tag:blogger.com,1999:blog-2499715909956774229.post7545719951534487505..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Reply to Sumner's ReplyStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger49125tag:blogger.com,1999:blog-2499715909956774229.post-35314046341016347792012-07-13T03:29:18.003-07:002012-07-13T03:29:18.003-07:00So, markets have been wrong multiple times now whe...So, markets have been wrong multiple times now when expecting QE to have some stimulative effect? At what point do we begin to consider markets stupid? And if markets are this stupid, why aren't those claiming QE doesn't work reporting making a killing in the market as a result?Mike Sandiferhttps://www.blogger.com/profile/04266779805691997171noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-65966306229428330842012-07-12T10:10:50.009-07:002012-07-12T10:10:50.009-07:00"If QE is as ineffective as you claim, why do..."If QE is as ineffective as you claim, why do asset markets seem to respond so strongly to announcements that would seem to raise QE expectations?"<br /><br />Per Steven Williamson, asset markets respond but because QE has an expectational component, ergo it does not work (or something along these lines)."O" Anonimohttps://www.blogger.com/profile/07896236826318022479noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-18255247852035516922012-07-11T20:26:11.896-07:002012-07-11T20:26:11.896-07:00Stephen Williamson,
If QE is as ineffective as yo...Stephen Williamson,<br /><br />If QE is as ineffective as you claim, why do asset markets seem to respond so strongly to announcements that would seem to raise QE expectations? Do you believe asset markets are responding as I claim?Mike Sandiferhttps://www.blogger.com/profile/04266779805691997171noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55147306912887514552012-07-11T06:00:51.054-07:002012-07-11T06:00:51.054-07:00"Yes, I know I'm ridiculous to think that..."Yes, I know I'm ridiculous to think that positional externalities are important for human utiltiy."<br /><br />At least you're finally admitting it.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-83135563839363646262012-07-10T17:44:40.548-07:002012-07-10T17:44:40.548-07:00Yes, I know I'm ridiculous to think that posit...Yes, I know I'm ridiculous to think that positional externalities are important for human utiltiy. Let's see, last time I quoted Nobel Prize winner Gary Becker, who's also ridiculous:<br /><br />"Traditionally, utility functions were assumed to depend on only the absolute level of current consumption, with no reference to past and peer levels. However, a large body of work now shows that our tastes are strongly influenced by our personal histories and social environment (e.g., Robert H. Frank 1985; Abel 1990; Becker 1996; and Brock and Durlauf 2001). Indeed, the explanatory power of economic models is greatly enhanced when including simple forms of personal and social capital in the utility function. In this way, otherwise puzzling phenomena-such as social influences on price, persistent habitual behavior, and neighborhood segregation-can be better accounted for."<br /><br />At: http://ideas.repec.org/a/aea/aecrev/v97y2007i2p487-491.html <br /><br />This time I think I'll add University of Michigan economist Miles Kimball. You may remember the name. Stephen said of him, <br /><br />"Miles Kimball may have been the first New Monetarist (actually, if you read the paper, he may have been the first New-Keynesian; he's basically outlining the basic NK model in 1995). Fortunately for us, Miles wants to blog, which is guaranteed to increase the average quality of discourse in the medium."<br /><br />At: http://newmonetarism.blogspot.com/2012/06/more-on-unconventional-open-market.html <br /><br />Here's what he had to say:<br /><br />"Interpersonal comparisons in the utility function are extremely interesting and indeed do provide the single strongest argument for high levels of taxation."<br /><br />At: http://blog.supplysideliberal.com/post/25205221766/avoiding-fiscal-armageddon#comment-560791474Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-38743933626310678052012-07-10T17:30:48.217-07:002012-07-10T17:30:48.217-07:00Stephen,
