tag:blogger.com,1999:blog-2499715909956774229.post2192545372726317028..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: QE3 TalkStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger21125tag:blogger.com,1999:blog-2499715909956774229.post-62223243646952934332012-08-03T09:39:51.368-07:002012-08-03T09:39:51.368-07:00Please do write more about #1.Please do write more about #1.Adamhttps://www.blogger.com/profile/00848821084269314215noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-2424154699015924232012-07-28T08:39:42.740-07:002012-07-28T08:39:42.740-07:00Above I meant the true state-return-vector (X in t...Above I meant the true state-return-vector (X in the paper), not the state-price-vector, to add the error term to.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-6419119291649219402012-07-26T22:39:46.828-07:002012-07-26T22:39:46.828-07:00Thanks Stephen,
I really would like to go over th...Thanks Stephen,<br /><br />I really would like to go over that paper. Right now I'm still putting whatever time I can find into Wallace's 1981 AER. I'm trying to understand every equation, term, and sentence, seperately and in combination completely, and with the important intuitions to the real world. I'm about 70% there; it's definitely been interesting going into a very new area on my own like this with no one to ask questions (although it definitely helped that the state price paradigm is common and big in finance), a very interesting exercise.<br /><br />What I'd like to look into, too, when I'm finished going through the paper, is expanding on it by adding an error term, Eh, to the true state price vector and/or state probability vector to model heterogeneity of investor beliefs, something that obviously exists in large measure in the real world. I think if I did this I could prove that the irrelevance proposition no longer holds, and may be able to get some interesting results as to how and why.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-73477286937053298272012-07-26T14:16:58.909-07:002012-07-26T14:16:58.909-07:00ironically fellas named Bernanke and Gertler wrote...ironically fellas named Bernanke and Gertler wrote a paper that the recessionary impact of high oil prices was primarily due to monetary policy responses. The Fed kept rates at 2% in sept 2008 even after lehman just collapsed and business conditions were worsening, for fear of inflation due to .... high oil prices that summer. heh. the irony. ever wonder if in bernankes memoirs he'll express regret?dwbhttps://www.blogger.com/profile/02799793864068767226noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59719104717304491362012-07-26T10:50:56.813-07:002012-07-26T10:50:56.813-07:00"To people who study market microstructure, t..."To people who study market microstructure, this might make sense, but I think economists will have trouble explaining it. Why would we think of the market for Treasuries as segmented in this fashion? "<br /><br />Messrs Scholes and Merton had troubles explaining it too - one reason that LTCM went bankrupt is because they were trying to arbitrage between on-the-run and off-the-run treasuries while abstracting from the very real liquidity issues that drive the gap between these securities. That seems to symbolize how modern economists think - assume away real life details like liquidity and sticky prices because they don't fit into some idealized model. At least with Merton and Scholes, their error was revealed by the markets, but one wonders how other economists who never need submit their ideas to a true market place ever get disciplined. <br /><br />"There are financial frictions that gum up the private sector's ability to do something like QE."<br /><br />No kidding. What private institution has the muscle to precommit to $600 billion worth of asset purchases over a few quarters? Probably none. Even if there were a few that could, why would they pre-announce? No, that would amount to financial suicide.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-51482834049169880822012-07-26T09:59:38.801-07:002012-07-26T09:59:38.801-07:00Does the Fed have any understanding that is should...Does the Fed have any understanding that is should not do anything about inflation, if it cannot do anything about the cause of inflation?<br /><br />Specifically, I am asking about Oil, which has gone up 50 times in price, since Something Big Happened in the 1970s?<br /><br />Oil prices are frequently, if not often, driven by events external to the US economy.