tag:blogger.com,1999:blog-2499715909956774229.post4651088324732306940..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: The State of the WorldStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger41125tag:blogger.com,1999:blog-2499715909956774229.post-60041323529921627692012-10-25T09:19:46.750-07:002012-10-25T09:19:46.750-07:00Consider a 1-year zero coupon bond worth 100, in r...Consider a 1-year zero coupon bond worth 100, in real terms, at maturity. A 2% inflation policy imposes a constraint of P <= 102 in real terms.Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-64458311401566841002012-10-24T04:44:43.367-07:002012-10-24T04:44:43.367-07:00"...when there is a binding price constraint&..."...when there is a binding price constraint"<br /><br />What is the binding price constraint in this case?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7322816148375189622012-10-23T12:30:38.377-07:002012-10-23T12:30:38.377-07:00Normally, when there is a binding price constraint...Normally, when there is a binding price constraint, it causes a market not to clear. In this case, as it happens, the central bank's promise both imposes the constraint and changes the demand curve in such a way as to allow the market to clear in spite of it. There are conceivably other ways to impose the constraint (e.g. the government could refuse to enforce bond contracts with a real yield less than -2%) that would not affect the demand curve and therefore would cause the market not to clear. However, given that the constraint is imposed, the central bank's promise is necessary to clear to the market.Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-47891160847013747682012-10-23T07:47:21.667-07:002012-10-23T07:47:21.667-07:00Andy,
I can't get past your first sentence. D...Andy,<br /><br />I can't get past your first sentence. Do you think that financial markets don't "clear" unless the central bank makes particular promises?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-25767764827132431352012-10-23T07:43:41.702-07:002012-10-23T07:43:41.702-07:001. There is no single summary measure of inefficie...1. There is no single summary measure of inefficiency.<br />2. How do you measure it?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-37131746416694454992012-10-22T23:37:31.894-07:002012-10-22T23:37:31.894-07:00Stephen, isn't this just upside down semantics...Stephen, isn't this just upside down semantics, similar to Scott Sumner's "loose" and "tight" monetary policy?<br /><br />You're saying the government should issue more debt until the interest rate rises? Doesn't the interest rate rise in response to inflation?<br /><br />How is this different than regular old Keynesian and monetary policy other than you being agnostic on government spending vs. tax cuts and skeptical that a "natural" rate can be quantified?<br /><br />Krugman's saying we should increase the deficit now by issuing more debt and the market's telling us this by buying our debt at negative real rates. And that this combined with monetary policy will push the inflation rate higher, which in turn will push up interest rates.<br /><br />How is what you're saying different?<br />anonnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-64842525464848200262012-10-22T15:37:09.717-07:002012-10-22T15:37:09.717-07:00Interesting point!
I believe the intuition here i...Interesting point!<br /><br />I believe the intuition here is to change the behavior of people who'd rather *hold cash* than invest in corporate bonds. The basic idea is the offer them something as safe as cash (government debt) and then funnel the money they spend to buy these bonds into government spending. You are certainly correct that this also gives the folks who *wanted to buy corporate debt* a better alternative than cash! I guess the thinking there is that all spending (private or public) is equal, so diverting this money will do no damage.<br /><br />I believe the overall recovery that Krugman and company are hoping for involves getting this government spending into the hands of currently no/low income workers and giving them a way to pay down their debt. The hope is that once their debt levels get low enough, they will start spending on consumption. This will get more businesses interested in investment. And the government slowly backs off from it's deficit. The government has sorta spun a new spending whirlwind into place.<br />marrishttp://leaveofliberty.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-84230379909946766922012-10-22T10:50:06.386-07:002012-10-22T10:50:06.386-07:00I am a bit surprised that the European crisis has ...I am a bit surprised that the European crisis has stayed out of the discussion of why the recovery has been so slow. <br /><br />I am also surprised with the cult-like behavior of Som Dasgupta and other Krugman followers. Pathetic!CAnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-1064843515540137242012-10-22T09:09:05.981-07:002012-10-22T09:09:05.981-07:00It does distort markets. But when we're alrea...It does distort markets. But when we're already in a second-best environment due to lack of commitment (which is why we don't have enough safe assets) then distorting markets is not necessarily bad.