tag:blogger.com,1999:blog-2499715909956774229.post4562193451757433974..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Liquidity Premia and the Monetary Policy TrapStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger58125tag:blogger.com,1999:blog-2499715909956774229.post-41634003621801939392013-12-07T03:45:19.923-08:002013-12-07T03:45:19.923-08:00Unrelated to the original comment, except for the ...Unrelated to the original comment, except for the fact that it relates to the same point in the text... You seem to assume here that the discount factor is above, rather than below, 1, since otherwise: B<1 implies 1/B > 1 or 1/B - 1 >0, and so there is inflation at the optimum...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81651810849378088642013-12-05T14:13:34.801-08:002013-12-05T14:13:34.801-08:00Two of your equations contain math errors, I think...Two of your equations contain math errors, I think. Equation (3) should be<br /><br />p(t+1)/p(t) = B<br /><br />Since B<1, we have the Friedman Rule suggesting deflation.<br /><br />(7) also has an error. Real interest rates = nominal - inflation = 0 - (Right side of (6) - 1). So,<br /><br />(7) r = 1-B/(1-L)<br /><br />Still decreasing in L, though. So, not a problem for the argument.<br /><br />Where the argument has a problem: it ignores the equilibration process. (I know I'm not original in pointing this out.) Thinking about equilibration rather than just equilibrium makes the result of (6) unsurprising. L increases => demand for money increases => we buy less stuff to increase money balances => p(t) falls. Assuming expectations of p(t+1) haven't changed, we have higher expected inflation.<br /><br />Which brings up another issue: you don't distinguish between expected variables and actual variables. There can be a difference, and that matters a lot to the logic of what's happening.<br /><br />Once we account for this, if we buy that QE => falling L, then we should say falling L=> we buy more stuff => p(t) rises. So, expected inflation falls, assuming a constant E[p(t+1)]<br /><br />But, if we compare p(t) to p(t-1), we should see inflation from QE, not deflation.<br /><br />An alternative possibility would be that QE => your blog post (or something else) => lower E[p(t+1)] => increased demand for money holding that offsets the falling L, so p(t) doesn't rise.<br /><br />I don't think either of these arguments is actually true, though. Far more intuitive to me to say that we have low inflation and low interest rates because the demand for money increased substantially in the recession (look at velocity - it fell like a rock) as a result of uncertainty. At the same time, the big increase in reserves from QE isn't translating into fast money supply growth - the money multiplier collapsed (perhaps because of interest on excess reserves + a lousy economy). At the same time, the money supply was increasing in a way that absorbed new long-term government debt thanks to Operation Twist. Sure, it's not based on a mathy steady-state equilibrium reasoning - but I very much doubt we're in a steady-state equilibrium.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-79879322367433048812013-12-03T19:28:33.317-08:002013-12-03T19:28:33.317-08:00Not to pick nits, but I think you should learn a b...Not to pick nits, but I think you should learn a better way to embed equations in your posts if you're going to push your point on the basis of a formal mathematical model. May I suggest Latex? There are options already available in blogger, for example:<br /><br />http://www.codecogs.com/latex/integration/blogger/install.php<br /><br />If many people find your model confusing or seem to be missing your point, the fault may lie in your communication strategy.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-56519776519226881792013-12-03T14:45:34.348-08:002013-12-03T14:45:34.348-08:00If you read the next post, and the set of notes th...If you read the next post, and the set of notes that goes with it, you'll see that swaps of money for bonds are irrelevant at the zero lower bound. The effect of QE comes from including long bonds, with long bonds being less useful as collateral. Then swaps of short for long matter. That's in my working paper:<br /><br />http://www.artsci.wustl.edu/~swilliam/papers/qe2.pdfStephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-39152739338568349792013-12-03T10:20:52.802-08:002013-12-03T10:20:52.802-08:00I'm glad you mentioned that. I was thinking th...I'm glad you mentioned that. I was thinking the same thing - this seems like a special case of what Gresham's Law describes. By swapping long-term treasuries, QE can be seen as price-setting of the long-term bonds. The long-term bonds would normally be worth less than short-term bonds or cash, but are now over-valued. This undervalues cash and short-term bonds, inducing hoarding. Hoarded cash effectively appreciates, opposing inflation.<br /><br />I was a Krugman agree-er at first, but I think I've been swayed. I've posted several comments on his and Andolfatto's blog about different narrative viewpoints for seeing why the market may respond to QA this way. Very interesting finding...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-32927644862982143722013-12-02T23:07:29.283-08:002013-12-02T23:07:29.283-08:00Hi Steve & blog readers,
