Recently I’ve heard a number of otherwise intelligent people assess an economic hypothesis based on the R2 of an estimated regression. I’d like to point out why that can often be very misleading.
Category Archives: financial markets
European monetary policy and the yield curve
From the Economist last week:
Since the financial crisis the European Central Bank (ECB) has ploughed a solitary course, reflecting its unique status as a monetary authority without a state. While other big central banks, notably America’s Federal Reserve, adopted quantitative easing– buying government bonds by creating money– to stimulate recovery, the ECB relied mainly on lowering interest rates and providing unlimited liquidity to banks on longer terms and against worse collateral. But as the Fed phases out its asset-buying programme in 2014, it may be the ECB’s turn to become unorthodox.
By one measure, the ECB may already be there.
A lack of ethics
David Kocieniewski of the New York Times is guilty of some outrageously bad journalism in the form of a groundless ad hominem attack on the reputation of two professors for the sole purpose of reinforcing the prejudices of his misinformed readers.
All quiet on the southern front
After a wild ride in 2011-2012, interest rates have settled down on European sovereign debt. For now.
Federal Reserve control of the short-term interest rate
Once upon a time, U.S. monetary policy was conducted with its primary target defined in terms of the fed funds rate, which is the interest rate on an overnight loan of Federal Reserve deposits between private banks or other institutions that hold accounts with the Fed. A bank that ended the day with more deposits in its account with the Fed than needed to meet its required balances could lend those funds to another bank that found itself short. The interest rate on these loans was very sensitive to the total level of excess reserves in the system. The Fed’s direct control of available reserves gave it near control of the interest rate on loans of fed funds, which was what made the fed funds rate a credible target for implementation of the FOMC’s policy directives.
Forward rates and monetary tightening
The Federal Reserve has been trying hard to communicate that it intends to keep short-term interest rates low for quite some time. The market seems to have embraced the message.
Summarizing monetary policy
Before 2008, U.S. monetary policy was primarily conducted in terms of a target set by the Federal Reserve for the fed funds rate, which is the interest rate a bank pays to borrow funds overnight from other banks. A large academic literature used the fed funds rate as a summary of monetary policy, looking at its correlations in dynamic regressions with other variables of macroeconomic interest. But the fed funds rate has been stuck near zero for the last 5 years, and will likely be replaced by an alternative policy focus even once we exit the zero lower bound. Economic researchers face not just the difficulty of summarizing what the Fed has been doing in the current and future environment, but also the practical challenge of how to update their historical regressions to try to describe the full set of historical data along with the new experience in a coherent way. Here I describe a new research paper that suggests one solution to these problems.
What Currencies Are Foreign Exchange Reserves Held In?
Following up on the dollar’s status as an international currency (and how threats of default are not helpful), here is what we know about the dollar’s role as a reserve currency.
American Debt, Chinese Anxiety, Elaborated
Or, how the Tea Party is working hard to sabotage the dollar’s role in global finance.
Debt Ceiling Watch (III)
Lots of pooh-poohing of the implications of a debt-ceiling crisis. It’s instructive to examine what happened to equity markets when we last came close to a breach, but the Government didn’t actually default.