tag:blogger.com,1999:blog-2499715909956774229.post7992168606464526815..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Post-FOMC: What Does the Fed Think It Is Up To?Stephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger42125tag:blogger.com,1999:blog-2499715909956774229.post-88083532036067828572011-09-25T11:46:45.444-07:002011-09-25T11:46:45.444-07:00"Specifically, the bond market may have react..."Specifically, the bond market may have reacted to the Fed's failure to deliver on an expected IOR cut to zero."<br /> <br />Fair enough. But I don't think I heard anyone of significance who was expecting a cut to the IOR.<br /> <br />Most of the big firms were expecting some sort of twist operation; the size was the uncertainty.<br /> <br />A minority expected QE3. <br /> <br />Here's my "model" for what happened. The moment the announcement came out, speculators front-run the Fed by buying up 10 and 30 year bonds and shorting 2 and 5 year bonds. It makes sense to get in front of big traders (like the Fed) and profit off them, especially if they make it easy by telegraphing their moves. So in the end, it was the signal that the announcement sent about the path of future purchases/sales that twisted yields.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-2507246984728713362011-09-24T14:38:52.441-07:002011-09-24T14:38:52.441-07:00anon1,
Yes, agreed. If you look at how all the as...anon1,<br /><br />Yes, agreed. If you look at how all the asset prices moved, it does not make sense in terms of any theory that the Fed has in mind (and I'm using the word theory very loosely here - more about that later) about how this intervention is supposed to work. You can argue the same for QE2 for example, that any of these announcement effects that people are picking up come from a change in views about the path for future policy.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-27374344458139992832011-09-24T14:24:59.885-07:002011-09-24T14:24:59.885-07:00JP Koning,
Virtually all of the drop in l.t. Trea...JP Koning,<br /><br />Virtually all of the drop in l.t. Treasury yields after the "Twist" announcement came from lower inflation expectations. It seems it was not "Twist" that moved l.t. yields, but the signal the announcement sent about the path of future policy. Specifically, the bond market may have reacted to the Fed's failure to deliver on an expected IOR cut to zero. This expected cut would also have depressed s.t. yields, such that its absence would cause those yields to rise.<br /><br />Saying "Twist" did not affect relative prices is not the same thing as saying the announcement, as a whole, had no effect.Anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-37480350227787113182011-09-24T13:39:39.517-07:002011-09-24T13:39:39.517-07:00Ok, well I'll have to respectfully take a pass...Ok, well I'll have to respectfully take a pass on your theory then. It's reasonable to me that what transpired in the markets in the 180 seconds following the announcement was due to the effect of that announcement. Given the fact that US 10 and 30 year bond futures were up significantly in that interval, as were German long bonds and German short bonds, yet US 5 and 2 year bond futures prices were down dramatically, tells me that Operation Twist had an effect on relative bond prices.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-12551018414141739772011-09-24T10:01:00.967-07:002011-09-24T10:01:00.967-07:00"Trouble is, all of us have peeked at the dat..."Trouble is, all of us have peeked at the data before we write our theories."<br /><br />This is no different than physical science. The physics, chemistry, medicine, etc. theories were devised by looking at what happens empirically and devising explanations why that fit the phenomena -- and other evidence from reality -- with hopefully mild assumptions, at least what we see actually exists, etc.<br /><br />This is fine, if it really fits the empirical data -- AS WELL AS the tons of other data and logic we've accumulated about the world and human beings, and then you also just keep watching it to see of it continues to do well.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-68173922012465740682011-09-24T09:49:29.238-07:002011-09-24T09:49:29.238-07:00"Are you saying that the twist operation will..."Are you saying that the twist operation will have no effect on the general price level, or no effect on relative prices?"<br /><br />No effect on anything.<br /><br />"So relative prices have definitely been affected by the announcement."<br /><br />That's what we have been discussing. You don't know what moved the prices.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-22152072620273124972011-09-24T09:00:20.226-07:002011-09-24T09:00:20.226-07:00"My contention is that both of these interven..."My contention is that both of these interventions are irrelevant, and will have no effect on current or future prices and real activity."<br /> <br />Are you saying that the twist operation will have no effect on the general price level, or no effect on relative prices?<br /> <br />Because 30 year bond futures exploded upwards in the seconds following the 2:15 announcement while 5 year bond futures got crushed. This never happens. So relative prices have definitely been affected by the announcement.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-43134360105509630152011-09-24T06:23:12.029-07:002011-09-24T06:23:12.029-07:00Nick,