Really those are good questions to be an...Stephen,<br /><br />Really those are good questions to be answered, to educate us; they're important to know – What are then the main papers you base your QE ineffectiveness conclusion on, so we can read them, and if a currency swap is different because only the government can create currency, then why is it not the same with 30 year T-bonds, which are pretty unique to the government too.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-23740584351084234242012-07-10T04:00:15.580-07:002012-07-10T04:00:15.580-07:00Great quote: "New Keynesianism...How do we wr...Great quote: "New Keynesianism...How do we write down a framework that justifies the status quo?"<br /><br />Love it.<br /><br />I make a similar point, less eloquently, in my post about Keynesianism more generally here: <br /><br />http://www.insofisma.com/wp2/the-long-run-is-here-keynes-is-dead/ <br /><br />(The Long Run is Here, Keynes is Dead).Frank Deliquohttp://insofisma.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-37000317802478436532012-07-09T11:33:11.406-07:002012-07-09T11:33:11.406-07:00Aren't you be worried that the debate over QE ...Aren't you be worried that the debate over QE has ignored the vastly-important role for positional externalities?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-89076282653576103942012-07-07T16:47:59.976-07:002012-07-07T16:47:59.976-07:00"No private sector party can create an asset ..."No private sector party can create an asset that comes that close to that level of risk-free'ness."<br /><br />Not sure I would go that far. After all, U.S. Treasuries are no longer rated AAA. Besides, I'm not sure the relative safety of the asset being swapped affects anything other than its price. I think you misunderstand the "uniqueness" concept. An asset convertible into currency is unique. All other assets are just that: assets.Anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-21687155142627081542012-07-07T16:14:21.315-07:002012-07-07T16:14:21.315-07:00Dude:
I'm a Randy Wright groupie too!Dude:<br /><br />I'm a Randy Wright groupie too!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-4973183145668107012012-07-07T09:46:16.824-07:002012-07-07T09:46:16.824-07:00"Wallace's paper is just an example of a ..."Wallace's paper is just an example of a particular neutrality theorem. It's very strong, and doesn't really have much to do with QE in the current circumstances."<br /><br />Oy, now he tells me, after I've used up my discretionary time for the next year! Ok, what are, then, the main papers you use to base your claim on that QE can't be effective, and that Fed buying of long-term treasury bonds, or even gold, won't move their price?<br /><br />And, you didn't answer my question; if, as you've asserted before, a swap for currency can make a difference, because currency is a unique asset that the private sector cannot create, then why can't a swap involving 30 year treasury bonds make a difference, as 30 year treasury bonds are a unique asset that the private sector cannot create. No private sector party can create an asset that comes that close to that level of risk-free'ness over a period as long as 30 years.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-35240440435261410972012-07-07T08:35:08.830-07:002012-07-07T08:35:08.830-07:00The "money base" concept seems unnecessa...The "money base" concept seems unnecessarily confusing. It implies since all reserves are part of the "base", they are also automatically "money". I think this is why many people -- even economists? -- have a hard time seeing reserves as s.t. assets.Anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-26659572315489413262012-07-07T07:06:35.575-07:002012-07-07T07:06:35.575-07:00Wallace's paper is just an example of a partic...Wallace's paper is just an example of a particular neutrality theorem. It's very strong, and doesn't really have much to do with QE in the current circumstances. You'll learn something from the paper, but it's not the key to what I'm talking about.<br /><br />If you think there are errors in Neil's paper, you should check with him.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-73028528439817782262012-07-06T20:05:42.955-07:002012-07-06T20:05:42.955-07:00Thanks Stephen, that’s helpful. I’m not yet convi...Thanks Stephen, that’s helpful. I’m not yet convinced that the IROR determines all short rates under a floor system.<br /><br />Let’s say we’re in a floor system (as described in your June 4 post). Under such a system, a bank presumably would never lend a reserve balance to another bank at an interest rate below the IROR. I think we’re in agreement here.<br /><br />But isn’t this just a special feature of the interbank market for reserve balances? What implications does it have for other lending rates, or for the price level?<br /><br />For example, suppose the IROR is 5% under a floor system. Suppose also that banks can issue deposit liabilities bearing 0% interest. It seems entirely possible under this scenario that banks might be willing to lend to some category of borrowers at, say, 3%. In other words, far below the IROR. In that case, the IROR isn’t a “floor” on short rates generally. I’m assuming that the supply of reserve balances is finite and determined by the central bank.