tag:blogger.com,1999:blog-2499715909956774229.post4305009823527617330..comments2024-03-09T02:22:57.289-08:00Comments on Stephen Williamson: New Monetarist Economics: Central Banking by Process of EliminationStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger21125tag:blogger.com,1999:blog-2499715909956774229.post-44381143857841953082016-02-04T19:27:51.156-08:002016-02-04T19:27:51.156-08:00Maybe they should have a separate "red team&q...Maybe they should have a separate "red team" that gets to see everything the blue team is doing (policy, internal forecasts), but it's the red team that publishes official forecasts to the public. Red team is evaluated on accuracy only. And they share their models with blue team (which may have it's own models). Blue team is graded on effectiveness in hitting their targets only.<br /><br />I don't know: I'm just making stuff up. Seems like an institutional problem though. If blue team keeps failing, but red team shines, they might want to start adopting red team's models. If blue team does well, but red team's forecasts suck, then red team might want to adopt blue team's models. <br /><br />Of course both teams could suck.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-54098802177232519352016-02-04T18:14:51.942-08:002016-02-04T18:14:51.942-08:00Well, just in case, I thought I should go on recor...Well, just in case, I thought I should <a href="http://banking-discussion.blogspot.com/p/toms-super-awesome-macro-theory.html" rel="nofollow">go on record now</a>.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-12366695178837262642016-02-04T17:24:41.141-08:002016-02-04T17:24:41.141-08:00The problem isn't a standard one of lack of fo...The problem isn't a standard one of lack of forecasting ability. In this case, the institution is forecasting something that it is supposed to have control over. The Riksbank has a 2% inflation target (though it's clearly concerned with other things too), so it always predicts that inflation will go back to the target (sometimes with some overshooting). Therefore, the conclusion is that the institution doesn't know how to control the thing it's supposed to control.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58556250523425001592016-02-04T16:35:12.949-08:002016-02-04T16:35:12.949-08:00Stephen, check out this plot of the many failed Ri...Stephen, check out this plot of the many failed Riksbank forecasts (source: Nordea Markets and Macrobond):<br /><a href="http://overthepeak.com/wordpress/wp-content/uploads/2015/06/32.jpg" rel="nofollow">http://overthepeak.com/wordpress/wp-content/uploads/2015/06/32.jpg</a><br />Why doesn't some notable economist out there put together an accurate forecast and rub the Riksbanks' repeated forecasting failures in their face? Even your simple forecast you describe above (a flat line) might do the trick! Once they rack up another 50 complete failures won't somebody start asking questions?<br /><br />It seems to me the forecasting "market" is DYING for a better product.<br /><br />And here's another <a href="https://4.bp.blogspot.com/-bhZpaQS0Bcs/VrPhhg3GbCI/AAAAAAAAIvQ/qUmrC6W8tNo/s1600/wrong.png" rel="nofollow">dozen embarrassing failures</a> for the BOE (source BOE), and another <a href="https://3.bp.blogspot.com/-i6u7werCHmg/VrPhhuAd3OI/AAAAAAAAIvM/Od-sn0gVp4c/s1600/wsjpic.jpg" rel="nofollow">three sets from three more central banks.</a>Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-5099621338299189152016-02-04T10:06:18.715-08:002016-02-04T10:06:18.715-08:00Turns out he just updated Switzerland, which you c...Turns out he just updated <a href="http://informationtransfereconomics.blogspot.com/2016/02/another-win-for-it-model-switzerland.html" rel="nofollow">Switzerland</a>, which you cover here.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59231414990102666792016-02-03T17:36:05.669-08:002016-02-03T17:36:05.669-08:00Thanks for the information Stephen.
