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EconVue Spotlight

Dear R. Hunter,

All eyes are on Jackson Hole and the annual Kansas City Fed Economic
Symposium. BOJ Governor Kuroda's appearance on a panel on Saturday could
be just as interesting as Fed Chair Yellen's speech on Friday morning.
Global central bankers who have made long flights and several
connections in order to get to Jackson Hole are bound to be discussing
the US election outlook with as much fervor as monetary theory. Some
will wonder if Janet Yellen will attend next year.

The just-released line-up of speakers and papers at the symposium is
here

https://www.kansascityfed.org/publications/research/escp/symposiums/escp-2016

. From my experience attending the conference, the papers are not as
exciting for media as the Chairman's speech, but this is a place and a
meeting where theory really matters. The most memorable symposium for me
was in 2007, on housing, housing finance, and monetary policy, a
prescient choice at the time. Marty Feldstein's concluding remarks are
here

http://content.davidhaleweb.com/acton/ct/3037/s-01be-1608/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct2_1/1?sid=TV2%3Ancipaishe

Most have expected Chair Yellen to signal an increase in the fed funds
rate. Another probable theme is that since monetary policy has given
everything it has, now is the time for an increase in fiscal spending,
on infrastructure and other needs, while the cost of borrowing is so
low. A more revolutionary view is that we should abandon the 2%
inflation target that seems irrelevant or unattainable in a world of
negative interest rates.

Included below are a number of current papers published by central banks
(some of them working papers) that might give an inkling of policy
changes to come.

STORIES IN OUR SPOTLIGHT

SETTING THE STAGE FOR JACKSON HOLE 1. The Dirty Little Secret of Central
Banking

https://www.washingtonpost.com/opinions/global-opinions/the-dirty-little-secret-of-central-banking/2016/08/23/b24bd8a0-6941-11e6-8225-fbb8a6fc65bc_story.html?postshare=6061472090199272&tid=ss_fb-bottom&utm_term=.1542d2f2dc8e

Sebastian Mallaby 8/23/16 Washington Post As central bankers gather this
weekend at Jackson Hole, they will be laying to rest the 2% inflation
target and will urge fiscal stimulus. Sebastian Mallaby: It would
underscore how the internationally celebrated 2 percent target is no
divinely ordained rule; it is shockingly arbitrary. The magical 2
percent marker could just as well be 3 percent or 4 percent, and the
dirty little secret of central banking is that the gains from stable
prices are difficult to demonstrate. Despite the brilliance of its
practitioners, monetary policy is not a settled science. It is an
improvised experiment. 2. In the lead up to Jackson Hole

https://twitter.com/SoberLook/status/767461090628341760

Twitter @SoberLook 8/21/16 The Fed is close to reaching its inflation
and employment goals and the dollar strengthens in advance of rate hike
discussion. But currencies can also strengthen as interest rates
fall-witness Japan. 3. Stephen Jen:

http://www.ft.com/cms/s/0/206a5078-65f0-11e6-8310-ecf0bddad227.html#axzz4IMhZnAeV

Fed watching has been the single biggest
waste of my time in the past two years

http://www.ft.com/cms/s/0/206a5078-65f0-11e6-8310-ecf0bddad227.html#axzz4IMhZnAeV

Roger Blitz, Sam Fleming 8/19/16 FT ...but things could get interesting
now. Fed watchers rejoice. 4. Why the Fed should Shrink its Massive Bond
Portfolio

http://www.marketwatch.com/story/why-the-fed-should-shrink-its-massive-bond-portfolio-2016-08-18

Andrea Riquier 8/19/16 MarketWatch The Fed should engage in a form of
"negative quantitative easing" and allow some of the debt it currently
holds on its $4.5 trillion balance sheet

https://www.federalreserve.gov/monetarypolicy/quarterly-balance-sheet-developments-report.htm

to run off when it matures, Eisenbeis and Berson believe. This relates
to news from Japan (see #9 below) that the BOJ is holding back on ETF
purchases. Will negative quantitative easing become the new path for
central banks, and if so and what does that mean for markets? Will it
protect against a sudden unwinding of central bank assets? DEEP DIVE:
Bayesian Probability I imagine that Christopher Sims

https://en.wikipedia.org/wiki/Christopher_A._Sims

, the luncheon speaker on Friday, will be touching on these issues: 5.