1. On trouble: That's a problem whether...Nick,<br /><br />1. On trouble: That's a problem whether you're looking at the data in advance or not. Observational equivalence is observational equivalence. Then you have to look for more data.<br /><br />2. "...but the actual price falls too slowly."<br /><br />So you have the wrong model.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-45357875925561003212011-09-24T04:22:31.635-07:002011-09-24T04:22:31.635-07:00JP,
The MBS the Fed will be buying are close subs...JP,<br /><br />The MBS the Fed will be buying are close substitutes for other assets, particularly Treasury bonds. If they Fed does not buy all of them, then the price of the MBS is determined by the price of the close substitute, and I'm arguing you have irrelevance. If the Fed buys everything, then they control the price. Of course then there is the issue of existing vs. newly-issued MBS, and maybe the Fed has to buy absolutely everything to actually have an effect.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-18369502482680970262011-09-23T21:41:05.536-07:002011-09-23T21:41:05.536-07:00Steve: "Of course you did. Why is that "...Steve: "Of course you did. Why is that "trouble?" "<br /><br />Just that we can have more than one theory, and they all fit the data. Observational equivalence. That's the trouble I had in mind.<br /><br />"Not sure why this observation wants you to think about sticky prices and wages."<br /><br />Start in equilibrium. Then something changes that causes the market-clearing equilibrium price to fall, but the actual price falls too slowly. So there's excess supply. Which means it is very hard (impossible) for an extra seller to find an extra buyer. But the extra buyer can find more extra sellers than he needs. And there's a recession, because Q=min{Qd,Qs} and Qd is below the market-clearing level.<br /><br />So the really crude sticky price model "explains" the stylised fact that it gets harder to sell, and easier to buy, goods in a recession. Except for money, which is the most liquid good, where it's the exact opposite. Because selling goods is buying money.<br /><br />What I want is some sort of search model, with monetary exchange built in, which can fit the same stylised fact without ad hoc price stickiness.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-71279772199101625562011-09-23T17:04:13.804-07:002011-09-23T17:04:13.804-07:00Ok, but why would domination be important? If Fed ...Ok, but why would domination be important? If Fed purchases of MBS were to dominate that market, how might this change things from a situation in which their purchases didn't dominate the market?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88828388038953563282011-09-23T14:20:21.871-07:002011-09-23T14:20:21.871-07:00This seems related to things that Leamer worked on...This seems related to things that Leamer worked on. I can go on a fishing expedition where I run a set of regressions looking for big t-statistics. I stop when I get the results I want, then I report only the last regression I ran. What I have in mind is something that I think is different. I am trying to construct a theory to explain what is going on in the world. When I'm working on the theory, I have some idea of what is in the data. Then I try to match up my theory with the actual data, and maybe I find some problems, in which case I refine the theory. There is an interplay there between the theory and the data that ultimately gives you a good theory. I don't create the theory in a vacuum.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-50111793433954674202011-09-23T14:00:03.473-07:002011-09-23T14:00:03.473-07:00"Why is that "trouble?""
see ..."Why is that "trouble?""<br /><br />see the Econometrica paper here: http://www.ssc.wisc.edu/~bhansen/718/White2000.pdf<br /><br />it has enough math even for you, professor williamson!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-37125714611669960302011-09-23T11:35:46.660-07:002011-09-23T11:35:46.660-07:00JP,
I'm thinking that when QE1 happened, most...JP,<br /><br />I'm thinking that when QE1 happened, most mortgages in the US ended up either being held by the GSEs, or were sold to the Fed as MBS.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-34596039603362977862011-09-23T11:33:24.354-07:002011-09-23T11:33:24.354-07:00Nick,
"Trouble is, all of us have peeked at ...Nick,<br /><br />"Trouble is, all of us have peeked at the data before we write our theories."<br /><br />Of course you did. Why is that "trouble?" <br /><br />"...it is harder than normal for an extra seller of illiquid goods to find an extra buyer, and easier than normal for an extra buyer of illiquid goods to find an extra seller."<br /><br />I have a vague memory of someone using a search model to think about this regularity in the housing market, and I think they had some success. Not sure why this observation wants you to think about sticky prices and wages.<br /><br />"All economic data, ultimately, is survey data. We ask people questions, and record the answers they give us. And call it "GDP", or "employment", or whatever."<br /><br />That does not have anything to do with the issue that Cochrane is getting at. Actually, not all data is survey data. Sometimes we are literally counting, for example housing starts. Sometimes the survey has to do with simple questions. For example, the unemployment survey has clear-cut questions. The probability is low that someone will misunderstand the questions, and there are yes/no answers. Some surveys seem pretty useless, which is what Cochrane is getting at - inflation expectations surveys for example. Who cares? Truman Bewley seemed to think that if he asked business people questions about how they set prices and wages, that would be informative, and he wrote a whole book about it. What a waste of time.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-68475367210480492912011-09-23T11:25:17.982-07:002011-09-23T11:25:17.982-07:00I have another rule:
