tag:blogger.com,1999:blog-2499715909956774229.post3779703548428514748..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Intuitive Neo-FisherismStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-2499715909956774229.post-41503866584831420012016-03-29T06:52:48.538-07:002016-03-29T06:52:48.538-07:00Thanks very much for your reply. I still dont foll...Thanks very much for your reply. I still dont follow the logic. Couple of clarifying points if I may:<br /> "And it doesn't work empirically, for example during the last few years inflation was falling and unemployment was falling."<br /><br />This was the point i was getting at - arguably it hasnt worked the past few years for exogenous reasons, Europe, China, oil, strong USD and the fact that we haven't been at NAIRU that long - at least in the US when we got there or thereabouts wages have started to pick up. At least for me its too early to say its not working. I looked at the original Phillips curve scatterplot, its not a super tight relationship that would lead you to think of a mechanical in level and time reaction function, particularly given the factors above. <br /><br />"Higher nominal interest rate makes interest-bearing assets more attractive relative to cash. So people start to dump cash and its price goes down, i.e. the price of goods in terms of cash goes up - inflation."<br /><br />Apologies - this part i just don't follow. If you have higher nominal rates, i can see interest bearing assets are more attractive - wouldnt this lead to higher savings rates? if people "dump cash" but are still buy interest bearing assets, i dont see how that leads to inflation - to me it sounds like it take money out of the economy, less demand for goods and services. In this world - how are the prices of things getting bid up, or company pricing power moving up? It seems like an identity rather than a practical model.<br />DannyTreeshttp://dannytrees.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-71105654512544131872016-03-28T15:48:31.971-07:002016-03-28T15:48:31.971-07:00"With the standard Phillips curve approach, I..."With the standard Phillips curve approach, I get it..."<br /><br />The problem is that that story actually doesn't make sense, though your reaction is a standard one - it seems to be intuitive. A tight labor market should make wages higher in units of goods (the real wage is higher), but it doesn't mean that prices or wages should be increasing at a higher rate in terms of money. And it doesn't work empirically, for example during the last few years inflation was falling and unemployment was falling.<br /><br />"I don't understand the transmission mechanism for higher rates to lead to higher inflation now..."<br /><br />Higher nominal interest rate makes interest-bearing assets more attractive relative to cash. So people start to dump cash and its price goes down, i.e. the price of goods in terms of cash goes up - inflation.<br /><br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-42477646028506519042016-03-28T12:51:47.946-07:002016-03-28T12:51:47.946-07:00Hi Stephen,
I'm trying to get to grips with th...Hi Stephen,<br />I'm trying to get to grips with the Neo-Fisher stuff as something of a layperson. Hoping you can help. So far I can see the evidence for it in some of the other pieces showing rates up inflation up and more recently and importantly rates down and inflation down. I don't understand the mechanism or flows in the economy that would make it happen though. With the standard Phillips curve approach, I get it - low rates increase demand, reduce project hurdle rates, hiring cycle, lower mortgages, falling unemployment and then tighter labour market, higher wages, higher prices etc. I can understand the view that we have not seen the inflation models predicted. To my (simple) mind, is this just a function of time - we are starting to see wages and inflation pick up now, the models I don't think predict a relationship that is instant or expressly direct in nature, more a loose framework. When looked at that way they are starting to to work? Also, can any inflation model survive the huge commodity price falls,and USD rise weve seen over the last couple of years when one woul'd have predicted via the Phillips curve inflation to have picked up. Absent those, and in the domestic sectors like rents and services, inflation doesn't look to be too far away from the more usual approaches. It seems like a lot of the case is made looking at other countries - Sweden, Switzerland as evidence the current standard approach isn't working, but these to me are evidence that the world is interconnected, and the exogenous factors keeping inflation down are impacting them as well - China over capacity and oil prices. The evidence presented looks compelling on the face of it, but I don't understand the transmission mechanism for higher rates to lead to higher inflation now? The only way I can see it happening is through a reverse of the idea that over time the return on capital drops to the cost of capital, and that hiking rates would lead to higher interest costs getting passed on. But that seems like a bit of a stretch overall? Apologies if I'm missing something obvious here?DannyTreeshttp://dannytrees.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55694985024658870542015-09-04T09:19:36.393-07:002015-09-04T09:19:36.393-07:00I had thought, though this is not entirely clear t...I had thought, though this is not entirely clear to me from the NK literature, that something like that is always in the model. That is, the policy rule can give you equilibria in terms of paths for the inflation rate, but you need something to pin down the price level,and B/P = present value of surpluses could give you that.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-26256038101049732342015-09-04T08:36:38.477-07:002015-09-04T08:36:38.477-07:00I had in mind something like the valuation formula...I had in mind something like the valuation formula for government debt Cochrane has used himself in his "Monetary Policy with Interest on Reserves". So we add in an equation saying that B / p is the present value of future real surpluses, with B as the nominal value of government debt and p as the price level and real surpluses as the exogenous policy instrument. This pegs the price level, so it eliminates the multiple equilibria problem in Cochrane's two equation model. Which path we get then depends on how B responds to a change in expected future interest rates (which depends on the term of the debt). If it responds enough, we get one of the paths that involves an initial deflation.<br /><br />This seems to me to be a natural extension of Cochrane's model, particularly as a way of dealing with the multiple equilibria issue.<br />Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-70128609989077294852015-09-03T08:57:41.541-07:002015-09-03T08:57:41.541-07:00"New monetarism" is just a name, like To..."New monetarism" is just a name, like Tom. There's no specific message in the name.