Narayana Kocherlakota, 9th Federal Reserve District President, gave a speech, posted here, which I originally commented on here. He's speaking to an audience of Upper Peninsula business people, and he treats them with respect. Narayana uses the opportunity to explain Fed policy to his audience, to teach them some economics, and to say something to the wider community (us) by posting the speech on the Minneapolis Fed website. The speech is quite comprehensive, touching on all the current monetary policy issues and, as it should, it brings to bear all the relevant macroeconomics we know to address the issues. Some of this theory is sophisticated, but Narayana does a good job of bringing this down to a level where a lay audience should be able to get most of it. We have Irving Fisher, search and matching theory of unemployment, New Public Finance, etc., all rolled into a coherent whole. We have come a long way. William McChesney Martin could not have pulled this off, and neither could Alan Greenspan.
Now I think the Invisible Hand got things right when she/he/it made Narayana Kocherlakota, Jim Bullard, and Jeff Lacker (for example) Fed Presidents, and sent Paul Krugman, Brad DeLong, and Mark Thoma off to the blogosphere. Brad wouldn't get far with Cargo Cults at the FOMC meeting (The Chairman: Thanks for sharing, President DeLong. Now on to more important matters. Who used up all the paper towels in the 3rd Floor wc, causing me to wipe my hands on my pants?). I'm done with the Kocherlakota speech. If you have more questions about it, please ask Narayana for help.
Is this your way of admitting you were wrong?ReplyDelete
also laughing at the anonymous post above
Prof Williamson, could you answer the direct question that Kevin posed in a earlier thread:ReplyDelete
"Is it reasonable to worry that another 6, 18, or 30 months of ZIRP will *increase* the likelihood or severity of deflation?"
1st anonymous: No. I have other things to do. Have to prepare my class.ReplyDelete
2nd anonymous: I try to answer that here:
"Now I think the Invisible Hand got things right when she/he/it made Narayana Kocherlakota, Jim Bullard, and Jeff Lacker (for example) Fed Presidents, and sent Paul Krugman, Brad DeLong, and Mark Thoma off to the blogosphere."ReplyDelete
Funny you say that since you are also a blogger...
Vivianne: I believe (he'll correct me if wrong) that Stephen Williamson is also a research fellow at the Federal Reserve.....ReplyDelete
pe: sure, but the way he talked about the blogosphere seemed derogatory, which is weird since he also blogs.ReplyDelete
I am not taking sides. I think a lot of what, for example, DeLong says is unnecessary and inflammatory, but I feel that Williamson wasn't being too different from DeLong in many instances. A lot of what he said was not something you would expect from a Fed employee, associate, or whatever. But isn't this exactly what Williamson is criticising Krugman, Thoma and DeLong for?
I think most people involved in the discussion about Kocherlakota's speech learned a lot, but some of those got angry in the process. Was it really necessary?
Yes, exactly. Some of that was unnecessary. Mea culpa. I'll try to be more dignified in future. This blog is an experiment. I'm trying to see what you can do in this medium, and I have constant debates with myself about whether it is useful. Primarily what this does for me is to help me work out policy issues in public, and that hopefully makes me more useful to the Fed people who pay me to be around. I like writing at different levels too (blogs, textbooks, academic articles). All those things feed on each other. I guess you could do with a little less passion though.
Prof Williamson: I think blogging is incredibly useful. It has enormously enriched the subject by opening up the neoclassical monopoly to some intellectual competition. For example, the modern monetary theory crew (LRWray, Mitchell) have done a sterling job in destroying myths about the money multiplier.Its intriguing to me that a new monetarist like yourself would be in agreement here with post-Keynesians.ReplyDelete
Another fascinating thing to me from reading econ blogs across the spectrum is it reveals the wackiness (or uniqueness?) of America. In no other country is there such extraordinary vitriol towards the central bank and belief it is the fount of evil.
I would think this debate about interest rates and deflation over the last week has exposed more people to useful ideas than a dozen articles in the JPE or JME which few would ever read.
I think your blog is very useful, and I have said this before in a comment to your post about blogging ( http://newmonetarism.blogspot.com/2010/06/is-blogging-useful.html?showComment=1279193547139#c461688912824658074 ).
So I agree with pe when he says that "this debate about interest rates and deflation over the last week has exposed more people to useful ideas than a dozen articles in the JPE or JME which few would ever read."
