The Unassuming Economist

The new IMF report on Ireland says that “the correction in house prices, one of the largest in recent history, has continued. The decline in nominal residential property prices slowed to 14.4 percent y/y in June 2012. The index has halved since its peak in 2007, eclipsing recent U.K. and U.S. house price declines and comparable to the Japanese and Nordic experiences of the 1990s. As yet, clear signs of stabilization are limited to Dublin house prices (excluding apartments), which, after dropping by 55 percent, have been flat in H1 2012. Rural areas, in contrast, still show signs of oversupply.”

Chart 1. Global House Price Index

Chart 4. House Prices Changes Compared With Predictions from an Econometric Model

In Singapore, “indicators of housing affordability are mixed. House prices have risen more quickly than median incomes, especially for HDB resale housing. In addition, the tighter LtV ceilings raise the bar on qualifying for a housing loan. On the other hand, all-time low mortgage interest rates (about 70 percent of which are at floating rates, currently between 1⅓ percent and 2 percent) have reduced debt servicing costs,” according to a new IMF report on Singapore.

Moreover, it says “Following successive rounds of policy tightening, together with external factors, home prices have remained flat since end˗2011, while the volume of transactions has declined noticeably. In particular, the share of foreign buyers collapsed in Q1:2012 to 5½ percent as a result of new macroprudential measures targeting foreigners and weakening external investment sentiment, with buyers from China falling by nearly 50 percent. The more-than-proportionate decline in purchases by Mainland Chinese may reflect the impact of the economic slowdown in China. Transactions in the luxury market have also fallen. However, the share in total transactions of “shoe box” apartments (with an area of less than 50 square meters) doubled in Q1:2012 to close to 20 percent. While this may reflect the characteristics of new supply coming on-stream, demand for such housing is strong, possibly because of the reduced affordability of standard-size units.”

Olivier Coibion

Loungani: Congratulations on your selection as an IMF Fellow. Is this your first stint at a policy institution?

Coibion: Thanks, I’m thrilled to be here!  I worked for a year at the CEA [U.S. Council of Economic Advisers] in 2000-01. It gave me an enduring sense of how economic theory and empirical methods can help address policy questions and make a difference in people’s lives. And because I happened to be there during the transition from the Clinton to the Bush administration, it was fascinating to see the change in style and personalities—and in the dress code. The suits got much more sober and I even had to start wearing a tie once the Bush administration was in place.

Loungani: Dress is casual at the IMF over the summer. You see the suits out in full force in the fall. What will you work on during your year here?

Coibion: I’ll continue some of my work on inequality. One project will look at links between inequality and financial crises, which folks at the IMF have also studied. I’ve also been studying the impact of monetary policy on inequality—who gains, who loses when the Fed changes its policy. This gets debated in policy circles a lot but not much in academia. Ron Paul says that expansionary monetary policies, or debasing the currency as he always puts it, raises income inequality; people on the left like Jamie Galbraith say the opposite.

Loungani: What do you find?

Coibion: We find that expansionary monetary policy has typically reduced U.S. inequality in the short run. This suggests that when the central bank can’t cut interest rates any more—when rates hit the so-called ‘zero lower bound’, as is the case at present—inequality will be higher than it would be otherwise. To avoid these additional increases in inequality at a time of crisis, the government should use other tools, such as targeted fiscal policies. I hope to do some more work on this while I’m here. More generally, I’ll be studying how best to sequence fiscal and monetary policies when the multipliers—the impacts of the policies on the economy—associated with each may vary with the state of the economy.

Loungani: Do you think the Fed has done enough to promote recovery?

Coibion: I think the zero lower bound [on interest rates] has certainly limited the size of their response. They would be lowering rates further if they could.  But as the IMF’s latest review of the U.S. economy noted, the Fed still has a few options to further support economic activity, given the weak state of labor markets and given the significant downside risks that still exist.

Loungani: Do you think that to avoid hitting the zero lower bound in the future, central banks should raise the target rate of inflation?

Coibion: No, I don’t. A higher inflation rate also has economic costs. So raising the target inflation rate will confer the benefit that we’ll be less likely to hit the zero lower bound. But such episodes are rare. So the high benefits conferred on rare occasions have to be balanced against the small but frequent costs of having higher inflation. In some work I’ve done, it turns out that the costs consistently outweigh the benefits for inflation rates above 2%. So rather than raise the target rate of inflation to deal with future episodes like the Great Recession, I’d prefer the more aggressive use of temporary policies designed for precisely this kind of episode, such as additional quantitative easing or fiscal policy.

Olivier Coibion–Recent Publications:

• The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise their Inflation Targets in Light of the ZLB?” (with Yuriy Gorodnichenko and Johannes Wieland), forthcoming in  Review of Economic Studies.

• “Why are target interest rate changes so persistent?” (with Yuriy Gorodnichenko), forthcoming in American Economic Journal: Macroeconomics.

•  “What Can Survey Forecasts Tell Us About Informational Rigidities?” (with Yuriy Gorodnichenko), 2012, Journal of Political Economy 120(1), 116-159.

• “One for Some or One for All? Taylor Rules and Interregional Heterogeneity” (with Daniel Goldstein), 2012, Journal of Money Credit and Banking 44(2:3), 401-432.

• “Are the Effects of Monetary Policy Shocks Big or Small?” 2012, American Economic Journal: Macroeconomics 4(2), 1-32.

• “Strategic Complementarity among Heterogeneous Price-Setters in an Estimated DSGE Model” (with Yuriy Gorodnichenko), 2011, The Review of Economics and Statistics 93(3), 920-940.

• “Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation” (with Yuriy Gorodnichenko), 2011, The American Economic Review 101(1), 341-370.