Tuesday, January 16, 2018

Market Monetarism Goes Mainstream

David Beckworth summarises who’s bought the idea of NGDP targeting (excerpt):

Do Changes in Potential Output and Data Revisions Make NGDP Targeting Impractical?

Over the past few months there has been increasing chatter about the need for a new framework for U.S. monetary policy. The Peterson Institute for International Economics (PIIE), for example, recently had its Rethinking Macroeconomic Policy conference where, among other things, Ben Bernanke called for the Fed to adopt a temporary price-level target. PIIE also launched Angel Ubide's new book on reforming monetary policy. Similarly, at the AEA meetings there was a session titled Monetary Policy in 2018 and Beyond where Christina Romer again made the case for a NGDP level target. Likewise, the Brookings Institute held a recent conference on whether the Fed should abandon its 2 percent inflation target. There, Jeff Frankel shared the arguments for a NGDP level target and Larry Summers endorsed it. Others at the conference, like San Francisco Fed President John Williams called for a price level target.

I am glad this conversation is happening. It is not new--some of us have been having it since 2009--but I get the sense that it is gaining traction. The turnover at the Fed and the opportunity it creates for new thinking makes this conversation about new monetary policy frameworks incredibly important now.

As this conversation continues to grow, so will the interest in the options available including nominal GDP level targeting (NGDPLT). Obviously, I have much to say here, but for now I want to respond to two critiques often applied to NGDPLT: (1) changes in potential output and (2) data revisions make NGDPLT an impractical rule to implement. I think these concerns are misplaced as explained below.

I’ve liked the idea of market monetarism from the start – it’s intellectually appealing, simple in implementation, and really, just common sense. I do have some reservations, though not the ones David brings up.

My main concern is the choice of growth path, especially when viewed through the lense of a developing economy versus a developed economy, as well as how such a path might evolve for an economy across time. That might not seem like much, given that a central bank no longer has to target a lagged reported variable (inflation) and an unobservable one (the output gap). Inflation and real growth can vary under the limits of the central bank’s growth target. So far so good.

But what governs the choice of the NGDP growth path? NGDP growth of 4%-5% would more or less be compatible with developed economy growth like the US, but what about Indonesia or Vietnam, where nominal growth is typically in the region of 8%-9%?

Second, should that target change as economies converge to the global production possibility frontier, and potential growth rates drop? It’s one thing to have inflation averaging 2% over time, but quite another to have it average 6% or more.

Third, what about the impact of demographic change? As populations age, the dependency ratio rises, and both nominal and real income and consumption growth will naturally slow. How should a NGDP growth rule respond to this? I think for this last point, any such monetary rule should target NGDP per capita or NGDP per worker, rather than NGDP. But I don’t have much of  feel for the solutions to problems 1 and 2.

Nevertheless, we’re seeing real progress here.

Friday, January 12, 2018

Raising the Minimum Wage

I was going to keep this for Monday, but this is too timely (excerpt):

Be Careful When Raising Minimum Wages
By Noah Smith

Minimum wages are one of the most contentious topics in economic policy. Many states and cities are experimenting with big minimum wage increases, so that there is now a lot of variation across the country...

...To many in the news media and in the world of think tanks and activists, being pro- or anti-minimum wage is akin to a religious belief. But even in the world of economics research, there’s plenty of disagreement.

A slew of recent minimum-wage studies illustrate the point...

It’s important to remember that these studies are all very limited. Some of them, like the Leamer et al. and the Allegretto et al. studies, are preliminary and subject to change once the final analysis is concluded. The studies that use synthetic controls -- Jardim et al. and Allegretto et al. -- could be wrong if they’ve chosen the wrong controls, which is easy to do. The method used by Cengiz et al. requires its own set of assumptions, which could be wrong.

At this point, anyone following the research debate will be tempted to throw up their hands. What can we learn from a bunch of contradictory studies, each with its own potential weaknesses and flaws? Some extreme cynics even see the contradictory minimum wage results as reason to doubt the usefulness of empirical economics itself.

But this is the wrong response. The right reaction to the contradictory studies is caution. Policy makers and advisers should read the whole literature, including studies that yield conclusions they don’t like. They should try to get a picture of which research methods are considered the most reliable, and why. And then they should move forward cautiously with policy, taking steps to try to help the poor, but not making the steps so big and bold that they can’t be reversed if things go wrong.

