tag:blogger.com,1999:blog-2499715909956774229.post203923615162148452..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Nominal GDP TargetingStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger60125tag:blogger.com,1999:blog-2499715909956774229.post-51974386823883911242011-10-24T07:58:42.610-07:002011-10-24T07:58:42.610-07:00Yes, I agree for the most part.
"...I think ...Yes, I agree for the most part.<br /><br />"...I think that within the context of many monetary models that is actually how money is defined (whether or not this is carried over into the corresponding empirical analysis, which it is often not...ugh)."<br /><br />Yes, this is one of my pet peeves. In the model, the stuff used in exchange looks like currency, and there are no financial intermediaries anywhere in sight. Then, the empirical work uses M1. Ugh for sure.<br /><br />"...if currency in circulation rises, how do I know that it is the result of monetary policy or a change in the demand for currency relative to other assets?"<br /><br />Yes, exactly. For the US, we don't even know how much of the outstanding stock of currency resides domestically.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13917186633449905002011-10-24T06:57:40.462-07:002011-10-24T06:57:40.462-07:00Steve,
I think that you are partially correct (ac...Steve,<br /><br />I think that you are partially correct (actually, I should say I partially agree with you, whether you are correct is independent of what I think). Empirically, I see the usefulness of money as an indicator variable. Nonetheless, for it to be meaningful in this sense, we need to have some idea about what we are measuring and how and why we are measuring it. Barnett's approach doesn't completely answer those objectives yet as a lot of what has been done is to develop acceptable index number counterparts to existing monetary aggregates.<br /><br />The question is then whether we can get some measure of money that isn't simply based on intuitive ideas about liquidity or other asset characteristics. You would likely argue that this is impossible, irrelevant or both and you might be correct. I am slightly more optimistic.<br /><br />In the past, you have mentioned using currency. I think that this is intriguing and I think that within the context of many monetary models that is actually how money is defined (whether or not this is carried over into the corresponding empirical analysis, which it is often not...ugh). My only problem with currency as an indicator variable is that I am not sure how well it performs empirically as a sign of future inflation. For example, if currency in circulation rises, how do I know that it is the result of monetary policy or a change in the demand for currency relative to other assets? [If you look at the episodes in Friedman and Schwartz's Monetary History, for example, a great deal of contractions coincided with increases in the demand for currency relative to other assets, such as demand deposits.]<br /><br />Regardless, there is much work to be done and I think there is a lot to glean from the search paradigm. On that, I know that we agree.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-80905862883678513702011-10-23T18:42:56.315-07:002011-10-23T18:42:56.315-07:00I tend to think of Barnett's approach as apply...I tend to think of Barnett's approach as applying directly the aggregation theory that was developed to think about broccoli and carrots to think about assets. Not a good idea. Further, what's the goal anyway? What are you going to do with the monetary aggregate once you construct it?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-72692309012558427412011-10-23T14:15:05.730-07:002011-10-23T14:15:05.730-07:001. Adding up some asset quantities and calling tha...<i>1. Adding up some asset quantities and calling that stuff money is not a useful exercise. Many assets not in M1 or M2 nevertheless play important roles in various kinds of exchange, and every asset's role in exchange is important in determining its price.<br />2. The "demand for money" is not a useful concept, in part because of (1), and also because that relationship is not structural. We can't think about the demand for an asset in the same way as we think about the demand for broccoli.</i><br /><br />Now, we are getting somewhere. I agree on both points. Although I will note that Bill Barnett and his cohorts have been working on ways to better measure the money supply -- both from a mathematical and from an economic perspective.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-43581307177185069542011-10-23T09:46:26.705-07:002011-10-23T09:46:26.705-07:00"Hard core" meaning the primary advocate..."Hard core" meaning the primary advocates. The rest of the profession has moved on.<br /><br />1. Adding up some asset quantities and calling that stuff money is not a useful exercise. Many assets not in M1 or M2 nevertheless play important roles in various kinds of exchange, and every asset's role in exchange is important in determining its price.