tag:blogger.com,1999:blog-2499715909956774229.post6416559474589785223..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Bad Ideas?Stephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger42125tag:blogger.com,1999:blog-2499715909956774229.post-90959201599250863262015-09-24T12:09:27.132-07:002015-09-24T12:09:27.132-07:00Steve is saying that policy is state dependent, no...Steve is saying that policy is state dependent, not time dependent. You don't lift off too early, you lift off in some state that perhaps is too high or low relative to some optimum.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-86186459294852924332015-09-14T08:26:49.839-07:002015-09-14T08:26:49.839-07:00Hi Stephen,
Long time (lurking) reader. Thanks f...Hi Stephen,<br /><br />Long time (lurking) reader. Thanks for everything you do. <br /><br />Yes, the banking system will bid down the int rate to whatever floor the Fed sets (if it chooses to). Otherwise, excess reserves will send the rate to 0%. My point is that the Fed has to LIFT the overnight rate from 0%. People who say the overnight rate has been "manipulated" lower are misunderstanding the dynamics here. <br /><br />It's true that I don't think the liftoff will make a huge difference either way, but I am not positive about that. I see more risks than benefits though which is why I would hold off. <br /><br />- CullenCullen Rochehttps://www.blogger.com/profile/04305383286133317610noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-27284501327066934812015-09-11T05:51:05.127-07:002015-09-11T05:51:05.127-07:00Is there anything more than correlation analysis t...Is there anything more than correlation analysis to support the idea? Anonymoushttps://www.blogger.com/profile/09445489809839987633noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-28866598415444379152015-09-10T18:08:00.293-07:002015-09-10T18:08:00.293-07:00Yes, that's what I was looking at.Yes, that's what I was looking at.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-64710126188638561762015-09-10T17:57:11.026-07:002015-09-10T17:57:11.026-07:00Is this the right paper for Fisher's debt defl...Is this the right paper for Fisher's debt deflation?<br /><br />https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdfAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-19310801579495732472015-09-10T15:40:34.676-07:002015-09-10T15:40:34.676-07:00I checked Fisher's 1933 Econometrica paper, ju...I checked Fisher's 1933 Econometrica paper, just to make sure I had this right. What Fisher wrote was a verbal description of a process. It's an idea - which has the same status as any idea we haven't yet formalized. In 2015 we have much higher standards than we did in 1933. We expect the idea to be fleshed out in terms of a formal model, so that we can check for consistency, to see if the logic is correct, and to evaluate how this fits with what we already know. So, I'm afraid Fisher's debt-deflation theory doesn't make it.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-32528264903716735182015-09-10T15:19:45.442-07:002015-09-10T15:19:45.442-07:001. Yes, I agree, clarity is good.
2. Plausibility?...1. Yes, I agree, clarity is good.<br />2. Plausibility? It's plausible to me, or I wouldn't have written it. Whether you buy it or not is another question.<br />3. "...non-neutrality scenarios show the liquidity effect dominates in the short run." This is always the question. If the change in policy is permanent, and everyone believes that, then the Fisher effect is there from the beginning. Then, the big question is how large the non-neutrality is, and there's no good reason to think that inflation will necessarily go down on impact when the nominal interest rate goes up permanently. And so what if it did go down? We still have to be cognizant of the dynamics in thinking about the policy. You can't focus only on the very short run.<br />4. "how long until the Fisher effect dominates?" You can see the correlation in the data - nominal interest rates and inflation are positively correlated. So, even if the inflation rate declines on impact, you don't have to wait long for it to go up.<br />5. "The Fed raises the target rate tomorrow by 1% - what happens to inflation?" Look at the chart in the European inflation post. That looks about right.<br />6. "The Fed never raises the target rate - what happens to inflation?" More of the same. Japan post 1995?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-27862407027297318552015-09-10T14:15:41.138-07:002015-09-10T14:15:41.138-07:00What the market's knew, or didn't, 7 years...What the market's knew, or didn't, 7 years ago doesn't seem relevant. Market uncertainty today leads to slower growth today. If clarity can alleviate the uncertainty, we should expect as much from policy makers.<br /><br />That's a good post, but is it really plausible in the short run? As in your other recent post "Intuitive Neo-Fisherism", non-neutrality scenarios show the liquidity effect dominates in the short run. If so, is that acceptable and how long until the Fisher effect dominates?<br /><br />A couple other questions:<br />The Fed raises the target rate tomorrow by 1% - what happens to inflation?<br />The Fed never raises the target rate - what happens to inflation?Anonymoushttps://www.blogger.com/profile/09445489809839987633noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81760914727615914122015-09-10T06:22:42.056-07:002015-09-10T06:22:42.056-07:00Do you mean the debt deflations idea? In early ver...Do you mean the debt deflations idea? In early versions of Bernanke Gertler (AER 1989), they tried to formalize that without success. If that's what you're talking about, but maybe you have something else in mind. To be more specific, I should say "serious model."Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-69323171100115755962015-09-09T21:59:43.429-07:002015-09-09T21:59:43.429-07:00"What is that "classic deflationary spir..."What is that "classic deflationary spiral" anyway? I see this mentioned from time to time, but I know of no model of a deflationary spiral."<br /><br />For a self-proclaimed Fisherite you are surprisingly unfamiliar with Fisher's most important paper.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59072347050204751832015-09-09T13:37:09.902-07:002015-09-09T13:37:09.902-07:00"...raising interest rates may cause deflatio..."...raising interest rates may cause deflation (or rather, disinflation) which cannot be offset by lowering rates below 0."<br /><br />Two problems: (i) maybe inflation goes up when the nominal interest rate goes up. (ii) If inflation goes down when nominal interest rates go up, why doesn't it go back up when nominal interest rates go down?<br /><br />"...seems to be concerned about a sort of "low-inflation trap", produced by similar logic to the classic deflationary spiral..."<br /><br />What is that "classic deflationary spiral" anyway? I see this mentioned from time to time, but I know of no model of a deflationary spiral.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-89373788397834172202015-09-09T06:11:21.046-07:002015-09-09T06:11:21.046-07:00"...still-fragile recovery..."