In the case of minimum wages, a majority of the evidence seems to indicate that raising the wage floor by modest amounts isn't very dangerous. That means that experiments like the ones now underway in places like Seattle should continue. But the studies showing larger harm from minimum wages boosts should be a reason not to make the increases too large or abrupt, and not to implement big hikes at the federal level. To borrow a phrase from Chinese leader Deng Xiaoping, the right approach is to “cross the river by feeling the stones.”

I'm generally supportive of the notion that the minimum wage is a necessary tool for addressing labour market imperfections and wage inequality. But there's also such a thing as pushing something too far, too fast.

One key problem with the Malaysian labour market is that, unlike in developed countries, a significant portion of the labour force is in the informal sector, where the minimum wage won’t apply and can’t be enforced. In other words, it’s not a silver bullet for the problem of low incomes. A second issue is that, in my own delvings into the impact of the minimum wage in Malaysia, the disemployment impact was statistically significant i.e. it cost jobs, even if the overall welfare benefits outweighed those job losses. So there is a very real trade-off involved. Third, the most recent minimum wage revision showed no impact at all on wages in proximity to the minimum wage level, i.e. zero welfare gains.

So the fact that Malaysia has a minimum wage at all is a positive, but let’s not get too carried away that it’s any kind of total solution. It isn’t.

An Obsession With Surpluses

No, I’m not addressing the government deficit. Rather this is about Malaysia’s (slowly) diminishing current account surplus. I wrote about it at length last year (link), but here’s another flavour of the same argument (abstract):

Current Account Deficits:The Australian Debate
Rochelle Belkar, Lynne Cockerell and Christopher Kent

This paper documents the clear change of view, which has taken place in Australia over the past three decades or so, concerning the relevance of the current account deficit for policy. Historical experience under a fixed exchange rate regime suggested that large persistent deficits were unsustainable and could leave the economy vulnerable to sudden reversals in sentiment. These concerns persisted after the floating of the Australian dollar and financial deregulation, and it was thought that all arms of policy should help to rein in the then much larger current account deficits. However, these policies were shown to be ineffective and, by the early 1990s, the argument that current account deficits represent the optimal outcomes of decisions made by ‘consenting adults’ gained wide support. This paper presents some empirical evidence consistent with optimal smoothing in the face of temporary shocks; the persistence of the deficit is attributed to a modest degree of impatience relative to the rest of the world. Although it is now widely accepted that policy should not seek to influence the current account balance, the issue of external vulnerability remains of interest. Here, country-specific considerations are important, and it is argued that the factors that have made Australia relatively resilient to external shocks are also those that helped to attract foreign capital in the first place.

It's an old paper, but still relevant. I'll note in passing here two things:

  1. The underlying argument is similar to my own – whether the current account is in surplus or deficit (and the extent of that imbalance) is primarily driven by factors in the domestic economy, not the external sector or the exchange rate;
  2. Australia now has almost no FX reserves to speak of, despite being heavily exposed to trade and commodity prices, and a foreign presence in their bond market that exceeds ours. IIRC, they barely have one month cover of retained imports.

The implication is that all adjustments take place in prices instead of levels i.e. the AUD exchange rate adjusts, not their level of reserves. Despite this difference, the MYRAUD cross rate is one of the most stable I’ve ever seen outside of a pegged exchange rate. Or to put it more bluntly – despite not having accumulated “insurance” (FX reserves) against capital outflows, and thus deliberately exposing the exchange rate to greater volatility, the AUD does not appear to be any more volatile than the MYR is. There was an exception to this, running roughly from October 2008-May 2009, coinciding with the collapse of Lehman Brothers and running to the beginnings of the global recovery. But this was more the exception that proved the rule.


Rochelle Belkar, Lynne Cockerell and Christopher Kent, "Current Account Deficits:The Australian Debate", Reserve Bank of Australia Discussion Paper 2007-02, March 2007

Thursday, January 11, 2018

Rent Control Doesn’t Work Either

I’ve been falling behind in my blogging – work commitments, travelling, time with the family etc have really eaten into my writing. One of my new year resolutions is to become more active again. Nevertheless, blogging is still likely to take a little bit of a back seat, though I’ll try to keep up to at least once a week, if not more. Just don’t expect long rants.

