tag:blogger.com,1999:blog-2499715909956774229.post9035166480368315992..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: The End of Central BankingStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger39125tag:blogger.com,1999:blog-2499715909956774229.post-58894264523459237652016-02-23T14:02:05.861-08:002016-02-23T14:02:05.861-08:00Thank you Stephen. I am just worried that the targ...Thank you Stephen. I am just worried that the target of 2 percent could continue like the last crash with NGDP falling. I am shocked at the amount of lending the banks are doing (thanks for the FRED link), but I am thinking that they are lending to everyone but America. That doesn't seem to be helpful to our nation. Gary Andersonhttps://www.blogger.com/profile/15499434824034613894noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81516444526836446632016-02-23T09:06:14.985-08:002016-02-23T09:06:14.985-08:00You could make this easier. Forget about the Taylo...You could make this easier. Forget about the Taylor rule, and just suppose in your equation (1) that i_t is stochastic. So, this implies that<br /><br />i_t = r + E_t[pi_t+1]<br /><br />So, when the nominal interest rate is high, expected inflation has to be high. Suppose that the nominal interest rate is first-order Markov, and is positively serially correlated. Then, states of the world with a high nominal interest rate have to be periods with a high inflation rate.<br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-49868007431905811902016-02-23T08:49:09.226-08:002016-02-23T08:49:09.226-08:00Expected inflation rose in the short term after th...Expected inflation rose in the short term after the announcement in December, which would be strange if raising the rate was going to decrease inflation.Baconbaconhttps://www.blogger.com/profile/13511082564082971086noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67287452745413935712016-02-23T06:47:04.090-08:002016-02-23T06:47:04.090-08:00You're not solving this properly, as you can&#...You're not solving this properly, as you can't ignore the zero lower bound (also what you're doing is technically incorrect). Conventionally, to study the behavior of stochastic models, people sometimes linearize around what they think is a stable steady state, or a unique deterministic equilibrium. Woodford would argue that the pi* equilibrium is unique, as he linearized a deterministic system and then argued that all the other potential equilibria are explosive - based on local behavior. But he's ignoring the global problem - that's the "perils of Taylor rules." The ZLB is actually stable. So, it would be natural to look at stochastic behavior in the neighborhood of the ZLB.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-70090251898391631742016-02-22T19:47:56.802-08:002016-02-22T19:47:56.802-08:00What I was talking about was the effect of adding ...What I was talking about was the effect of adding shocks to the model, I assumed the inflation target was zero. Adding an inflation target would produce<br /><br />pi_t+1 = a pi_t + (1-a)pi* + e_t<br /><br />which, given e_x = 0 for all x > 0, would result in<br /><br />pi_t = (1/a)((a-1)pi* - e_t)<br /><br />The key question is what happens when e_t is positive. It turns out that a positive monetary policy shock causes inflation to fall; active Taylor Rules save the conventional wisdom as long as you ignore the zero lower bound and ban explosive solutions.John Handleyhttps://www.blogger.com/profile/16057855086740377031noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-3805615668832631942016-02-22T17:39:07.307-08:002016-02-22T17:39:07.307-08:00I'm trying hard to answer your questions, but ...I'm trying hard to answer your questions, but it's difficult to figure out what you want to know. Yes, indeed, the Fed has control over deflation and inflation. They have promised 2% inflation, and if they don't deliver it, or something sufficiently close, you have something to complain about. To be more precise, here are the Fed's own stated goals:<br /><br />http://www.federalreserve.gov/faqs/money_12848.htm<br /><br />If you think they're not living up to that, or you think they should be doing something else, let someone know.<br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-73964591321475278012016-02-22T16:15:21.821-08:002016-02-22T16:15:21.821-08:00Stephen, I really appreciate your patience.You are...Stephen, I really appreciate your patience.You are a Fed guy. You didn't give me a straight answer on how much control the Fed has over deflation and onthe intensity of deflation. Maybe you don't know. I would like to know if you know or if you don't know. I know the Fed mispriced risk in the past. That is a bubble blowing evil. A lot of people got hurt, especially in Las Vegas, where I live. Pets were abandoned, there were divorces, and lots of evil.The private foreign Fed is probably proud of all that, although I am not sure if you know. <br /><br />So,(to quote Janet Yellen), Is the Fed the cause of deflation? Well, not so far but soon? <br /><br />And about Switzerland makes squat. They make snow and watches and they just charge more for both if their Frank balloons in value. Oh, and they do finance. What do they care about inflation or deflation? But what about people who make real ordinary things? Oh, and that chart of bank lending doesn't tell us who our banks are lending to. I bet it isn't much to Americans. Your opinion is valued but you can see that people in the real world are frustrated about all this. Thanks again for your time. Gary Andersonhttps://www.blogger.com/profile/15499434824034613894noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-89082815703249488492016-02-22T11:45:06.651-08:002016-02-22T11:45:06.651-08:001. But lending is actually growing at a good rate....1. But lending is actually growing at a good rate.