tag:blogger.com,1999:blog-2499715909956774229.post1013588214995747262..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Liquidity Traps and Deflation TrapsStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger17125tag:blogger.com,1999:blog-2499715909956774229.post-60771322690029944512010-09-05T12:54:58.373-07:002010-09-05T12:54:58.373-07:00But sometimes there doesn't seem to be a failu...But sometimes there doesn't seem to be a failure, which is what Prescott was getting at. As well, if we think the early 1980s recession was about monetary policy (and we could debate that), that has to be some short-run nonneutrality of money. I wouldn't call that a coordination failure.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-30239686991806448242010-09-04T20:03:54.801-07:002010-09-04T20:03:54.801-07:00"I tell my students that business cycles have..."I tell my students that business cycles have many causes"<br />I seem to recall John Bryant saying that business cycles are always at bottom co-ordination failures. That's the unifying theme. You can talk about what lies behind the failure, but I think its a nice way to frame it.<br />So I wouldn't have it as a separate theory, its a meta-narrative for all the others....<br /><br />peAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-2313086277493872992010-09-04T13:27:00.522-07:002010-09-04T13:27:00.522-07:00JP: No, that's not an assumption. There is alw...JP: No, that's not an assumption. There is always an equilibrium where money is not valued. We take that as being well-known, and focus on equilibria where money is valued.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36440156393537672162010-09-04T09:42:35.883-07:002010-09-04T09:42:35.883-07:00Just browsed Wright-Lagos 2005. Why do they assume...Just browsed Wright-Lagos 2005. Why do they assume a positive price level? Isn't the whole point of essentialist models to describe why fiat money is valued in the first place?JP Koningnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36743517162561413932010-09-02T19:51:58.359-07:002010-09-02T19:51:58.359-07:00Shameless advertising: Yes, the 4th edition has fi...Shameless advertising: Yes, the 4th edition has financial crisis stuff in it. I expand on credit markets - some things with frictions associated with information and collateral. As well, I integrate some of the current policy issues into the presentation, among other things.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-24270014386232143752010-09-02T17:06:02.044-07:002010-09-02T17:06:02.044-07:00Thanks,
I'll order a copy of the 4th and even...Thanks,<br /><br />I'll order a copy of the 4th and eventually read those chapters.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-4543976212035797422010-09-02T15:54:41.662-07:002010-09-02T15:54:41.662-07:00Richard,
You're looking at the 3rd edition, r...Richard,<br /><br />You're looking at the 3rd edition, right, with the road and the tree on the front? Chapters 11 and 12 give the standard views on sources of business cycles. I do 4 theories:<br /><br />1. Real business cycle model (basically Prescott for undergraduates)<br />2. Segmented markets model (gives you a nonneutrality of money in an equilibrium model)<br />3. Keynesian coordination failure model (Keynes in equilibrium)<br />4. Standard IS-LM AD-AS (Chapter 12).<br /><br />This goes through each theory, explains something about how the theory matches the data, and goes through criticisms. I try to be fair about it. I like the most recent edition (4th edition) better, in terms of what I do with the Keynesian economics. I do a sticky price model (essentially Woodford for undergrads) and it fits in better with the rest of the stuff and is much simpler. I want students to understand all of these things and think independently. If you say "demand deficiency," that assumes something in particular about what you think is causing the downturn, and what you should do about it. I tell my students that business cycles have many causes, all of these theories potentially have something to say, and the policymaking involves figuring out what factors are at play and what to do in specific circumstances. Chapters 11 and 12 do not address anything relating to unemployment - it's all employment determination (except of course with the sticky wage in Chapter 12, 3rd edition, which is very conventional). Unemployment is in Chapter 16, where I do search and efficiency wages.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81189105933523634212010-09-02T15:41:29.915-07:002010-09-02T15:41:29.915-07:00Andy,
Yes, it's actually not so far off. The ...Andy,<br /><br />Yes, it's actually not so far off. The real interest rate can be low, essentially because there is a scarcity of "liquid" assets - liquidity associated with how useful it is in financial transactions. That's when you get the liquidity trap. What is it that makes the marginal product of capital low in your Wicksellian framework? Of course the usual Keynesian notion is that the real rate is too high when there is a liquidity trap. You would like the nominal rate to be lower, but you're stuck at the zero lower bound.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-77206612270063194182010-09-02T14:40:49.587-07:002010-09-02T14:40:49.587-07:00'"Demand deficit" means absolutely n...'"Demand deficit" means absolutely nothing to me. That's some old language. Modern macroeconomoists don't find that notion useful.'<br /><br />I have your Macroeconomics textbook (2008 edition). What pages explain your view of the causes of recessions, or big jumps in unemployment? Or if not in that edition, your new edition, or some other summarizing writing.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-14141162090781134332010-09-02T14:27:45.856-07:002010-09-02T14:27:45.856-07:00In my Wicksellian way of thinking, you can get a l...In my Wicksellian way of thinking, you can get a liquidity trap at a positive inflation rate if the risk-adjusted marginal product of capital is negative, which can happen if risk aversion is high enough and physical capital is plentiful enough. I think it could persist forever, too, if people have sufficient motivation to save at a negative real interest rate (thus replenishing the capital stock and keeping the marginal product of capital low). Does this bear any relation to what's happening in your model?Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-79032805893754623812010-09-02T08:29:16.084-07:002010-09-02T08:29:16.084-07:00Nick:
You say:
"OK. I think I've got thi...Nick:<br /><br />You say:<br />"OK. I think I've got this. It's because the level of intermediation is indeterminate? Over a wide range of equilibria, people don't care whether they hold capital directly, or hold bank money and let the banks hold the capital? So all the nominal and real things are the same, comparing across equilibrium paths, but more capital is intermediated into money on one path than one another? Is that right? It's a sort of Modigliani-Miller theorem?"<br /><br />It's more or less standard liquidity trap. People use currency and bank deposits in transactions. The banks hold reserves, government bonds, and loans. In the liquidity trap equilibrium the nominal interest rate is zero and banks are holding excess reserves. Now conduct a one-time open market purchase of bonds. The banks are happy to hold the reserves rather than the bonds, all the transactions are executed using the same media of exchange, all prices and quantities are unchanged.<br /><br />"For "banks" in the above, you can read "government plus central bank", perhaps."<br /><br />Yes, the central bank is in there too. When I say "banks" that's a catch-all. What's in the model represents all the financial intermediaries out there.<br /><br />"If "money" pays interest, I have no problem with seeing that liquidity traps can occur at any inflation rate. Start in one liquidity trap, increase inflation by 10%, increase the interest on money by 10%, and you are back in another liquidity trap. Is that what's happening?"<br /><br />No. You can get this without interest on reserves. Note that the equilibrium with a liquidity trap has a nominal interest rate of zero.<br /><br />"But results like that (a continuum of real equilibria) are usually very "fragile", in the sense that a tiny change in the assumptions of the model will destroy all but one of those equilibria."<br /><br />No, it's not a continuum of equilibria. There are many equilibria (it's a monetary model), but I'm just looking at the stationary ones. There can be a unique liquidity trap equilibrium. Change exogenous policy, and you get the same equilibrium.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59991545369460184372010-09-02T04:36:57.677-07:002010-09-02T04:36:57.677-07:00Start in one liquidity trap. Increase the inflatio...Start in one liquidity trap. Increase the inflation rate (which pushes nominal interest rates on bonds up), and also increase the demand for government bonds relative to real capital at the same time (which pushes the nominal interest rates on bonds back down again). That can put you back in a liquidity trap. OK. I can see that. And that increased demand for bonds, relative to capital, a large part of what got us into the current liquidity trap (falling expected inflation, and falling natural rate, did the rest).Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11237573219916797732010-09-02T04:03:41.378-07:002010-09-02T04:03:41.378-07:00If "money" pays interest, I have no prob...If "money" pays interest, I have no problem with seeing that liquidity traps can occur at any inflation rate. Start in one liquidity trap, increase inflation by 10%, increase the interest on money by 10%, and you are back in another liquidity trap. Is that what's happening? <br /><br />If not, then I can't think why the MRS between money and other assets could stay equal to the return differential when you raise inflation and lower the real return on holding money.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-4867519373997751992010-09-02T03:54:49.031-07:002010-09-02T03:54:49.031-07:00For "banks" in the above, you can read &...For "banks" in the above, you can read "government plus central bank", perhaps.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-38942530734963478082010-09-02T03:46:33.826-07:002010-09-02T03:46:33.826-07:00I'm trying to get my head around this.
"...I'm trying to get my head around this.<br /><br />"Further, the path for price level in the first case is also an equilibrium in the second case."<br /><br />OK. I think I've got this. It's because the level of intermediation is indeterminate? Over a wide range of equilibria, people don't care whether they hold capital directly, or hold bank money and let the banks hold the capital? So all the nominal and real things are the same, comparing across equilibrium paths, but more capital is intermediated into money on one path than one another? Is that right? It's a sort of Modigliani-Miller theorem?<br /><br />But results like that (a continuum of real equilibria) are usually very "fragile", in the sense that a tiny change in the assumptions of the model will destroy all but one of those equilibria.<br /><br />"In the paper I'm revising (see these slides) you can show that liquidity traps can occur for any inflation rate, ...."<br /><br />That's what I can't get.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36246285262469707592010-09-01T11:50:25.562-07:002010-09-01T11:50:25.562-07:001. "But should we be worried about just LOW i...1. "But should we be worried about just LOW inflation?" That's not clear. If you take a strong position that the inflation rate should be 2%, then it's currently too low. You would have to tell me why 2% is better than 1%, for example.<br />2. "Demand deficit" means absolutely nothing to me. That's some old language. Modern macroeconomoists don't find that notion useful.<br />3. In the link you talk about, they try to dismiss the idea of mismatch due to sectoral reallocation across industries. But note that they have a lot to say about geography. The key observations are the labor market observations about unemployment and vacancies. It would be useful to know where the vacancies are, and where the unemployment is, both in terms of geography and occupations. We seem to have some inkling that the dispersion across "sectors" (geographical, occupational, and by industry) is high, slowing the recovery. By the way, you should ditch these old notions of "structural" vs. cyclical (what you call "demand crunch") unemployment. Unemployment is unemployment. It's people we observe searching for work. Don't think of this working like a competitive auction market with a fixed wage. <br /><br />By the way, you're off topic. I was trying to focus this on deflation without thinking about the real implications - not that these things aren't an important part of the larger problem.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58174467422226435212010-09-01T11:12:33.552-07:002010-09-01T11:12:33.552-07:00"These are just more reasons why we should no..."These are just more reasons why we should not be too worried about deflation."<br /><br />But should we be worried about just LOW inflation? As this can greatly limit the Fed.s ability to fight a demand deficit which causes higher than necessary unemployment and lower than necessary GDP. Plus, it can hurt real wage adjustment due to excessive resistance to nominal wage cuts, that I think there is good empirical evidence for.<br /><br />If you're going to claim that all of the employment is just structural and none of it is due to a demand crunch, what do you think of this:<br /><br />http://voices.washingtonpost.com/ezra-klein/2010/09/where_the_job_losses_are_in_on.htmlRichard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.com