<br />2. The "demand for money" is not a useful concept, in part because of (1), and also because that relationship is not structural. We can't think about the demand for an asset in the same way as we think about the demand for broccoli.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-91567578502840408972011-10-23T09:16:36.571-07:002011-10-23T09:16:36.571-07:00"Read Lucas, Laidler, Meltzer, and Friedman.&...<i>"Read Lucas, Laidler, Meltzer, and Friedman."<br /><br />Exactly. The hard core quantity theorists.</i><br /><br />Are they quantity theorists because they looked at the data or did they interpret the data the way that they did because they are quantity theorists? Your response seems to suggest the latter. I'm willing to give people the benefit of the doubt <i>on both sides of the debate</i> and assume that their conclusions aren't driven by their biases.<br /><br />The point that I am making is as follows.<br /><br />1. It is not clear if money demand is unstable. Evidence using annual data suggests that it is stable. Evidence that uses monthly and quarterly data is mixed, but it leans toward instability (although some of these findings are not robust).<br /><br />2. Even if money demand is stable in the long run, it does not imply that the central bank should target monetary aggregates.<br /><br />At least on point 2 I think that we would agree.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13924423696256900552011-10-23T08:30:47.451-07:002011-10-23T08:30:47.451-07:00"Read Lucas, Laidler, Meltzer, and Friedman.&..."Read Lucas, Laidler, Meltzer, and Friedman."<br /><br />Exactly. The hard core quantity theorists.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36677485147200735142011-10-23T07:33:29.079-07:002011-10-23T07:33:29.079-07:00My point was that Friedman first asserted this, th...<i>My point was that Friedman first asserted this, then central banks tried targeting monetary aggregates and it didn't work. Why? Because money demand is not stable. There is good theory and empirical evidence for why that is the case. You're pretty hard core if you want to argue otherwise.</i><br /><br />I am very familiar with this literature and the problem is that most people are talking past one another. Read Lucas, Laidler, Meltzer, and Friedman. They are arguing that money demand is stable over the long-run. Then, look at the empirical evidence of those who say that they are unstable -- they use much higher frequency data.<br /><br />Laidler discusses this here:<br /><br />http://research.stlouisfed.org/publications/review/90/03/Legacy_Mar_Apr1990.pdf<br /><br />Also, Lucas was clearly aware of this issue as well:<br /><br />http://ideas.repec.org/a/eee/crcspp/v29y1988ip137-167.html<br /><br />Finally, I think that we would agree that there is some good theory to suggest money demand is unstable. I would disagree that there is good empirical evidence. Again, many of these studies are not robust.<br /><br />Stable money demand doesn't imply that we should target monetary aggregates. I think there are many reasons why we shouldn't that are independent of whether money demand is stable.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-29246804939778445972011-10-23T06:47:52.302-07:002011-10-23T06:47:52.302-07:00Again, you said "the fed has no hope of targe...Again, you said "the fed has no hope of targeting asset prices." The money supply is potentially infinite. Infinite demand chasing finite supply must necessarily move prices. Any model may be inelastic <i>locally,</i> but no one would actually extrapolate that to the case, where say the Fed beefs up its balanace sheet to, say, 50 Tn. <br />If the Fed expanded its balance sheet to 7 Tn, buying MBS, the price of MBS would go up (yields decline) because prices are not inelastic. The total stock of GSE MBS is in that neighborhood, so the Fed now owns all GSE MBS. At the margin, the price of that last MBS tranche is virtually zero. Don't take my word for it, ask your favorite bond trader or FOMC member what would happen if the Fed announced 7Tn in MBS purchases. Then another 7 Tn in corporate debt purchases, then 20Tn in stock market purchases. maybe a cartoon model of says asset prices don't move, but taken to its logical conclusion, its empirically false. There's been plenty of rebuttal from other economists.dwbnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-54896785071827309412011-10-22T16:33:56.975-07:002011-10-22T16:33:56.975-07:00Why is anyone worried about "controlling infl...Why is anyone worried about "controlling inflation" when core is at 2 percent for last year, and many conservative economists have said that the CPI probably overstates true inflation (due to rapidly evolving goods and services). When GDP is 15 percent below trend and unemployment is at 8 percent. <br /><br />Additionally, far smaller fractions of US labor force are unionized than previous eras. <br /><br />Additionally, goods, services, capital and labor easily cross into the USA (less os lately for labor, perhaps)--and price surges are met with fresh supply, much more so than previous decades.