tag:blogger.com,1999:blog-2499715909956774229.post1633679508914590472..comments2024-03-09T02:22:57.289-08:00Comments on Stephen Williamson: New Monetarist Economics: Neo-Fisherians: Unite and Throw off MV=PY and Your Phillips Curves!Stephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger22125tag:blogger.com,1999:blog-2499715909956774229.post-10886973920160176732014-11-16T09:18:04.507-08:002014-11-16T09:18:04.507-08:00I'm a little lost on your basic premise. Cur...I'm a little lost on your basic premise. Currency is a safe asset. If I want it, I have only to go to the bank and request it, then lock it away in a vault. This is a little less efficient than holding a repo, but not terribly so, since I could buy and sell paper claims on that vault cash. These claims could be used to collateralize any financial transaction, just as government bonds do today. Currency is just a type of liability of the government, one that never earns interest and can't be redeemed. At any level of the policy rate, there is infinite supply available for "financial exchange". If this is the case, how can there be a shortage of safe assets? <br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-16114887058869580092014-11-15T15:58:00.612-08:002014-11-15T15:58:00.612-08:00You can stop being sad. I don't think that mat...You can stop being sad. I don't think that matters much qualitatively.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31484971423534873392014-11-14T16:52:55.104-08:002014-11-14T16:52:55.104-08:00If the truth or falsity of the Friedman rule (in a...If the truth or falsity of the Friedman rule (in a second-best world) depends on something so trivial as whether the fiscal authority targets (M+B)/P or [M+B/(1+i)]/P, that's a bit sad.<br /><br />Me, I would rather say that the truth or falsity of the Friedman rule depends on the Ramsey rule.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-24313189010639395962014-11-14T16:08:03.855-08:002014-11-14T16:08:03.855-08:00Well I suppose it might depend on the scenario- th...Well I suppose it might depend on the scenario- theoretically speaking if we image the BIG stimulates consumption without having a significant impact on the ability of the central bank to continuously accumulate new debt to keep its stock of government debt constant (ie perpetual QE), then we can assume the same-> "the lower is the quantity of safe assets (effectively, the quantity V+K), the higher is the inflation rate, and the lower is the real interest rate" would apply in this case. <br /><br />Of course the most salient question might be what level of BIG are we talking about, as certainly one would need to image a government transfer program large enough to meaningfully affect consumption and inflation (and possibly for the coordination of other deflationary measures like taxes to work in conjunction with interest rates). In other words if we assume $3k/month for every American adult we are talking about $7.5tril in new government debt annually, and assuming the Fed can continue to hold around 25% of total UST stock, then this would mean $156bil in QE per month, not unfathomable, but it would be easier to imagine in a scenario where a country is flirting with negative rates. For example, I do not see a theoretical reason why Switzerland could not enact a BIG as a way of preventing the overvaluation of the CHF.Anthonynoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67961268901796378592014-11-14T14:33:29.565-08:002014-11-14T14:33:29.565-08:00I could have said it more impolitely though.I could have said it more impolitely though.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58298391528243439712014-11-14T14:31:35.160-08:002014-11-14T14:31:35.160-08:00Why are you guys so sad? You can find plenty of in...Why are you guys so sad? You can find plenty of instances in which people have tried to get across ideas about the fiscal side of monetary policy. It's in "unpleasant monetarist arithmetic" and the fiscal theory of the price level, for example. Seems pretty interesting, if not exciting. No need to get depressed. Maybe David feels discouraged because his power as a central banker doesn't seem so imposing.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-86322339147853328932014-11-14T14:28:05.196-08:002014-11-14T14:28:05.196-08:00That's correct. But given that, what do you th...That's correct. But given that, what do you think would happen to the nominal interest rate?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-37219098120672421452014-11-14T12:46:41.801-08:002014-11-14T12:46:41.801-08:00David: sadly (because of the 'discouraging&quo...David: sadly (because of the 'discouraging" bit), I agree.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-41065297258328172302014-11-14T11:04:18.245-08:002014-11-14T11:04:18.245-08:00Yes, I think that's right. And yes, it is inte...Yes, I think that's right. And yes, it is interesting/discouraging to see how much hangs on just precisely how the fiscal policy is modeled. But I think it should be made much more explicit when we speak of "monetary policy."David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-21055969236338632362014-11-14T08:00:59.176-08:002014-11-14T08:00:59.176-08:00Assuming for a moment there is no practical constr...Assuming for a moment there is no practical constraint (due to the division of monetary and fiscal policy), how would the notion of direct cash transfers in the form of a basic income grant factor into your findings? It would seem to me that this would be the most direct way of creating inflation and this could be entered directly into the household part of your model. Would your findings support these conclusions: <br /><br />http://www.foreignaffairs.com/articles/141847/mark-blyth-and-eric-lonergan/print-less-but-transfer-moreAnthonynoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-57243762359815995402014-11-14T04:31:41.365-08:002014-11-14T04:31:41.365-08:00OK, I think I've got it.
