tag:blogger.com,1999:blog-2499715909956774229.post3840505721888876707..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: The Trouble with Paul RomerStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-2499715909956774229.post-26396735313558194632017-01-16T09:54:46.645-08:002017-01-16T09:54:46.645-08:00Dr. Williamson,
Yes, the Fed's QE programs...Dr. Williamson,<br /><br />Yes, the Fed's QE programs' limited effectiveness in my view was due to the percreived lack of the FOMC's determination to continue stimulus even in the face of temporary above-average NGDP growth. They are too fearful of inflation.<br /><br />I point out again that liquid asset markets certainly react to QE announcements as if a small pickup in economic growth is expected. This is true of stock indexes, commodity price indexes, and credit spreads. This is certainly not consistent with the strictest neo-Fisherian interpretation.<br /><br />I don't think it is a coincidence, for example, that the bottom of the Great Recession occurred in March of 2009, when the FOMC began QE. It's also not a coincidence that the economy actually grew a bit faster after fiscal austerity began in 2013, through 2014, in conjunction with another QE program.<br /><br />I argue that with a new targeting regime, like NGDP level targeting, or perhaps targeting nominal total labor compensation, the Fed's stimulus efforts would be just as effective at the zero lower bound as when that bound is not an issue.<br /><br />Also, I say that I'm general skeptical of old ideas that were rejected in the distant path within a scientific field, like neo-Fisherianism. It has been rejected by most of the best minds in economics for many decades. That doesn't mean it's wrong, but it would mean I'd be extra careful about examining such an idea.Antihttps://www.blogger.com/profile/17677035271760844211noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-8257519540268980812017-01-16T06:51:27.433-08:002017-01-16T06:51:27.433-08:00"If a monetary authority executed a helicopte..."If a monetary authority executed a helicopter drop, say crediting all deposit accounts with the total of 10% of NGDP, ceteris paribus, I would expect a 10% rise in the price level."<br /><br />Over a six-year period, the Fed increased the quantity of outside money by almost five-fold. Over that same period prices increased by a factor of about 1.08. It wouldn't have made any difference if the Fed had made the large scale asset purchases with currency - what you might call a helicopter drop.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-50520064962802754132017-01-15T17:50:43.459-08:002017-01-15T17:50:43.459-08:00Dr. Williamson,
I don't think QE has had big ...Dr. Williamson,<br /><br />I don't think QE has had big effects, at least relative to the size of the asset purchases involved, but I think they can have large effects in principle. The key from my perspective is in the creation of new money in exchange for assets, with credibility for leaving that new money in the economy long enough to restore previous NGDP growth trend crucial. I view the Fed Funds rate, and other interest rates as merely targeting/signalling tools. <br /><br />To explain, I should start with a thought experiment. If a monetary authority executed a helicopter drop, say crediting all deposit accounts with the total of 10% of NGDP, ceteris paribus, I would expect a 10% rise in the price level. However, if the helicopter drop occurred, but then the monetary authority said they would not expand the money supply again for a decade, policy would have relatively tightened, and the price level would rise less than 10%, or could fall outright, depending on prior expectations. <br /><br />In a situation in which a central bank has 100% credibility with regard to creating enough new money to return NGDP to trend, the amount of new money that would need to be created would be equal to both the percent of shortfall in the money supply versus demand and the downward movement in the Fed Funds rate. <br /><br />In other words, in the case in which NGDP fell 2% due to a nominal shock, money supply growth would need to increase 2%, and the Fed Funds rate would need to come down 2%, if the Fed Funds rate is changed at all and is to be a target/signal. In the case of QE, the Fed Funds rate need not change. <br /><br />The critical point here is that it's the asset purchases that cause the Fed Funds rate to change, not the reverse. One should focus on the amount of new money created, and how permanent that increase in the supply of money is deemed to be, and how conditional.