<br /><br />A peevish fixation on inflation, rather than economic growth, innovation, and commercial freedom is becoming the intellectual death knell of right-wing economists. <br /><br />The three-year period ended August 2011 was the lowest CPI for a three-year period in the postwar era. If you are doing the "Chicken Little" dance now on inflation, when would you be happy? In Japan after 20 years of deflation? <br /><br />Several years of moderate inflation and strong economic would be a great tonic for the USA.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-73355932868032596722011-10-22T15:45:22.666-07:002011-10-22T15:45:22.666-07:00anonymous 8:27,
My point was that Friedman first ...anonymous 8:27,<br /><br />My point was that Friedman first asserted this, then central banks tried targeting monetary aggregates and it didn't work. Why? Because money demand is not stable. There is good theory and empirical evidence for why that is the case. You're pretty hard core if you want to argue otherwise.<br /><br />dwb,<br /><br />You are just making assertions. I don't see an economic argument in there.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-23440253933736192472011-10-22T12:13:31.261-07:002011-10-22T12:13:31.261-07:00if you want to have debate about whether its appro...if you want to have debate about whether its <i>appropriate </i> for the fed to buy other assets like MBS, thats a useful debate. If you want to debate elasticity- whether it would take 1 Tn or 10Tn in more QE, that's also interesting. But you are not making that argument, you are making the argument that they can't, period. "The Fed has no hope of moving asset prices." Such a statement is patently, absurdly, and easily proven false. The Fed is being held back, not because it <i>can't</i> target long term nominal rates, or move asset prices, but because of the potential distortions it might causes (a legitimate and serious concern). The Fed <i> could </i> target NGDP, its a question of whether the benefits are worth the costs, depending on what it would have to do to get there, for how long, and how hard it will be to exit. <br /><br />Yes, it may have to raise it's balance sheet to 5Tn and accomodate some likely commodities price rises. But at full employment, commodities prices will be higher, there is no getting around that. <br /><br />but saying that it can't be done... well like i said, relish the opportunity to be proven right if they embark on another round of QE.dwbnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-24984636085994225122011-10-22T08:27:16.226-07:002011-10-22T08:27:16.226-07:00Friedman looked at the historical data and said: &...<i>Friedman looked at the historical data and said: "money demand seems pretty stable."</i><br /><br />Yes, as did Meltzer and Laidler and Lucas. It is also not entirely clear that these guys were incorrect. Most studies that say that money demand isn't stable use cointegration techniques. Using these techniques, they fail to find stable cointegrating relationships and conclude that money demand is unstable because of financial innovations. As McCallum has detailed, however, these statements are contradictory. If the demand for money is influenced by financial innovations, which I think that most of us would agree with a reasonable proposition, this would necessarily imply that one would not find evidence of cointegration. Thus, saying that money demand is unstable based on an absence of cointegration is not correct.<br /><br />More importantly, Steve, have your TA get the data from some of these "unstable money demand" papers and try to replicate their results -- they are not robust.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58762914899770234532011-10-22T07:34:43.236-07:002011-10-22T07:34:43.236-07:00"I guarantee if the fed bought 1 Tn in MBS, M..."I guarantee if the fed bought 1 Tn in MBS, MBS prices would move (the spread would compress). If the Fed bought asset backed securities or Greek or Italian debt, those prices would move too."<br /><br />You guarantee it, so I guess it must be true.<br /><br />"your premise that the system is "awash with reserves to the point where the marginal value of reserves in financial transactions is essentially zero" is contradicted by your own evidence. the fact that reserves are marginally more expensive (i.e. scarce) than t-bills"<br /><br />No, it's the other way around. The interest rate on reserves is higher than the interest rate on T-bills, so the price of reserves is lower than the price of T-bills, i.e. T-bills carry a higher liquidity premium.<br /><br />"That is exactly the point of NGDP targeting. The fed commits to doing anything and everything."<br /><br />You're not serious, are you? The Fed should commit to intermediating everything? Do you understand why it is a bad idea for the Fed to be buying private assets?