tag:blogger.com,1999:blog-2499715909956774229.post1362598997498000378..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Wren-Lewis Takes a Stab at ItStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger49125tag:blogger.com,1999:blog-2499715909956774229.post-13272508492867652772015-04-01T09:54:24.541-07:002015-04-01T09:54:24.541-07:00I'm not sure how Hicks and Samuelson entered t...I'm not sure how Hicks and Samuelson entered the discussion. Obviously you think there is such a thing as a demand shortfall. So tell me exactly what it is so that I can understand it.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88233415823867325572015-04-01T09:24:45.809-07:002015-04-01T09:24:45.809-07:00Indeed, you should use David Levine's take-dow...Indeed, you should use David Levine's take-down of all the nonsense Keynes/Hicks/Samuelson/Krugman have been peddling for years. Thus you can fail out anyone with heretical views. I love it when you convincingly repudiate the idiocy of the likes of know-nothing hicks like Hicks and Paul Samuelson, and show that you've discovered that these Nobel Laureates have all be repeatedly making a very basic error, and that there is no such thing as demand shortfalls. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-8298132690548831042015-03-31T11:36:41.788-07:002015-03-31T11:36:41.788-07:00Yes, you'll see I got a little snippy with poo...Yes, you'll see I got a little snippy with poor Nick. This was certainly not a waste of time, at least for me, as I think I better understand exactly what is going on in these models.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-33575536186162454202015-03-31T09:16:54.130-07:002015-03-31T09:16:54.130-07:00wow, a model of clarity. But kudos to Nick Rowe w...wow, a model of clarity. But kudos to Nick Rowe whose nonsense and limited competence was actually helpful in elucidating the Woodford model. Actually Mr Rowe plays this role many, many times, so thanks to him for being brave enough be the student who asks dumb questions so others can understand. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-71327207266105902812015-03-30T07:46:52.554-07:002015-03-30T07:46:52.554-07:00I'm grateful to you for taking the time to eng...I'm grateful to you for taking the time to engage on this - I'm finding it extremely informative. I think it has also finally clicked why it has taken me so long to understand your point.<br /><br />It strikes me that it makes quite a bit of difference here exactly what price inflexibility we are talking about. If we assume, say, staggered price setting, but fully flexible wages, then we will always have a situation where both the Euler equation and the equation relating labour and consumption hold. In that case, there is no arbitrage in a barter trade between labour and consumption, so it makes no difference whether we assume barter or monetary exchange. The same applies if we assume sticky wages, but fully flexible prices.<br /><br />In the scenario I had been describing, both wages and prices were independently sticky. In that case, you can't have both marginal conditions fulfilled at the same time, so there needs to be something that determines which one holds. This is where I believe it matters whether or not it is assumed that barter exchange is possible, but I don't think Woodford goes into this.<br /><br />Beyond the unit of account, this is the only way in which monetary exchange has any role in the model. Therefore, as we move towards the limiting case of fully flexible wages (or prices), then any distinction between a barter economy and a monetary economy disappears. Money becomes, as you say, like stardust - just a reference price.<br /><br />So I think I would agree with you that, at least in the benchmark fully flexible wage version, that monetary exchange is irrelevant in the Woodford model.<br />Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-87205701220908817382015-03-29T12:01:23.872-07:002015-03-29T12:01:23.872-07:00To make this clearer (hopefully): In any general e...To make this clearer (hopefully): In any general equilibrium model in which money plays no role, for example an Arrow-Debreu model, which is the most general, all that matters are relative prices. So, in writing the theory down, I could for example define any good to be the numeraire, and define all prices and quantities in terms of that numeraire. But it doesn't matter how I choose the numeraire - the equilibrium relative prices don't change as a result. In fact, I could choose some extraneous object to be the numeraire if I wanted to. This would be an object that plays no role in the model - it doesn't enter preferences or technology. Call it stardust, say, define all other prices in terms of stardust, and it doesn't matter. The equilibrium relative price of peaches today in terms of oranges tomorrow is still the same. To start with, that's what Woodford does. He says, basically, that stardust is the numeraire, then expresses all prices and quantities in terms of stardust. If that's as far as he went, it would not matter. But, he also says that it may be costly (in fact infinitely costly in some specifications) to change a price in terms of stardust. Not only that, he says that there is a central bank, and the central bank has the power to set the price of stardust tomorrow in terms of stardust today. But that's all he does. This doesn't mean that stardust is a medium of exchange. It's not. Stardust is a unit of account - it's the numeraire. And that matters because changing a price in terms of the numeraire - so defined - is costly. How does exchange take place? Exactly as it does in the economy in which we never bother to think about stardust. But our stardust economy is different because the relative prices can be messed up, and the central bank has the power to fix that problem.