"inflati...Thanks for the information Stephen.<br /><br />"inflation at every future date is the same as it is today would have been quite accurate for Sweden"<br /><br />Lol, yes. In fact the author of that trend model above compares his forecasts to several others, including just a horizontal line (which does pretty well in the near term). He also does several other countries. It might take a decade or more to see a significant difference, but if he calibrates his ~3 parameters (or whatever it is: it's not many) to data, say from 1960 to 1990, the out of sample results from 1990 till today fit amazingly well.<br /><br />I'd love to find more people doing the same kind of thing, especially over several decades. For the sake of comparison.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58824198865229670102016-02-03T13:16:20.585-08:002016-02-03T13:16:20.585-08:00"your favorite neo-Fisher model"
Same c..."your favorite neo-Fisher model"<br /><br />Same confusion as eyesoars. All standard models that macroeconomists work with have neo-Fisherian properties. But a lot of central bank models don't have those properties. In some cases - for example the FRB/US model - they're some variant of large-scale econometric models developed in the 1960s. Most of those don't even have some standard properties we require of our theory - e.g. the neutrality of money in the long run. Further, when used for forecasting, the model isn't doing much work other than making sure accounting identities hold - the add factors of the forecasters are doing the heavy lifting.<br /><br />Now, back to forecasting. Forecasting inflation is notoriously difficult. You might call this cheating, as I'm doing this ex post, but a naive forecast that says inflation at every future date is the same as it is today would have been quite accurate for Sweden - forecasting inflation today as of early 2014 - than the Riksbank's forecast.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-40055321658807902462016-02-03T10:19:30.690-08:002016-02-03T10:19:30.690-08:00I'd be interesting to see the results (fit &am...I'd be interesting to see the results (fit & forecasts) from your favorite neo-Fisher model. Would your favorite neo-Fisher model also model changes of the trend vs time? "Econometrics" and "revert to trend" makes me think of a VAR model. <br /><br />For example, <a href="http://1.bp.blogspot.com/-Ug6qEtnQT38/Vq_yyp5LcmI/AAAAAAAAIt8/1CcXM-ZYOBc/s1600/pce%2B2.png" rel="nofollow">here's a simple low order trend model</a> (theory <a href="http://arxiv.org/abs/1510.02435" rel="nofollow">here</a>) showing its fit to old data and its forecast as compared to the NY Fed DSGE model forecast.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-76968180151817879272016-02-02T20:43:24.088-08:002016-02-02T20:43:24.088-08:00"I'd love to see how you do against the S..."I'd love to see how you do against the Swedish forecasts (and against reality of course)."<br /><br />If I couldn't do that, my econometrics teachers would be very disappointed. These models are boilerplate. Everything reverts to trend, with a bit of Phillips curve thrown in (and the Phillips curve is part of what's throwing them off). The confidence intervals you can't take seriously.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-15735787893306582932016-02-02T18:48:45.603-08:002016-02-02T18:48:45.603-08:00Stephen, do you have an inflation model that can p...Stephen, do you have an inflation model that can produce forecasts with those confidence interval bands? I'd love to see how you do against the Swedish forecasts (and against reality of course).Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-60212284372150844802016-02-02T13:10:44.390-08:002016-02-02T13:10:44.390-08:00"In the long run, if the central bank increas..."In the long run, if the central bank increases the inflation target..."<br />No, take the model, increase the inflation target, and I think it's correct to say that the nominal interest rate will be higher in all states of the world in their model. That's the sense in which their model is Fisherian.<br /><br />The experiment in which the nominal interest rate goes up once and for all is just that - an experiment to illustrate an idea. The fact that Woodford can construct an example in which this can't be an equilibrium doesn't tell me much. How come central banks manage to peg nominal interest rates for extended periods of time with no problem?<br /><br />"It is true in real models but as Kocherlakota showed, those models are not robust."<br /><br />You bought that idea?<br /><br />"you're making claims about the short run dynamics..."<br /><br />Supported by standard models and data.<br /><br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-70601027612419074162016-02-02T11:55:59.067-08:002016-02-02T11:55:59.067-08:00Well, you're doing comparative statics between...Well, you're doing comparative statics between different equilibria. In the long run, if the central bank increases the inflation target, then yes the nominal interest rate will be higher in the long run. This may well be true in the short run.<br /><br />However, does this mean that the reverse causality holds? No. It is true in real models but as Kocherlakota showed, those models are not robust. It is also true in NK models if agents have rational expectations and if they all expect the central bank to peg the nominal interest rate forever. As Garcia-Schmidt Woodford showed, this is not robust either. Furthermore do you really believe that agents would expect the central bank to peg the nominal interest rate forever? Is this what central banks are doing?<br /><br />Everyone agrees that the fisher effect has to hold in the long run, but you're making claims about the short run dynamics.End.noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-86514656275615648692016-02-02T11:13:03.049-08:002016-02-02T11:13:03.049-08:00"What about Garcia-Smchmidt and Woodford...&q..."What about Garcia-Smchmidt and Woodford..."<br /><br />I said "standard" macro models. That's got a learning mechanism that kills some equilibria. But it's also true in that model that, if the central banker increases the inflation target, that will increase the nominal interest rate one-for-one in all states of the world. Hard to get away from the Fisher effect, don't you think?