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36238307259619364652015-09-03T08:56:01.534-07:002015-09-03T08:56:01.534-07:00Sure, if you want to talk about a different model,...Sure, if you want to talk about a different model, we could explore that. But I disagree with this:<br /><br />" It's not hard to add something like this into Cochrane's model and get a negative impact effect on F. "<br /><br />The baseline NK model has complete markets, so there's no role for debt, and we can't talk about the prices of long-maturity bonds going down when short rates go up, and that having any significance. Potentially what you're talking about is interesting, but the NK model is not the place to start in thinking about the issue.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-56812285556225677702015-09-03T05:23:53.836-07:002015-09-03T05:23:53.836-07:00"It's not clear why anyone would expect t..."It's not clear why anyone would expect the impact effect of the increase in R on F to be negative, if he or she understands what is going on in the model."<br /><br />Certainly, what the effect is in Cochrane's two equation model should be pretty clear. But I think the intuitive resistance to the idea that the impact effect on F is positive comes when we think about translating this effect to real economies.<br /><br />For my own part, this has nothing to do with the Philips curve, but rather things like the widespread existence of term debt. Most notable is that an expected permanent increase in rates would cause an immediate reduction in the real value of holdings of public debt. It's not hard to add something like this into Cochrane's model and get a negative impact effect on F. <br />Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-70293707361785244322015-09-02T16:35:57.095-07:002015-09-02T16:35:57.095-07:00You have a reply here, in case you didn't know...You have a reply here, in case you didn't know:<br />https://thefaintofheart.wordpress.com/2015/09/01/steve-williamson-should-change-the-name-of-his-blog-from-new-monetarist-to-new-fisherite/Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-42134265134038047392015-09-02T06:20:47.532-07:002015-09-02T06:20:47.532-07:00I am just talking about QE's effect on interes...I am just talking about QE's effect on interest rates (not the real economy). It seems to effect expected inflation the same way. Actual inflation is another matter altogether.ReturnFreeRisknoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-85440311288209805082015-09-02T06:11:06.325-07:002015-09-02T06:11:06.325-07:00QE is something else altogether. If it works at al...QE is something else altogether. If it works at all (in terms of ultimate effects on output and inflation), I don't think it works like conventional monetary policy - but that's another story.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-8515657124265153042015-09-02T06:00:29.625-07:002015-09-02T06:00:29.625-07:00Every time the Fed started QE (more money printing...Every time the Fed started QE (more money printing), interest rates rose and vice versa. Is not that evidence that we are in the Neo Fisherian world?<br /><br />QE-1 was formally adopted in March 2009, when the U.S. T-Bond yield was 2.53%, but by the end of QE-1, in March 2010, the yield had moved up to 3.83%, for a rise of 1.3% points. When the Fed launched QE-2 in November 2010 the T-Bond yield was 2.62%, but 3.16% when QE-2 was ended in June 2011 – a rise of 0.5% points. QE-3 began at the end of 2012, when the T-Bond yield was 1.76%, by the end of QE, it was 2.4%.<br /><br />This same dynamic happens every time that the Fed cuts rate in a deflationary environment. It is not conclusive but it is evidence.ReturnFreeRisknoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-40988510414347943722015-09-02T04:47:30.190-07:002015-09-02T04:47:30.190-07:00Volcker entered his term during an oil shock that ...Volcker entered his term during an oil shock that demanded large resets in relative prices and wages. If the reset, is upward (which is desirable to limit recessions and high unemployment) then higher than average inflation is necessary. If not allowed to spiral out of control, inflation will subside naturally once the reset is complete. Volcker left his term after Carter energy policy (fiscal and regulatory) was fully implemented and business and the economy had largely adjusted to energy by conservation and energy switching. <br /><br />Why did inflation not return when unemployment rates returned to low levels in the 90s? No major economic shocks demanded large relative resetting of wages and prices. The oil shock inflation had been addressed by Carter's energy policy. Many people cannot admit that Carter's policies were correct and they fixed the majority of the problem. Some economists believe that only monetary policy is important or only monetary policy should be used to guide an economy so dismiss out of hand very important regulatory and fiscal policy and very important interactions with monetary policy. So Volcker as the monetary avenger is credited with the fix and Carter who addressed the underlying problem, dismissed. This rewriting of history prevents people from learning the lessons of past successes that may be politically inconvenient today.<br /><br />By raising interest rates, Volcker made financing of energy conservation and energy switching much more expensive and possibly slowed the implementation that addressed the underlying cause of inflation: the oil shock. Volcker caused much misery and unnecessary unemployment with his misguided over the top policy. Of course he is praised by the wealthy elite special interests and their minions for diminishing the power of labor and setting the table for corporate execs to grab more of the economic pie at the expense of labor that has seen stagnant wages.<br />-jonny bakebakhohttps://www.blogger.com/profile/16472764185459425186noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67726429853424470232015-09-01T17:34:32.743-07:002015-09-01T17:34:32.743-07:00Science marches on.Science marches on.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67763304386533032792015-09-01T16:47:35.027-07:002015-09-01T16:47:35.027-07:00I learned something here.
I learned that you can ...I learned something here.<br /><br />I learned that you can connect the dots in a Fred dot-plot with lines.<br /><br />Thank you.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-9496233176043887442015-09-01T13:17:41.043-07:002015-09-01T13:17:41.043-07:00Interesting stuff. I posted a couple responses her...Interesting stuff. I posted a couple responses here: <a href="http://noahpinionblog.blogspot.com/2015/08/non-intuitive-neo-fisherism.html" rel="nofollow">http://noahpinionblog.blogspot.com/2015/08/non-intuitive-neo-fisherism.html</a><br /><br />I hadn't thought about things in R = F + L + r terms before, so that's interesting. Of course I agree that Marshallian partial-equilibrium intuition is not the only intuition or always good intuition. Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.com