<br /><br />If this is right, then it’s not clear to me how an increase in the IROR is contractionary, even under a floor system. On the contrary, it seems to expand the supply of base money and might therefore be inflationary/expansionary.M.R.noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-65676739775512789732012-07-06T19:29:37.491-07:002012-07-06T19:29:37.491-07:00Stephen, your QE claims so intrigued and frustrate...Stephen, your QE claims so intrigued and frustrated me that I've recently spent over 40 concentrated, uninterrupted, serious study hours on Wallace 1981 AER. And it's extremely hard for me to make that kind of time (as opposed to little breaks here and there for blogging). I'm still working on it, but I've gone through it very carefully, line by line, equation by equation. I'll eventually have a lot to say about it.<br /><br />What I would like to ask now is, you've said that if the government adds, or exchanges for, currency, that can make a difference, because currency is something the private sector cannot create; only the government can create this unique asset. But isn't that also true for 30 year treasury bonds? No private sector party can create something that's that close to this, because no private sector party can make a 30 year claim very close to that risk free.<br /><br />Also regarding Wallace, AER, 1981, I think there are some significant errors in the paper:<br /><br />1) On page 268, second paragraph, the expression K(t)x/(t+1) + xY(t+1) should be K(t)x(t+1) + Y(t+1).<br /><br />2) In equation 2, the two utility functions should be partial derivatives of the utility functions with respect to consumption in states i and j respectively.<br /><br />Do you agree?Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82770364916860000832012-07-06T14:02:10.400-07:002012-07-06T14:02:10.400-07:00"you believe that QE is ineffective because t..."you believe that QE is ineffective because the Fed is substituting one liability (cash) for another (Treasuries), in effect, issuing dollars and retiring/nettting debt."<br /><br />No, it's substituting reserves for Treasuries. There's no change in anything that changes the terms on which people want to hold currency, so think of the stock of currency as unchanged. Intraday exchange involving reserves can be supported with a very small quantity of reserves, so most of the reserves sitting in the accounts of financial institutions with the Fed just sit - all day and overnight. They're not much different from T-bills, though in fact we could argue that T-bills are more liquid, and this is reflected in a T-bill rate (3-month) that is currently 0.07%, while the interest rate on reserves is 0.25%. But this also extends to exchanges of reserves for long Treasuries, as I've argued elsewhere. If you can't change anything by exchanging reserves for Treasuries, you can't get to your level nominal income target.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-72167636729479167202012-07-06T13:55:21.266-07:002012-07-06T13:55:21.266-07:001. What a change in the IROR accomplishes depends ...1. What a change in the IROR accomplishes depends on what kind of monetary regime you are in. If it's a channel system, in which excess reserves are essentially zero, this just tightens the channel, and reduces the cost of holding required reserves (if there is a reserve requirement). There are economic effects, but it's not a big deal in terms of monetary control. In a floor system (what we are in now - excess reserves in the system always), a change in the IROR is a big deal, as the IROR is essentially determining all short rates. If you think of an increase in short rates as contractionary, then indeed an increase in IROR is contractionary.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58503949573764090012012-07-06T13:48:18.792-07:002012-07-06T13:48:18.792-07:00"As such, as long as there is some asset some..."As such, as long as there is some asset somewhere in the world that they don't yet own, they can print money and buy it."<br /><br />That doesn't mean anything happens as a result.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-68022707715735160052012-07-06T06:39:24.373-07:002012-07-06T06:39:24.373-07:00The commenters on that page are worse than EJMR.The commenters on that page are worse than EJMR.