tag:blogger.com,1999:blog-2499715909956774229.post5718960553380931248..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Levine on KeynesStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger80125tag:blogger.com,1999:blog-2499715909956774229.post-36671754304478260692015-03-22T06:24:31.486-07:002015-03-22T06:24:31.486-07:00Well, Wren-Lewis missed the point, didn't he? ...Well, Wren-Lewis missed the point, didn't he? There actually is no auctioneer in a competitive equilibrium model. The Walrasian auctioneer is just part of a story someone thought up about how you could actually get to an equilibrium. In a competitive equilibrium, everyone is optimizing, and markets clear. That's all there is to it. Equilibrium is pretty fundamental to all of economics, and if you want to throw that out, we would have to all go find some other line of work.<br /><br />A basic NK model makes a small departure from Prescott's RBC model. NK has monopolistic competitors in goods markets. They indeed set prices, and for some of them it can be infinitely costly to do so. But otherwise all the markets are competitive, including the bond market. So I guess Wren-Lewis would think of this as a model with a Walrasian auctioneer and a Calvo fairy.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-6317708372027407182015-03-22T06:15:58.917-07:002015-03-22T06:15:58.917-07:00Levine wrote down a little example, nothing more. ...Levine wrote down a little example, nothing more. If we want to think about asset shortages, we need to do more work. That's what some of my research is about. Though definitely you don't solve the problem by "printing money." Actually there are cases where, if "printing money" means a standard swap of reserves for government bonds, that's a bad thing to do.<br /><br />The point of Levine's example, as I would summarize it, is that Keynesian economics isn't so simple, if you're serious about it. It's hard to see why it leads to the simple fiscal policy solutions some people talk about.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81485127646886165642015-03-21T21:50:55.858-07:002015-03-21T21:50:55.858-07:00I am somehow confused here: you say that you agree...I am somehow confused here: you say that you agree with Delong that shortage of safe assets causes recessions. By walras's law framework (that Delong mentioned), that means deficient demand for goods and other assets. In such a case, government printing money can work to solve some problems, say Brad Delong and Nick Rowe. Given your blog posts, I do see that you argue that purchasing government bonds may actually be worsening the problem and so on, but what Levine seems to argue here doesn't seem to go that well with what I understand as your economics understanding. <br /><br />After all, what he criticizes is not just Keynes's General Theory (that's not even a real issue anyway) - Levine criticizes Keynesian economics practiced - fiscal stimulus, etc. So if your praise of Levine's criticism is about criticism of General Theory, OK. But I don't get why you would support Levine's criticism. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44309951430816510732015-03-21T21:12:02.418-07:002015-03-21T21:12:02.418-07:00http://mainlymacro.blogspot.com/2015/03/is-walrasi...http://mainlymacro.blogspot.com/2015/03/is-walrasian-auctioneer-microfounded.html<br /><br />Well, according to Simon Wren-Lewis, New Keynesians are doing much better than RBC people in 80's because RBC price taking isn't microfounded. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-74058283051363478212015-03-20T06:07:41.797-07:002015-03-20T06:07:41.797-07:00"...because households have a negative wealth..."...because households have a negative wealth shock..."<br /><br />Which is what, exactly? Why does wealth go down?<br /><br />"Heathcote and Perri have a recent paper (Wealth and Volatility) with sunspot equilibria..."<br /><br />Yes, we've known about sunspot equilibria for some time. Levine mentions multiple equilibria, but seems dismissive that this provides a role for policy. Currently Keynesians don't seem interested in the idea. Why not?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13336035858177160932015-03-19T19:11:29.148-07:002015-03-19T19:11:29.148-07:00AD could shift to the left because households have...AD could shift to the left because households have a negative wealth shock and so they cut back on spending. Sufi and Mian find evidence of that. Heathcote and Perri have a recent paper (Wealth and Volatility) with sunspot equilibria. Or credit from banks may go down because there is higher uncertainty about the possibility of loans being repaid.<br /><br />The way DKL sets it up, it is clear that there is not going to be a free lunch because the phone guy now likes leisure more than before. Yes, DKL calls the phone guy stupid, but those are just his preferences which just happened to change. As economists, what else can we say?<br /><br />The whole DKL’s post has quite a few of these gems such as “So what if the reason the phone guy stopped producing phones and buying tattoos was because he wanted to spend his time creating the "next great thing" that will lead to world peace and prosperity in a few years time?” And indeed states like Nevada and Michigan have become tech hubs since 2007, right? Another nice one is thinking of fiscal policy as forcing people to work (or sending them to the front) rather than investing in the not so healthy U.S. infrastructure.