01 October 2007

Mishkin is pop, people are irrational and other news

I was going through our blog yesterday and a very interesting headline was showing up in our news section: "Fed's Mishkin downplays globalization as a factor in low inflation". In an earlier post on the theme, I defend that globalization can impact inflation through imports prices as well as through policy incentives and other mechanisms. Forbes reports:

Mishkin did say globalization may have helped in 'subtle' ways, such as by spreading a 'common culture that stresses the benefits of achieving price stability.'

[H]e said that while it is 'plausible' to hold the theory that lower priced imports from China and other countries are lowering inflation, research suggests that the importance of this factor 'should not be exaggerated.'


The Fed governor seems to be particularly under the spotlight ever since the media have called attention to his clues about the 50 basis points cut during last open market committee meeting. The Wall Street Journal blog had a very good piece about this. One passage above all others caught my attention:

There’s only one problem. Most of those four speeches came on nights or weekends. The March inflation speech was on a Friday night. The Jackson Hole paper was presented on a Saturday and last week’s “important”-downside-risks speech was given at 7:30 p.m. EDT, which might as well be midnight for Wall Street.

It is clear to me investors were not using all available information, which brings us to a question about the efficient market hypothesis and rational expectations theory, which claims "expectations will be identical to optimal forecasts [...] using all available information"[1]. It does not explain why the relevant and available information above would be ignored, perhaps because it doesn't address costs and benefits of gathering information.

But even if we account for that, wouldn't it be rational to assume that the expected benefits of gathering information about a Fed governor's public speeches outweigh costs?


Back to international economics, Brian Caplan points out 4 other irrational beliefs people have in The 4 Boneheaded Biases of Stupid Voters. Check out the "Anti-Foreign Bias".


Finally, Greg Mankiw points out The Rationality of Harry Markowitz and attends a seminar in Behavioral Macroeconomics.

[1] MISHKIN, Frederic, "The Economics of Money, Banking, and Financial Markets", 8th edition, p. 157.

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