The fiscal authority...OK, I think I've got it.<br /><br />The fiscal authority holds (M+B/(1+i))/P constant. So if the central bank increases i above 0%, (M+B)/P increases, so the total amount of shopping increases, which increases welfare. But increase i too much and it reduces boys' shopping relative to girls' shopping too much, and reduces welfare.<br /><br />Hmmm. I'm not sure I'm happy with that assumption. It seems a very thin reed on which to base a violation of the Friedman rule. If the bonds were n-period, rather than one-period Tbills, it would gives some very different results. Even more if the bonds were perpetuities.<br /><br />Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-64719567091312582072014-11-14T03:52:24.883-08:002014-11-14T03:52:24.883-08:00Mum and Dad give M to the boys, and B to the girls...Mum and Dad give M to the boys, and B to the girls, and the boys and girls go shopping, while Mum and Dad go off to work. I don't see why the central bank would tax the boys' shopping more than the girls' shopping. The only difference is that the girls use some credit, which can't be taxed at all, but that shouldn't matter for the optimal marginal tax rate on shopping. And the math says it works even with no credit. There's a non-negativity constraint on both M and B, I think.<br /><br />It looks symmetric to me. Either I'm missing some asymmetry, or there's a typo somewhere in the equations.<br /><br />Other than that, this paper makes sense to me. I don't buy the assumption about the fiscal authority holding (M+B)/P constant when the central bank does something, but it makes more sense as a nominal anchor than those models which don't have M and B and just assume the Fisher relation holds.<br /><br />Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-90219145634980280592014-11-13T19:44:13.447-08:002014-11-13T19:44:13.447-08:00I knew you'd say that :)I knew you'd say that :)David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-33392235608028214762014-11-13T19:09:21.008-08:002014-11-13T19:09:21.008-08:00Let me talk to Steve about this--it may very well ...Let me talk to Steve about this--it may very well be the case. Regarding your earlier comment, note that real tax revenue is *not* being held constant in the exercise. The real market value of the government's outstanding debt is being held constant. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-50668079640667022062014-11-13T18:58:43.649-08:002014-11-13T18:58:43.649-08:00It wasn't unnecessarily anything.It wasn't unnecessarily anything.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-62828501828733237732014-11-13T18:36:39.382-08:002014-11-13T18:36:39.382-08:00Re-reading your 5:56 comment David, I think you *a...Re-reading your 5:56 comment David, I think you *are* telling me that the demand for B is more elastic than the demand for M. In which case your results are consistent with the Ramsey rule, which pleases me.<br /><br />But I still can't figure out why the demand for B is more elastic.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7996732430792815362014-11-13T18:16:26.851-08:002014-11-13T18:16:26.851-08:00Thanks David. So you don't get the Friedman ru...Thanks David. So you don't get the Friedman rule even if K=0. <br /><br />My gut tells me the Ramsey rule must be at work here. "Have a higher tax rate on the good with the less elastic demand, and a lower tax rate on the good with the more elastic demand." That is consistent with the theory of second best.<br /><br />That would work if the demand for B/P were more elastic than the demand for M/P. Which sounds empirically plausible, but I can't see why it would be true in your model, because the only relevant difference is that M can be used in both markets while B can only be used in one market. Though it *might* be true in your model. But I can't figure out why.<br /><br />The other thing I can't figure out is why a change in the composition of the tax, lowering the tax on B and increasing the tax on M, holding total tax revenue constant, should increase the total tax base (M+B)/P, and so lower P initially. My guess is that that has something to do with the relative demand elasticities for M and B too, just like the Ramsey result above.