tag:blogger.com,1999:blog-2499715909956774229.post8060212672692842103..comments2024-03-09T02:22:57.289-08:00Comments on Stephen Williamson: New Monetarist Economics: TwistingStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger28125tag:blogger.com,1999:blog-2499715909956774229.post-27439993997006151252011-10-22T07:28:17.690-07:002011-10-22T07:28:17.690-07:00wrong again. Fed could indeed target long term rat...wrong again. Fed could indeed target long term rates if it chose to (I worked on a trading desk).Fed already targets the funds rate. Just the fact that the Fed annnounced such a target would do most of the work. Even though it could, its not necessarily a good idea. Targeting nominal long terms rates presents a whole host of issues such as the fact that much corporate and MBS and other assets are indexed off the 5 & 10 year treasury. The Fed and other market participants would lose a significant amount of information on financial conditions, inflation and the state of the economy by targeting the 10 yr rate. I have mixed feelings about it - it might be ok in the short term but then how do you exit this policy? <br /><br />I do agree that the maturity swap exercise is not going to do much. Anyway, low rates are not really the problem right now.dwbnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-86359379878975976942011-10-18T08:30:15.086-07:002011-10-18T08:30:15.086-07:00Benjamin is a spammer. Or perhaps a troll - his m...Benjamin is a spammer. Or perhaps a troll - his motivation is not clear.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-16171288243601465932011-10-18T06:42:49.101-07:002011-10-18T06:42:49.101-07:00Benjamin,
Do you actually think anyone is paying ...Benjamin,<br /><br />Do you actually think anyone is paying attention to you? Seriously, dude, go push the crackpipe somewhere else.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-89708443054091095382011-10-17T21:22:34.056-07:002011-10-17T21:22:34.056-07:00http://www.scribd.com/doc/69165529/Goldman-Sachs-R...http://www.scribd.com/doc/69165529/Goldman-Sachs-Recommends-Fed-Boost-the-Economy<br /><br /><br />The above cite is fascinating. Goldman Sachs has embraced nominal GDP targeting by the Fed, a position I wholeheartedly agree with. <br /><br />The Market Monetarism school has been promoting this view for a couple of years, and it is wonderful to see a mainstream institution adopt the view. <br /><br />Bernanke and the Fed have been choking the economy for years, as the Bank of Japan has done to the Land of the Rising Sun. <br /><br />Sustained, embedded and chronic low interest rates are not a sign of easy money--they are a sign of tight money and a suffocated economy, as Milton Friedman said.<br /><br />You boys need to re-read Friedman, and start reading Goldman Sachs.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-41050523740922207392011-10-17T18:22:51.504-07:002011-10-17T18:22:51.504-07:00Fisher's comment isn't crazy I think. Supp...Fisher's comment isn't crazy I think. Suppose the Fed can really lower long term real rates (at least for a while). It isn't obvious that everyone will increase consumption. Suppose you are saving for retirement - you might choose to save more with lower rates. In a simple 2 period life-cycle model with log preferences, no discounting, and a fixed endowment in the first period only, you save half the endowment irrespective of the interest rate. I'm not sure if someone has figured this out for a carefully calibrated OG economy.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-56971944593596352142011-10-16T10:37:49.191-07:002011-10-16T10:37:49.191-07:00Sorry, a combination does, not a combination do.Sorry, a combination does, not a combination do.Chris the regression runnerhttp://languageland.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-91626178957346764592011-10-16T10:36:06.319-07:002011-10-16T10:36:06.319-07:00Steve, pick your favorite model. If there is inte...Steve, pick your favorite model. If there is intertemporal C smoothing, there will be an Euler equation relating the MRT to the MRS. <br /><br />If policy induces a change in expected real asset returns, then I cannot see how some combination of C, S and I do not change.Chris the regression runnerhttp://eulersbasement.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-54634107539028465822011-10-15T15:21:52.594-07:002011-10-15T15:21:52.594-07:00Bloom has been trying to push the notion that chan...Bloom has been trying to push the notion that changes in uncertainty matter for macro aggregates. This is vaguely within the "saltwater"/keynesian tradition in that you could think of uncertainty shocks as something close to expectations shock and somehow "demand"/animal spirits related. <br /><br />Quadrini's agenda is to explore the consequences of financial frictions. Focus on financial disfunction is also a mainstay of saltwater/keynesian traditions although before the crisis it has been neglected by the Woodfordian sticky price literature. Now Woodford and all the others are being very quick to embrace it.<br /><br />Finally, Quadrini and Perri have multiple equilibria built in somewhere as a foundation for the shocks in their model (although I haven't quite figured out how or why exactly it works). Nothing could be more keynesian than that.<br /><br />Having said all that, none of the papers has sticky prices, all of them use calibration approaches and, in much of Bloom's work there is no market failure to be seen. <br /><br />You seem to have uncovered some of the best examples of why the saltwater/freshwater divide is not very helpful.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-34816555943683700902011-10-15T15:07:54.070-07:002011-10-15T15:07:54.070-07:00Josh,
