tag:blogger.com,1999:blog-2499715909956774229.post2704555820534318374..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: What Do We Know About Long and Variable Lags?Stephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger20125tag:blogger.com,1999:blog-2499715909956774229.post-46462456439882808222016-11-30T14:08:51.573-08:002016-11-30T14:08:51.573-08:00I think Larry (he put the C in CEE) is a little to...I think Larry (he put the C in CEE) is a little too cavalier about sticky prices and wages. There are by now several New Monetarist models that generate the appearance of stickiness in different ways -- and hence are consistent with the broad facts as well as some of the detailed micro data -- but have policy implications dramatically different from Keynesian models. Head et al. in JEEA is one such model focusing on empirical micro issues, but there are various others. Recent work by Tao Zhu generates impulse responses to some kinds of money shocks that display fast rises in output and slow rises in prices, but output does NOT rise because prices are sticky; to the contrary, prices look sticky because output rises. VAR's can be deceiving. I am also working on microfounded models of open market operations and on models of the impact of monetary policy news where prices look stocky to the naive eye, but again policy implications dramatically different from Keynesian models. Finally, Larry's suggestion that the DMP model provides support for sticky wages is off base for several reasons, not the least being that those models have very little to do with money and nominal wages. Why did I post this? LC is clearly one of the world's leading macroeconomists and one of the world's nicest guys. Hence I wanted to try to reduce his confusion ;-)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-72742180036455935422015-11-15T12:05:11.796-08:002015-11-15T12:05:11.796-08:00Ramey's chapter is in the Handbook of Macroeco...Ramey's chapter is in the Handbook of Macroeconomics, not Monetary Economics.mhttps://www.blogger.com/profile/12673902998380551984noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59103990351962360782015-11-11T05:19:50.951-08:002015-11-11T05:19:50.951-08:00What if we model the effects of money supply in a ...What if we model the effects of money supply in a manner consistent with the existence of lags, but then we consider the effect of money demand so that it reflects expectations and mix both effects somewhat ... Jose Romeu Robazzinoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-43454926175845837882015-10-28T06:03:14.122-07:002015-10-28T06:03:14.122-07:00It looks like reality has finally caught up with y...It looks like reality has finally caught up with you too, Mr Yates.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36160296290883092902015-10-21T19:58:50.699-07:002015-10-21T19:58:50.699-07:00Could there be an alternative explanation? I think...Could there be an alternative explanation? I think the key to the long-and-variable puzzle lies in money demand. An argument could be made that monetary policy shocks have instant effect, but it is money demand that creates the lags. In other words, you cannot project the impact of a policy shock unless you know what money demand will do. The issue is that money demand cannot be observed directly due to the ex-post nominal identity between money supply and demand. This casts the illusion that monetary policy is subject to a lag. The good news is that money demand can be deduced from the velocity of money.H. Publiushttps://www.blogger.com/profile/16019756383734059819noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-48327322289973246742015-10-21T06:41:36.423-07:002015-10-21T06:41:36.423-07:00Steve. I wrote a reply to your post on my blog. ...Steve. I wrote a reply to your post on my blog. Just dawned on me that Mark Thoma doesn't aggregate my site any more so you might not have noticed it. https://longandvariable.wordpress.com/2015/10/17/steve-williamsons-scepticism-about-empirical-and-saltwater-macro/Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-29687990172782423812015-10-17T07:51:43.244-07:002015-10-17T07:51:43.244-07:00Business cash balances account for a large share o...Business cash balances account for a large share of the money stock. It should not be surprising to see firms accumulate cash prior to making purchases (such as investment and employment) nor to seem them run down cash to buffer unexpected declines in sales and/or profits. This is consistent with apparent lags between cash balances and real business activity without implying that firms make investment and employment decisions based on the amount of cash on hand. Alan Reynoldshttp://www.cato.org/people/alan-reynoldsnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-51939874561460206262015-10-16T13:39:17.800-07:002015-10-16T13:39:17.800-07:00This is a comment from Larry Christiano:
Steve, I...This is a comment from Larry Christiano:<br /><br />Steve, I enjoyed this post, though I’m less pessimistic about CEE (full disclosure: I’m the C in CEE!). I would like to address your five points and then make two observations. 1. Sticky prices are introduced in response to micro evidence on prices and the evidence of monetary non-neutrality. At the same time, I do agree with you that the absence of microfoundations is a huge drawback and out of step with modern economics. So, I look forward to the day when a tractable, microfounded approach is found. 2. I also agree with you that sticky wages are unappealing. However, here the news is better. A microfounded way to capture the observed inertia in wages has been found and sticky wages are no longer necessary (http://faculty.wcas.northwestern.edu/~lchrist/research/alt_offer/ChristianoEichenbaumTrabandt.pdf) . The new approach follows the Diamond-Mortensen-Pissarides vision to labor markets, a vision which I think all of us agree is the best one at this time. 3. Capital utilization plays only a minor role in models and should be dropped. 4. I think `Cash in advance’ got a big boost from the evidence that firms were hurt during the financial crisis when they could not get access to credit to pay for working capital (see http://people.bu.edu/sgilchri/research/GSSZ_inflation.pdf) . 5. The cost of adjustment in investment proposed in CEE has received a lot of support. Matsuyama and Lucca describe interesting ways to microfound it. Eberly, Rebelo and Vincent (JME, 2012) describe micro evidence from COMPUSTAT that support it (ERV provide citations to Matsuyama and Lucca). Another ‘bell and whistle’ that is often mentioned in the context of CEE is habit persistence in consumption. Apart from any introspective evidence on this assumption, there is one generally agreed upon fact that seems hard to understand (without pyrotechnics) unless habit persistence is adopted: that consumption growth appears to rise for a while in the wake of a monetary policy induced fall in the real interest rate. Apart from fitting the data tolerably well (see not only CEE but also Smets and Wouters), the CEE model has also proved to be a useful platform for thinking about financial frictions (see, for example, Gertler and Kiyotaki). For example, the model successfully reconciles the notion that disturances to financial intermediation which hurt investment do no simultaneously trigger a consumption boom (see my 2014 AER paper on this).