Bullard then turned to how policymakers and financial markets view the FOMC’s near-zero policy rate coupled with forward guidance and the asset purchase program. He noted that policymakers tend to think of these tools separately, and financial markets tend to think of the two tools together. “Both views have some merit,” he said. The financial market view has some merit because for both tools, the setting is dependent on the state of the economy, Bullard said. “When there is a change to the macroeconomic outlook, it is reasonable to think that the settings for both tools would be affected.” The policymaker view also has some merit because the two tools can be thought of as independent, Bullard explained. “The policymaker can choose to respond to a change in the outlook by altering the setting of one tool, leaving the other unchanged,” he said. “In particular, a decision to taper need not change the Committee’s forward guidance.” Bullard discussed two recent events that provide a window on the connection between asset purchases and forward guidance. The first was in June, when the FOMC announced a “roadmap” for a possible tapering decision in the autumn. The second event was in September, when the FOMC decided not to taper at that particular meeting and instead decided to continue with the current pace of purchases. Bullard noted that the June announcement was viewed as relatively hawkish by financial markets and the September announcement was viewed as relatively dovish. “The ‘financial markets signature’ from the unexpected changes in the policy stance at the June and September FOMC meetings showed that asset purchases are very effective,” Bullard said. He explained that key variables, including the real interest rate, the exchange rate, equity prices and expected inflation, moved significantly and in the conventional direction following these announcements. “This demonstrates that changes in the pace of asset purchases have a very similar financial market effect as changes in the policy rate during more ‘normal times,’” Bullard said. While changing the pace of asset purchases acts very much like a conventional change in interest rates, this effect also spilled over to the expected path of the policy rate (the FOMC’s “forward guidance”). Bullard noted that this effect was perhaps surprising to policymakers, who view the two tools as independent, but not to financial markets, which view the two tools as tied closely together.“The Committee needs to either convince markets that the two tools are separate, or learn to live with the joint effects of tapering on both the pace of asset purchases and the perception of future policy rates,” Bullard said. Signaling[edit] Michael Spence originally proposed the idea of signaling. He proposed that in a situation with information asymmetry, it is possible for people to signal their type, thus believably transferring information to the other party and resolving the asymmetry. This idea was originally studied in the context of looking for a job. An employer is interested in hiring a new employee who is skilled in learning. Of course, all prospective employees will claim to be skilled at learning, but only they know if they really are. This is an information asymmetry. Skill in learning is malleable, and depends upon many factors, including diet, exercise and money. Spence proposes, for example, that going to college can function as a credible signal of an ability to learn. Assuming that people who are skilled in learning can finish college more easily than people who are unskilled, then by finishing college the skilled people signal their skill to prospective employers. No matter how much or how little they may have learned in college or what they studied, finishing functions as a signal of their capacity for learning. However, finishing college may merely function as a signal of their ability to pay for college, it may signal the willingness of individuals to adhere to orthodox views, or it may signal a willingness to comply with authority. but the commodity cycle cough cough the beginning and ending is not a indirect screen or has a indirect effect on payroll at all?
Posted on: Fri, 01 Nov 2013 21:29:30 +0000
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