tag:blogger.com,1999:blog-2499715909956774229.post7050869603099906208..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: The FRB/US Model and InflationStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-2499715909956774229.post-57665307306742619062014-04-19T11:31:21.170-07:002014-04-19T11:31:21.170-07:00I haven't watched the video, as I really can&#...I haven't watched the video, as I really can't bear to watch myself. I spent a couple of days at KSU, and enjoyed my visit there. The "debate" wasn't quite a debate format, and I thought of it more as an opportunity to talk to the students and teach them about monetary policy. More on low inflation, policy traps, and the Fisher relation later. Mark and I had a good time together, actually. On everything except economics, we agree I think.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67579083640635741302014-04-18T19:48:20.091-07:002014-04-18T19:48:20.091-07:00Hello Stephen,
I just watched your debate with Mar...Hello Stephen,<br />I just watched your debate with Mark Thoma. In my book, you won. Now I write for a left of center blog, Angry Bear and I research effective demand.<br />To me, the key issue in the debate was the causality of the Fisher equation. You said that expected inflation will follow the nominal rate in the middle and long run. This implies that the real rate is independent of monetary policy in the long-run. You made a case that real rates should be low. I think they should be rising, while monetary policy is trying to push them lower. You also made a case that the short-run effects of monetary policy have worn off. And since we are now in the long-run of monetary policy, inflation is low because of the low Fed rate.<br />I agree with you.<br />I have been calling for a rise in the Fed rate and tighter monetary policy and I have taken some heat for it. Yet, in my research of effective demand, the output gap is much smaller than the CBO says. My research says we are actually reaching the end of the business cycle. The spare capacity is almost all used up. Some $100 billion more in real GDP and it is all gone. This leads me to want tighter monetary policy. <br />Yet, I see taking a different and complementary approach to the issue... and I like your thinking. If you were to think that the output gap was very small, you would have even more reason to want tighter policy. <br /><br />Now Thoma says that demand should come first to give support for raising nominal rates. But your distinction between the short-run and longer-run effects wins out. As I understand you, seeing the real rate as independent of monetary policy in the long-run, a rise in the nominal rate will create more expected inflation. Like you say, there will be a reaction in the short-run, but eventually the expected inflation will rise to meet the nominal rate.<br /><br />I agree, <br />Appreciate your work and look forward to more posts from you.<br />Edward Lamberthttp://effectivedemand.typepad.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-49314281985092042742014-04-15T14:10:22.794-07:002014-04-15T14:10:22.794-07:00Steve should delete all of your posts, John.Steve should delete all of your posts, John.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67194352615449819732014-04-15T12:41:40.246-07:002014-04-15T12:41:40.246-07:00Thanks for deleting my post. It shows that you can...Thanks for deleting my post. It shows that you cannot stand it when somebody points out that your previous inflation predictions (4-5%) have been way off. So much about your "scientific" economics. :DAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82429748750375666862014-04-15T07:35:47.030-07:002014-04-15T07:35:47.030-07:00Thanks Stephen for this post; as always, sharp and...Thanks Stephen for this post; as always, sharp and insightful =)<br /><br />It seems that the uncertainty of predictions would be better clearly communicated. It is always possible for inflation rate to rise to 2%. The question is with what probability. What is the range of inflation rates that has the highest probability based on the information available today? <br /><br />As for estimating the inflation equation, I think in recent years there have been quite some research on modeling regime-switching or change-point in coefficients. These econometric models are likely to improve the out-of-sample forecasting performance if that is the target. But I guess there might be other considerations for central banks to decide the model specifications they use, e.g. ease of communicating with the business world, connecting with the DSGE so to have a more coherant description of the economy etc. As always, models are built to serve specific purposes. Depending on how the Fed intends to use the inflation equation, maybe it is not too bad for that purpose.... don't know...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44987429528411363152014-04-12T18:31:10.701-07:002014-04-12T18:31:10.701-07:00"Given that you past inflation predictions ha..."Given that you past inflation predictions have been way off nobody really cares another of your predictions which is again based on bad theory."<br /><br />In modern macro-theory there is only bad theory. I found it interesting that Yellen in the link provided attributes low inflation since 2005 despite a rise in commodity prices to low inflationary expectations due to credibilility earned during the Volcker monetary policy of the 1980s. Rubbish. It scares me to hear that central bank governors believe this stuff. Driving these high commodity prices was rising demand in China. When it reigned back on its demand through direct loan based monetary policy its demand stalled, and so too the rise in commodity prices. Comparing the role of oil in the world economy and its effect on inflation now with the 1970s is also nonsense.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-35296294823139647572014-04-11T20:33:27.612-07:002014-04-11T20:33:27.612-07:00I'll defer to you on the usual purposes of emp...I'll defer to you on the usual purposes of employing Bayesian methods in the New Keynesian literature. I just think it's important not to conflate Bayesian statistics with intuition. Properly understood, Bayesian statistics simply provides a way of regularizing inferences by combining prior information with the data under investigation. Prior information, in turn, need not have anything to do with intuition, unless intuition includes information acquired from earlier data analyses. Moreover, classical statistics is no less susceptible to manipulation by intuition, as the likelihood is just as much a product of the mind as the prior. Bad statistics is bad statistics, but there is no reason for Bayesian inferences to be more suspect than classical inferences, other things being equal.