There is a piece of modern macro - New Keyn...Josh,<br /><br />There is a piece of modern macro - New Keynesian economics - that, while it might seem small in terms of actual progress made, looms large in some minds. The rest of modern macro is very much alive, with plenty of people thinking about problems and frictions that have nothing to do with sticky wages and prices. If anyone is claiming that "freshwater macro," whatever that is, is dead, they should remember the old Mark Twain quote. Something like "Reports of my death are an exaggeration." I have seen the Jermann/Quadrini paper, but not the other two. J/Q is interesting - interesting take on some features of the data, though the friction is a bit on the ad-hoc side.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-71539140948333393682011-10-15T14:14:07.680-07:002011-10-15T14:14:07.680-07:00"Josh, these papers show how silly it is to e..."Josh, these papers show how silly it is to even talk about freshwater macro. What makes them freshwater? The fact that they don't have price rigidities? Is that the dividing line?"<br /><br />That's probably a more sensible way to look at things, yes! I'm not particularly fond of the labels either... but they do get tossed around often enough, and sticky prices are indeed the dividing line the great bulk of the time. But again, you're right- I mean one of the papers is basically just Smets/Wouters plus calibration and minus the sticky prices. <br /><br />Anyway, I feel a bit foolish now.Joshnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-53625583769596253972011-10-15T13:02:42.909-07:002011-10-15T13:02:42.909-07:00Steve:
The question about targeting prices vs. qu...Steve:<br /><br />The question about targeting prices vs. quantities reminds me of a similar discussion in environmental economics, namely whether it is best to use cap and trade vs. carbon tax.<br /><br />Weitzman has some work on the issue. This is the seminal paper, I think:<br /><br />http://www.jstor.org/stable/2296698<br /><br />Basically it has something to do with what is the nature of the uncertainty faced by the planner. I guess you could say that under this framework targeting quantity is an admission of uncertainty in some dimension. But it is not enough grounds to dismiss it as a policy strategy.<br /><br />-RVAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-69401836877175845782011-10-15T12:54:11.270-07:002011-10-15T12:54:11.270-07:00Josh, these papers show how silly it is to even ta...Josh, these papers show how silly it is to even talk about freshwater macro. What makes them freshwater? The fact that they don't have price rigidities? Is that the dividing line?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-14886416924964969632011-10-15T10:36:31.512-07:002011-10-15T10:36:31.512-07:00Ah it's back now. It was down for a bit, had m...Ah it's back now. It was down for a bit, had me worried he ragequit bloggging or something. I'll ask you the same question I asked him, have you seen any of these papers:<br /><br />Baker/Bloom/Davis<br />http://goo.gl/5Upgm<br />TLDR: VAR+uncertainty index<br /><br />Jermann/Quadrini and Perri/Quadrini<br />http://goo.gl/fS6M9<br />http://goo.gl/v7GRG<br />TLDR: RBC+Financial frictions/shock<br /><br />If you've read them, thoughts? Don't feel compelled to read them if you haven't of course, I know you're busy. Just figured they would interest you. They show how silly it is to think freshwater macro is dead.Joshnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-20723058881006894152011-10-15T08:02:00.039-07:002011-10-15T08:02:00.039-07:00"What happened to David Andolfatto's blog..."What happened to David Andolfatto's blog?"<br /><br />It seems to still exist, as does Andolfatto. He seems to be out of town at the moment though.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-65748660420481351372011-10-15T08:00:03.790-07:002011-10-15T08:00:03.790-07:00"The last time that we had this argument you ..."The last time that we had this argument you said that I needed a model to conclude that QE affected the economy."<br /><br />Yes, that's still true. My view is an irrelevance theorem. Show me a good theory that says irrelevance doesn't work, then show me the evidence. Don't talk about event studies. That's nonsense.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58251163790294677742011-10-14T20:44:36.351-07:002011-10-14T20:44:36.351-07:00"Why then are these unusual interventions spe..."Why then are these unusual interventions specified not as interest rate targets but in terms of the quantities of assets purchased? You know why. If they thought they could hit the interest rate targets, they would announce it that way. But they know they cannot; basically it doesn't work."<br /><br />Respectfully... h0r$e$hi+, Steve. <br /><br />There are a host of potential reasons why the FOMC hasn't tried to "fix" long rates. For one thing, I suspect that the FOMC is afaid of being accused of monetizing the debt -- or actually doing it. And they don't want to get into a situation where they reduce the liquidity of the Treasury market. So the FOMC might limit the Q up front to avoid an open-ended Q commitment. <br /><br />Doing QE was a big enough step, now you accuse them of mendacity because they didn't do enough. <br /><br />I know at least one fairly prominent ranking economist at a major (non-US) central bank who wanted to start moving out on the yield curve, pushing rates down as we went. He had no doubt that it would "work" and you definitely would know him. <br /><br />No one who has looked at the event data thinks that the QE purchases didn't "work." And if you think that the event effects are obviously systematically reversed then you must think that markets are remarkably inefficient because then there are HUGE profit opportunities. <br /><br />The last time that we had this argument you said that I needed a model to conclude that QE affected the economy. My response was that it would be a strange model in which changes in real asset prices did not affect the economy. <br /><br />Now you're going further and denying the real asset price effects. Go look at the data. 10-year Treasury yields fell by about 100 bp around the first round of QE announcements and inflation expectations rose by almost as much.Chris the regression runnerhttp://behindtheramparts.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-20623091398036128502011-10-14T18:24:42.841-07:002011-10-14T18:24:42.841-07:00"JP, can't the negative 'floor' o..."JP, can't the negative 'floor' on specials be made more negative?"<br /><br />I think so. <br /><br />But at the moment I think the main issue seems to be that there are no fail penalties for repos involving agency debt and MBS, so those rates can't go negative at all.JP Koningnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-62118405628327278152011-10-14T17:52:12.937-07:002011-10-14T17:52:12.937-07:00More feeble dithering by the Fed.
