tag:blogger.com,1999:blog-2499715909956774229.post2094471264777424520..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: FOMC MinutesStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-2499715909956774229.post-63681158410464300482010-05-25T20:34:16.973-07:002010-05-25T20:34:16.973-07:00We are in agreement regarding monikers. They are ...We are in agreement regarding monikers. They are often hard to pin down. Nonetheless, I think that we are in agreement on what defines New Keynesians and Old Keynesians. I think that I simply give more credit to Old Monetarist than you. Also, I find individuals who consider Friedman a Keynesian to be very amusing because he explicitly differentiates himself from Keynesians in nearly all of his work.<br /><br />Also, I agree (somewhat) with your critique of the Taylor rule, but I don't think that this applies to nominal income targets. It is true that a nominal income target has an underlying, implicit goal for output and inflation. However, adherence to a nominal income target is the simplest way to respond to aggregate demand shocks because of the co-movement generated between the price level and output. Conversely, it necessarily prevents monetary policy from responding to AS shocks.<br /><br />In contrast, under an inflation target, the central bank must understand in real time that productivity is changing. A reading of the Fed minutes around 2003 suggests that this is not necessarily the case. Greenspan seemed to believe that loose monetary policy was justified on the grounds that inflation wasn't rising when, in fact, it was likely being held down by rapidly growing productivity.Joshhttp://www.everydayecon.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-41007061099245169852010-05-25T06:54:53.236-07:002010-05-25T06:54:53.236-07:00Yes, it's quite hard to nail down exactly what...Yes, it's quite hard to nail down exactly what the central tenets of Old Monetarism, Old Keynesianism, or New Keynesianism are. Recently I have had people tell me that New Keynesians are very far removed from Keynes and the General Theory, and that Milton Friedman was actually a Keynesian, among other things. We could argue about these things forever, and probably get nowhere. With regard to the inflation target idea, I'm beginning to think that this is the most practical approach for a central bank, outside of issues to do with the central bank's role as lender of last resort, which I have not sorted out yet. Taylor rules and nominal income targets both have implicit in them the notion that there is some inefficiency we want to correct, and I'm not sure we have a good theory for what that is. Yes, the inflation target should not be a constant - you have to change it over time in response to aggregate productivity, for example.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-20354375839096246572010-05-24T10:24:06.612-07:002010-05-24T10:24:06.612-07:00Stephen,
I think that we might disagree on what ...Stephen, <br /><br />I think that we might disagree on what Old Monetarism really is. For example, Friedman and Scwartz (1970) argued that currency was likely the most desirable aggregate -- at least in the context of international comparisons of money demand. In addition, I think that a monetarist who truly believes in the destabilizing nature of monetary disequilibrium would actually advocate the increase in the monetary base that we have seen (I don't know that I am necessarily an Old Monetarist, but I certainly have defended the policy on these grounds).<br /><br />Regardless, I'd rather not squabble over names and definitions thereof. Where we agree is when we are talking about how to judge the stance of monetary policy. The monetary base as well as short term interest rates (real and nominal) provide limited information for monetary policy in the current context. A policy should be judged relative to the goal for policy. (Of course this is difficult at present as we have no stated or explicit goal for policy in the U.S.)<br /><br />However, I do want to raise the following question. Why do we want to target inflation rather than the nominal income? Doesn't inflation targeting impose strong informational assumptions on central banks who seemingly have to deal with differentiating in real time between AD shocks and AS shocks (to be overly simplistic)? In other words, would we want temporarily lower inflation due to rising productivity and temporarily higher inflation due to negative supply shocks?Joshhttp://www.everydayecon.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-52611251538753470182010-05-24T07:56:54.104-07:002010-05-24T07:56:54.104-07:00Hope you'll post a link in your blog when SED ...Hope you'll post a link in your blog when SED presentation becomes available...The Money Demand Bloghttp://themoneydemand.blogspot.com/noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-46416002531433604952010-05-22T08:11:33.395-07:002010-05-22T08:11:33.395-07:00I think we'll have to agree to disagree on thi...I think we'll have to agree to disagree on this. I'm actually working this out. I'll present the results at the SED in Montreal if you're interested.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-74078235447459080832010-05-22T02:20:26.950-07:002010-05-22T02:20:26.950-07:00You have to pay more for the term deposits to comp...You have to pay more for the term deposits to compensate for the liquidity and interest rate risk premium - this has no effect for inflation. But you also have to pay more because you have shifted the term structure of interest rates. This happens because of imperfect arbitrage and is deflationary.The Money Demand Bloghttp://themoneydemand.blogspot.com/noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-45370975693818973242010-05-21T06:49:31.881-07:002010-05-21T06:49:31.881-07:00Yes, exactly. Fix the total quantity of reserves i...Yes, exactly. Fix the total quantity of reserves including term deposits, fix the interest rate on regular reserves, and increase the fraction of term deposits in total reserves from zero. You have to pay more for the term deposits. What is it that you are not getting?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-90706123541423899812010-05-21T06:20:46.104-07:002010-05-21T06:20:46.104-07:00"Suppose we fix the average interest rate on ..."Suppose we fix the average interest rate on reserves (including regular reserves and term deposits), and increase the fraction of reserves held as term deposits. What happens? Well, the price level goes up."<br />This is true. But this is not the relevant comparison. What they are doing is they are fixing interest rates on regular reserves, and increasing weighted average interest rate on central bank liabilities by increasing the fraction of term deposits.The Money Demand Bloghttp://themoneydemand.blogspot.com/noreply@blogger.com