The final week of February 2015 comes to an end. The market did pretty well for the week and the month. As I prepare for the next week, this is what I found interesting over on the Net. As usual, some are related to the market some to the geopolitics and some are for fun and information. Some were published on the weekend and some earlier. So here is the list in no particular order.
Leonard Nimoy, a pop culture force as Spock of ‘Star Trek,’ dies at 83 – Spock was the ultimate outsider — a trait Mr. Nimoy said he understood. He was Jewish and had grown up in an Irish section of Boston. Going to movies as a child during the Depression, he was drawn to actors who specialized in bringing pathos to the grotesque — especially Boris Karloff in “Frankenstein” (1931) and Charles Laughton in “The Hunchback of Notre Dame” (1939).
The Closed Minds Problem – Inflation cultists can’t be moved; but reporters and editors who tend to put out views-differ-on-shape-of-planet stories because they think it’s safe can be, sometimes, deterred if you show that they are lending credence to charlatans. And this in turn can gradually move the terms of discussion, possibly even pushing the nonsense out of the Overton window.
Asset Markets with Heterogeneous Information – This paper studies competitive equilibria of economies where assets are heterogeneous and traders have heterogeneous information about them. Markets are defined by a price and a procedure for clearing trades and any asset can in principle be traded in any market. Buyers can use their information to impose acceptance rules which specify which assets they are willing to trade in each market. The set of markets where trade takes place is derived endogenously. The model can be applied to find conditions under which these economies feature fire-sales, contagion and flights to quality.
House Prices, Local Demand, and Retail Prices -We use detailed microdata to document a causal response of local retail prices to changes inhouse prices, withelasticities of 15%-20% across housing booms and busts. We provide evidencethat our resultsare driven by changes in markupsrather than by changes in local costs. We arguethat this markup variation arises when increases in housing wealth reduce households’ demand elasticity, and firms raise markups in response. Consistent with this channel, price effects are larger in zip codes with many homeowners, and non-existent in zip codes with mostly renters. Shopping data confirms that house price changes have opposite effects on the price sensitivity of homeowners and renters. Our evidence has implications for monetary, labor and urban economics, andsuggests a new source of markup variation in business cycle models.
Origins of Stock Market Fluctuations – Three mutually uncorrelated economic disturbances that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. A model is employed to interpret these disturbances in terms of three latent primitive shocks. In the short run, shocks that a¤ect the willingness to bear risk independently of macroeconomic fundamentals explain most of the variation in the market. In the long run, the market is profoundly a¤ected by shocks that reallocate the rewards of a given level of production between workers and shareholders.
The Taylor rule conundrum – Monetary policy can be too accommodative when central banks follow US interest rates to avoid appreciations of their currencies. But if monetary policy was that accommodative for more than a decade we should have seen increasing inflation rates during those years. That was not what we saw, inflation rates remain stable (and even decreasing) in most of these markets. Today, where interest rates remain very low compared to those implied by the Taylor rule, we talk about global deflation, not global inflation.
10 Things to Know About Negative Bond Yields – The ultra-low interest rate regime is likely to persist for now. In the medium-term, this historical and highly unusual phenomenon is likely to bring not just possible benefits for the European economy but also much higher risks of collateral damage and unintended consequences. Accentuated by the illusion of market liquidity, this is a world in which small adjustments in probabilities of future outcomes — if and when they occur — could result in sharp movements in asset prices.
The Industrial Revolution – The Industrial Revolution decisively changed economy wide productivity growth rates. For successful economies, measured efficiency growth rates increased from close to zero to close to 1% per year in the blink of an eye, in terms of the long history of humanity, seemingly within 50 years of 1800 in England. Yet the Industrial Revolution has defied simple economic explanations or modeling. This paper seeks to set out the empirical parameters of the Industrial Revolution that any economic theory must encompass, and illustrate why this makes explaining the Industrial Revolution so difficult within the context of standard economic models and narratives.
Why Markets Can’t Price the Priceless – To pay for infrastructure, water rates over the past two decades have been increasing yearly at 4 percent to 6 percent above the consumer price index. But water prices can rise only so far before real affordability limits are reached—and that’s one limitation of relying just on pricing. Water needs to be funded as a public good. Yet federal funding for water systems has declined dramatically. After enactment of the 1972 Clean Water Act, the federal government provided 75 percent of the funding for water systems through the 1970s and 1980s, but provides only about 10 percent today.
Conducting Monetary Policy with a Large Balance Sheet – with regard to balance sheet normalization, the FOMC has indicated that it does not anticipate sales of agency mortgage-backed securities, and that it plans to normalize the size of the balance sheet primarily by ceasing reinvestment of principal payments on its existing securities holdings when the time comes.