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-74350206794308463652011-10-21T17:40:24.580-07:002011-10-21T17:40:24.580-07:00there are too many things wrong with your assertio...there are too many things wrong with your assertions. <br /><br /><br />"The Fed has no hope of moving asset prices." The spread between mortgages and treasuries is higher now than in the spring. I guarantee if the fed bought 1 Tn in MBS, MBS prices would move (the spread would compress). If the Fed bought asset backed securities or Greek or Italian debt, those prices would move too. <br /><br />your premise that the system is "awash with reserves to the point where the marginal value of reserves in financial transactions is essentially zero" is contradicted by your own evidence. the fact that reserves are marginally more expensive (i.e. scarce) than t-bills, even if only a few bps, tells you money is still tight. The private sector cannot "create reserves" as you claim. I agree its confounding to have IOR at 25bps (btw this is a policy not a law), but nevertheless reserves are still relatively scarce. the fact that we have a lot does not prove we have enough.<br /><br />the "other liquid assets" which have "different liquidity properties" but are "essentially identical" for exchange is not accurate and is a gross oversimplification. MBS, ABS, most of the things you mention all get collateral haircuts. the yield spread on these securities are all highly correlated with other measures of financial stress (the TED spread, the OIS spread, the VIX, AAA-BBB credit spread etc). Those are assets whose price will fall in times of stress, and are NOT useful for "exchange."<br /><br />"At the zero lower bound the fed cannot achieve a higher price level except for talk about the future."<br /><br />That is exactly the point of NGDP targeting. The fed commits to doing anything and everything. there is nothing preventing the Fed from buying corporate debt, muni debt, or many other things. Maybe in a grossly oversimplified and inaccurate world of reserves and dairy farms, sure. But: there is a huge logical and evidentiary gap between an agnostic and an atheist. <br /><br />and, if you are an atheist on QE (no effect), hen its simultaneously pretty irrational to be against something like more QE that you claim will have no effect.dwbnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-41314139600284769752011-10-21T13:47:34.943-07:002011-10-21T13:47:34.943-07:00"If we look in the long term, the GDP trend d..."If we look in the long term, the GDP trend does seem to be fairly constant."<br /><br />Friedman looked at the historical data and said: "money demand seems pretty stable."Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-15385404306033322602011-10-21T13:14:04.510-07:002011-10-21T13:14:04.510-07:00If we look in the long term, the GDP trend does se...If we look in the long term, the GDP trend does seem to be fairly constant. The Great Depressin seems like a blip, which may be why Friedman came up with a "plucking model".<br /><br />NGDP targeting may be vulnerable to the Lucas Critique. I think the market monetarists would say the various measures of money were mistaken targets because we don't care about money in itself, it's just a means to an end. NGDP (or it's relation to the long-run trend) is their representation of aggregate demand and so if they want to tinker with aggregate demand they tinker with NGDP. It could all be pointless if, like in Hume's thought experiment, it just resulted in everyone adding a zero on the end of all prices (if a ten fold increase is ridiculous, then these are agents who price in the more sensible binary system) without having any real effect. Their hypothesis is that we aren't in the typical market clearing situation precisely because prices aren't that flexible.Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-54157436131367327152011-10-21T12:51:26.804-07:002011-10-21T12:51:26.804-07:00I was half-joking. The idea in McCallum and Nelson...I was half-joking. The idea in McCallum and Nelson's work, some of McCallum's work, and the Taylor-influenced literature is one of robustness. We're uncertain about what a good macro model is. If I can demonstrate that a particular policy rule does well in a wide class of models, under some well-defined criterion, then I'll think of that rule as robust, and argue that policymakers should use it. McCallum and Nelson set up a particular sticky-price model, and simulate it under a NGDP target and compare that to some alternatives. The criterion seems to be how well it does in hitting an inflation target while also keeping the variance of the output gap low.<br /><br />1. The criterion for evaluating good performance has to be model-specific. I'm not sure how you make these cross-model comparisons in a reasonable way.<br />2. Even in McCallum and Nelson's framework, they're not telling us what policy is optimal, or how the NGDP target does relative to an optimal policy.<br />3. I find it hard to believe that any of the models we play with have the property that the welfare losses from suboptimal monetary policy depend only on the gap between nominal GDP and a constant nominal GDP growth path.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-4301755182995025932011-10-21T11:57:37.009-07:002011-10-21T11:57:37.009-07:00Steve,