<br /><br />"If you assume that the real interest rate is fixed..."<br /><br />Who is assuming that? I said "standard," which includes models in which the real interest rate is not fixed.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44189548323399226442016-02-02T08:59:00.440-08:002016-02-02T08:59:00.440-08:00"As far as I've been able to determine, a..."As far as I've been able to determine, all standard macro models are neo-Fisherian."<br /><br />What about Garcia-Smchmidt and Woodford NBER's paper (http://www.nber.org/papers/w21614)? The Neo-fisherian results in the New Keynesian model are a pure disturbance due to rational expectations.<br /><br />If you assume that the real interest rate is fixed, then your model must be Neo-fisherian. But in this case, why would you care about monetary policy anyway? <br /><br />End.noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-53875349765150582152016-02-01T19:28:29.243-08:002016-02-01T19:28:29.243-08:00The Fisher effect isn't everything. There'...The Fisher effect isn't everything. There's also a short-run liquidity effect. When the nominal rate goes down, in the short run the real rate goes down too. So, in the short run, the Fisher effect and liquidity effect work in opposite directions with regard to inflation. But you would need a very large liquidity effect - more than one-for-one - for the inflation rate to go up when the nominal interest rate goes down.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55975546143575942842016-02-01T18:01:45.349-08:002016-02-01T18:01:45.349-08:00"I think most macroeconomists would agree tha..."I think most macroeconomists would agree that there is a countercyclical role for monetary policy - the central bank should lower nominal interest rates in a downturn."<br /><br /><br />How does this work with the fisher effect? Wouldn't lowering rates cause lower inflation expectations which means shifting less of the consumption from the future to present?<br />Dannoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-72582159960823836062016-02-01T12:01:48.344-08:002016-02-01T12:01:48.344-08:00I should add again that there is no single "n...I should add again that there is no single "neo-Fisherian model." As far as I've been able to determine, all standard macro models are neo-Fisherian.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-47373273564620189882016-02-01T11:59:33.967-08:002016-02-01T11:59:33.967-08:00"...but is there any reason to believe raisin..."...but is there any reason to believe raising the interest rates (per the not-so-implicit neo-Fisherian model) will work? If so (examples, please? Line forms on the right...) why no description of the model and how it would affect the economy?"<br /><br />You're not paying attention. Follow the links in the post, and if that doesn't satisfy you, search my archive.<br /><br />"...the actual preferred and prescribed solution is to increase government spending."<br /><br />If the problem is that inflation is too low, we usually think it's the central bank's job to increase it.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-29957751303704766272016-02-01T11:36:12.472-08:002016-02-01T11:36:12.472-08:00Seems to me that the emperor is wearing no clothes...Seems to me that the emperor is wearing no clothes. Certainly lowering interest rates has not worked, but is there any reason to believe raising the interest rates (per the not-so-implicit neo-Fisherian model) will work? If so (examples, please? Line forms on the right...) why no description of the model and how it would affect the economy?<br /><br />The actual solution, per the denigrated Keynesian theories, is that lowering the interest rate is a non-preferred solution: the actual preferred and prescribed solution is to increase government spending. Politically, however, that doesn't seem to be possible. Indeed, government spending, particularly in the U.S., has shrunk as a fraction of the economy (popular belief to the contrary).eyesoarshttps://www.blogger.com/profile/17518648372753650065noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-27532573125499746932016-02-01T06:10:35.475-08:002016-02-01T06:10:35.475-08:00"Is there a single example in an advanced eco..."Is there a single example in an advanced economy where Zirp & QE have actually worked and increased inflation?"<br /><br />Not to my knowledge.<br /><br />"...mainstream economic orthodoxy..."<br /><br />In fact, one can readily understand what is going on with orthodox economics. It's orthodox central banking practice that goes awry.<br /><br />"How would neo-Fisherite ideas be implemented in practise?"<br /><br />I think most macroeconomists would agree that there is a countercyclical role for monetary policy - the central bank should lower nominal interest rates in a downturn. But, for inflation control, it's very important to be mindful of the Fisher effect, under which lower nominal interest rates cause lower inflation. And the effects of monetary policy on real activity - employment and real GDP - are temporary, but the Fisher effect is permanent. In current circumstances, for many central banks in the world, the only solution to the low inflation problem is to increase nominal interest rates.<br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-56166744099235463242016-02-01T03:38:45.556-08:002016-02-01T03:38:45.556-08:00Very interesting. Is there a single example in an ...Very interesting. Is there a single example in an advanced economy where Zirp & QE have actually worked and increased inflation?<br /><br />Wondering how long mainstream economic orthodoxy will hold if inflation stays near zero?<br /><br />Presumably the solution, to get inflation to target along with raising interest rates is looser fiscal policy. Lower or even Negative income tax rates & higher spending at least temporarily?<br /><br />How would neo-Fisherite ideas be implemented in practise?<br /><br />Would the Fed just hike regardless of the stage of cycle or wait until the next early stage growth upswing?<br /><br /> Anonymousnoreply@blogger.com