<br />https://research.stlouisfed.org/fred2/graph/?g=3xG8<br />2. Banning cash won't solve any problems, and will create more.<br />3. Deflation isn't so bad. But you can see some of the costs - currency is too attractive. But the solution isn't to make cash less attractive by banning it.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44077490214450089212016-02-22T10:35:30.707-08:002016-02-22T10:35:30.707-08:001. Yes, but isn't that an argument for giving ...1. Yes, but isn't that an argument for giving them nothing on reserves? You say, correctly that they don't want to lend, but isn't that part of the problem for our economy?<br /><br />2. People hoard currency for sure, when rates go negative. It is happening in Europe. But that is why that bank in Norway demanded the end of cash. That concerns me.<br /><br />3. Deflation can get worse. Do central banks cause and control deflation or do they just stop it from getting too bad?Gary Andersonhttps://www.blogger.com/profile/15499434824034613894noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-17314330141984873782016-02-22T09:51:40.721-08:002016-02-22T09:51:40.721-08:001. I know the deposit creation story is popular in...1. I know the deposit creation story is popular in money and banking courses, but it's misleading. Banks are content to hold interest bearing reserves. They're not trying to get rid of the reserves by "loaning them out."<br />2. The cost of negative interest rates is likely that it encourages too much currency to be held.<br />3. I was in Switzerland last fall, and no one there seems bothered by deflation.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-5172283644552514722016-02-22T09:38:10.163-08:002016-02-22T09:38:10.163-08:00Stephen, why isn't this happening and what can...Stephen, why isn't this happening and what can make it happen? "If the Federal Reserve increases reserves, a single bank can make loans up to the amount of its excess reserves, creating an equal amount of deposits. The banking system, however, can create a multiple expansion of deposits. As each bank lends and creates a deposit, it loses reserves to other banks, which use them to increase their loans and thus create new deposits, until all excess reserves are used up."<br /><br />There is little interbank lending because the Fed pays interest on reserves. Shouldn't that be diminished or stopped? I don't like the idea of negative IOR because that could be passed on to retail bank accounts. <br /><br />One more question, why are you not afraid of deflation, and of massively negative rates and even a cashless society? Or do those concern you? Thanks for your time.Gary Andersonhttps://www.blogger.com/profile/15499434824034613894noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-89826499011439185442016-02-21T19:24:19.262-08:002016-02-21T19:24:19.262-08:00You've almost got it. I think what you want to...You've almost got it. I think what you want to say is that e = (1-a)pi*, where pi* is the inflation target. In your model, the real rate is constant. It doesn't have to be a cashless model, as this works with, say, cash-in-advance and a constant endowment.<br /><br />Then, the two equations solve for a difference equation in pi_t,<br /><br />pi_t+1 = api_t + (1-a)pi*<br /><br />But you also want to take account of the lower bound on the nominal interest rate. Assume it's zero, so modify the above to get:<br /><br />pi_t+1 = max[-r, api_t + (1-a)pi*]<br /><br />There are two steady states: pi = pi*, and pi = -r. You solve the difference equation forward. Draw the picture and start with any initial condition and see what happens. If the initial condition is pi > pi*, that explodes and is not an equilibrium. But there is a continuum of equilibria with intital condition pi in [-r,pi*), and each of those equilibria converges to the zero lower bound. That's all for a > 1. But, if 0 < a < 1. Then, there are many equilibria that all converge to pi*. You can even have -1 < a < 0 (shocking!), and you get the same thing - all the equilibria converge to pi*. That is, under a Taylor rule for which the nominal interest rate goes down when inflation goes up, the steady state in which the CB hits its inflation target is stable.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-21995781007246946042016-02-20T16:03:35.691-08:002016-02-20T16:03:35.691-08:00Here's my model, I assure you it exhibits the ...Here's my model, I assure you it exhibits the features I outlined above given my assumptions, feel free to test it yourself:<br /><br />Let's stick with the simplest model possible, the basic two equation cashless model from before:<br /><br />(1) i_t = r + pi_t+1<br /><br />(2) i_t = r + a pi_t + e_t<br /><br />where i_t is the nominal interest rate, a > 1 is the coefficient on the Taylor Rule (I'm assuming active monetary policy here because I'd rather not deal with fiscal policy), pi_t is the current inflation rate, r is the constant real interest rate, and e_t is the shock variable that the central bank chooses each period.