Quote of the day

 “One must prevent the dealings of the ECB from easing the pressure for improvements in competitiveness.” 

(Angela Merkel, according to the FT.)

It is very good to see this sentiment being openly expressed by the German leader, since it is what we believe the German government thinks, and confirmation is useful. But, really, it is intolerable. Where in the treaties does it say that Eurozone monetary policy should be run in a sub-optimal and deflationary manner, thus increasing unemployment, putting the public finances under pressure and worsening economic distress more generally, so as to force other peoples’ governments to do things that the Germans think are good for them, but that have nothing to do with monetary policy?

No democrat should accept a Eurozone run along those lines.

For Risk Measurement Nerds Only: The Swiss Franc Shock was a 200-sigma event

On January 15th, the one-day return to holding Swiss Francs from a Euro perspective was 16.9%. This is a high one-day return for any currency pair, but appears cataclysmic given the extremely low return volatility of the Swiss Franc from a Euro perspective in recent months. This one-day jump was a “239-sigma event” meaning that the magnitude of this return was 239 times the recent return volatility (using a 90-day historical estimate of volatility). In fact, in the period just before the sudden jump, the sample volatility of this exchange rate was even lower. Using a shorter 20-day volatility estimate, the sudden jump was a 400-sigma event.

It is interesting how closely the time-series behaviour of this exchange rate matches the predictions of Krugman’s 1991 model of a government-implemented exchange rate limit, in which traders credibly believe that the authorities will prevent the exchange rate from piercing the exchange rate limit. As the fundamentals for the exchange rate made the Swiss Franc greatly undervalued, the traded exchange rate settled down just near the government-imposed limit, with very low volatility. And then suddenly the credible promise became a non-promise.

Chalk one up for Krugman, in terms of the elegant fit between his theoretical model and this recent market experience. Several forex trading firms went bust, but they should have had better risk management systems.

John Van Reenen: Solving the Growth Puzzle

Slides, audio and video from this talk at IIEA yesterday – here.

Central Bank of Ireland Conference: Balance Sheet Recovery of Households and Firms

Friday January 30th.  Details here.

Chetty on Behavioural Economics and Policy

From the recent AEA conference, Raj Chetty’s lecture on behavioural economics and public policy is one of the most useful summaries to date (summary here).