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-690186422325603542014-11-13T17:56:10.043-08:002014-11-13T17:56:10.043-08:00No, it has nothing to do with K. But you ask a goo...No, it has nothing to do with K. But you ask a good question. Let me see if I can offer some intuition.<br /><br />Suppose we are in the constrained case and at the Friedman rule. Consumption in both markets is equated (good insurance) but at depressed levels. <br /><br />Now, consider increasing the nominal interest rate a little bit. Underlying this action are "open market operations" that increases the bond-to-money ratio (permanently). That is, the central bank sells bonds for money (looks like tightening). At the same time, the growth rate in the nominal supply of money/bonds is increased, and taxes are cut. <br /><br />The effect of having the central bank sell bonds is to relax the debt constraint in market 2. Consumption in that market expands.<br /><br />What happens to consumption in market 1? We can show that for log preferences, it does not change. In general though, it may rise or fall. There must be some offsetting substitution and income effects here. The higher interest rate makes market 1 consumption more expensive, so ppl would want to substitute into the market 2 good. On the other hand, relaxing the debt constraint has a kind of positive wealth effect--ppl would want to increase consumption of both goods. <br /><br />So, close to the Friedman rule, an increase in the interest rate increases GDP and welfare. <br /><br />This is also consistent with the theory of the 2nd best. We know that introducing an additional friction (in this case, the nominal interest rate wedge) does not necessarily reduce welfare in a 2nd best world. Indeed, it may increase welfare, and this is the case here. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7411653040135635532014-11-13T17:44:53.776-08:002014-11-13T17:44:53.776-08:00Yes, well, to be fair, Steve does say as much in h...Yes, well, to be fair, Steve does say as much in his explanation above. I just wanted to reiterate it because I don't think the statement "increase R to increase P" can be made in isolation of the supporting policy regime.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-22729333815315385922014-11-13T14:20:58.569-08:002014-11-13T14:20:58.569-08:00David: suppose I said: "The only way to incre...David: suppose I said: "The only way to increase inflation permanently is to print more M and B permanently, and use that printed M and B to increase the nominal rate of interest paid on B permanently".Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-24680553739089169702014-11-13T14:07:12.118-08:002014-11-13T14:07:12.118-08:00There are two media of exchange: one called "...There are two media of exchange: one called "M" and one called "B". Both are issued by the government.<br /><br />M can be used in both markets, B can only be used in market 2.<br /><br />In the "constrained" equilibrium, the government insists on a fixed amount of seigniorage, so the equilibrium is not optimal. Both M and B will have a liquidity premium.<br /><br />I am trying to figure out why the Friedman rule (where M and B have the same real rate of return) is not constrained optimal. In other words, why ought the central bank price discriminate and charge a higher liquidity premium on M than on B?<br /><br />My guess is that it is because K > 0, where K is the fixed amount of credit in market 2. My guess is that this affects the elasticity of demand for the medium of exchange in market 2 relative to market 1. So the Ramsey principle says it is optimal for the central bank to tax M at a higher rate than B.<br /><br />But that's just a guess. Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-10227488509538682014-11-13T13:49:39.413-08:002014-11-13T13:49:39.413-08:00My own view is that the statement:
(ii) If the n...My own view is that the statement: <br /><br /><i>(ii) If the nominal interest rate is zero, and inflation is low, the only way to increase inflation permanently is to increase the nominal interest rate permanently.</i><br /><br />is unecessarily provocative. The equations in the model make it clear that there must be an underlying fiscal accommodation (a passive fiscal policy, to use Leeper's language) to support the higher nominal interest rate and inflation rate. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.com