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-18264043444302847602015-03-29T08:22:34.383-07:002015-03-29T08:22:34.383-07:00"it requires exchanges to take place through ..."it requires exchanges to take place through a common standard, a medium of account."<br /><br />No, that's just how prices are defined (see my reply above). Nothing to do with what is exchanged for what - just the terms of exchange.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-138627209772013642015-03-29T08:20:59.462-07:002015-03-29T08:20:59.462-07:00"But what about the situation where some or a..."But what about the situation where some or all prices are stuck so that not all markets clear?"<br /><br />In Woodford's model, the prices are not going to be market clearing prices in terms of the equilibrium concept that is used, say, in the underlying model with flexible prices. So Woodford needs another equilibrium concept. He assumes that a firm that cannot change its price in the current period has to serve all the consumers that want to purchase the firm's good at the fixed price. So, that's just another kind of equilibrium. Any fixed-price or fixed-wage model has to deal with the problem of how to redefine equilibrium. But this has nothing to do with the process of exchange. Money in Woodford's model is not money as we know it - it's not a medium of exchange. It's just a unit of account relative to which we can define what price stickiness means. In actually monetary models, it's critical how exchange takes place, and the role money and other assets play in exchange. But that's not what Woodford is about. What he wrote down is not a monetary model.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-32781048819719656442015-03-29T03:05:59.931-07:002015-03-29T03:05:59.931-07:00"Agents cannot directly negotiate quantities ..."Agents cannot directly negotiate quantities and bypass the MOA in their exchanges, which is why relative price distortions can cause dislocations."<br /><br />I don't entirely agree with this. I think relative prices distortions give you dislocations (demand / supply mismatches?) whether you have barter or not - it's just you get different ones (and less optimal ones) if you restrict the ways exchange can take places.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67582881034385122532015-03-28T14:28:45.956-07:002015-03-28T14:28:45.956-07:00Yes, but Woodford's model does exclude barter ...Yes, but Woodford's model does exclude barter in the sense that it requires exchanges to take place through a common standard, a medium of account. Agents cannot directly negotiate quantities and bypass the MOA in their exchanges, which is why relative price distortions can cause dislocations. Nick Rowe above is right that if barter, defined as directly negotiating exchanges without reference to some MOA was possible, the NK recession goes away. This is not like the old Fama Accounting System of Exchange where it truly is a non-monetary system equivalent to barter; exchanges here must take place through MOA prices and thus bypassing the price system through direct barter is not allowed in the model. The mechanics of the exchanges don't seem to matter but they do in the sense that they must happen through the MOA standard for the NK model to mean anything.<br /><br />This doesn't necessarily mean that Nick Rowe is right that a MOE is hiding in the cashless model as bonds. It is at least possible that the MOA in the cashless version is what Buiter called phlogiston, i.e. a mere government definition that cannot by owned (and cannot be an MOE), but happens by some focal-point magic to successfully select a determinate, non-explosive price level equilibrium. Woodford is not entirely clear in his responses to these criticisms as he seems to conflate those that accuse him of leaving the money supply out of the explicit equations in the standard model with those who focus on the cashless version where no reserve balances or currency exist at all. <br /><br />dlrnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81880681215417498502015-03-28T12:26:13.762-07:002015-03-28T12:26:13.762-07:00I appreciate that in a state of general equilibriu...I appreciate that in a state of general equilibrium it's probably not going to make any difference what individual exchanges take place. But what about the situation where some or all prices are stuck so that not all markets clear? Can it then be possible that the outcome depends on which exchanges are permitted? In my description, whether households end up long leisure / short future consumption or long current consumption / short future consumption depends on whether the direct leisure / goods trade is permitted.