(c) Getty Images

A sobering message from Larry Summers this afternoon in a speech at the “Conference on Inclusive Capitalism” in LondonRead more

Claire Jones

The European Central Bank is not exactly renowned for stoking inflation. At 0.7 per cent, price pressures are now less than half its target of below but close to 2 per cent — something that the governing council has done nothing to correct over the past six months.

That did not stop Paul Krugman today telling the ECB to raise its target even higher. The Princeton professor was standing only meters away from Mario Draghi, in Sintra at an event that the eurozone’s monetary authority hopes to become its own version of the US Federal Reserve’s Jackson Hole.

As hard sells go, this is right up there. Read more

Chris Giles

Professor Thomas Piketty’s Capital in the 21st Century has data on wealth inequality at its core. His data collection has been universally praised. Prof Piketty says he has collected,

“as complete and consistent a set of historical sources as possible in order to study the dynamics of income and wealth distribution over the long run”

However, when writing an article on the distribution of wealth in the UK, I noticed a serious discrepancy between the contemporary concentration of wealth described in Capital in the 21st Century and that reported in the official UK statistics. Professor Piketty cited a figure showing the top 10 per cent of British people held 71 per cent of total national wealth. The Office for National Statistics latest Wealth and Assets Survey put the figure at only 44 per centRead more

Chris Giles

Dear Chris,

I am happy to see that FT journalists are using the excel files that I have put on line! I would very much appreciate if you could publish this response along with your piece.

Let me first say that the reason why I put all excel files on line, including all the detailed excel formulas about data constructions and adjustments, is precisely because I want to promote an open and transparent debate about these important and sensitive measurement issues (if there was anything to hide, any “fat finger problem”, why would I put everything on line?). Read more

Ferdinando Giugliano

The importance of small and medium-sized enterprises as engines of job creation is a well-established economic fact. In countries such as Italy and Spain, SMEs account for 70-80 per cent of the workforce, and for a similar proportion of all newly created jobs.

Much less is known, however, about which kinds of SMEs are better at boosting employment. The SMEs universe is varied, but distinguishing between them is essential for governments to direct their economic policies in an effective way.

A study published this week by the Organisation of Economic Cooperation and Development analyses in painstaking detail a database including SMEs from 18 countries over ten years. Its main finding is that among all SMEs, it is the youngest companies that contribute the most to boosting employment. Read more

Ferdinando Giugliano

 

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Robin Harding

The most newsy point from NY Fed president William Dudley’s speech today was his call for a change in exit strategy, urging the central bank to reinvest in its mortgage portfolio. But there was a lot more going on in the speech: Mr Dudley put a dovish spin on the Fed’s inflation target. He said bank regulation may be driving down neutral interest rates, and he put markets on notice that how they price bonds will decide how the Fed changes interest rates.

(1) Inflation is coming

Mr Dudley’s tone on inflation was different to the isn’t-it-worringly-low type of remarks that Fed officials have tended to make recently. Instead, he expects inflation to head upwards, and seemed to be testing arguments for why Fed policy should not react.

“With respect to the outlook for prices, I think that inflation will drift upwards over the next year, getting closer to the FOMC’s 2 percent objective for the personal consumption expenditure deflator . . . That said, I see little prospect of inflation climbing sharply over the next year or two. There still are considerable margins of excess capacity available in the economy—especially in the labor market—that should moderate price pressures.”

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Emily Cadman

This morning’s dovish inflation report press conference dampened market expectations of an early rate rise. Here are some of the reasons the Bank believes there is still someway to go before a rate rise is needed:

1. Labour market slack Read more

John Aglionby

Bank of England Governor Mark Carney will come under pressure when presenting the bank’s quarterly inflation report on Wednesday to explain how the central bank proposes to cool the housing market without derailing the wider economic recovery.

By John Aglionby and Sarah O’Connor

 

Chris Giles

In Threadneedle Street tomorrow, the Bank of England has some big questions to answer in its inflation report. How much slack does it think remains in the labour market? How is monetary policy likely to respond to falling estimates of spare capacity? And how much can the BoE rely on macroprudential tools in lieu of raising interest rates?

This post addresses the first question from which the other two follow. The answer for people who do not like spider-web diagrams is that not much slack remains in the labour market, at least if you believe the BoE’s analytical methods.

For context, Britain’s central bank said in February there is little spare capacity within companies, so the slack in the economy relates to unemployed and underemployed people. It has moved away from unemployment as the sole indicator of slack to a more holistic approach, one it first considered last August when it first used the spider-web diagram (top) in the chart below.

In this pentagon, the BoE said all five different indicators of labour market slack it considered for Q1 2013 were roughly one standard deviation higher than the 1992 to 2007 trend. In percentage terms, this finding equates to the BoE saying that the labour market at the start of 2013 was in a position where it had been historically stronger about 84 per cent of the time and weaker only about 16 per cent of the time. Read more

Emily Cadman

Welcome to our live coverage of ECB president Mario Draghi monthly press conference. Earlier the ECB kept its benchmark interest rate on hold at its record low for the sixth month in the row, despite weaker than expected inflation. Follow the questions and reaction live here with capital markets editor Ralph Atkins and economics reporter Emily Cadman.

 

Robin Harding

The Fed is locked into bad equilibrium where it is forced to change policy gradually, because that is what markets expect, which in turn means policy works better with gradual changes.

That is the possibility outgoing Fed governor Jeremy Stein has raised in a speech on Tuesday evening. Read more

Chris Giles

The world has known since Reinhart and Rogoff’s classic “This time is different” that financial crises are likely to cause persistent damage to economies. Even if growth returns to pre-crisis rates (and that is a big if), the level of output is generally lower. Persistently lower output is horrible as it generally requires households, governments and companies to tighten their belts in order to bring spending into line with the new expectations they are poorer than they had hoped.

The big question has always been by how much will economies suffer. Alongside the normal economic forecasts and recommendations for structural reform that always come with an economic outlook from the Organisation for Economic Cooperation and Development, the Paris-based international organisation has also published its latest guess at the permanent damage from the crisis and the different causes in different countries.

Every country has its own internal debate on the matter and it is often useful to have an external comparator, which is consistent across countries to challenge domestic views, which can often conclude that this time it is different for us.

First, the OECD agrees with Reinhart and Rogoff, saying: “For most OECD countries, the crisis has probably resulted in a permanent loss of potential output, so that even with a continuing recovery, GDP may not catch-up to its pre-crisis trajectory”.

For the OECD as a whole, the organisation compared outcomes since the crisis with the assumption that labour force participation, structural unemployment and productivity growth remained at the averages between 2000 and 2007. It finds a big variation among OECD countries with an average overall loss of economic output of 3.25 per cent as shown in the first chart.

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