Happy New Year!

Happy New Year from bondeconomics.com! The upcoming year should be an interesting one in the world of bonds and economics. Will the Fed hike rates? Will the JGB market finally collapse (if you use a microscope, the JGB market has had a lousy finish to 2013)? Stay tuned for more updates.

Theme: Personal Finance

This post is a list of links to articles I have written which discuss personal finance. I would not consider this a personal finance blog, rather I have a few points that I hope may be useful. (This article will be expanded over time.)

Theme: Personal Finance Resources

This entry is a list of external resources for personal finance that I find useful, including book reviews.

Merry Christmas!

Happy Holidays to you and yours from bondeconomics.com!

Handling Cash Within Personal Portfolios

This article is the follow up to this article about money and uncertainty. In the previous article, I discussed how money was used to reduce uncertainty for spending decisions. In this article, I discuss the role of cash within investment portfolios.

Pricing The Fed

Just a quick comment on what is priced into the U.S. yield curve.

Primer: What Is A Policy Portfolio?

This is a short description of what a policy portfolio is, and why you should have one for your personal investment portfolio.

Taper! Taper! Taper!

Well that was exciting. So far my forecast that this would be viewed as a policy error was wrong, but in my defence, it's too early to say...

Fearless Fed Forecast – Policy Error

The 2-day December FOMC meeting is underway, and the markets await the announcement Wednesday. Today’s CPI results did not add much in the way of new information. My fearless Fed forecast is that the result will be a policy error.

UPDATE (Wednesday 2:37 PM EST): TAPER! TAPER! TAPER! Hooray, maybe we can stop hearing about this nonsense...

Money As A Weapon Against Uncertainty

One of the insights associated with Keynes is the view that money acts as a weapon against uncertainty. If we knew in advance what all future scenarios are, and their associated probabilities, we would not need to hold money. However, the future is uncertain, and so we hold money as a way of reducing the risks associated with that uncertainty. In this article, I discuss how money and cash should be thought about in personal finances, in light of these insights.

On Kyle Bass And Keynes

 Kyle Bass has provided the latest entry in the JGB Collapse wall of predictions. In an interview in a book by Steven Drobny (in a free chapter available here), he argues that JGB yields are going to 20% and the yen/dollar rate is going beyond 200. In this article, I make a few comments on this scenario, and find that this is a good example of Keynes' distinction between uncertainty and randomness...

Link: "Lord Keynes" On Austrian Economics

This article by "Lord Keynes" is a bibliography of his posts explaining (and debunking) Austrian Economics. Taken together, the posts are probably near book length. "Everything you wanted to know about Austrian economics, but were afraid to ask."

Less Fiscal Drag Means A Brighter 2014?

The season for annual economic forecasts is upon us. As Warren Mosler observed in this article, there is a common thread in many of the forecasts: there should be 2% less fiscal drag in 2014, and so real GDP growth should be closer to 4% than 2%. I don’t have a growth forecast (I am an “observer”, not a “forecaster”), but I echo Mosler’s sentiment that this reading of fiscal policy may be somewhat too optimistic. (His analysis is more complicated and somewhat more pessimistic than my comments here.)

Theme: Concerns With DSGE Models

This theme post gives an overview of my complaints (and possibly praise) about Dynamic Stochastic General Equilibrium (DSGE) models in economics. This post will be updated over time, as material is added.

What Is Ricardian Equivalence, And Why It Does Not Hold

Ricardian Equivalence is a theoretical concept that has been used to argue that fiscal policy is not effective. The argument is that increased government spending implies higher future taxes, so households will increase savings to cancel out the increase in government spending. This concept has been heavily disputed; see this blog entry by Bill Mitchell for an example. He argues that various assumptions are too restrictive in the models that show the “Ricardian Equivalence” effect.

In this article, I will introduce the “inter-temporal governmental budget constraint”, which is the equation which provides the justification for Ricardian Equivalence. I also show why this equation does not hold if term premia are non-zero. The chart above gives an example that shows the error in its prediction about the Net Present Value of future primary surpluses can become arbitrarily large. This has obvious implications for models that incorporate this constraint, as well as the usage of the concept in the analysis of fiscal sustainability.

Employment Report: Shutdown Effect Reversed

The  November U.S. Employment Report was a good report, and it allows "Dectaper" to remain a possibility. The Canadian data was more mediocre...

Japanese Income Data - No Signs Of Inflation

This is a big week for labour market data. In today's entry, I will mainly comment on the recently released Japanese household income data...

A Poor Specification Of Fiscal Policy Means That DSGE Models Will Not Be Properly Identified

In my previous post, I discussed how the use of the primary balance as the point of departure for the analysis of fiscal policy was problematic. Those observations need to be kept in mind when looking at many mainstream analyses of fiscal sustainability. However, in this post, I look at an implication that is less obvious. Dynamic Stochastic General Equilibrium (DSGE) models which use the primary balance (or a similarly poor specification) to model fiscal policy cannot be properly fitted to empirical data.

There is a great deal of controversy about DSGE models. Their underlying assumptions appear bizarre. However, the usual justification for their use is that they can be fitted to data, and answer empirical questions that are demanded by policy makers (“What happens if we hike rates by 100 basis points?”). However, DSGE model parameters may be incorrectly identified in a systematic fashion due the misspecification of fiscal dynamics. This undercuts their purported usefulness for generating scenario forecasts.

This poor identification of model parameters will generate models that imply that monetary policy is more effective than is warranted. As a result, the run of forecast errors by central banks since the end of financial crisis is more easily understood…

What Is The Primary Fiscal Balance, And Why Its Use Should Be Avoided

As I noted in my article describing the impact of rising rates on fiscal policy, my model did not follow standard conventions in mainstream economic analysis. This was deliberate, as I feel that standard analysis techniques have limitations when analysing fiscal policy dynamics. I will break up this discussion into a several posts, each discussing one topic, as there is considerable background information to cover for each subject.

A great deal of analysis of fiscal policy is based upon analysing the trend in the primary budget balance. I explain in this post why this is a mistake, as the primary budget balance gives a misleading view of fiscal settings…