<br /><br />Is that specific enough?Antihttps://www.blogger.com/profile/17677035271760844211noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88204677150710873892017-01-15T11:42:53.074-08:002017-01-15T11:42:53.074-08:00"...if a central bank were legally able and w..."...if a central bank were legally able and willing to buy any and all assets, whether financial or otherwise, meaning literally every item in existence in the world, could it buy every item in the world without raising prices?"<br /><br />This would mean that my title would be changed to "loan officer," in which case you have a lot more to worry about than what the price level would be as a consequence.<br /><br />"...then how does that not kill the neo-Fisherian hypothesis?"<br /><br />no.<br /><br />"It seems pretty clear to me that the QE programs had some modest, but important positive effects on economic growth, as evidenced in both market reactions and later GDP figures."<br /><br />I'm not sure why that's clear to you. What's your theory of QE? Why should it have big effects?<br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-78171140103171881152017-01-14T22:24:33.709-08:002017-01-14T22:24:33.709-08:00Dr. Williamson,
On the reductio ad absurdum, if a...Dr. Williamson,<br /><br />On the reductio ad absurdum, if a central bank were legally able and willing to buy any and all assets, whether financial or otherwise, meaning literally every item in existence in the world, could it buy every item in the world without raising prices?<br /><br />If not, then how does that not kill the neo-Fisherian hypothesis? Then, the explanation for the huge increase in the Fed's balance sheet, for example, with relatively small effects, would involve the zero lower bound problem/positive interest on reserves, and/or a credibility problem.<br /><br />It seems pretty clear to me that the QE programs had some modest, but important positive effects on economic growth, as evidenced in both market reactions and later GDP figures. 2013 seems a particularly good example of this, in which there was significant fiscal austerity.Antihttps://www.blogger.com/profile/17677035271760844211noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67287788931115024942017-01-14T10:03:53.717-08:002017-01-14T10:03:53.717-08:00"I think it's safe to say you have not de..."I think it's safe to say you have not demonstrated the direction of causation is as you claim."<br /><br />I'm not sure what it would take for you to think that causation was "demonstrated." What's true is that: (i) Essentially all the models we work with have neo-Fisherian conclusions. (ii) Those conclusions are consistent with the data. All we need now is for a central bank to follow neo-Fisherian principles for 20 years or so, to see how it works.<br /><br />"...the Fed could just buy all the assets it wanted, while generating little or no inflation."<br /><br />Exactly. The Bank of Japan has been buying a lot of assets, while generating little or no inflation.<br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-30847263006396853442017-01-14T09:58:37.391-08:002017-01-14T09:58:37.391-08:00You can find the FOMC transcripts here:
https://w...You can find the FOMC transcripts here:<br /><br />https://www.federalreserve.gov/monetarypolicy/fomc_historical.htm<br /><br />I've only dipped into this stuff, but what I read was interesting. I think you're correct that, however this policy worked, that it was not a surprise.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-20508823358703670432017-01-13T01:34:29.862-08:002017-01-13T01:34:29.862-08:00Nice post!