<br /> <br />All the best, LarryStephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-6662641493765995052015-10-16T12:17:44.737-07:002015-10-16T12:17:44.737-07:00Exactly. Sometimes economists write down models in...Exactly. Sometimes economists write down models in an attempt to fit the data, and a lack of fit in the model comes from the fact that decisions appear to be more sluggish in the real world than in the model. So, a cheap way to fix the model is to impose some costs in the model, associated with particular decisions. That's what costly utilization is about. As you point out, there's really not an economically justifiable reason for those costs to be in the model.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-2166205394480804562015-10-16T01:25:13.270-07:002015-10-16T01:25:13.270-07:00As a regular non-economist, it does seem that chan...As a regular non-economist, it does seem that changing the utilization is costly. What am I missing?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59196852930516028762015-10-15T11:29:21.643-07:002015-10-15T11:29:21.643-07:00What do you mean by "reserve system?"What do you mean by "reserve system?"Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-34741490730629724152015-10-15T09:58:26.141-07:002015-10-15T09:58:26.141-07:00Isn't this almost trivially true in a reserve ...Isn't this almost trivially true in a reserve system? New construction, for example, almost always follows a course of sketch planning, raising capital, detailed planning then building (with some overlap). It seems almost impossible to do it the other way with a CB.Baconbaconhttps://www.blogger.com/profile/13511082564082971086noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11903436087779100412015-10-15T06:24:58.373-07:002015-10-15T06:24:58.373-07:00It's not enough to talk. The talk has to be cr...It's not enough to talk. The talk has to be credible. Credible promises about future policy actions can have effects in the present.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-32586198956370452132015-10-14T22:17:53.274-07:002015-10-14T22:17:53.274-07:00Nice summary Stephen.
"In a world with for...Nice summary Stephen.<br /><br /><br /> "In a world with forward looking people, promises about future actions matter for economic activity today - monetary policy actions need not precede effects."<br /><br />What exactly did you mean by "monetary policy actions need not precede effects."? Are you saying it's enough to talk about doing things?<br /><br />HenryAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-38544573955985322352015-10-14T09:53:23.811-07:002015-10-14T09:53:23.811-07:00That certainly is a good question. It takes a mode...That certainly is a good question. It takes a model to beat a model. But at what? We have a lot of different models, and if those models are any good, each one will give us a tiny bit of insight into how the world works. We have a lot of different ideas, manifested in models, about what monetary policy does. I think we're taking things way too seriously if, for example, we take the CEE model and try to literally use that to guide monetary policy. That would surely produce a mess. Similarly, it would be silly to write down a specific rule - some version of the Taylor rule, for example, with provision for financial crises, etc., and commit to it. But, I think it's possible for a committee of individuals, with all their modeling baggage, to make policy decisions in a consistent way, and to speak about those policies, so that, implicitly, the policy rule is well understood.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-53194086662553950542015-10-14T09:36:23.057-07:002015-10-14T09:36:23.057-07:00Great piece. But one of my colleagues asked a goo...Great piece. But one of my colleagues asked a good question: What rule would you follow now? And what model would you base it on? To coin a phrase, it takes a model to beat a model. Dave Backushttps://www.blogger.com/profile/11472846910681816429noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-22013148434569206442015-10-14T06:26:19.691-07:002015-10-14T06:26:19.691-07:00In the quote, you can see roughly what Friedman an...In the quote, you can see roughly what Friedman and Schwartz were up to. They looked at turning points in money supply and turning points in what he calls "general business." I haven't read the Monetary History in a long time, but I think "general business" is the NBER "reference cycle," which is roughly an index of aggregate economic activity - not aggregate output, but presumably highly correlated with it. Basically, Friedman and Schwartz showed that money leads aggregate economic activity. It's the informal counterpart of what Sims (1972) is about. Sims showed that money Granger-causes output in the the U.S. time series. Of course Granger causation need not imply economic causation. That was part of Tobin's critique of Friedman and Schwartz. Money could in fact be endogenously responding to output, but appear to lead output in the time series. The endogeneity could come from policy, or from the banking sector, if we're measuring money as M1 or M2, say.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-49366777889917103512015-10-13T23:47:21.265-07:002015-10-13T23:47:21.265-07:00It would be interesting to know if Friedman measur...It would be interesting to know if Friedman measured the lags of monetary policy response on past movements in output. In other words , output slumps , monetary policy responds by easing , but output could care less , operating on its own schedule , thus yielding highly variable lags.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-48750042205533948562015-10-13T15:17:27.530-07:002015-10-13T15:17:27.530-07:00I think one can learn a lot by reading FOMC transc...I think one can learn a lot by reading FOMC transcripts. But I'm not sure the Romer/Romer measure amounts to much. In particular, I don't like their interpretation of Fed forecasts. It's not clear that we should think of these as capturing the best projection of future macroeconomic variables given current information.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-70906898902568569562015-10-13T15:01:25.995-07:002015-10-13T15:01:25.995-07:00Very nice post!
What do you think of the "na...Very nice post!<br /><br />What do you think of the "narrative" approach to identifying monetary policy shocks, as in Romer and Romer (2004)?jonathannoreply@blogger.com