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-71850826681193990192012-10-22T08:43:37.131-07:002012-10-22T08:43:37.131-07:00It seems to me that the market for financial asset...It seems to me that the market for financial assets only clears because the central bank makes a promise to produce an artificial scarcity of base money in the future, once the "asset shortage" has passed. Absent such a promise (and absent nominal rigidities), there is no reason that the market-clearing real interest rate couldn't fall far below negative 2% when safe assets are hard to get. (For example, if we had a commodity currency and prices/wages were flexible, the real value of money in terms of current goods could rise far above its expected future value, allowing financial assets to offer arbitrarily low real yields.) But the Fed has a 2% target inflation rate, which is essentially a promise to constrict the supply of base money in the future, leading a lot of agents who would otherwise want to hold scarce financial assets to forego them in favor of base money. By targeting the inflation rate, the Fed is essentially saying, "Stop trying to buy bonds. Instead, hold this base money we produce. We promise we'll buy it back from you in the future (if nobody else does) at a price that gives you an effective yield of negative 2%." And this way people do stop trying to buy bonds, and the market for bonds clears at a price that is artificially depressed by the Fed's promised intervention. Doesn't this promise distort markets?Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-28330094489726869672012-10-22T07:49:58.373-07:002012-10-22T07:49:58.373-07:00Steve
A few comments and questions:
(1) Please pr...Steve<br />A few comments and questions:<br /><br />(1) Please provide me with a model that (with the parameters and assumptions) that gives me the "fundamental" value of : (a) a 500 sq ft. apartment on the Upper West side of Manhattan, built this year. (b) the price of 10-year American style put option on (lets keep this interesting) on AAPL, struck at-the-money spot. Same requirements (parameters, assumptions etc) apply.<br /><br />(2) "Fundamental Value" means different things and values to different people. Price deviations from these theoretical values occur all the time (which gives rise to trading) and are not necessary to imply a bubble. <br /><br />(3) Maybe you are surrounded by too many right-side-heavy many bubble heads.<br /><br />(4) Lastly (not that any defense is needed) Krugman has actually been extremely accurate in his characterisation of the economy, inflation and rates in the last 4-5 years. You have not. So until you do, bow down low from your waist and s-t-fup about Krugman.<br /><br />(5) any number of people can solve pde's etc etc.(yes even I can ! :-) ) but only a precious few have true insights like Krugman. Your point of departure is the same hackneyed right-wing supply side canard that can never stand up to even a mild scrutiny.<br />Som Dasguptahttps://www.blogger.com/profile/11848089230329819807noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-60318366072186091002012-10-22T06:10:17.916-07:002012-10-22T06:10:17.916-07:00Then that's fine. You agree there is no shorta...Then that's fine. You agree there is no shortage. Everyone who wants to hold safe assets at the market clearing interest rate does hold safe assets. So the safe market rate of interest is not "too low". It is infact at it's "natural level" which has declined. Now if for some reason, say a ZLB, the nominal market price is prevented from adjusting upwards then the expected rate of deflation exceeds the real rate of interest and there will be an excess demand for safe assets. The argument Krugman etc. make is that in this case the expected price level is the adjustment variable that equilibrates.. making the natural rate you describe and the market rate equal. But what you are describing is how the natural rate changes.. It is not an explanation of any "shortage"ffnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67537385685649522072012-10-22T05:16:09.847-07:002012-10-22T05:16:09.847-07:00Why?Why?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-8642818719692045632012-10-22T05:09:40.833-07:002012-10-22T05:09:40.833-07:00The government could send out "stimulus check...The government could send out "stimulus checks" every quarter until the 10-yr US treasury hits 4% (or some other number). Then it would be: 1) Temporary and 2) Spending discretion would be with individual citizens.Doc at the Radar Stationnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11200852031312323402012-10-22T04:43:05.134-07:002012-10-22T04:43:05.134-07:001. The market clears.