First up, a paper on the effectiveness of rent controls on housing (abstract):

The Effects of Rent Control Expansion on Tenants,Landlords, and Inequality: Evidence from San Francisco
Rebecca Diamond, Tim McQuade, & Franklin Qian

In this paper, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants, landlords, and the rental market as a whole. Leveraging new micro data which tracks an individual’s migration over time, we find that rent control increased the probability a renter stayed at their address by close to 20 percent. At the same time, we find that landlords whose properties were exogenously covered by rent control reduced their supply of available rental housing by 15%, by either converting to condos/TICs, selling to owner occupied, or redeveloping buildings. This led to a city-wide rent increase of 7% and caused $5 billion of welfare losses to all renters. We develop a dynamic, structural model of neighborhood choice to evaluate the welfare impacts of our reduced form effects. We find that rent control offered large benefits to impacted tenants during the 1995-2012 period, averaging between $2300 and $6600 per person each year, with aggregate benefits totaling over $390 million annually. The substantial welfare losses due to decreased housing supply could be mitigated if insurance against large rent increases was provided as a form of government social insurance, instead of a regulated mandate on landlords.

Frisco (I lived there for a few years, so feel entitled to use the short form) is an interesting case. Silicon Valley is next door, and the agglomeration of high tech companies in the area have both increased demand for housing (from internal and external immigrants) as well as boosted house prices substantially. Couple that with Californian zoning regulations, and Frisco has a housing market that is one of the most unaffordable in the world. Rent control is one solution, but the paper estimates that the costs far outweigh the benefits.

This isn’t to say that rent controls don’t work at all, but the specific circumstances in Malaysia are similar – inadequate supply, internal migration to economic centres of activity, increased compliance costs. So I’m comfortable extrapolating the results to our domestic housing problem. The solution is still to reduce barriers to contruction and increase supply in the right market segments.


Rebecca Diamond, Tim McQuade, & Franklin Qian , "The Effects of Rent Control Expansion on Tenants,Landlords, and Inequality: Evidence from San Francisco", paper presented at the NBER Conference on Public Economics, October 26-27 2017

Wednesday, January 10, 2018

Effective Exchange Rate Indexes: December 2017 Update

The NEER and REER page has been updated, as has the Google Docs version.


December saw the Ringgit gaining for a fourth straight month across all the indexes. The NEER hit 4.1% yoy, while the REER rose 2.1%. On the month, gains accelerated, with the Ringgit gaining 1.7% in nominal terms, and 1.5% in real terms. Gains were across the board, with appreciation recorded against all 15 currencies in the indexes, the first time that has happened since April 2016.

The largest (m-o-m) gains were against the JPY (2.33%), IDR (2.30%), HKD (2.25%) and USD (2.16%). The smallest gains were against the KRW (0.71%) and GBP (0.86%).



  1. Indexes have been updated to December 2017
  2. CPI deflators and forecasts have been updated for November/December 2017
  3. Trade weights have been updated to 3Q2017. This caused revisions to the indexes from January 2017 onwards

Thursday, December 7, 2017

Effective Exchange Rate Indexes: November 2017 Update

The NEER and REER page has been updated, as has the Google Docs version.


The Ringgit has continued to strengthen across October and November. The yoy growth numbers all turned positive in November with the exception of the Real ASEAN sub-index, while mom growth has been positive for three months running. Gains were broad based, though skewed a little more against the majors, and less so against regional counterparts. The Broad Nominal Index rose 0.36% in October and 1.26% in November, while the Broad Real Index rose 0.72% in October and 1.30% in November.

In November, the only drop recorded was against the KRW (-1.35%), which has been on a tear this year. The biggest gain recorded was against the AUD (Oct: 1.89%; Nov: 3.64%).



  1. Indexes have been updated to November 2017
  2. CPI deflators and forecasts have been updated for October/November 2017

Monday, November 13, 2017

Chart of the Week: Don’t Bet On Real Trade Growth

It was a good run, but Malaysia’s trade growth numbers will “normalise” within the next couple of months (RM millions):


However, this is partly a price phenomenon (index numbers; 2010=100):


On the import side, it’s food, fuel, and edible oils and fats; on the export side, fuel and electronics. Import volume, like imports overall, appear to have plateaued, but there’s still some export volume upside, which is still fairly broad-based.

Two conclusions: Despite the steady increase in export volume, I think this runup is at an end – there’s a lot of volatility in the sub-indices, which means that this increase is hiding a lot of movement underneath. The price trends are mostly oil & gas related. Trade volume in the rest of East Asia has also plateaued, so most of the double-digit growth we’re still seeing across the region is simply from the low base last year. That implies growth rates will gradually drop to “normal” levels, which means something in the low single digits again, as the base shifts to the higher numbers seen earlier this year.