<br /><br />Again, my point is not that keynesians are right, just that DKL does not even start engaging with them. Which is similar to Lucas laughing at the idea of multipliers. There are no conditions under which fiscal policy can ameliorate the cycle. This is held as a sacred belief. I think this has more to do, rather than with economic theory, with the view that some economists have of the role of government. And with the view that these economists have of other economists who are more favorable to fiscal policy. It is more a sociological than a scholarly divide. But this is just my speculation and would require further arguments.Carlnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-78483486071385066452015-03-19T18:59:55.399-07:002015-03-19T18:59:55.399-07:00"abandoned research program by Stiglitz&G..."abandoned research program by Stiglitz&Greenwald..."<br /><br />That's not abandoned at all. You could say there is some of that in a lot of the work on credit markets and monetary economics that we do.<br /><br />"And in terms of policy recommendations nothing, except for the expectation stuff, has changed since 80 years."<br /><br />I wasn't around 80 years ago. But I think the FOMC discussion, for example, is much more rooted in science and academic work than it was in 1935. Holy cow.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-74490372095292662522015-03-19T17:39:32.248-07:002015-03-19T17:39:32.248-07:00"Arguments by authority never end well...&quo..."Arguments by authority never end well..."<br /><br />Never? You would probably say Google maps is an authority, I think. Do they always lead you astray?<br /><br />"David Levine probably fell asleep..."<br /><br />You're intuiting this, or what?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-43710764688059751112015-03-19T16:19:04.148-07:002015-03-19T16:19:04.148-07:00I read the book, i suggest you read chapter 24 and...I read the book, i suggest you read chapter 24 and tell me if that does not look like the Venezuelan government. Most papers I read about fiscal multipliers, and actually found something, also show that most significant effects go away after you control for other exogenous shocks, most notably monetary policy. I don't deny AD can be managed, I just don't think "liquidity preference" explains AD shortfalls, and more importantly, that fical spending can solve it. If you care to read other authors of the time you will see that people were already concerned about inequality and pushing for fiscal spending, before keynes wrote about it, so, his ideas were far from original, they actually justified actions that a lot o people wanted done anyway. This hardly constitutes a "general theory" a name that his ideas don't deserve. Anonymoushttps://www.blogger.com/profile/01666016402842949585noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-43859047865627519462015-03-19T12:37:54.564-07:002015-03-19T12:37:54.564-07:00And I'm wondering, once you kill all the heret...And I'm wondering, once you kill all the heretics, what happens in your lovely democracy when another heretic comes along who wants to change things?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-85719579424107131272015-03-19T12:36:09.750-07:002015-03-19T12:36:09.750-07:00Interesting democracy you have there.Interesting democracy you have there.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-24747621462574459482015-03-19T12:35:27.296-07:002015-03-19T12:35:27.296-07:00"Unemployment arises because of a preference ..."Unemployment arises because of a preference shock."<br /><br />Keynesians are always talking about demand shocks. How would you model that?<br /><br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-64040014903615498832015-03-19T11:07:34.823-07:002015-03-19T11:07:34.823-07:00Arguments by authority never end well, Stephen. Da...Arguments by authority never end well, Stephen. David Levine probably fell asleep during Samuelson and Solow's classes...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-85224418346441459502015-03-19T10:11:19.724-07:002015-03-19T10:11:19.724-07:00p.s.: I should have posted my post below here as i...p.s.: I should have posted my post below here as it was written as a response to your comment. I wrongly posted it as a separate comment.Carlnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7364451049284313802015-03-19T10:08:05.369-07:002015-03-19T10:08:05.369-07:00The example chosen is telling. Unemployment arises...The example chosen is telling. Unemployment arises because of a preference shock.* So obviously, it is just an unfortunate event. After all, unemployment is not a goal of itself as there are always some who are voluntarily unemployed (actually in DKL’s case, out of the labor force but never mind). With this set-up, obviously there is no free-lunch. If you want to make the fate of the “involuntarily unemployed” (I love the quotation marks here, clearly these are fictional people) better, then you have to stick it to someone else.<br /><br />DKL then discusses coordination failures and notes that monetary policy does not work either. No discussion is made of fiscal policy. Meanwhile, in the real world, when the Great Recession came, states slashed their operating budgets and laid off workers, engaging in pro-cyclical fiscal policy. I take it from DKL that this had no negative effect on output. After all, slashing budgets freed resources that should have shown up elsewhere. Yes, some may be worse off and others better off, but we were on the frontier before and we remained on the frontier later. That this may aggravated the coordination failure does not seem to be even a logical possibility according to DKL. It is kind of ruled out a priori.