<br /><br />The equilibrium for this model is pi_t+1 = a pi_t + e_t. If we ban explosive equilibria and the monetary policy shock is set to zero in each period, then pi_t = 0 for all t. What happens if e_0 is positive (consistent with the central bank setting a higher nominal interest rate for a given rate of inflation)? In this case, pi_1 = a pi_0 + e. Since we've banned explosive equilbria, we can simply solve backward from some period arbitrarily far in the future to get the equilibrium. In this case, I'll assume the economy is in equilibrium by t = 5. Given that and a value of zero for e in each period following t=0, pi_4, pi_3, pi_2, and pi_1 all equal zero. In this case, 0 = a pi_0 + e, or pi_0 = -(1/a)e. That is, for any positive value of e, pi_0 will be lower than it is in equilibrium. This is the point I made above and "The Perils of Taylor Rules" doesn't, to my knowledge, contradict it.<br /><br />Of course, if I hadn't assumed active monetary policy and implicitly assumed passive fiscal policy, then the result would probably be different, but I honestly don't think the real world has active-fiscal passive-monetary (as defined by https://ideas.repec.org/a/eee/moneco/v27y1991i1p129-147.html) regimes all that often.<br /><br />As I understand it, what "The Perils of Taylor Rules" points out is that the only stable equilibrium in a simple cashless model with a zero lower bound and an active Taylor Rule is the deflationary one. To my understanding the only way to escape this trap in that model is to increase the nominal interest rate, irrespective of inflation, but I'm also curious about the effectiveness of repeated negative shocks to a Taylor Rule (which would basically be equivalent to a higher inflation target) in this scenario. I haven't tested this, and maybe it's covered in the paper (which I will admit I have never fully read), but my intuition is that it might work.John Handleyhttps://www.blogger.com/profile/16057855086740377031noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-41863115355784649262016-02-20T11:50:13.634-08:002016-02-20T11:50:13.634-08:00"your preoccupation with the liquidity effect..."your preoccupation with the liquidity effect as the primary way that models cease to exhibit neo-Fisherian qualities."<br /><br />That's not a preoccupation. It's just definitional. You can separate the dynamic response to a change in the nominal interest rate into two components: (i) Fisher effect; (ii) liquidity effect. We know how the <br />Fisher effect works. The liquidity effect could be due to sticky prices, market segmentation, etc.<br /><br />"In order to cause inflation to increase, now the central bank has to promise to have a lower interest rate, given the inflation rate." <br /><br />Not correct: https://ideas.repec.org/a/eee/jetheo/v96y2001i1-2p40-69.html<br /><br />The idea is: Show me your model, and I'll show you how it's neo-Fisherian. You can't sidestep the Fisher effect.<br /><br />"...the correct policy response to low inflation is to promise lower rates given the rate of inflation. This appears to be what the Riksbank is trying to do..."<br /><br />Exactly. Read "The Perils of Taylor Rules." We know what they're trying to do, and why. Given that they think that way, the theory says that they end up stuck in a low-inflation and low nominal interest rate steady state - assuming sticky prices, or not assuming sticky prices.<br /><br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31621928804797118012016-02-20T11:38:08.368-08:002016-02-20T11:38:08.368-08:00"I know that's not the case in the real w..."I know that's not the case in the real world"<br /><br />That's just it. At best, the central bank could issue a tradeable security - a Fed bill, for example (the Swiss National Bank has such an instrument), and that would be as liquid as a T bill. But, in reality reserves are not as liquid as T-bills. Only a subset of financial institutions can hold them. That's why the interest rate on reserves is higher than the T-bill rate.<br /><br />I think the helicopter drop won't work to increase prices, even if it is a transfer financed by literally issuing currency. People have to be willing to hold the currency, but at existing prices and interest rates, they're not, and the outside money is held as reserves and doesn't affect inflation.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59166093028228325262016-02-19T16:05:55.209-08:002016-02-19T16:05:55.209-08:00"This basic CIA is purely Fisherian - there&#..."This basic CIA is purely Fisherian - there's no liquidity effect in it. The real interest rate is constant."<br /><br />I don't quite understand with your preoccupation with the liquidity effect as the primary way that models cease to exhibit neo-Fisherian qualities. I know you're anything but a fan of sticky prices (or any kind of nominal rigidity), but the most common way that the 'conventional wisdom' is brought about in the literature (that is, the price determinacy under interest rate rules literature) is through the addition of said friction.