Friday, November 10, 2017

Taxing Land

I’ve been meaning to highlight this, but better late than never (excerpt):

Faster Growth Begins With a Land Tax in U.S. Cities
This would lower land costs, encouraging affordable housing and more density.
By Noah Smith

…In cities, especially large metropolises like New York and tech hubs like San Francisco, the land under a building is often worth a lot more than the buildings itself. When a city gets denser or more desirable, lucky landowners reap windfalls as land prices appreciate. But these windfalls aren’t just unfair -- they raise both rents and housing prices, pushing potential new residents out of a city and choking off its growth.

So it makes sense to tax the value of land. A land-value tax, or LVT, is like a property tax, but with a deduction for the value of buildings and other improvements. The tax would reduce land prices and increase the incentive to build more, which in turn will help drive down rents, making a city more affordable. And because land is a fixed quantity, taxing it doesn’t shrink the economy like taxes on wages and capital sometimes do. Also, since you’re taxing a windfall, it’s hard for landowners to argue that the tax isn’t fair. The money raised with a land-value tax can be spent building affordable housing for the poor.

Therefore, a land-value tax is an efficient and fair way to take a city that now works only for lucky prosperous landowners, and turn it into a place where the working class can afford to make a decent life….

…In the U.S., Pennsylvania is the LVT trailblazer. More than a dozen cities in that state use split-rate taxation -- one tax on land value, and a lower rate on improvements, such as buildings. Some of these experiments, like the one in Altoona, have failed, probably due to ineffective implementation and businesses’ failure to understand the novel tax structure.

But in Pittsburgh, a large city where valuable locations are scarce, the tax has been a success….

BNM Watch: The Countdown Has Started

Yesterday’s MPC statement is about as clear a statement of intent as you can get from a central bank (excerpt; emphasis added):

Monetary Policy Statement

...At the current level of the OPR, the stance of monetary policy remains accommodative. Given the strength of the global and domestic macroeconomic conditions, the Monetary Policy Committee may consider reviewing the current degree of monetary accommodation. This is to ensure the sustainability of the growth prospects of the Malaysian economy....

Tuesday, November 7, 2017

Thoughts on Alternative Budget 2018

So, I’ve finally sat down to read through Pakatan Harapan’s alternative budget for 2018. There are some good ideas here, and a fair share of bad ones, but no more than expected. The numbers are bonkers, but I expected that since this is more a political manifesto than a real fiscal document. I’ll give most of it a pass except the more egregious ones, and like many, I note that some of the policy objectives and prescriptions are contradictory. At least one proposal has me upset, but I’ll leave that for the very last.

Can the (overall) numbers be achieved? I’d say yes. If the government really wanted to, they could go with a balanced budget tomorrow. But I think it would involve as much cutting the provision of public goods and services, as it would be some putative “savings'” from reducing corruption and improving governance. I’m sceptical that there’s that much savings to be had from that source.

Wednesday, November 1, 2017

Thoughts on Budget 2018

I missed most of the Budget speech this year, having just landed from an overseas trip. That and jet lag meant I’m late in catching up on things, and today’s the first day I’m comfortable enough with the numbers and the anmouncements to actually comment on them. I’ll have something more to say about the opposition’s alternative budget(s) later.

First up, on the economic forecasts (2017: 5.2%-5.7%; 2018: 5.0%-5.5%). They’re eminently achievable, especially with the high frequency data coming in. The numbers continue to surprise on the upside, though some of that is coming from the low base we had last year. Even if we see just trend growth for the rest of 2017 and into 2018, the forecasts should bear out.

Friday, October 13, 2017

Effective Exchange Rate Indexes: September 2017 Update

The NEER and REER page has been updated, as has the Google Docs version.


September was a turnaround month for the Ringgit. The year on year changes are still negative, but all six indices posted gains on the month, and the best positive performance since May-17. Capital inflows were apparently the main reason. The Broad Nominal index rose 1.26%, while the Broad Real index rose 1.04%.

On a bilateral basis, the Ringgit rose against 14 out of 15 currencies. The biggest gains were against the JPY (+2.66%), the INR (+2.49%), the KRW (+1.86%), the USD (+1.72%), and the PHP (+1.70%). The only drop recorded was against the GBP (-1.22%).



  1. Indexes have been updated to September 2017
  2. CPI deflators and forecasts have been updated for August/September 2017