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-40276156800950332852012-07-05T21:00:04.799-07:002012-07-05T21:00:04.799-07:00Let me get make sure I understand this correctly -...Let me get make sure I understand this correctly - you believe that QE is ineffective because the Fed is substituting one liability (cash) for another (Treasuries), in effect, issuing dollars and retiring/nettting debt. I agree that the two are substitutes, but not perfect substitutes, as dollars circulate with higher velocity than debt, and affect the prices of a different set of assets (debt drives asset prices, dollars drive consumption prices, though obviously there is leakage, as higher asset prices tend to release more dollars out of "storage", or increase velocity).<br /><br />However, if I understand the monetarists correctly, this kind of misses the point of level targeting, which is to increase or decrease the aggregate money supply (Fed liabilities, private liabilities, plus other claims) in such a way to maintain the level target. NGDP is really just another monetary aggregate, so NGDP targeting is managing the growth of a monetary aggregate. Monetarists argue that the Fed has unlimited power to create money and expand the money supply (don't ask me about the legal constraints, because I don't really know what they are and I'm pretty sure they could be changed in a pinch). Monetarists appear a little inconsistent with respect to QE - either seeing it as incoherent or seeing it as a signal for expansionary monetary policy. As a practicioner, I can say that the markets interpret it as the latter.<br /><br />I tend to view QE in the substition form, except as directed release of excess reserves held at the Fed that otherwise have no velocity.Dan Carrollhttps://www.blogger.com/profile/01263502310806035736noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-85630948854532113342012-07-05T18:40:56.620-07:002012-07-05T18:40:56.620-07:00I have a basic question about the interest rate on...I have a basic question about the interest rate on reserves (IROR).<br /><br />Unless I misunderstand some aspect of the operation, when IROR increases, the growth rate of base money increases (all else equal).<br /><br />One might normally expect an increase in the growth rate of base money to be inflationary/stimulative. Yet an increase of IROR is normally said to have the effect of a monetary tightening (and thus to be contractionary).<br /><br />What am I missing?M.R.noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-83332494873986145752012-07-05T17:17:48.329-07:002012-07-05T17:17:48.329-07:00We are in Alice in Wonderland now. One can define...We are in Alice in Wonderland now. One can define whatever terms they want to mean whatever they want. Last I saw that being done was by patent lawyers.Ray Lopezhttps://www.blogger.com/profile/11134761834999705305noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-61184771145825610612012-07-05T17:08:52.266-07:002012-07-05T17:08:52.266-07:00@Stephen Williamson who said: ""Monetize...@Stephen Williamson who said: ""Monetize" the debt, and you don't change net indebtedness to the private sector." -- this is clear error. Monetizing the debt means from what I've seen not using the existing moneys supply but literally printing money, electronically and physically. As such, in the long term it is inflationary.Ray Lopezhttps://www.blogger.com/profile/11134761834999705305noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-90620233862708822322012-07-05T13:47:50.934-07:002012-07-05T13:47:50.934-07:00Ok, thanks. It sounds like your position leaves r...Ok, thanks. It sounds like your position leaves room for the possibility that QE may cause increased inflation in the future, although you think the extent of that increase would be small. I just have a few last questions to complete the logical chain:<br /><br />Do you believe that the extent of the future inflation increase would scale with the size of the QE? i.e., could the Fed make up for the relatively small traction on future prices by performing QE at a very large scale (trillions)? And do you believe that increased expectations of future inflation would affect the price level today?JSRhttps://www.blogger.com/profile/09614849295823728127noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82666925841633411542012-07-05T13:11:02.865-07:002012-07-05T13:11:02.865-07:00The key problem under the current circumstances is...<i>The key problem under the current circumstances is that you can't just announce an arbitrary NGDP target and hit it with wishful thinking. The Fed needs some tools, and in spite of what Ben Bernanke says, it doesn't have them.</i><br /><br />This seems to me to be a very, very, VERY strange comment. The Fed is a central bank. As such, as long as there is some asset somewhere in the world that they don't yet own, they can print money and buy it.<br /><br />NGDPLT works as long as the Fed is credible, and there is nothing preventing the Fed from being credible.Davehttps://www.blogger.com/profile/11877699517690934530noreply@blogger.com