<br /><br />*A side note here. Usually if you try to explain economic events with something strange happening to preferences, you tend to be mocked. And that's one of the usual objections levied against the so-called behavioral people. If you change the utility function enough, the argument goes, you can explain almost anything. But here we are supposed to take seriously that one of the best toy model to explain unemployment is based on preferences. Interesting.Carlnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-63903966189660099962015-03-19T09:41:13.061-07:002015-03-19T09:41:13.061-07:00A few people will lose their heads, but at the end...A few people will lose their heads, but at the end of it will be the emancipation and democratisation of the discipline.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-62483468470101758192015-03-19T09:19:55.062-07:002015-03-19T09:19:55.062-07:00"Once we re-liberate Macro from Micro..."..."Once we re-liberate Macro from Micro..."<br /><br />Who is the "we," and what do you have planned? Does this involve the guillotine and a reign of terror, or what?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-91240172581291886682015-03-19T09:17:52.621-07:002015-03-19T09:17:52.621-07:00"Keynesians believes that an increase in AD w..."Keynesians believes that an increase in AD will increase output when unemployment is above Nairu, not under any conditions. By the same logic, if u < Nairu, one should decrease AD."<br /><br />So you have a belief, and you say some words. Levine writes down an explicit little model to try to give those words some content. There is indeed something we can recognize as "full employment," there is a multiplier. I'm not sure how you're separating demand from supply. Levine could have introduced his "shock" at any stage in the chain, and the whole thing would break down. For example, as I told another commenter, if the last person in the chain suffers a "demand shock," i.e. they don't like their consumption good, to the point where it's not worthwhile to trade it for a phone, we get the same result. Everyone's unemployed.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-22574850974272550042015-03-19T08:54:05.724-07:002015-03-19T08:54:05.724-07:00Once we re-liberate Macro from Micro, understandin...Once we re-liberate Macro from Micro, understanding that they are as distinct as Psychology and Sociology, and thereby not get tangled up in aggregation issues and Say's Law type fallacies - we can start returning to progress and relevance in Macro-economic theory.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-75502214756038296112015-03-19T08:12:21.086-07:002015-03-19T08:12:21.086-07:00From DKL: "The thing is that the Keynesian pr...From DKL: "The thing is that the Keynesian prescription - spend more and don't worry about the bills coming due - sounds a bit too good to be true, almost like a perpetual motion machine."<br /><br />Come on, one could stop reading there. Keynesians believes that an increase in AD will increase output when unemployment is above Nairu, not under any conditions. By the same logic, if u < Nairu, one should decrease AD.<br /><br />For DKL, it is all about supply. If you give a phone to somebody you have to take it from somebody else. You are always on the frontier of the PPF. He does not even consider you could be within it for whatever reason (sticky prices frictions, animal spirits a la Farmer, whatever).<br /><br />I am not saying that keynesians are right, just saying that DKL fails to even engage with their argument. And supply-side people are left to explain how slumps such as the Great Recession could even occur. All of a sudden output goes down: what we were able to produce yesterday, we are not even close to be able to produce today. The PPF suddenly shifted inward. Did they bomb our cities?<br />Carlnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-20033119863579984102015-03-19T07:15:09.099-07:002015-03-19T07:15:09.099-07:00The problem with IS-LM is not its predictions but ...The problem with IS-LM is not its predictions but its mechanics, how it arrives at those predictions. And the mechanics matter for two reasons: 1) Because the goal of policy-makers should be to enhance social welfare, not to maximize employment/output. <br /><br />Absolutely not. And this one of many reasons we need a political science education. It is up to the elected population in a democracy to determine an elected government's macro-economic policy agenda. It is not to up to you or policy authorities to decide what "maximises social welfare". The elected government's mandate may be to increase employment and in fact in many countries, that is precisely what it is at this very moment. To show how to get that the ISLM does that as effectively as any other model, and more simply. If you want to bring in discussions about social welfare, you are going to have to make assumptions that could involve the aggregation of individual utility functions (assuming anyway we know what those actually are), even when it is not being asked to be done, and you are unnecessarily making the problem more complicated, not clearing it up.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-14820611052660813372015-03-19T05:07:52.634-07:002015-03-19T05:07:52.634-07:00"All he did was to put them together and call..."All he did was to put them together and call it a "general theory"."<br /><br />Read the book. The title is a reference to Einstein. In physics Newtonian mechanics is the appropriate model most of the times, unless you are e.g. close to the velocity of light. Same in econ, the classical model is appropriate most of the times, unless you are in a recession.<br /><br />"It does not matter to keynesians in the past or now that observed fiscal multipliers are virtually ZERO."