I learned a lot from the discussion around Kocherlakota's speech, and I even like the name-calling part because it is very entertaining and funny. Once someone is upset, though, it is not so funny anymore, it is kind of sad... I would most likely get angry, too, if someone was making personal attacks to me, but hey, you are blogging for free, so you might as well have fun with it :)
I found the discussion in the comments section of the post, "How to get worked up over nothing", to be very useful. Thank you for taking the time to blog, and to respond to questions/comments.ReplyDelete
Excellent. Now I feel better. I was feeling like this had been an exercise in beating my head against the wall. Yes, the United States is a wild place, which is I guess what I like about it, and why I live here instead of Canada, where I grew up. The disrespect for authority (including the central bank) is a healthy thing - though you can get carried away with it of course. And yes, there is something funny about little boys throwing mud at each other.ReplyDelete
I've been following the back and forth on the various blogs, but wanted to make one quick point.ReplyDelete
Defenders of Narayana have used the fact that he was speaking to a lay audience as an excuse his ommisions and lack of theoretical completeness. To me, it is exactly the setting that makes his comments so problematic.
If he was in a seminar setting and was pointing out how a standard RatEx equilibrium produced this perverse result, that would be entirely appropriate. But when he is speaking to an audience that cannot possibly understand the fragile basis for his claim, the only conclusion he could possibly expect them to take away from his speech is that by keeping a low Fed Funds rate, the Fed is inviting a prolonged deflationary slump. That is what is inexcusable and dangerous about his comments.
I disagree that the long-run result is fragile. My sense of the literature is that the explosive equilibrium is fragile, instead. But reasonable people can disagree here. (I think that Woodford's text and some of the recent Cochrane and McCallum papers are useful here).ReplyDelete
Right now, we have low inflation and low rates. In order to rule out the explosive equilibrium, the Fed needs to promise to raise rates if inflation breaks out--which seems to be what they are signaling.
So I guess here's vote in disagreement with Joe.
Before time to conclude, let me, as anonymous #8, remind some standard results in the literature, which seems to be forgotten in the whole debate. Correct me if I am wrongReplyDelete
Think of standard phrase diagram of capital vs consumption in any neoclassical growth model. Even in a perfect foresight situation, there are continuum of explosive paths diverging from the steady state.
That doesn't matter since they are RULED out from the perfect foresight eqm as any rational agent knows that other rational agents know that other rational agents know that.... that those explosive paths never be chosen, as transversality condition (ie, not optimal from private persective)is violated. Only the saddle path is the unique eqm. So can we say the saddle path is fragile?
What the literature of dynamic indeterminacy led by Benhabib or Farmer does is to provide conditions where the saddle path no longer unique. They have nothing to do with the explosive paths. Explosive paths are always there, but they are always off eqm path. So why that matters?
What the sophistiscated monetary policy sells is those explosive paths cannot be used by the central bank to implement some eqm it likes, because those explosive paths are not credible to happen. Again it is because those explosive paths must be off-equilibrium paths. You can call such sophistiscated policy also as subgame perfection or time-consistent. What is important is that theexpectation of agent is also an eqm concept, rather than some ad hoc assumption.
In the end, I think an objective ranking device for any established scholars is how well their students are treated and advised. Checking those guys' CV and you will see the difference. No room to be inflammatory
That's excellent. I think you have it nailed.
What isn't credible is expecting deflation when the fed is expanding the money stock by using OMOs to keep the fed funds rate low.ReplyDelete
Similarly, it would not be rational to expect higher inflation when the fed is raising rates: such action makes lower inflation credible because it shows the fed is willing to reduce the growth in the money supply.
Adam Smith in Theory of Moral Sentiments argued that a man can only judge the worth of his thoughts and actions by reference to what others think - man is a social animal. Deidre McCloskey says economics is one long (234 years and counting) conversation. Moral: keep blogging, Prof Williamson, keep the conversation going. It is not good to follow the Kartik solution and retreat into the echo chambers of the Fed and speak only to those who know what a Hilbert space is.ReplyDelete
And finally (wish I'd thought of it): heard on campus: "What are the other 5 things Naryana believes before breakfast?"
Kartik wasn't actually trying to blog. He told someone about something he had written, and was asked to post it on his web site. The thing circulated, and then you know what happened. For various reasons, Kartik would rather not interact in this kind of unstructured setting, and I understand that. Now, what does this mean? I think I'm lacking some context (or I'm slow).ReplyDelete
"What are the other 5 things Naryana believes before breakfast?"