Wednesday, September 28, 2016

Farmer and Wall Street macro

" Do not build roads and bridges as a temporary stimulus. A better way to prevent the recession that might otherwise occur when the Bank raises the Bank Rate would be an explicit commitment by the Financial Policy committee of the Bank of England, to support the value of the stock market. This could be achieved by offering to buy or sell shares in anExchange Traded Fund at a value linked to the performance of the unemployment rate. "

"The private sector does not typically find the right price for stocks and shares. Animal spiritsrepresent a separate independent fundamental of the economy; they are like technology or preferences. And the state of animal spirits is reflected in the price that households are prepared to pay for stocks and shares.
The role of fiscal policy is to counteract the influence of animal spirits by helping markets to coordinate on a ‘good equilibrium’. In the absence of the direction of the Treasury or the Central Bank, asset markets are often trapped like the proverbial prisoner in the ‘prisoners’ dilemma’ who confesses to avoid the fate that would await him if his partner in crime were to confess first.
My argument is not made lightly. My recent books and articles provide a coherent alternative to the conventional New Keynesian paradigm and I provide empirical evidence that demonstrates a stable link between asset prices and the unemployment rate.
Conventional wisdom argues that the path to higher inflation lies through lowering interest rates. That path is supposed to trigger a demand expansion, higher employment and higher wages and prices. But the link from unemployment to wage inflation, the so-called ‘Phillips Curve’ has not existed since Phillips published his eponymous article in 1958. It was an artifact of the gold exchange standard when monetary policy operated very differently from the way it operates today.
The evidence from twenty years of stagnation in Japan does not inspire confidence in a policy of lowering interest rates further. It’s time for new approach."

That last sentence suggests the likely impact of farmers stock market State props