<br /><br />For example, the evidence is convincing to many that the 2008 crisis was caused by a one two punch: (1) rises in oil prices followed by (2) increases in interest rates. (Stock/Watson 2012)<br /><br />Said differently, has the Fed learned its lesson that, in response to oil price increases, that it should lower rates?<br /><br />Surely we can have agreement on the proposition that an oil price increase is, in economic effect, the same as a tax increase<br /><br />Prices may go up, but the effect will be deflationary.Anonymoushttps://www.blogger.com/profile/07904132869021579763noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-5283682308579108212012-07-26T09:14:35.217-07:002012-07-26T09:14:35.217-07:00Even if the chicken model premise is valid, the qu...Even if the chicken model premise is valid, the question remains as to whether LSAP's should be carried out by the fiscal authority, not the central bank. This sis an institutional issue: contingent tax liabilities are better created through the appropriations process. The Fed's independence will be at risk if it resorts to creating contingent tax liabilities under the guise of monetary policy.Anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-28867071562485820252012-07-26T08:54:04.623-07:002012-07-26T08:54:04.623-07:00Thanks.Thanks.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-15315953198759242662012-07-26T07:20:03.487-07:002012-07-26T07:20:03.487-07:00i forgot to mention, an important driver among tho...i forgot to mention, an important driver among those half dozen reasons i mentioned is the tax /accounting implications of premium/discount.<br /><br />for example, you can see the differential price of various treasuries on the WSJ page<br /><br />http://online.wsj.com/mdc/public/page/2_3020-treasury.html?mod=mdc_bnd_pglnk<br /><br />these three bonds nearly 10 years remaining are worth highlighting:<br /><br />maturity, coupon, bid price, ask price, chg, ask yield<br /><br />5/15/2022 1.750 103.1094 103.1719 -0.0156 1.403<br /><br />8/15/2022 7.250 155.5938 155.6406 -0.0469 1.322<br /><br />11/15/2022 7.625 160.0938 160.1875 0.0000 1.349<br /><br />The 8/15/2022 bond has a price of 155.64 because it is really old with a high coupon. the $55.64 premium over par could have some peculiar tax capital/gain loss consequences depending on the investor circumstances. Its not just that the market for off the runs is less liquid: the demand for bonds with a significant premium/discount to par makes them less liquid as well.dwbhttps://www.blogger.com/profile/02799793864068767226noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13957209620544356272012-07-26T07:06:27.085-07:002012-07-26T07:06:27.085-07:00"This difference in price is thought to be a ..."This difference in price is thought to be a liquidity premium, in that the market in on-the-run Treasuries is more liquid because it is thicker. To people who study market microstructure, this might make sense, but I think economists will have trouble explaining it. "<br /><br />There are lots of economists who have looked at this, i have texts going back 50 years. <br /><br />There are a number of things that diminish the availability of older treasuries. The supply itself of older treasuries is generally lower because of the mere fact that the national debt has a 225 year up trend. Older treasuries are often broken into strips (i.e. split into the discrete cashflows). Once broken up, hard to put back together. Bonds, once placed with buy-and-hold investors, can be difficult to pry from them (for tax or other reasons they may not want to sell). I can think of a half dozen other reasons availability of older bonds is lower. <br /><br />Conversely, Treasuries are also used for hedges (i.e. to hedge mortgages or imminent issuance). If you are using it to hedge something indexed to the ten year treasury (most contracts specifically mention the most current on-the-run) then the most efficient hedge is the exact bond the index is tied to. This phenomenon tends to create specific demand for that bond. And you only want to hedge with a bond that is easy to sell.<br /><br />Why the Fed cares is another matter. If you buy the argument that QE works by taking risk off the market onto the Feds balance sheet, that argues for buying off the runs, not on the runs, since they are riskier. Of course, it might be hard to do the size the Fed needs for the availability reasons i mentioned above...<br /><br />Oh, and i think QE will not do much good without updated guidance as well, ideally in the form of an economic target not a calendar-date.dwbhttps://www.blogger.com/profile/02799793864068767226noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88320113620783061592012-07-26T06:43:17.512-07:002012-07-26T06:43:17.512-07:00What determines capacity? You would think that'...What determines capacity? You would think that's endogenous. If the Fed starts taking their business to the banks, then capacity will increase.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-60442135097256753852012-07-26T06:41:00.239-07:002012-07-26T06:41:00.239-07:00Richard,
