tag:blogger.com,1999:blog-2499715909956774229.post1866076044300409586..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: What the Fed Thinks It's DoingStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-2499715909956774229.post-87596614577797581112011-01-19T05:36:49.334-08:002011-01-19T05:36:49.334-08:00Dear Stephen,
I came across the reference to our ...Dear Stephen,<br /><br />I came across the reference to our paper (Vayanos-Vila) in your post above. We are not assuming that assets enter in the utility function, unlike what is claimed in your post. We are instead assuming that investors want to consume at specific dates, and are infinitely risk-averse over consumption. (For example, a pension fund might have inflexible commitments to pay pensions at fixed dates.) A riskfree consumption profile at a specific date can be achieved by holding the zero-coupon bond maturing at that date, but also by replicating that bond using a trading strategy that involves other bonds. For example, an investor wanting to consume in fifteen years can hold the fifteen-year zero-coupon bond, but can also invest in a portfolio involving the one- and the thirty-year bonds, and rebalance continuously. The key point is that preferences are over riskfree consumption in fifteen years and not over the fifteen-year zero-coupon bond.<br /><br />Our work is definitely not the last word on preferred habitat, and there is scope for better theories. But claiming that preferences in our paper are over assets rather than over consumption is incorrect, in my opinion.<br /><br />Best,<br /><br />DimitriDimitri Vayanoshttp://personal.lse.ac.uk/vayanos/noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-52405811612418708322011-01-15T12:02:43.978-08:002011-01-15T12:02:43.978-08:00JP,
That's exactly the idea. You want a theor...JP,<br /><br />That's exactly the idea. You want a theory of asset prices based on the underlying payoffs on the assets, and how those assets are used in exchange. Assuming people hold money, or Treasury bills, or mortgage-backed securities because they like them does not help us understand anything.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13742658445452748502011-01-14T18:40:01.331-08:002011-01-14T18:40:01.331-08:00"Thus, we can safely say that we are still wa..."Thus, we can safely say that we are still waiting for a good theory of preferred habitat."<br /><br />...and this proceeds from the fact that - given the tradition in which you work - assets, along with money, cannot go into the utility function. And the reason for this is because assets and money are - above all - intrinsically valueless, and therefore cannot enter the utility function, whereas consumer goods are valuable, utility-yielding, and the only items that can enter utility functions.<br /><br />Off topic I know, but just wanted to verify. Does that make sense?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-15619588390455241522011-01-12T12:21:30.361-08:002011-01-12T12:21:30.361-08:00Oops, I assume you understood I meant $600 billion...Oops, I assume you understood I meant $600 billion.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-19811084224409949962011-01-12T11:18:03.528-08:002011-01-12T11:18:03.528-08:00Right.Right.David Barkerhttps://www.blogger.com/profile/17243910374364993035noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-776560371092704012011-01-12T10:54:29.443-08:002011-01-12T10:54:29.443-08:00David,
In any case, it could well be that a $600 ...David,<br /><br />In any case, it could well be that a $600 purchase does not move Treasury yields at all.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-23203134042649843172011-01-12T09:44:09.035-08:002011-01-12T09:44:09.035-08:00Things may be different now than they were in the ...Things may be different now than they were in the short pre-Accord period. I think Friedman and Schwartz say the peg worked because of expectations of deflation after the war. There are also more alternatives to U.S. Treasuries for investors wanting riskless debt than there were in the late 1940s.<br /><br />If the world yield on riskless debt is i, getting a sustained yield greater than or less than i on U.S. debt will be pretty hard.David Barkerhttps://www.blogger.com/profile/17243910374364993035noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59760895209655453762011-01-12T06:27:45.316-08:002011-01-12T06:27:45.316-08:00Suppose the world price for riskless debt of a par...Suppose the world price for riskless debt of a particular maturity is P. If the Fed offers P+e for the stuff, it can get all it wants. Some people point to the pre-Accord (pre-1951) period in the US, when the Fed appears to have been able to peg long bond yields, as evidence that control of long rates by the Fed is feasible.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-30342869958169551972011-01-11T20:42:26.070-08:002011-01-11T20:42:26.070-08:00"Ultimately, of course, if the Fed were to pu..."Ultimately, of course, if the Fed were to purchase the entire stock of Treasury debt, it could certainly control long Treasury yields."<br /><br />Could it really? The price of the only Treasury security in the world might be high, but I don't think it would be higher than the price of a German bond plus the price of a currency hedge.David Barkerhttps://www.blogger.com/profile/17243910374364993035noreply@blogger.com