<br /><br />Furthermore, and perhaps more importantly, if you assume that the central bank, instead of pegging the nominal interest rate, sets it according to an active Taylor Rule (plus some shock that it controls every period), then the neo-Fisherian nature of even simple cashless models (e.g., i = r + pi(+1), i = r + f(pi) + shock) becomes cloudy. In order to cause inflation to increase, now the central bank has to promise to have a lower interest rate, given the inflation rate.<br /><br />So, if real world central banks do something closer to following an active Taylor Rule and setting a shock value each period than simply adjusting pegs, the correct policy response to low inflation is to promise lower rates given the rate of inflation. This appears to be what the Riksbank is trying to do, but maybe you are right and, rather than loosely following a monetary policy rule, they peg the nominal interest rate and change that peg on a whim. If that really is the case, then they should probably be raising rates, but I'm not quite sure.John Handleyhttps://www.blogger.com/profile/16057855086740377031noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-1981248767904395212016-02-19T08:27:28.668-08:002016-02-19T08:27:28.668-08:00Well, you could imagine a liquidity Premium linked...Well, you could imagine a liquidity Premium linked to reserves that would make sure that they pay less interests than t bills (I know that's not the case in the real world). <br />I am also thinking about helicopter drops. If the government finances a tax cut with reserves and reserves are perfect substitutes to t bills tan obviously this helicopter drop won't be different from a normal debt financed tax cut.<br />Things are different if the tax cut is financed with reserves that pay less tan t bills cause of a liquidity Premium. You can think of it as cash. If the tax cut is financed with cash and, for instance, some transaction can only be made with cash, so cash has a liquidity advantage, then I think the helicopter drop would cause inflation, in particular if the liquidity Premium on cash is decreasing in the quantity of cash.<br />Do you think that would not be the case?LMhttps://www.blogger.com/profile/04209992315578358377noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-71123137600416595272016-02-18T18:41:15.241-08:002016-02-18T18:41:15.241-08:00"I'm pretty sure that you don't usual..."I'm pretty sure that you don't usually make this reference to the money supply and only talk about the nominal interest rate by itself."<br /><br />No. Of course, a central bank that is targeting a nominal interest rate has to support that policy with open market operations. In this case of this CIA, people often think of this as transfers - so it's whatever transfer policy supports the desired path for the nominal interest rate. This basic CIA is purely Fisherian - there's no liquidity effect in it. The real interest rate is constant.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-26893997234487507412016-02-18T18:00:28.573-08:002016-02-18T18:00:28.573-08:00Stephen,
I agree that fixing the initial money su...Stephen,<br /><br />I agree that fixing the initial money supply would change the result and that the model is otherwise completely neo-Fisherian. Nevertheless, I think I may not have articulated my point correctly. <br /><br />If a CIA model is going to have a neo-Fisherian result (which I will define as a nominal interest rate increase causing a corresponding increase in expected inflation that <i>is not</i> offset by current deflation -- hopefully this should deal with LM's complaint), then the current money supply must not fall. <br /><br />If a central bank manages to increase the nominal interest rate by increasing the expected money supply, then the neo-Fisherian result as I previously defined holds. <br /><br />I'm pretty sure that you don't usually make this reference to the money supply and only talk about the nominal interest rate by itself. This leaves the question of what happens to the money supply upon a rate increase open. If the mechanism for the rate increase is a fall in the current money supply instead of an increase in the future money supply, then the model fails to show the Neo-Fisherian result (as I defined).<br /><br />I understand that, when money and government bonds are perfect substitutes, the money supply ceases to be relevant in CIA models. In this case, the effect of a rate increase would still be undefined -- did the central bank escape the 'liquidity trap' by decreasing the current money supply or increasing the future money supply?<br /><br />Of course, increasing the future money supply is useless if the liquidity trap is expected to be permanent, so I was implicitly assuming that, when the central bank "increas[es] the future money supply," it is doing so at a point after the liquidity trap is no longer in effect and setting the money supply in each prior period sufficiently lower than its following money supply, such that expected inflation is above negative the rate of time preference.