All you have to do is start with the mod...Richard,<br /><br />All you have to do is start with the model in this paper:<br /><br />http://www.artsci.wustl.edu/~swilliam/papers/web%20page%20paper.pdf<br /><br />That's forthcoming in the AER, so it's not completely goofy. Just extend it by including bonds of different maturities, and show that, in the liquidity trap equilibria, you can do swaps across maturities and it won't matter. There are ways to be more ambitious, but that's a start. I haven't had time to write it down formally, but the reasoning is all in my blog posts.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31104352997098056012012-07-26T06:33:30.929-07:002012-07-26T06:33:30.929-07:00Yes, but all the major banks, and the GSEs are on ...Yes, but all the major banks, and the GSEs are on the approved list too. You could lose all the MMFs and seemingly not put a dent in the Fed's ability to do reverse repos.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-63056476548730949652012-07-26T05:22:28.415-07:002012-07-26T05:22:28.415-07:00@ SW - the banks only have so much capacity to do ...@ SW - the banks only have so much capacity to do reverse repos with the Fed. I would guess that capacity might be insufficient, and hence the Fed wants to be able to trade with the MMFs.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44231202841669579302012-07-25T21:40:30.990-07:002012-07-25T21:40:30.990-07:00Stephen,
What are the key papers on which you bas...Stephen,<br /><br />What are the key papers on which you base your conclusion that QE cannot have any effect under current circumstances? Please let us know so that we can study these papers.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-52030555512955399032012-07-25T21:07:19.768-07:002012-07-25T21:07:19.768-07:00See here: http://www.newyorkfed.org/markets/rrp_co...See here: http://www.newyorkfed.org/markets/rrp_counterparties.htmlLancehttps://www.blogger.com/profile/13501887116369167662noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-14831648178167715342012-07-25T21:05:47.799-07:002012-07-25T21:05:47.799-07:00I think it would be purely from an institutional p...I think it would be purely from an institutional point of view. I think the Fed can only conduct reverse repo's with institutions on an approved list of counterparties. Some of these CP's are MMF's. If MMF's drop in significance from withdrawals, this might impede the Fed's ability to conduct reverse repo operations to withdraw excess liquidity.Lancehttps://www.blogger.com/profile/13501887116369167662noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-1708917529408492472012-07-25T18:27:55.042-07:002012-07-25T18:27:55.042-07:00Exactly. The Fed claims it can move long Treasury ...Exactly. The Fed claims it can move long Treasury rates. Why not target the whole term structure if that's the case?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59401990459771385062012-07-25T16:30:09.833-07:002012-07-25T16:30:09.833-07:00"Indeed, it's always puzzled me that the ..."Indeed, it's always puzzled me that the FOMC has not conducted its asset purchase programs in the way it formerly targeted the fed funds rate. Why not fix the path for purchases until the next FOMC meeting, and revisit the issue at each subsequent meeting?"<br /><br />Also, why are they specifying a quantity of purchases rather than targeting an interest rate?Robertnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-23988007717874383482012-07-25T13:50:34.480-07:002012-07-25T13:50:34.480-07:00Why do you need a MMF to do a reverse repo?Why do you need a MMF to do a reverse repo?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-3684065587106094092012-07-25T12:45:51.134-07:002012-07-25T12:45:51.134-07:00re MMF disruption - presumably the fed needs the M...re MMF disruption - presumably the fed needs the MMFs for their reverse repos when they begin to tighten, so putting them out of business now might not be the best idea?<br /><br />there seems to be plenty of evidence from japan that ZIRP has reduced private sector participation in the money market.Anonymousnoreply@blogger.com