<br /><br />Or maybe the answer is that my scenario makes sense, but just that it's not a good reflection of Woodford's model. Quite possible.<br /><br />Whether there is actually any money in my set-up is an interesting question and maybe just down to interpretation. I described it in a way that implied non-zero intra-period balances. But imagine each period is a day and the guy who does the ledgers at the bank doesn't get round to doing the books till after close of business. He just collects up all the payment instructions and makes the entries which always cancel out. There's no time stamp on the payments - only the day is relevant, so there is never a non-zero balance existing for any meaningful period of time. I don't think it's obvious that there is any actual money in this situation. It still relies on the third party entity (the Bank) though, rather than bilateral credit as with the IOUs.<br />Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-41192297913174725402015-03-28T11:13:20.408-07:002015-03-28T11:13:20.408-07:00There are no exchanges disallowed in Woodford'...There are no exchanges disallowed in Woodford's model. What is going on is that the firms are sometimes constrained in the prices they set. He's got a story in there about prices being set in terms of money, and the central bank affecting the relative prices, but that's not relevant for thinking about how the exchange actually takes place, which is the same as it would be if we just took the baseline stochastic growth model with monopolistically competitive producers. Consumers are trading subject to their budget constraints, and firms sell their output and pay their workers, with some profits that need to somehow be rebated to consumers (they own shares in the firms, say). Just as in standard GE, it's not critical exactly how the exchange takes place, and there can be different ways to describe it. Typically we don't describe it - because it doesn't matter. Everyone is optimizing, there's an equilibrium concept, and that's all we care about. You can think of everything happening simultaneously, with workers paying for their consumption goods with their wages and share income, which are paid in goods - which of course are the revenues the firms receive from the consumers. If you don't like that, think of the consumers paying for the goods with IOUs, which the firms use to pay their workers, and then all the IOUs are settled at the end of the period. You don't need money to execute any transactions in Woodford's world, and no one ever holds the stuff. Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-51325379125078519572015-03-28T09:53:10.634-07:002015-03-28T09:53:10.634-07:00"higher" in the last sentence of the pen..."higher" in the last sentence of the penultimate paragraph should read "lower".Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-65575355580646223162015-03-28T08:34:22.840-07:002015-03-28T08:34:22.840-07:00I'm sorry to come back rather late on this - I...I'm sorry to come back rather late on this - I was travelling and my question was too long to tap out on my phone. <br /><br />I don't really understand the point you are making about Woodford's model being equivalent to a barter economy. This may well be because I don't understand the model well enough, but when I work through what I think it is doing, it seems fairly critical to me that certain barter exchanges are disallowed. <br /><br />Starting from your outline of the model, I imagine that what is going on is something like the following:<br /><br />All agents have an account with a central registry (the Bank). The account balances can be positive or negative. All agents start with a zero balance. At the start of the period therefore, there are no assets (or liabilities). <br /><br />Firms set prices and determine how much they expect to sell. They hire labour and pay wages. Payment of wages involves firms instructing the Bank to debit their accounts and credit those of households. This gives households a positive balance on their accounts and firms a negative balance, i.e. firms are overdrawn. In the simplest case, we are assuming no constraint on the amount to which they can be overdrawn.<br /><br />Households then buy goods from firms. Payment is effected the same way. This results in firms having a positive balance, with households being overdrawn.<br /><br />Firms distribute profit to households (with payment effected the same way), leaving all balances at zero for the end of the period. In principle, any household could carry a positive balance to the next period, thereby deferring consumption, but they can only do so if some other household runs a negative balance and, as we are assuming identical households, this does not occur.<br /><br />There is an equilibrium set of prices (and wages) which achieves the optimal relative consumption between periods and balance between consumption and leisure within each period.