Why don't you consider McCallum and Ne...Steve,<br /><br />Why don't you consider McCallum and Nelson to be serious?<br /><br />I can understand if you have quibbles regarding the role of money and sticky prices, etc. in these types of models -- I share that view. Is that what you are talking about when you say the model isn't serious? If so, then I do think we have different meanings of "serious." For example, I think Woodford does serious analysis. I think McCallum and Nelson do serious analysis. I might differ with them in regards to the <i>usefulness</i> of such analysis, but that reflects my preferences, not a level of seriousness. They would obviously disagree.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7992258998145681712011-10-21T11:49:58.258-07:002011-10-21T11:49:58.258-07:00"Wouldn't negative interest (or a tax) on..."Wouldn't negative interest (or a tax) on excess reserves push a lot of that out and cause inflation? I know you've said the Fed isn't authorized to do that, but they're already breaking the law."<br /><br />Yes, if you allow the Fed to tax reserves, there's no liquidity trap. Problem solved. The law that permits interest on reserves seems deeply flawed, but I doubt that the Fed would want to violate it in such an obvious way as to charge fees for holding reserve balances.<br /><br />On another note, don't you think that a problem with NGDP targeting is the problem with other simple rules. Here I'm thinking of Friedman-style money growth targeting. Friedman wanted to think that there was a simple money demand function that was structurally invariant to the policy intervention (changing to a policy rule with money growth targeting), and also to technological and regulatory change. Not the case. There's the same problem with NGDP targeting. This seems to require that you think of the long run real GDP trend as fixed. Also I think there has to be a fixed relationship between the fluctuations in economic welfare and fluctuations in nominal GDP, about trend. That seems far-fetched.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81841424805845485442011-10-21T10:52:20.515-07:002011-10-21T10:52:20.515-07:00Phil:
Everything rests on the Phillips curve bein...Phil:<br /><br />Everything rests on the Phillips curve being correct: economic activity and inflation co-move positively. There can never be a contradiction between them. <br /><br />Thus, the NGDP targeting people don't believe that they have to worry about your decomposition.<br /><br />KPAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13359086051229112492011-10-21T08:09:56.145-07:002011-10-21T08:09:56.145-07:00Wouldn't negative interest (or a tax) on exces...Wouldn't negative interest (or a tax) on excess reserves push a lot of that out and cause inflation? I know you've said the Fed isn't authorized to do that, but <a href="http://uneasymoney.com/2011/10/10/is-the-fed-breaking-the-law/" rel="nofollow">they're already breaking the law</a>.Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-89546041364890331442011-10-21T08:00:43.015-07:002011-10-21T08:00:43.015-07:00Apropos of the point I raised above, McCallum and ...Apropos of the point I raised above, McCallum and Nelson (JME, 1999) write, "real output and employment fluctuations might be smaller on average than with pure inflation targeting ... [this] result can not be assured, because of the profession’s ignorance concerning the mechanism by which nominal income growth is split between inflation and real output growth components." The "ignorance" M&N refer to appears to be rarely acknowledged in the claims of Sumner & Co.Phil Rothmanhttp://personal.ecu.edu/rothmanp/rothman.htmnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-16587442746089629032011-10-21T06:39:32.195-07:002011-10-21T06:39:32.195-07:00"McCallum and Nelson (JME, 1999): http://idea..."McCallum and Nelson (JME, 1999): http://ideas.repec.org/p/hhs/iiessp/0644.html"<br /><br />I think you and I have different notions of "serious."Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44629907807892081652011-10-21T06:35:58.981-07:002011-10-21T06:35:58.981-07:00Robb,
One way to put it is that, given the large ...Robb,<br /><br />One way to put it is that, given the large stock of excess reserves in the system, inflation has come unhinged from policy actions. I think there are contingent paths for policy that would allow the Fed to control inflation from here on out, but NGDP targeting won't do it, and neither will buying commercial paper.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.com