January 2015 newsletter – Annual Conference of the Money Macro Finance Group

The 46th Annual Conference of the MMF was held over 17-19th September at the University of Durham. The group’s chair, Jagjit Chadha, reports.

So with excitement over the Scottish referendum reaching a crescendo, on the Wednesday before the vote the country's macroeconomists headed off to huddle as near to the border as we dare go, in the splendid surroundings of Durham University. Indeed Sir Walter Scott’s words inscribed on Prebends Bridge seemed rather apt:

Grey towers of Durham
Yet well I love thy mixed and massive piles
Half church of God, half castle 'gainst the Scot
And long to roam these venerable aisles
With records stored of deeds long since forgot.

With some 150 attendees overall and some 120 papers presented this conference was yet again (repeating my comments from last year) testament to the observation that UK macro is, contrary to many offhand comments, in rather rude, even robust, health (http://editorialexpress.com/conference/MMF2014/program/MMF2014.html). As ever, the MMF is also indebted to the Manchester School both for sponsoring the conference and for producing a conference volume (thirteen years of such volume can be found here: bit.ly/18Y7kOc) and this year to the local organiser, Leslie Reinhorn (Durham) for such sterling support.

Keynote Speakers
We were treated to three excellent keynote addresses with masterclasses on banking reform and forward guidance. Douglas Gale (Imperial) started the conference with ‘Laws, sausages, … and financial regulation’ and began with the maxim: Laws, like sausages, cease to inspire respect in proportion as we know how they are made. He then reminded us just how hastily regulation developed after the crisis with theory lagging some way behind practice. We know that the dilemma faced by authorities, in the event of a crisis, is that a bailout may seem preferable to severe economic dislocation but that any such bailout will make future crises more likely. So he proposed a mechanism that might make banks ‘failsafe’ where, in the event of failure, equity would be wiped out and creditors would take a (serious) haircut (bail-in), and where assets would be
transferred to a bridge bank which would continue to function while claims on the bankrupt entity were settled.

Raf Wouters (National Bank of Belgium) took a careful look at forward guidance on policy rates, which for the uninitiated, is a statement (or explicit forecast) about the likely path of the policy rate and an explanation of the likely reaction to certain economic variables such as unemployment. He advised considerable caution in any attempt to understand the effectiveness of forward guidance simply in terms of the reaction of longer term interest rates. He showed in a standard macro-model that it was not at all clear that longer term rates should fall when the monetary policy authority pins down the policy rate at some very low level for an extended period. This is because that forward guidance may or, indeed, ought to induce expectations of a boom, and higher interest rates, further into the future.

Following the theme of central bank communication and forward guidance, Seppo Honkapohja (Bank of Finland) examined the case for inflation, price-level and nominal income targeting under imperfect knowledge and learning. He suggested that if agents incorporate either a target price level path or target nominal GDP path, into their forecasts of the economy, then monetary regimes can be shown to be significantly more robust than under traditional forms of inflation targeting. Forward guidance may have some role to play in helping agents to plan around the announced policy objective when there is imperfect information.

The MMF Honorary Lecture
Mike Wickens (York and Cardiff), as a former Chair of the MMF and continuing Vice-President, gave us a lovely account of his own intellectual odyssey. The journey had started 50 years ago with the inductive inference of standard statistical courses such as he enjoyed at the LSE in the 1960s and has culminated in his championing of quantitative theory, which today tries to explain data in ways that has raised the standards and the logical underpinnings of macroeconomics to an enormous degree. He encouraged us to think hard about how best to evaluate the theory and what lessons we can learn about the (mis)use of evidence in the past in supporting or rejecting theories. Arguing that theory cannot be formally tested and more useful criteria for judging macroeconomic theories are the insights that they provide on the behaviour of the economy, their usefulness for policy and their ability to explain macroeconomic and financial data. Perhaps the bottom line was that although data mining may well often improve the statistical properties of a model it does not necessarily improve economic understanding.

Bank of England Reception and Poster Session
On the first evening of the conference, the Bank of England sponsored a reception for young economists and explained the importance of the intellectual interchange between academic and policy-makers, particularly with so many new issues to consider. Fortunately we were allowed large degree of elasticity in the definition of the upper bound of the word young, and so most were able to hear Stephen Millard’s (Bank of England) address.

As drinks flowed, a small phalanx of Committee members quizzed the contributors to the poster session. I am always amazed at presenters’ patience at poster sessions and here any of the papers could easily have been awarded the Harry Johnson Prize that the judges eventually decided should go to Anthony Savagar (Cardiff, coauthored with Huw Dixon), ‘Firm Entry, Imperfect Competition and Macroeconomic Dynamics’. He considered the question of endogenous firm entry and firm-level spare capacity. By allowing for imperfect competition and costly firm entry, existing firms — following a demand or supply-led shock to production — may be prompted into increasing capacity utilisation but over the longer run the entry of new firms will lead to the resurrection of spare capacity. The endogenous determination of spare capacity may have a number of implications for inflation and productivity dynamics that may help us understand some existing puzzles. It pains me to note that Anthony was unwilling to share his prize bottle of whisky.

Special Sessions
There were four special sessions dotted around the three days, which tackled some pretty big issues. Parantap Basu (Durham) organised an important session on Human Capital and Growth. B. Ravimukar (Federal Reserve Bank of St Louis) found that measured labour quality is up to two times better in rich as opposed to poor countries. Robert Tamura examined the mortality and fertility of the blacks and whites US in the South and Outside of the South, pre- and post- Civil War and found some striking estimates of the welfare costs of educational discrimination. Ping Wang (Washington) suggested that access to health care may well explain why the economic take-off may or may not occur in poor countries. In the spirit of learning from the past, David Chambers (Cambridge) and Ranald Michie (Durham) hosted a session on financial history where David, himself, looked at the out-sample-returns from currency trading in the inter-war period and gauged quantitatively Keynes’ performance as a trader, Christopher Coyle (Queen’s University, Belfast) examined British Bank instabilities over the very long run and a final paper looked at the experiences of the Bank of England during gold standard exit in 1797.

The current practices in UK macro forecasting models were carefully and thoughtfully explained by Matthew Waldron from the Bank of England, James Warren from the National Institute of Economic and Social Research and Tom Pybus from the Office for Budget Responsibility. In an electrifying session, Peter Sinclair (Birmingham) not only brought together the opposing sides of the macroeconomic debate on the benefits, Tim Worrall (Edinburgh) and costs of the Union, Andrew Hughes Hallett (St Andrews and George Mason) but treated us to a wonderful tutorial on the a-f of the issues, which perhaps boiled down to the optimality of insurance mechanisms within the Union and out. In the interests of impartiality, I should say that the debate led to a scoring draw.

Next Steps
The MMF looks forward to its 47th conference in Cardiff on 9-11th September 2015. But also has been able to continue with its new initiatives for 2015, as well as the usual series of seminars and a sponsored session on fiscal policy at RES 2015 at Manchester. A PhD workshop for some 40 final year PhD students will take place at York on 8th to 9th April. Next year’s three policy seminars, after three successful ones at Queen Mary in 2014, will be held at the LSE. On a final note, there are far too many people to thank individually for the MMF activities over the course of any one year but the MMF simply could not continue without the goodwill of the Committee, its senior membership and the common wish to further the dissemination of macroeconomic research in the UK.