The rece..."...still-fragile recovery..."<br /><br />The recession ended, according to the NBER, six years ago. Since then real GDP has been growing at a sustained pace, albeit at a lower rate than average performance over the post-WWII period. It's troubling that productivity growth is low, but it would seem that's something that monetary policy can't address. I discussed the state of the labor market here:<br /><br />http://newmonetarism.blogspot.com/2015/08/the-state-of-labor-market-in-us.html<br /><br />That's not completely "normal," but if you look at it closely, you could characterize it as "tight." I'm not sure where to find this "fragility." Why would a modest increase in short-term nominal interest rates push this thing off a cliff?<br /><br />Debt may be good, but that's the fiscal department, not the monetary department.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-69742226311503032682015-09-09T06:09:56.129-07:002015-09-09T06:09:56.129-07:00I'm surprised nobody has mentioned what seems ...I'm surprised nobody has mentioned what seems to me the obvious interpretation of Krugman's concern: raising interest rates may cause deflation (or rather, disinflation) which cannot be offset by lowering rates below 0. This makes the ZLB constraint tighter, since with lower inflation a 0 nominal interest rate now corresponds to a higher real interest rate.<br /><br />Now admittedly formalizing this argument requires making assumptions about how people form inflation expectations. Krugman seems to think in terms of simple backward-looking adaptive expectations, where the rate of change in inflation depends on the gap between the real interest rate and the natural rate.<br /><br />One critique of Krugman's position is the lack of a deflationary spiral in any country at the ZLB over the last several years. But he seems to be concerned about a sort of "low-inflation trap", produced by similar logic to the classic deflationary spiral, but in a model augmented with a lower bound on inflation.jonathannoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36933682734775069492015-09-09T03:51:12.858-07:002015-09-09T03:51:12.858-07:00Krugman in "Debt is good" also writes: &...Krugman in "Debt is good" also writes: "What can be done? Simply raising interest rates, as some financial types keep demanding (with an eye on their own bottom lines), would undermine our still-fragile recovery. What we need are policies that would permit higher rates in good times without causing a slump. And one such policy, Mr. Kocherlakota argues, would be targeting a higher level of debt".<br />Luciano Priori F.LPFhttps://www.blogger.com/profile/05629520091750647083noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-48668016871608118032015-09-08T13:01:20.150-07:002015-09-08T13:01:20.150-07:00"Before the financial crisis, if the New York..."Before the financial crisis, if the New York Fed received a directive to hit a lower fed funds rate target, they would attempt to do so through open market purchases. So initially reserves balances would go up, and Treasury securities held in the private sector would go down (typically this would have been a repo market intervention, but this gets the idea)."<br /><br />Let's assume interest on central bank reserves is 0%. The fed funds rate is 4%, and the central bank wants to go to 2% on the fed funds rate. Central bank buys a bond and sells central bank reserves. The fed funds rate heads toward interest on central bank reserves. The central bank then reverses the process by buying central bank reserves and selling a bond. However, the fed funds rate remains lower at 2%.<br /><br />Also, I believe there can be an "announcement affect". The central bank announces the target, and it goes there.<br /><br />In both of those cases, the monetary base (currency and central bank reserves) stays the same, while the fed funds rate went down.<br /><br />In my scenario, the fed funds rate and market rates both fell with no change in the monetary base.<br /><br />“There is an old story about money multipliers (I think this is your "private debt" argument) which I don't entirely buy into.”<br /><br />I am pretty sure my private debt argument is not about money multipliers. Now with both market and fed funds interest rates lower, is that an attempt to increase private debt and increase demand deposits from the ***banking system*** so that “money” increases (“third idea”) and is spent so that quantities and prices increase, hopefully lifting price inflation back to target?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-63288960612167000192015-09-08T12:11:43.371-07:002015-09-08T12:11:43.371-07:00Before the financial crisis, if the New York Fed r...Before the financial crisis, if the New York Fed received a directive to hit a lower fed funds rate target, they would attempt to do so through open market purchases. So initially reserves balances would go up, and Treasury securities held in the private sector would go down (typically this would have been a repo market intervention, but this gets the idea). Then we have to work through what happens in asset markets, and the initial open market purchase doesn't tell you what the path of open market operations is required to, say, support a lower fed funds rate forever. There is an old story about money multipliers (I think this is your "private debt" argument) which I don't entirely buy into.