http://www.federalreserve.gov/econresdata/feds/2016/files/2016067pap.pdf

Financial Stability and Optimal Interest Rates

http://www.federalreserve.gov/econresdata/feds/2016/files/2016067pap.pdf

Andrea Ajello, Thomas Laubach, David Lopez-Salido, and Taisuke Nakata
August 2016 Fed Reserve Board Bayesian vs Robust policymaking choices. …
the Bayesian policymaker responds to the negative demand shock by
reducing the policy rate by less under uncertainty. In our calibration,
the optimal policy rate becomes positive. Uncertainty regarding the
severity of the crisis affects the robust policymaker facing a large
negative demand shock in the same way as in normal times. 6. Recession
Forecasting Using Bayesian Classification

https://www.kansascityfed.org/publications/research/rwp/articles/2016/recession-forecasting-bayesian-classification

Troy Davig Aaron Smalter Hall August 2016 Fed Reserve Bank Kansas City
We demonstrate the use of a Naive Bayes model as a recession forecasting
tool… In contrast to Markov-switching models, Naive Bayes treats
National Bureau of Economic Research business cycle turning points as
data rather than hidden states to be inferred by the model. ..We show
Naive Bayes consistently outperforms logistic regression and the Survey
of Professional Fore-casters for real-time recession forecasting up to
12 months in advance. TRADE 7. Trade Liberalization and Mortality

http://faculty.som.yale.edu/peterschott/files/research/papers/mortality_108.pdf

http://faculty.som.yale.edu/peterschott/files/research/papers/mortality_108.pdf

Justin R. Pierce, Peter K. Schott May 2016 Yale The Trump campaign would
love to get their hands on this paper. It documents and quantifies the
decline in health, not just economic status, of communities that lost
manufacturing jobs to China. 8. Global Uncertainty and U.S. Exports

https://www.kansascityfed.org/~/media/files/publicat/econrev/econrevarchive/2016/2q16sly.pdf

Nicholas Sly Q2 2016 Fed Reserve Bank Kansas City Businesses can deal
with low or weak growth, what inhibits them is uncertainty. Exports of
goods and services account for a substantial share of total U.S.
economic activity, with a total value upward of 13 percent of GDP since
the year 2000…Sluggish export activity has been a drag on US growth
recently…The propensity for uncertainty to diminish orders of U.S. goods
suggest that export activity would likely pick up if foreign growth
expectations were to stabilize, even if the expectations for growth
remain relatively weak. JAPAN 9. BOJ moving cautiously with ETF buying
to preserve firepower

http://asia.nikkei.com/Politics-Economy/Economy/Bank-moving-cautiously-with-ETF-buying-to-preserve-firepower?n_cid=NARAN012

Makoto Nakanishi 8/25/16 Nikkei Asian Review This is good news. And
might just bring us closer to helicopter money. 10. Will the Tokyo
Olympics Be A Boost to the Japanese Economy?

https://www.boj.or.jp/en/research/brp/ron_2016/ron160121b.htm/

Mitsuhiro Osada, Mayumi Ojima, Yoshiyuki Kurachi, Ko Miura, Takuji
Kawamoto 1/21/16 Bank of Japan Research The Bank of Japan says yes,
predicting about $250B in benefits. ECONVUE RESEARCH AND INSIGHTS Banks,
FSA Push Back Against Negative Rates

http://econvue.com/reports/richard-katz/toe-alert-banks-fsa-push-back-against-negative-rates

Richard Katz

https://econvue.com/experts/richard-katz

08/22/16 As long as Kuroda remains Governor, through March 31, the BOJ
is likely to stick to his insistence that his policy is successfully
moving Japan toward 2% inflation. This will further cement growing views
that the BOJ policy is not data-driven but ideology-driven. So while
Bernanke tells us to watch the data, not FOMC members, EconVue expert
Rick Katz is saying that the BOJ is driven by ideology and dismisses the
data. His new report on the effects of Japanese monetary policy is a
must read, usually only available to subscribers, so please click
through. How P2P Lending Works

https://econvue.com/pulse/how-p2p-lending-works-fintech-articles-week-082116%C2%A0

Collin Canright

https://econvue.com/experts/collin-canright

08/22/16 FinTech investment in blockchain firms continues to increase
even as the sector as a whole contracts slightly. The Decline of Putin's
Russia: My comments

https://econvue.com/pulse/decline-putins-russia-my-comment

Nikolai Tagarov

https://econvue.com/experts/nikolai-tagarov

08/23/16 We are reminded of Putin's predicament and the fact that his
domestic support is not unassailable. This piece resulted in a lively
exchange on our Facebook

https://www.facebook.com/econvue/

page. ECONVUE CALENDAR AND EVENTS September 26, 2016 One-Day "Director
Boot Camp" Program in Chicago with Nicholas Benes

https://econvue.com/pulse/926-–-one-day-"director-boot-camp"-program-chicago

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Lyric Hughes Hale

Editor-in-Chief

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