tag:blogger.com,1999:blog-2499715909956774229.post484652195214651749..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Multiple Equilibria, Installment #2Stephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-2499715909956774229.post-26995656796050766822016-08-14T09:10:39.090-07:002016-08-14T09:10:39.090-07:00Prof, I have a question for you. Why did Bernanke ...Prof, I have a question for you. Why did Bernanke save big business but let the RE industry decline and crash in 2008? Was it because the bonds backing RE were inferior to the bonds backing big business? I noticed big business bonds are used as collateral more and more, and I don't know if MBSs are used again as collateral. <br /><br />If that was the case, I am a bit disappointed in the Fed because the Fed adopted the flawed David X Li Copula that led to so many MBSs going bad. I would have thought the Fed had a responsibility to fix that mistake by saving the Commercial Paper market that was the foundation of subprime lending during that time. <br /><br />I guess that leads to my second question: why didn't the Fed save RE because of Basel 2's involvement in backing mispriced risk in the MBSs in the first place?Gary Andersonhttps://www.blogger.com/profile/15499434824034613894noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59347661335801511742016-08-04T13:39:20.970-07:002016-08-04T13:39:20.970-07:00I am not an economist. But clearly, demand for tre...I am not an economist. But clearly, demand for treasury bonds, rising price and falling yields, have nothing to do with the real economy, since the yields have been declining since Greenspan took office, in good and bad times. So, bonds have a demand of their own, regardless of other factors. They have demand as collateral, starting with the Salomon Brothers, and now the shorter duration bonds have demand as essential bank capital required by Basel. So, it would seem, nothing is going to get in the way of bond demand except for the occasional tantrum, the process of shaking weak hands out so they will sell their bonds.<br /><br />More economists should focus on the supply and demand of bonds themselves. The demand is increasing and it appears that the supply is decreasing. JMO from a non economist. Gary Andersonhttps://www.blogger.com/profile/15499434824034613894noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-3288099372903462212016-08-02T06:25:52.049-07:002016-08-02T06:25:52.049-07:00Well, Paul would never really engage, which was no...Well, Paul would never really engage, which was no fun. Sorry this a bit technical for most people, but if no one else can figure it out, at least I'm learning something - I think.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44709971207556803832016-08-01T14:10:29.790-07:002016-08-01T14:10:29.790-07:00Another great post! Once you stopped blogging abou...Another great post! Once you stopped blogging about Paul Krugman you became the best macro-blogger in the business...hehe :-)Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-18570181112378927452016-08-01T08:30:49.854-07:002016-08-01T08:30:49.854-07:00This was where this literature went. Models like t...This was where this literature went. Models like this needed a big income effect to get sunpsot equilibria, some people argued this wasn't plausible, and some other people explored other types of models. In some of Farmer's work, for example, you need sufficient increasing returns.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-79627611649989469112016-08-01T07:51:40.338-07:002016-08-01T07:51:40.338-07:00Hi Stephen, Equilibria respond to context... the e...Hi Stephen, Equilibria respond to context... the environment in which they are found. The context we have now is very high corporate profit rates with very low nominal rates. <br />According to a model that I am developing with a mathematician. Inflation is in a rut because of this unusual situation of high profit rates and low nominal rates. We are exploring equations for the forces acting within this context. <br />Here is a post that talks about a 3% inflation target.<br />http://effectivedemand.typepad.com/ed/2016/07/3-inf-target.html<br /><br />The model also implies that a rise the Fed rate would move the data points to the left from the current extreme on the lower right. There would be enough profit rate to absorb the rise in the Fed rate. The question is... Do the dynamics of the forces then create a situation where corporations will start to raise prices without causing a freefall toward a 0% real profit rate. The real profit rate is currently around 8% which is historically still very high.<br /><br />I hope that this model will place some proper context on how the Fisher effect would work now, but why it wouldn't have worked in previous business cycles. <br />My concern with your theories is that you are trying to apply them to all business cycles. Yet I think the Fisher effect will only work when there is a very wide positive difference between profit rates and nominal rates. <br />This situation exists in Japan and other places where inflation has fallen into a low rut. Taking nominal rates even lower increases the spread between profit rates and nominal rates and keeps inflation in its low rut. Corporations need to be "disciplined" with a higher rate to bring down their profit rates to a point where they begin to feel a need for firming up prices. Real profit rates are high enough to absorb higher nominal rates, but in past biz cycles they were not.