<br /><br />We now want to consider a change in B, resulting in future consumption being valued more highly, whilst holding the set of prices and wages fixed. It is convenient to specifically consider that, at the start of period t, there is a change in the value of B that applies for discounting from period t+1 to period t, but there is no change in the value of B for discounting from all subsequent periods back to period t+1. In the limited scenario we have here, I think this implies there is no impact beyond the current period.<br /><br />In equilibrium, current consumption is given both by the Euler equation: u'(c) = u'(c*)Bp/p*, and by the balance between consumption and leisure: u'(c) = v'(n)w/p where w and p are wages and prices and * indicates the value for the next period (I'm assuming nominal interest of zero). With no change in the set of wages and prices, when B rises one of these conditions for current consumption must fail.<br /><br />If we allow households and firms to trade labour for goods, they will do so up to the point where u'(c)=v'(n)w/p. At this point, we have u'(c) < u'(c*)Bp/p*. Households would like to sell some of their current goods in return for a positive balance at the bank, thereby deferring consumption. But they will find no takers at the fixed price, because everyone is on the same side of the trade.<br /><br />If we disallow the barter exchange of labour for goods, households can only obtain goods through monetary exchange (that is through the process of credits and debits at the Bank). Since this now involves them giving up future consumption, they will only do so to the point where u'(c) = u'(c*)Bp/p*. This obviously involves a higher rate of consumption than in the barter case.<br /><br />I apologise if you feel that you have already addressed this in your exchange with Nick Rowe and I understand if you don't wish to go into it again. It's just that I've read through your comments and I just don't see it, so I feel I must be missing something fundamental.<br />Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-4332919491240834992015-03-26T12:30:13.441-07:002015-03-26T12:30:13.441-07:00Tell me -- does your tinfoil hat burn your scalp w...Tell me -- does your tinfoil hat burn your scalp when you go out in the sun? <br /><br />Inquiring minds want to know.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-66052913366683071692015-03-26T12:23:06.720-07:002015-03-26T12:23:06.720-07:00I would like to see DeLong and Levine in a room to...I would like to see DeLong and Levine in a room together. Krugman and Levine would also be good.<br /><br />Unfortunately, Krugman is no better than DeLong at figuring out what Levine is up to. As usual of course, it's always possible that Krugman understands but doesn't want to admit it.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-32974458407860668682015-03-26T08:19:24.221-07:002015-03-26T08:19:24.221-07:00Ah but de Long has slain Levine via picador Krugma...Ah but de Long has slain Levine via picador Krugman & matador Sims:<br />http://www.bradford-delong.com/2015/03/on-the-stupidity-of-anti-monetarist-economics-david-k-levine-vs-chris-sims-as-refereed-by-paul-krugman-with-additional-th.html<br />Though you may think of other bull-related concepts when reading de LongAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-18583088013355601252015-03-26T06:43:24.909-07:002015-03-26T06:43:24.909-07:00OK. Thanks for the discussion.OK. Thanks for the discussion.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-75638728250378963212015-03-26T06:32:01.290-07:002015-03-26T06:32:01.290-07:00"But if it does drop, underemployed individua..."But if it does drop, underemployed individuals would all gain from a barter deal where they all agree to increase consumption back to the original amount."<br /><br />That's just it. They can only make Barter deals at Woodford prices.<br /><br />"Each individual consumer chooses quantity of consumption taking other consumers quantities of consumption as given."<br /><br />Wrong. Other consumers' consumption quantities have no bearing in that model on an individual consumer's decisions. They optimize given prices.<br /><br />"Woodford's game is also symmetric with identical players, though it's not 2x2."<br /><br />The Nash game that firms are playing is not a prisoner's dilemma.<br /><br />I think we should stop here. You make bold statements about Woodford being wrong, Levine not knowing what he's doing, and some other people you think should go back to school. But, from what I've seen, I'd say you don't know your economics very well. You're also incredibly stubborn, and I think I'm probably wasting my time on this.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31663942909163320272015-03-26T05:28:22.682-07:002015-03-26T05:28:22.682-07:00"The central bank's setting for the nomin..."The central bank's setting for the nominal interest rate affects relative prices, which affects consumption, and then the Euler equation tells you how, in part. That's got nothing at all to do with barter exchange or the lack of it."