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October 16, 2012



Aren't market monetarists with you on markets in GDP securities?

From Arse To Elbow

"Getting a forecast wrong is no crime". Michael Fish would no doubt agree.

Nick Rowe

miltonkeynes beat me to it. Add Scott Sumner to your list. But not just because it allows people to insure themselves against NGDP risk, but because it lets the monetary authority observe market NGDP expectations in real time. And stabilising NGDP expectations would be an important automatic stabiliser. Much better than an inherently backward-looking Taylor Rule, which only responds to two variables, and with an unavoidable lag.

Nick Rowe

Plus, the existence of a very small stock of NGDP perpetuities (paying an annual dividend of one trillionth of NGDP forever) would prevent "dynamic inefficiency" (where the nominal interest rate is forever less than the NGDP growth rate) because that would make the market price of a trill perpetuity infinite.

Chris Purnell

"I fear that Robert Shiller and I...."

And he ought to get a Nobel Prize, so you're in very good company.


Shiller: decent man with an unfortunate name.

Didn't he plug an ETF based on the US housing market, so that buyers could hedge purchase price risk?

Frances Coppola

Chris Purnell got there first. Shiller - evident Nobel material. And it looks like you can add Nick Rowe to the list of people who approve of GDP securities. You are definitely in good company. All you need now is someone to make a market in the things.

That OBR report is the closest I've ever seen a Government department get to admitting "Oops, we got it wrong".

jobs in banks

Thanks a lot for those tips!

Ralph Musgrave

I like Chris’s “flexible fiscal policy” idea, but I don’t agree with his claim that because infrastructure projects cannot be turned on and off at will, that therefore a more flexible fiscal policy is not possible. It would be perfectly feasible to tell schools, hospitals, the police, etc that the size of their budgets is liable to be changed by a small amount at a moment’s notice by central government. In a school for example, hiring or sacking a supply teacher is no big deal. And for the police, buying a new car or delaying its purchase is no big deal.

Second, I don’t see why (as Chris suggests) we need a BIGGER government sector for the above to work. The idea works with a big OR SMALL public sector.


What about automatic working-time reduction, partially compensated by unemployment benefits.
I believe that's more or less what they have in Germany, and one of the reason this country was not severely by the crisis (apart from the euro distortions, of course).
A big problem with recessions is the economic uncertainty they create because people fear losing their jobs (a notion that is absent from main economic models by the way). If working-time reduction is shared, the problem does not exist any longer. It's a micro-mechanism with a macro stabilizing effect.

Nick Rowe

Ralph: as someone who has worked doing university budgets, I can say that hiring one more or less supply teacher is a very big deal, *if you have to do it quickly*. Because you need to tell the students months in advance which courses will be offered. And you can't suddenly cancel the course halfway through the year. If our budget went up or down at a moment's notice, we would simply offset that by saving increases and dissaving decreases, which means it wouldn't work at all as a quick fiscal policy change. The government would give us more money, and we would just sit on it for a year. If the government gave us less money, we wouldn't cut actual spending until next year.

Frances Coppola

Ralph: what Nick said. Education budgets really can't have that degree of uncertainty. In fact I don't think any budget can be subject to sudden alteration without notice. It would be impossible to plan or manage.

Frances Coppola

Chris, I've now read the OBR report. I agree with you up to a point - they do spend far too much time explaining small forecast/actual differences that really aren't significant. But the growth forecast is very wrong and I do think they had to explain that. Not that they were able to satisfactorily, of course, without following the IMF into a "mea culpa" about multipliers. Their argument that it is due to persistently high inflation and weakening exports looks a bit thin to me.

Ralph Musgrave

Nick Rowe makes a good point: I overstated my case and chose a bad example (teachers) to illustrate it. Obviously money dished out with a view to getting fiscal stimulus will not necessarily be spent.

That problem actually occurred on a catastrophic scale in the U.S. in that most of the stimulus money channelled to states was hoarded – at least according to this source:


On the other hand ALL FORMS OF STIMULUS (monetary and fiscal) involve much longer lags than we would like. So to re-state my point in a less silly way: “The fact that infrastructure projects cannot be turned on and off at will is not a reason to throw out the baby with the bathwater: i.e. avoid all forms of fiscal stimulus. Reason is that while the effects of non-infrastructure fiscal stimulus are uncertain, they can be turned on and off more quickly than infrastructure projects.”

Re teachers (appropriately qualified teachers, that is) they are a bad example in that it’s often not easy to get people with ideal qualifications in a hurry. So would it be possible to engineer an increase in employment using less well qualified people who would do relatively peripheral or unimportant tasks? I wrote a paper claiming that IS POSSIBLE. The paper actually gives theoretical backing to the British government’s “Work Programme” though I wrote the paper long before the Work Programme was implemented. See:


Frances Coppola

No, Ralph, I don't agree. Creating jobs that can disappear when the political wind changes isn't increasing employment for the longer-term, which is what we really need.

People doing "peripheral" jobs should no more be subject to sudden changes that result in them losing their jobs without notice than people doing jobs that are considered "more important". They deserve better treatment than that.

The public sector divides itself into a protected "core" of largely well-qualified, highly articulate and well-paid people with secure jobs and - importantly - the support of powerful unions, and a growing "shanty town" of people doing part-time, casual and insecure work, often for very low pay. Your proposal would not touch the "core", which protects itself very well - but it would make the lives of the "shanty town" workers even more difficult. And the shanty town workers are not necessarily any less qualified than the core workers. They are just more vulnerable.

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