What's happening in monetary policy and macroeconomics.
Thursday, December 5, 2013
What's the difference between a New Keynesian, an Old Monetarist, and a New Monetarist? A New Keynesian thinks no assets matter, an Old Monetarist thinks that some of the assets matter, and a New Monetarist thinks all of the assets matter.
Dr. Williamson, if you'll bear with me, I am truly trying to make sure the blogosphere mob doesn't lynch an innocent man. So can you please clarify your position by telling me if I'm understanding you?ReplyDelete
You are saying that if the Fed hadn't engaged in QE, then price inflation (such as the increase in CPI from 2008-13) would have been higher than what we observed. Further, you are saying that the mechanism at work here is *not* that the Fed's policy announcements of QE led investors and consumers to revise their forecasts about the economy; in other words, it's NOT that people said, "Whoa, they're announcing another trillion in asset purchases, so they must think we're on the edge of a depression here. I'd better put off buying that plasma screen TV."
Finally, you aren't claiming to have discovered some knife-edge equilibrium result that wouldn't survive a "trembling hands" perturbation. Rather, you are saying that given the situation the last few years, a burst of QE would quite naturally lead to lower price inflation; there doesn't exist a more stable path toward an equilibrium of higher price inflation.
I realize you might not have worded everything the way I did, but do you endorse the above statements?
My original post actually didn't focus on QE, I merely wanted to suggest reasons why, if the Fed maintained policy at the zero lower bound for a long time, we need not observe deflation, and why we could see falling inflation. In the model, it's a long-run proposition. Then, some people wanted to focus on the QE result in my working paper which is that, as a long run proposition, at the zero lower bound QE will lower inflation (while also raising consumption and making us better off, through a mechanism which involves relaxing collateral constraints. That idea ran away with itself, and people started putting words in my mouth.Delete
1. There are some complications. For example, I haven't worried about the short run effects of monetary policy. That's going to complicate what we see in the actual time series of prices 2008-13.
2. I wouldn't rule out announcement effects from QE. The effects I'm talking about could be quantitatively small, and all you're seeing are signaling effects of QE. Maybe it's only the policy rate that matters, and QE is just signaling future policy rates.
"Finally, you aren't claiming to have discovered some knife-edge equilibrium result that wouldn't survive a "trembling hands" perturbation."
Definitely not. When Krugman was discussing "little arrows," he seemed to have a well-specified notion of dynamic stability in mind. I addressed that. There's no stability problem in that sense at all. As to the other "stability problem," that was just some nonsense.
"Rather, you are saying that given the situation the last few years, a burst of QE would quite naturally lead to lower price inflation; there doesn't exist a more stable path toward an equilibrium of higher price inflation."
I would put it differently. The original issue that I was focused on, was the idea that there is another long-run equilibrium with higher inflation, but the liquidity trap equilibrium was indeed highly stable. It's so stable in part because of policy errors the Fed is making, or it's own misunderstandings.
A lot of people are reading things that other people are writing about what I'm writing, rather than actually reading my writing unfiltered, and that's bound to be confusing.
Like all such jokes, it's not 100% true, but there's enough truth in it that it works.ReplyDelete
To my Old Monetarist mind, the assets that really matter are those that are both media of exchange and media of account (or have a pegged exchange rate with the medium of account, as the dollars in my chequing account do).
Despite our disagreements, I appreciate the New Monetarist approach in trying to understand media of exchange better, and seeing better how other assets fit into the picture.
Without wanting to argue that it is a good paper, there are more than zero (and more than one) assets in Tobin's "Keynesian Models of Recession and Depression"..ReplyDelete
Tobin, i.e. Old Keynesianism?Delete
Tobin has some interesting papers. He did in fact want to think about alternative assets, and central bank asset swaps rather than money transfer experiments. As well, he made it clear that the money mulitiplier story is misleading, which I think is correct. He doesn't get into the basics though. For example, think about this paper:Delete
There are some different assets in that model, but it's static, and asset demands are just specified as arbitrary functions of wealth and rates of return. No notion of asset prices determined by future payoffs, how assets are used in exchange, collateral, etc. It's a start of course.
I met Tobin once (I'm thinking this was sometime in the late 1980s). I thought maybe he would be interested in developments in intermediation theory - Diamond-Dybvig and Diamond's work, for example. Turned out he didn't like it though. He was rather curmudgeonly in his old age.
Have you seen Nick Rowe's latest blog post? I think it might be more intelligible to you:ReplyDelete