<br /><br />For simplicity, hold all firms nominal prices fixed at competitive equilibrium relative prices forever. Then the central bank raises the nominal (and real) interest rate above the natural rate for one period. Woodford and the Euler equation say that consumption and employment will drop. But if it does drop, underemployed individuals would all gain from a barter deal where they all agree to increase consumption back to the original amount.<br /><br />"In Woodford's model, the consumers optimize by choosing quantities, treating prices as given."<br /><br />Agreed. But it's a Nash equilibrium. Each individual consumer chooses quantity of consumption taking other consumers quantities of consumption as given.<br /><br />"A prisoner's dilemma is a particular two-by-two game. Look it up."<br /><br />I know that. I was using it as an example of a symmetric game with identical players. Woodford's game is also symmetric with identical players, though it's not 2x2.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-63723958581375003232015-03-26T05:10:05.274-07:002015-03-26T05:10:05.274-07:00"He implicitly assumes that barter is ruled o..."He implicitly assumes that barter is ruled out when he uses the consumption-Euler equation to say the central bank sets the rate of interest and that affects consumption."<br /><br />That statement makes no sense. The Euler equation comes from the consumer's optimization problem. The central bank's setting for the nominal interest rate affects relative prices, which affects consumption, and then the Euler equation tells you how, in part. That's got nothing at all to do with barter exchange or the lack of it.<br /><br />"Consumers play Cournot Nash when choosing consumption, because they take their current period income from others' consumption as given."<br /><br />Wrong again. In Woodford's model, the consumers optimize by choosing quantities, treating prices as given.<br /><br />"Prisoner's Dilemma is a simple example of a symmetric game where all players make the same choice in equilibrium, but where to solve for that equilibrium we have to ask what would happen to an individual player's utility if he chose an action different from the other players."<br /><br />A prisoner's dilemma is a particular two-by-two game. Look it up.<br /><br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44029371919299472062015-03-25T17:34:17.308-07:002015-03-25T17:34:17.308-07:00And I have deleted the competitive labour market f...And I have deleted the competitive labour market for simplicity, and replaced it with worker-owned firms. It doesn't make any difference to anything.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67339482180618172722015-03-25T17:30:55.330-07:002015-03-25T17:30:55.330-07:00Woodford is wrong about his model being a non-mone...Woodford is wrong about his model being a non-monetary exchange model. He implicitly assumes that barter is ruled out when he uses the consumption-Euler equation to say the central bank sets the rate of interest and that affects consumption.<br /><br />Firms play Bertrand-Nash when setting prices (if Calvo's fairy lets them). Consumers play Cournot Nash when choosing consumption, because they take their current period income from others' consumption as given.<br /><br />Prisoner's Dilemma is a simple example of a symmetric game where all players make the same choice in equilibrium, but where to solve for that equilibrium we have to ask what would happen to an individual player's utility if he chose an action different from the other players.<br /><br />Borrow infinite amounts from the central bank, by consuming an infinite amount so the balance in his chequing account at the central bank goes to minus infinity.<br /><br />Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-85344696899859367652015-03-25T15:04:35.225-07:002015-03-25T15:04:35.225-07:00"I agree. That stuff needs to be introduced t..."I agree. That stuff needs to be introduced to explain why people need to use monetary exchange in Woodford's model, so we can make sense of NK model's results. That's what I'm saying."<br /><br />I thought you were telling me Woodford was wrong. How can we say he's wrong about his model if you're talking about a different one?<br /><br />"In symmetric Nash equilibrium..."<br /><br />Why is this Nash? I thought the labor market was competitive and there is monopolistic competition. Dixit-Stiglitz involves some strategic play, but that doesn't seem to be what you're getting at.<br /><br />"Prisoner's Dilemma"<br /><br />Whoa. What's that about?<br /><br />"Otherwise every agent will want to borrow infinite amounts..."<br /><br />From who? On what market?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36998613199218395042015-03-25T14:30:50.337-07:002015-03-25T14:30:50.337-07:00Though the practical difficulties of enforcing the...Though the practical difficulties of enforcing the no-ponzi condition probably explains why central banks issue currency, and don't let everyone have a chequing account that can have a negative balance. That's why the real world doesn't look exactly like Woodford's model of what central banks do. Whether that difference is big enough to matter,....I think maybe it is. But that's another question.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com