I have a brief questi...Hi Steve & blog readers,<br />I have a brief question about your modeling of QE:<br />Doesn't the Fed exchange bonds for money and hence nothing changes for agents because they don't care which one (bonds or money) they're holding at the ZLB?<br />Hence L remains constant and QE has no effect?<br /><br />Thanks a lot in advance!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-26513431408394586542013-12-02T14:40:45.819-08:002013-12-02T14:40:45.819-08:00No,
(6) p(t+1)/p(t) = B/(1-L)
does not mean if L g...No,<br />(6) p(t+1)/p(t) = B/(1-L)<br />does not mean if L goes up then p(t+1) goes up. It means if L goes up then p(t) goes down. For tomorrow's inflation, the economy becomes deflation today.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-29074233086977302182013-12-02T09:30:03.410-08:002013-12-02T09:30:03.410-08:00I shouldn't say, to avoid being accused of Kru...I shouldn't say, to avoid being accused of Krugman bashing.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7920677280076584692013-12-02T01:53:57.909-08:002013-12-02T01:53:57.909-08:00That's true. But the set of ideas thought to ...That's true. But the set of ideas thought to be gibberish that *were* gibberish is much larger than those that *were not.*<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-68000809159011547552013-12-02T01:51:32.284-08:002013-12-02T01:51:32.284-08:00Williamson, how frequently do you entertain the hy...Williamson, how frequently do you entertain the hypothesis that you're wrong and the rest of the world is not confused?<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-87891820417187307462013-12-01T15:17:01.082-08:002013-12-01T15:17:01.082-08:00They are rather knocking him down because he doesn...They are rather knocking him down because he doesn't know what he is taking about. Doing maths is easy, understanding economics and equilibrium-disequilibrium issues is not:<br /><br />http://krugman.blogs.nytimes.com/2013/11/29/on-the-importance-of-little-arrows-wonkish/Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-85084202254985251612013-12-01T14:50:07.731-08:002013-12-01T14:50:07.731-08:00if its any consolation Prof W, people thought the ...if its any consolation Prof W, people thought the idea that bacteria caused infection was gibberish too.<br />Its amazing how confident people like Krugman and deLong are in their mental modelsAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-17658994279095021582013-12-01T11:13:34.270-08:002013-12-01T11:13:34.270-08:00Steve:
In case you're still alive, my 2 cents...Steve:<br /><br />In case you're still alive, my 2 cents worth:<br />http://andolfatto.blogspot.com/2013/12/is-qe-lowering-rate-of-inflation.html<br />David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-5896923671210541222013-12-01T05:40:20.882-08:002013-12-01T05:40:20.882-08:00They are certainly not useful in this context. If ...They are certainly not useful in this context. If I switched to believing in perfectly flexible prices, I would still have the same problem with this post.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-52546210912224427652013-12-01T03:55:55.030-08:002013-12-01T03:55:55.030-08:00In an exchange you got to give up something for so... In an exchange you got to give up something for something the other person likes. <br /><br /> In all seriousness though your disagreement with Krugman doesn't seem to be on questions of policy necessarily. <br /><br /> If you're advocating fiscal policy to counter the slump he'd be with you there. So what is is about him you don't like-his method?<br /><br />Mike Saxhttps://www.blogger.com/profile/01360689916550576484noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88448454063377016002013-11-30T21:00:00.292-08:002013-11-30T21:00:00.292-08:00The irony is that Krugman ridicules WIlliamson'...The irony is that Krugman ridicules WIlliamson's result as bizarre, because it would be a supply-side problem, which Keynesians dismiss. But Williamson nails it. It is a supply-side problem, because interest on reserves locks up excess reserves at the Fed and the GSE's have a monopoly on reserves. Most banks are reserves supply-limited and that is why inflation is subdued. Look at loan-to deposit ratios!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-29705195566196396182013-11-30T19:51:15.280-08:002013-11-30T19:51:15.280-08:00What's wrong with Krugman bashing? Sometimes t...What's wrong with Krugman bashing? Sometimes the man needs a good bash.