2. Shift the supply curve, n...1. The market clears.<br />2. Shift the supply curve, not the demand curve.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-28445107104140380382012-10-22T04:40:21.914-07:002012-10-22T04:40:21.914-07:00"...doing something productive with the proce..."...doing something productive with the proceeds"<br /><br />Whether the government should be spending more, and if so, on what, are other issues. You can increase the quantity of government debt by reducing taxes. The difficulty is that the problem is temporary, and you want a temporary increase in government debt. This requires more dexterity than the fiscal authority in the U.S. is capable of.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-12131114202161441232012-10-22T04:36:37.532-07:002012-10-22T04:36:37.532-07:00I'm not particularly fond of the concept.I'm not particularly fond of the concept.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-16061974006969120232012-10-22T04:34:37.691-07:002012-10-22T04:34:37.691-07:00The market clears. Shift the supply curve to the l...The market clears. Shift the supply curve to the left. What happens?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-35821414913506757152012-10-22T04:32:48.857-07:002012-10-22T04:32:48.857-07:00I'm not suggesting that financial markets don&...I'm not suggesting that financial markets don't clear.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-64578566041681657092012-10-22T04:30:45.545-07:002012-10-22T04:30:45.545-07:00David,
"The very reason, however, that forme...David,<br /><br />"The very reason, however, that formerly safe assets were destroyed in the first place is because of massive shift in investors preferences toward safe assets."<br /><br />No. You have the causation going the wrong way.<br /><br />Noah,<br /><br />"What does the "natural rate of interest" really mean?"<br /><br />Woodford likes this notion, but I'm not sure it's useful, just as the "natural" rate of unemployment is not so helpful. People seem to want some summary statistic that will tell them if an inefficiency exists. Good luck. The funny thing is, you can find plenty of people who will quote you a number for the natural rate of unemployment (Kocheralakota says it's 5.5%). The natural rate of interest seems important to some people, but I've never seen an estimate.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-26996063774339559882012-10-21T20:19:41.253-07:002012-10-21T20:19:41.253-07:00This makes sense to me. The government (i.e.) nee...This makes sense to me. The government (i.e.) needs to increase the supply of safe assets by issuing more debt and doing something productive with the proceeds (bridges to somewhere). When the interest rate on safe assets, for example 10-year treasuries, rises above 4%, then issue less debt. Have I got it right?Doc at the Radar Stationnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44604606174531415282012-10-21T19:17:26.827-07:002012-10-21T19:17:26.827-07:00My guess here is that the demand for safe governme...My guess here is that the demand for safe government bonds immediately moves gov bond prices to a higher equilibrium and their interest rates to a lower equilibrium ,as you and Ram and FF say. <br /><br />But the return the government can earn on safe projects is unchanged (or hasn't fallen that much).<br /><br />So why isn't the government issuing more debt in order to start on these projects, thus arbitraging away the difference between cost of funding and return on capital? Why hasn't it issued as much debt as it could have?<br /><br />The core problem is that there are profitable opportunities not being exploited. There is some sort of "gap". Perhaps the government's monopoly on various sectors is to blame as it prevents others from taking the bull by the horns.<br /><br />I think Steve has talked about some of these things in the past, but I may be putting words in his mouth.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-61394098527674756272012-10-21T19:02:58.136-07:002012-10-21T19:02:58.136-07:00"The "natural rate of interest" has..."The "natural rate of interest" has not fallen. For more detail, see this post, point #1."<br /><br />Why do you put the term natural rate of interest in scare tags? You did the same with the phrase Wicksellian rate in point #1 of the post you link to. <br /><br />Do you have a better word? Or do you have problems with the underlying concept that the phrase "natural rate of interest" is supposed to represent?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44526508121247050952012-10-21T18:19:45.496-07:002012-10-21T18:19:45.496-07:00Stephen,
If the supply of safe assets shifts to t...Stephen,<br /><br />If the supply of safe assets shifts to the left, then shouldn't the price adjust to clear the market? What's keeping the market from getting to equilibrium, and is maintaining the excess demand? Are you saying there is a government price control or price stickiness?JoeMachttps://www.blogger.com/profile/12650518988624821388noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-30465713404804229252012-10-21T18:18:38.133-07:002012-10-21T18:18:38.133-07:00If you manage to refute FF, instead of just repeat...If you manage to refute FF, instead of just repeatedly saying he/she's wrong, I'll be impressed. A shortage of safe assets is equivalent to a glut of funds chasing safe investments. If there is a glut of funds, lowering the cost of funds clears the market. Period. What else could you have in mind?Ramnoreply@blogger.com