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55775125524335036402015-09-08T09:29:12.130-07:002015-09-08T09:29:12.130-07:00"So, suppose we're in the pre-financial c..."So, suppose we're in the pre-financial crisis world. Then, the central bank reduces the fed funds target. What happens next? Well, the conventional idea is that, in the short run, inflation will go up."<br /><br />Why does price inflation go up here when the fed funds target is lowered?<br /><br />I'm going to say it is because more private debt is created (third "idea").Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-49567084364919493522015-09-08T09:11:58.295-07:002015-09-08T09:11:58.295-07:00Try it this way. There is some shock to the econom...Try it this way. There is some shock to the economy and inflation goes down. Short-term nominal interest rates don't go down unless the central bank reduces its policy target interest rate. So, suppose we're in the pre-financial crisis world. Then, the central bank reduces the fed funds target. What happens next? Well, the conventional idea is that, in the short run, inflation will go up. But, we know that, in all of the monetary models we have, that if the central bank reduces nominal interest rates permanently, that this will actually reduce inflation. So the long-run effect works the other way. Typically, at best we're relying on a short-run effect to push inflation back to target, if the fed funds rate is going down in an attempt to increase inflation.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-51963831339191360862015-09-08T08:37:34.817-07:002015-09-08T08:37:34.817-07:00There is some aggregate shock to the economy. Pric...There is some aggregate shock to the economy. Price inflation comes in below target. Market interest rates fall. The central bank goes along and lowers the fed funds rate also. More private debt is created thru the commercial banking system so demand deposits go up. With the third "idea", that means "money" goes up, hopefully increasing quantities and prices. Price inflation goes back to target or above.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-70493416390285163382015-09-08T06:44:00.124-07:002015-09-08T06:44:00.124-07:00Duy says: "First, it will help clarify the Fe...Duy says: "First, it will help clarify the Fed's reaction function. Second, if the experience of Japan and others who have tried to hike rates in the current global macroeconomic environment is any example, the Fed will only get one shot at pulling the economy off the zero bound. They better get it right."<br /><br />1. If people thought they were clear on the Fed's "reaction function" prior to the financial crisis, i.e. the Taylor rule, that rule would tell you that liftoff is long overdue.<br />2. The experience of "Japan and others" I think can be summarized by: lliftoff from zero is a very hard thing to do, as a lot of people are in the grip of ideas like those in Duy's post.<br /><br />"...what should the ECB have done?"<br /><br />http://newmonetarism.blogspot.com/2014/09/theories-of-inflation-and-european.htmlStephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-62652636579818684252015-09-08T06:39:47.690-07:002015-09-08T06:39:47.690-07:00I'm not sure what you're getting at.I'm not sure what you're getting at.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-40598370766065544422015-09-07T21:14:31.106-07:002015-09-07T21:14:31.106-07:00Let's assume there was some shock to the econo...Let's assume there was some shock to the economy. It requires more "money". This is believed to be temporary. It may or may not be temporary.<br /><br />How does the more "money" happen?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-48169195984992900872015-09-07T20:00:27.404-07:002015-09-07T20:00:27.404-07:00"But why?"
Expectations and signaling: ..."But why?"<br /><br />Expectations and signaling: http://economistsview.typepad.com/timduy/2015/08/does-25bp-make-a-difference.html<br /><br />"How do we know that?" Fair enough, but what should the ECB have done?Anonymoushttps://www.blogger.com/profile/09445489809839987633noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-41164366065483315562015-09-07T18:01:23.698-07:002015-09-07T18:01:23.698-07:00In terms of the macroeconomic models people like t...In terms of the macroeconomic models people like to think about, we would say a recession is caused by some aggregate shock to the economy. In some theories, the economy need not respond to the shock in an optimal fashion on its own, and then there may be a role for monetary policy in correcting an inefficiency. So the case for staying at zero would be that this is more efficient than the alternative, not just for today, but thinking about the entire future.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-42017491356669559692015-09-07T17:55:07.081-07:002015-09-07T17:55:07.081-07:00"...the correction requires more than a reset..."...the correction requires more than a reset but an offset or overcorrection."<br /><br />But why?<br /><br />"The ECB is a fine example of this."<br /><br />Assuming what they did was right. How do we know that?<br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.com