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-69733247564287644012014-04-10T23:11:17.683-07:002014-04-10T23:11:17.683-07:00Sure, I agree with most of that. I'm quite wil...Sure, I agree with most of that. I'm quite willing to consider the output that comes out of a calibrated model, in which the modeler somehow marshaled all the evidence he or she had on how to set the parameters and then did some quantitative experiments. You could say that in Bayesian estimation is just an efficient way to efficiently use the information in the data set, and what comes from outside the data set. But there are two things that make me suspicious in this instance:<br /><br />1. I know that Phillips curve estimates are going to be highly sensitive to the sample period, and the prior. These relationships simply are not stable.<br />2. The slope of the Phillips curve is a key parameter in this model. It's going to matter a lot for the policy conclusions and the forecast. And the prior is moving the parameter estimate in a direction consistent with the thinking of the people who are choosing the policy. Hmmm.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-91129082354240493272014-04-10T19:44:03.748-07:002014-04-10T19:44:03.748-07:00A more charitable interpretation is that the model...A more charitable interpretation is that the modelers believe that the recent inflation data are more relevant to understanding the behavior of inflation for the foreseeable future, owing to the historically unusual circumstances that have recently obtained, but recognize the potential bias and variability inherent in small samples, and so see fit to shrink the estimates towards estimates based on less recent data. If we think A tells us more than B about how things work in general, but B tells us more than A about how things work for the time being, then we should put more weight on B, but also utilize A, in order to obtain estimates that are constrained by the full set of information available, but put more emphasis on recent trends. If you think weighting different parts of the data differently based on external knowledge is scientifically suspect, I wonder how you think anyone ever models anything at all. Priors are no more subjective than likelihoods--both reflect the modelers pre-existing knowledge about the system under study, or lack thereof. Why is it good science to say that y is normally distributed with mean X*beta, and hence we can use OLS to estimate beta, but bad science to say beta is normally distributed with mean mu, estimated from a separate data set?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-66193166778263505682014-04-10T12:23:51.423-07:002014-04-10T12:23:51.423-07:00"You're going to run into some brick wall..."You're going to run into some brick walls if you limit yourself to a monocausal explanation of everything."<br /><br />Who is limiting him or herself to a monocausal explanation of what? I'm just saying using some output gap, which you can't measure, and which we have good reasons to think would not be useful even if we could measure it, to forecast inflation or explain its causes, is a very poor approach.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-26869956574534686082014-04-10T12:19:54.967-07:002014-04-10T12:19:54.967-07:00Bayesian estimation effectively takes a prior dist...Bayesian estimation effectively takes a prior distribution, uses information in the data, and produces a posterior distribution. Where does the prior come from? Well, you can say that it's "using data from different sources," but it looks to me like these people just didn't like the maximum likelihood estimate that the data sample delivered, and changed it by manipulating the prior. That's the role that Bayesian estimation plays in New Keynesian estimation. In some cases the likelihood function is flat, effectively, and the prior is choosing the parameter estimate. That's the modeler's intuition, if you ask me.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-30023144833079320582014-04-10T08:51:33.776-07:002014-04-10T08:51:33.776-07:00So, what was the current supply shock?So, what was the current supply shock?CAnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-86651067382477736442014-04-09T21:12:21.765-07:002014-04-09T21:12:21.765-07:00Again, Stephen, what you've shown is that the ...Again, Stephen, what you've shown is that the output gap alone doesn't determine inflation. Sure, high oil prices in 2012 which fell later in 2012 and 2013 also had an impact. It doesn't mean the output gap doesn't matter. You're going to run into some brick walls if you limit yourself to a monocausal explanation of everything. <br /><br />Question for Stephen: take the last 30-40 major recessions in large economies not associated with oil prices shocks. How many are associated with drops in inflation? How many are associated with increasing inflation? If you're hypothesis is correct, we should see 15-20 cases where inflation went up in a recession. If I'm correct, and I am, we should see very few or no sharp corrections in GDP which were not also associated with declines in inflation like we saw in the US from 2007-2009. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-62888605151075786312014-04-09T17:21:00.282-07:002014-04-09T17:21:00.282-07:00"So, apparently being "cautious" is..."So, apparently being "cautious" is when you ignore the data and go with your intuition."<br /><br />I can't comment on the specific methods employed here, but as a characterization of statistical regularization, the quote is pretty off base. The prior is based on the MLE and it's SE from the earlier data set, and it is combined with a likelihood for the more recent data. What does this have to do with data versus intuition? Bayesian methods simply provide a natural way to combine different sources of information in a coherent way. MLE alone is only more data-based if they're pulling the prior out of thin air. They're not.Anonymousnoreply@blogger.com