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58461295369223795772013-11-30T17:28:17.990-08:002013-11-30T17:28:17.990-08:00 Depends on how much you want it Stephen. Would... Depends on how much you want it Stephen. Would you be willing to take a hiatus on Krugman bashing in exchange for banning the words saltwater and freshwater?Mike Saxhttps://www.blogger.com/profile/01360689916550576484noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7681176862579381142013-11-30T16:09:44.247-08:002013-11-30T16:09:44.247-08:00"...reputation as a freshwater economist.&quo..."...reputation as a freshwater economist."<br /><br />Here's a proposal: Heretofore, we should ban the use of the words "saltwater" and "freshwater." Just not useful.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-8343915463811714112013-11-30T15:03:17.479-08:002013-11-30T15:03:17.479-08:00Nick, I just tried to leave a comment on your post... Nick, I just tried to leave a comment on your post and it also disappeared. <br /><br /> So I'll just live my point here then. David Andolfatto makes an interesting point:<br /><br /> "He is saying that *if* the problem is an asset shortage, then there's really not much the Fed can do about it. Maybe tinker around a bit with asset swaps (an effect that may have some surprising implications for inflation). But the real solution is a short term increase in Treasury debt -- something beyond the power of the Fed to accomplish. This is a policy recommendation that I'm sure Krugman and DeLong would favor. The fact that they (and you, and Nick, and most others) did not catch it demonstrates that you nobody really bothered reading Steve's papers before joyfully portraying him as an ignoramus."<br /><br /> http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/11/why-inflation-will-not-fall-off-a-bottomless-cliff.html?cid=6a00d83451688169e2019b01ec3048970d#comment-form<br /><br /> That is interesting. The implications of SW's piece are much less anti-Krugman than they are anti Sumner. <br /><br /> http://diaryofarepublicanhater.blogspot.com/2013/11/stephen-williamson-on-zlb-interest.html<br />After all he's arguing that monetary policy is pretty much powerless at this point-if anything he sounds more pessimistic than Krugman himself even. <br /><br />He's only real disagreement with Krugman here is on what the liquidity trap is and why we haven't had deflation. <br /><br />In this sense it makes much more sense for Nick to bag SW than Krugman and Delong. That is if you forget how much time SW has spent razzing Krugman personally over the last few years. <br /><br />Then again, it may be that Delong and Krugman are knocking SW because of his reputation as a freshwater economist. <br /><br />There's been a lot of discussion on the saltwater-freshwater divide lately. <br /><br />http://qz.com/150779/the-shakeup-at-the-minneapolis-fed-is-a-battle-for-the-soul-of-macroeconomics-again/<br /> Mike Saxhttps://www.blogger.com/profile/01360689916550576484noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-49772526160111383792013-11-30T09:44:32.218-08:002013-11-30T09:44:32.218-08:00Steve: I didn't delete it. We do have spam fil...Steve: I didn't delete it. We do have spam filter problems, but I just searched 55 pages and couldn't find it in the filter. Apologies.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-62582432520349290722013-11-30T05:33:32.900-08:002013-11-30T05:33:32.900-08:00A great example of how liquidity premia drive infl...A great example of how liquidity premia drive inflation via velocity is the Gresham effect. If a currency is undervalued because of a price fix, it will be hoarded. If another currency, in exchange with the first, is over-valued, it will change hands more rapidly which will inflate prices denominated in it.<br /><br />So if you want the Dollar to change hands more rapidly, you want it be more over-valued....in other words, you want the interest on reserves lower, not higher.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-45979969004149835662013-11-29T15:10:34.471-08:002013-11-29T15:10:34.471-08:00"In this case, we could think of the implicit..."In this case, we could think of the implicit liquidity yield coming from at least two sources"<br /><br />Sounds to me like you're describing a safety premium, or yield to safety, not a liquidity premium, or liquidity yield. Anyways, I'll leave off. Maybe I'll figure you out in subsequent posts.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-84121475712767882032013-11-29T14:27:55.252-08:002013-11-29T14:27:55.252-08:00You're easily convinced, apparently. I'm w...You're easily convinced, apparently. I'm working on a response. I'll flesh this out for you. Nothing to do with stability.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-75749303002020207342013-11-29T13:47:15.529-08:002013-11-29T13:47:15.529-08:00Somehow the gibberish from Rowe, Delong and Krugma...Somehow the gibberish from Rowe, Delong and Krugman strikes me as more compelling than the gibberish here. They seem to think you're doing comparative statics on an unstable equilibrium.Michael Robertshttps://www.blogger.com/profile/16455035518968529794noreply@blogger.com