<br /><br />If the central bank escapes the liquidity trap by reducing the current money supply, the model indeed does not support my definition of the neo-Fisherian result.<br /><br />Sorry for the extremely long comment, I wanted to explain myself thoroughly.John Handleyhttps://www.blogger.com/profile/16057855086740377031noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-4646491827997179672016-02-18T08:28:33.423-08:002016-02-18T08:28:33.423-08:00Sorry, it doesn't fail there. Suppose R(t)=R f...Sorry, it doesn't fail there. Suppose R(t)=R forever. That pegs the inflation rate forever in your model - it's purely Fisherian. Of course, the price level at the beginning of time is proportional to the beginning-of-period money stock - the nominal interest rate has nothing to do with pegging that of course. But the first-period price level is irrelevant - that's just the neutrality of money at work (though of course in your model money is super neutral too). Think about another experiment. Set the first-period money stock at whatever you want. Fix R forever. Also, suppose that people in this economy have the option, at the beginning of each period, of putting their money in a reserve account earning R, instead of spending it. Let money grow at the constant rate from the first date commensurate with R as an equilibrium and no reserves held. Then at date T, sometime in the future, there is a level increase in M (fully anticipated), then M continues to grow at the previous rate. What happens?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-57698989137087564172016-02-18T08:26:08.917-08:002016-02-18T08:26:08.917-08:00The writer of the article seems quite confused. In...The writer of the article seems quite confused. In fact, his model has a neo-fisherian effect. He himself says that when the nominal rate goes up future price levels are higher. Sure, current prices are not determined, but neo-fisherism does not say anything about current prices, it speaks about expected future inflation. Even if the current Price falls on impact, that's inflation today that falls, not expected inflation and neo-fisherism talks about expected inflation! It says that the peg is stable!LMhttps://www.blogger.com/profile/04209992315578358377noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13560049867276108832016-02-18T08:14:00.548-08:002016-02-18T08:14:00.548-08:00Yes, in particular I've seen Rogoff's stuf...Yes, in particular I've seen Rogoff's stuff on this, and heard him talk. I've haven't addressed this specifically (except in a tangential way), but this is an important question. In normal times, with essentially no reserves outstanding, most of the central bank's portfolio is financed with currency. But currency is aiding and abetting a host of undesirable activities. On the other hand, poor people use currency extensively in transactions. So, doing away with currency would hurt criminals, but it would also hurt poor people - there are distributional effects. Short of doing away with currency, we could tax it at a higher rate, i.e. have a higher inflation rate, but that is subject to the same problem. Doing away with large denominations (see Summers's blog post) has the advantage that it hurts criminals but doesn't hurt poor people. There are other solutions, including digital currencies. Green dot is a private (and apparently successful) alternative, probably used predominantly by poor people:<br /><br />https://www.greendot.com/greendot/getacardnow?utm_source=Google_Search_Brand&utm_medium=SEM&utm_campaign=brand&utm_content=SH_goto<br /><br />Should central banks get into digital currencies? That's an open research question. Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-29889757606803003772016-02-18T06:50:50.356-08:002016-02-18T06:50:50.356-08:00Professor,
Many people are now talking about elimi...Professor,<br />Many people are now talking about eliminating cash, citing terrorism, drugs etc as a rationale.<br />Do your models have anything to say about the desirability of this ?<br /><br />peAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-8434966446216862342016-02-17T23:41:34.124-08:002016-02-17T23:41:34.124-08:00Stephen, somebody takes a look at your post here u...Stephen, somebody takes a look at your post here using an "off-the-shelf" Cash-In-Advance model, and concludes:<br /><br /><a href="http://ramblingsofanamateureconomist.blogspot.com/2016/02/what-off-shelf-monetary-models-actually.html" rel="nofollow">"It's interesting that even this exceedingly simple monetary model fails to fully support the neo-Fisherian hypothesis."</a>Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-64094724403012928932016-02-17T17:45:06.690-08:002016-02-17T17:45:06.690-08:00CA: "Also, if there exists a shortage in safe...CA: "Also, if there exists a shortage in safe assets as in your models, wouldn't the government face a free lunch so long as demand for such assets is perfectly elastic and if the impact of the tax cut on income is sufficiently high?"<br /><br />Yes, that looks like a free lunch, in the sense that you can increase welfare. But, see the comment above.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.com