Fisher makes po...More feeble dithering by the Fed.<br /><br />Fisher makes point--small business lending is dead. Small businesses need to post collateral. Equipment and people are usually worthless. That means your collateral has to be real estate.<br /><br />Except real estate is underwater right now.<br /><br />Inflate real estate, and you will get small business lending again.<br /><br />You can get a virtuous cycle going again, but not with feeble dithering at the Fed.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82329517968882235992011-10-14T16:20:26.451-07:002011-10-14T16:20:26.451-07:00What happened to David Andolfatto's blog?
(Go...What happened to David Andolfatto's blog?<br /><br />(Good post btw)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-33586985916751799842011-10-14T16:00:07.990-07:002011-10-14T16:00:07.990-07:00JP, can't the negative 'floor' on spec...JP, can't the negative 'floor' on specials be made more negative? <br /><br />steve, thanks, i will read (or re-read) that post.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31095517255149458022011-10-14T13:03:44.223-07:002011-10-14T13:03:44.223-07:00anonymous,
Yes, my theory says it doesn't wor...anonymous,<br /><br />Yes, my theory says it doesn't work. See this:<br /><br />http://newmonetarism.blogspot.com/2011/08/liquidity-traps-money-inflation-and.htmlStephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-74758349010105941762011-10-14T13:02:11.467-07:002011-10-14T13:02:11.467-07:00JP,
"Yes, mind you the gap existed before th...JP,<br /><br />"Yes, mind you the gap existed before the new FDIC rules and never got arbitraged away."<br /><br />Yes, exactly. The gap has been there since the Fed has been paying interest on reserves. The gap got larger, apparently because of the FDIC rules, and maybe because of the increase in the quantity of reserves in the system.<br /><br />"In short, the theory is it could cause severe problems in the repo market."<br /><br />I'm beginning to think this disruption story is nonsense. This might indeed be "disruptive" in some sense for people who run mutual funds or engage in the repo market - they will have less business or none at all. However, socially I don't think we should care, i.e. the Fed should not care.<br /><br />"The Fed set t-bill rates from 1942-47 and long term gov bond rates from 1942-51, no?"<br /><br />I don't know enough about the pre-Accord period to understand what they are doing. Certainly if the Fed buys all of a particular maturity of T-bonds, they can set the price. I don't know if that was what was going on. In any case, if they can peg bond rates, why don't they do that?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-61516362219964731472011-10-14T11:07:41.228-07:002011-10-14T11:07:41.228-07:00"basically it doesn't work"
it'..."basically it doesn't work"<br /><br />it's theoretically impossible?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88826477637789917892011-10-14T09:01:58.479-07:002011-10-14T09:01:58.479-07:00"However, a contributing factor to the lack o..."However, a contributing factor to the lack of arbitrage has been the change in deposit insurance assessments."<br /><br />Yes, mind you the gap existed before the new FDIC rules and never got arbitraged away.<br /><br />If you are interested in seeing what a drop in the IOR would do, you can use the FDIC tax introduced in April as your example.<br /><br />"The "disruptions to money markets" may refer to effects that might arise because of the rules governing money market mutual funds, but I'm not sure. "<br /><br />This is discussed at FT Alphaville:<br /><br />http://ftalphaville.ft.com/blog/2011/09/14/676701/why-cutting-ioer-could-be-suicidal/<br /><br />In short, the theory is it could cause severe problems in the repo market.<br /><br />"If they thought they could hit the interest rate targets, they would announce it that way. But they know they cannot; basically it doesn't work."<br /><br />The Fed set t-bill rates from 1942-47 and long term gov bond rates from 1942-51, no?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31829856771497761582011-10-14T08:16:30.682-07:002011-10-14T08:16:30.682-07:00Yes, whether that's a better question I'm ...Yes, whether that's a better question I'm not sure, but that is important too. You announce something explicit (not what, for example, Evans has in mind) - a target for the inflation rate, or a price level target path - then there is the question of how you implement that, usually through some short-run target for an overnight nominal interest rate. Under current Fed policy, the ultimate goal(s) is implicit, and the short run target is not even implicit. I don't think the people on the FOMC understand what it is, let alone anyone else.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.com