<br />Nick Rowe has always looked to the past to explain why the Fisher effect would not work. But the context has changed, and it looks like it would work now solely because of the very high spread between profit rates and nominal rates.Edward Lamberthttp://effectivedemand.typepad.com/noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58866306186597737892016-08-01T07:19:14.425-07:002016-08-01T07:19:14.425-07:003. I think it's more an intertemporal consumpt...3. I think it's more an intertemporal consumption/leisure substitution effect, for the young workers (old consumers don't have any choices). But in either case, the income (wealth) effect from currency, which is around 5% of NGDP in countries like Canada, won't be very big.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-74352870427130577092016-08-01T06:09:45.579-07:002016-08-01T06:09:45.579-07:00No, it has nothing to do with transversality.No, it has nothing to do with transversality.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-62149346427332594722016-08-01T00:47:28.232-07:002016-08-01T00:47:28.232-07:00I believe Kocherlakota’s critique simply regards t...I believe Kocherlakota’s critique simply regards transversality conditions. What he seems to imply is that if the usual transversality makes sense when you select a certain solution (equilibrium) it is not obvious that you can select another solution simply forgetting about checking the validity of the transversality condition.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-61557061413457538502016-07-31T19:13:21.227-07:002016-07-31T19:13:21.227-07:00"What we are trying to see is how robust are ..."What we are trying to see is how robust are the claimed results of any model with respect to people's long-term expectations."<br /><br />Here, expectations are endogenous. In an rational expectations equilibrium you don't get to change expectations exogenously. If we're allowed to do that, it's clear we can get all kinds of behavior. That's not fragility, it's a different way of looking at the world. Change assumptions, you change results. We either think it's useful or not.<br /><br />2. Basically, the money growth rule offsets incipient changes in money demand.<br /><br />3. In Costas's model, you get sunspot equilibria when the income effect is large enough.<br /><br />4. It's a claim about inflation. Want inflation to go up? What should the central bank do to its interest rate target?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-51652658850566640792016-07-31T15:31:20.370-07:002016-07-31T15:31:20.370-07:00Thanks Steve!
1. If I were forced to take P(T) li...Thanks Steve!<br /><br />1. If I were forced to take P(T) literally, I would say there is a currency reform at time T, where all the old money is redeemed for real goods at a price P(T), and then a new money is issued.<br /><br />Why doesn't the government/central bank do something like this every period, to pin down the price level? Because it's a costly hassle; and it doesn't need to. Simply the threat that it might do it, eventually, if needed, should be enough (provided monetary policy is sensible). Fiscal policy has other jobs to do, and can't do those jobs if it is also being used to target inflation (or whatever).<br /><br />But I would prefer not to take it that literally. What we are trying to see is how robust are the claimed results of any model with respect to people's long-term expectations. If the results are very fragile, even in the limit when "long-term" means infinitely long term, I wouldn't trust that model.<br /><br />2. That last bit, about optimal monetary policy to kill off indeterminacy, is interesting. I'm trying to get the intuition. Does it amount to announcing a very price-elastic money supply rule, at some (implicit) price level target? So the central bank increases M if the price of money rises above that implicit target, and reduces M if the price of money falls below that target?<br /><br />3. Empirically, I think the mechanism that drives the results in Azariades' model is too small to matter. When the young expect higher inflation, the higher inflation tax causes them to supply less labour, because their wages will be worth less when they spend them. This only applies to currency, which pays 0% interest. And since wages can be spent quickly, and labour supply elasticity is low, it would take Zimbabwean levels of expected inflation for this effect to matter much. (I *think* we probably saw it in Zimbabwe.)<br /><br />4. The original argument was about the Neo-Fisherian claim. The US and Canadian economies do have money in them (they are not "cashless" in any sense). And yet the Fed and BoC *claim* to use a nominal interest rate instrument. We can re-phrase the Neo-Fisherian question this way: if the Fed or BoC wanted to increase the growth rate of M, should it raise or lower its nominal interest rate instrument today?<br /><br />But this was a worthwhile post, even if I disagree.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com