Glad you are posting again. Nice post!<br />Glad you are posting again. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-730998032791556022017-01-12T20:12:30.602-08:002017-01-12T20:12:30.602-08:00Dr. Williamson,
I have read many of your intro to...Dr. Williamson,<br /><br />I have read many of your intro to neo-Fisherism you link to above, and am pretty familiar with neo-Fisherian views in general. While I agree with you that there is fairly often correlation between rate increases and increases in inflation, I think it's safe to say you have not demonstrated the direction of causation is as you claim. In my view, all the logic seems to suggest causation goes the other way.<br /><br />I'm curious as to how you respond to the reductio ad absurdum I mentioned. What of the implication I see in the neo-Fisherian view that, if correct, the Fed could just buy all the assets it wanted, while generating little or no inflation? Do you disagree that this is an implication of your perspective?<br /><br />Also, how do you defend the focus on interest rates? The price of money is simply the goods, services, and investment opportunities purchasable with that money. Interest rates are the price of credit, which is a very different thing. <br /><br />As I see it, when there is a negative nominal shock, it means the growth in the money supply versus money demand is not expected to be sufficient to support the previously expected rate of economic growth. If it is a shock of say, 2%, then interest rates can be expected to fall 2% to keep real rates constant(the value of each dollar is expected to rise 2%), assuming the monetary authority allows this. Otherwise, real interest rates rise, as they did for a time during the financial crisis. Also, consumption and investment fall by 2%. This is ultimately due to sticky wages. <br /><br />Do you agree with that outline? If so, how do we get from interest rate changes being a symptom of changes in expected money supply versus demand to interest rates causing changes in NGDP?Antihttps://www.blogger.com/profile/17677035271760844211noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-54992909775894688062017-01-12T12:57:03.062-08:002017-01-12T12:57:03.062-08:00Is there a published account of staff discussions ...Is there a published account of staff discussions during the Volker days? My recollection is pretty hazy. We were almost all thinking of money growth entering the Volker disinflation and we almost all were talking about setting interest rates after. Also, I recall looking more at GDP growth than unemployment. This was all well announced and well understood and pretty hard for us to reconcile with its having to be a surprise. (I also have no idea about neo-Fisherian models. My guess is the comment has to do with inflation adjustments to nominal rates.)Bob Floodhttps://www.blogger.com/profile/10755214976203287542noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82978416902991398262017-01-12T06:49:40.319-08:002017-01-12T06:49:40.319-08:00There is no "neo-Fisherian model." I wor...There is no "neo-Fisherian model." I work with all kinds of models, including ones that lay out the details of central bank balances sheets, open market operations, and multiple assets, some playing roles as transactions media. Essentially all of these models have neo-Fisherian properties.<br /><br />Empirically, the evidence is on the neo-Fisherian side. Go through my archive and read my posts. The ECB, which you mention, is a good case in point. Sustained low nominal interest rates inevitably lead to sustained low inflation.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-1082361068363961762017-01-12T05:06:10.846-08:002017-01-12T05:06:10.846-08:00Dr. Williamson,
The problem I see with your neo-F...Dr. Williamson,<br /><br />The problem I see with your neo-Fisherian model is the same as that of many New Keynesian and old Keynesian models, and that is a focus on interest rates. Interest rates are a distraction. They are not the price of money. They are the merely the price of credit.<br /><br />The key to understanding the mechanisms of monetary policy, as practiced by the Fed for example, is to focus on the open market operations. The Fed funds rate target is just a target, not the transmission mechanism.<br /><br />If I were to accept your neo-Fisherian hypothesis, I'd have to believe that the Fed could buy up all the assets in the world, without significant increases in inflation. I'm pretty sure prices would start to rise well short of such an absurd ultimate goal.<br /><br />The problem many central banks around the world is having has to do with a lack of credibility regarding the willingness to facilitate sufficiently high inflation for long enough to actually get much traction.<br /><br />The Fed is a good case in point. In September of 2008, the FOMC kept the Fed Funds target at 2% two days after Lehman failed. Especially if you think demand for money increased after this event, then monetary policy effectively tightened. In retrospect, given that NGDP was allowed to fall 6.3% below trend during the Great Recession, the Fed Funds rate should have been set to -4%. <br /><br />But again, -4% is merely a target. Had markets been convinced the Fed would do whatever it took to make sure new money ceeation would meet demand, less actual Fed action than this may have been required.<br /><br />Every central bank currently experiencing ZLB problems lost credibility at some point along the way, and has failed to demonstrate the understanding and resolve to correct the problem.<br /><br />Right off the top of my head, I can recall that the ECB did what neo-Fisherians would recommend in 2011, and raised rates. Immediate market reactions and the double-dip recession that followed don't speak well for that remedy.Antihttps://www.blogger.com/profile/17677035271760844211noreply@blogger.com