<br />Nope. The last IMF paper I read on the issue estimated a multiplier above 1.<br /><br />"As John Cochrane and others put it simply, keynesians of today are 80 years behind in terms of ideas, and at least 40 years after these very ideas failed in practice."<br />There are indeed some folks who are 80 years behind. It's the folks who deny that demand exists.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-33450122616635822282015-03-19T05:03:50.934-07:002015-03-19T05:03:50.934-07:00"In the end you are actually distracted from ..."In the end you are actually distracted from properly looking at how a real world target system actually works which is to be found by concentrating on everything "knowable" - looking at as much evidence as you can, even if this does not lead to a neat, tidy or even systematic story."<br /><br />Totally agree. Now of course we should nut shun complex models ... but what is the use of complex DSGE without finance/money in them? Sure, AFTER the crisis everybody tacks finance upon DSGE but the point is that the New Keynesian focus upon imperfect competition + menu costs (resp. Calvo pricing) has been utterly wrong.<br />It is no coincidence that it were people like Roubini, i.e. guys who did NOT have a "unified theory" which is totally disconnected with the real world, who predicted the financial crisis.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-51918725034587711452015-03-19T04:59:14.995-07:002015-03-19T04:59:14.995-07:00"For example, if the problem is a shortage of..."For example, if the problem is a shortage of safe assets, a temporary tax cut financed by issuing short-term government bonds is potentially a more effective policy than increasing government spending, though the latter would have a similar impact."<br /><br />First of all, I don't disagree that IS-LM is basic model which lacks many features. But I claim that it is a reduced form of many more complex models just like ordinary supply and demand curved are a reduced form of a household/Firm optimization problem. If you read about increased milk demand in China you can solve the complex micro model in half an hour or you can just quickly sketch a demand and supply curve and be fairly sure that the demand shock will lead to an increased price and an increased quantity.<br />Of course a Woodford paper on the liquidity trap is theoretically superior to sketching IS-LM but if one does not care about economics as science but economics as engineering IS-LM suffices and all the New Keynesian literature does actually more harm than good (the bonds and money market are far clearer in IS-LM than in Woodfordian stuff).<br /><br />Now about shortage of safe assets, right now is not the cause of the problem but rather a symptom/ intermediate step:<br /><br />When we have a supply-side recession (I guess most recessions in this century will be supply-side due to resource shortages) demand side management is obviously poison.<br /><br />When we have a normal recession we let monetary policy do the trick<br /><br />When we have a balance sheet recession and a liquidity trap, i.e. interest rates are close to zero and a lot of private player gotta deleverage because an asset bubble burst, conventional monetary policy becomes ineffective (the CB can swap its safe asset money with risky assets of private players). Private Players deleverage, savings increase and we arrive at the situation you describe, a shortage of safe assets. QE as well as government spending of any kind do increase the average quality of the risk pool of private players so they should become more willing to tolerate risk. But this is just a side effect, the main goal is to jumpstart demand. You cannot do this via a tax reduction as private players save part of that very tax reduction so you gotta temporarily increase government spending.<br /><br />Please note that I would argue against deficit spending if we were not in a liquidity trap. There might be some half-wit Post-Keynesians (Richard Koo has provided great insights about balance sheet recessions but his tirades against the use of monetary policy are braindead) who think that fiscal policy should always be used and there might some some half-wit Neoclassicals who think that deficit spending should never ever be used ... but all the non-extremist economists who are less guided by politics and ideology and more by technical stuff first take a look at what kind of recession we are in before they provide solutions.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-66186481669870164652015-03-19T00:07:27.794-07:002015-03-19T00:07:27.794-07:00"Why do these dinosaurs like Krugman and de L..."Why do these dinosaurs like Krugman and de Long keep wanting to regress to ISLM ?"<br /><br />You could write a book about that."<br /><br />I guess his reasoning basically is that all models are going to be totally inadequate depictions of how the real world target system actually works. So if one simple wrong model gives exactly the same result as the complex wrong one, you go with the simple one. Efforts to more properly replicate real world target systems with a model lead to more complex models, or make existing models more complicated, and as one commentator has said earlier in relation to your comment on search models, end up as "nonsense on stilts," In the end you are actually distracted from properly looking at how a real world target system actually works which is to be found by concentrating on everything "knowable" - looking at as much evidence as you can, even if this does not lead to a neat, tidy or even systematic story.<br /><br />Anonymousnoreply@blogger.com