4. Understand that it is ver...I have another rule: <br />4. Understand that it is very hard to forecast inflation.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-76287708428991174132011-09-23T11:04:57.270-07:002011-09-23T11:04:57.270-07:00All economic data, ultimately, is survey data. We ...All economic data, ultimately, is survey data. We ask people questions, and record the answers they give us. And call it "GDP", or "employment", or whatever.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67251702513062146162011-09-23T09:20:37.578-07:002011-09-23T09:20:37.578-07:00Nick : "I think the answer is to survey peopl...Nick : "I think the answer is to survey people before the announcement, and ask them what they expect the announcement to be.<br /><br />John Cochrane: "Rats in mazes do a good job of obeying the laws of economics, but they’re not so good at responding to surveys."<br />http://www.bloomberg.com/news/2011-09-22/why-identifying-a-bubble-is-so-much-trouble-john-h-cochrane.htmlAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-26006347393012658502011-09-23T07:35:52.454-07:002011-09-23T07:35:52.454-07:00I am sure someone has said this before, but event ...I am sure someone has said this before, but event studies are like the proverbial drunk looking for his keys under the lamppost. It is impossible to know what markets expected beforehand, and what other influences are brought to bear. Further, they ignore levels: if the S&P500 falls 10% in two weeks in expectation of an announcement and rises 2% the day of, this will be flagged as a "positive response". <br /><br />The only question is, if they are so obviously flawed, why do journals publish them? It seems once they do, other economists (like Bernanke) are free to cite them as probative.Anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88333676312226611612011-09-23T07:31:58.298-07:002011-09-23T07:31:58.298-07:00Actually, I can do a *little* bit better than &quo...Actually, I can do a *little* bit better than "monetary exchange; sticky prices; Q=min{Qd,Qs}".<br /><br />http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/04/a-monetarist-search-model-of-keynesian-unemployment.html<br /><br />It does capture that stylised fact (if not much else). You have the ability to do a much better job of it.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81911899969416815052011-09-23T07:31:54.630-07:002011-09-23T07:31:54.630-07:00"Second, while the QE1 purchases of mortgage-..."Second, while the QE1 purchases of mortgage-backed securities (MBS) may have mattered (possibly in some bad ways), under current conditions MBS purchases by the Fed cannot make any difference unless the Fed purchases dominate the market, which they will not."<br /><br />Steve, what do you mean by "dominate"? At what point does one dominate or not dominate a market? If the Fed does or doesn't dominate the market, how does this make a difference vis a vis MBS purchases?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59096276995238888912011-09-23T07:05:24.028-07:002011-09-23T07:05:24.028-07:00Steve: agreed. Trouble is, all of us have peeked a...Steve: agreed. Trouble is, all of us have peeked at the data before we write our theories. So we know our theory will match (roughly) the data we peeked at before writing the theory. Plus, all theories have unobservable exogenous variables.<br /><br />To my mind, the one stylised "fact" about the business cycle that too many theories ignore is this: in recessions, it is harder than normal for an extra seller of illiquid goods to find an extra buyer, and easier than normal for an extra buyer of illiquid goods to find an extra seller.<br /><br />In some future day, you, or someone like you who works on liquidity and search, will come up with a model that captures that stylised fact (and is otherwise vaguely reasonable as a model).<br /><br />When that day comes, I will not say "You were right and I was wrong". Instead I will say "That's what I've been trying to say all along!".<br /><br />But until that day comes, the best I can do is: monetary exchange; sticky prices; Q=min{Qd,Qs}.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-16327922899187785482011-09-23T05:07:49.812-07:002011-09-23T05:07:49.812-07:00"how can we ever really tell if any policy wo..."how can we ever really tell if any policy worked?"<br /><br />You need a theory that you somehow trust, immune to the Lucas critique for the policy intervention in question.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-19432249307719019222011-09-23T04:49:25.489-07:002011-09-23T04:49:25.489-07:00Ted: fair point.
I think the answer is to survey ...Ted: fair point.<br /><br />I think the answer is to survey people before the announcement, and ask them what they expect the announcement to be. Then compare the actual announcement to what people said in the survey. This isn't perfect of course, because the survey will give a range of answers, and it's not obvious what statistic (mean? median?) to use as a proxy for the expected announcement. (Theory can answer that question in principle, but not in practice).<br /><br />Alternatively, we look at announcements that seem to be totally unexpected, where the most plausible counterfactual was that people expected that the world would continue just as it had been.<br /><br />People who do "event studies" on financial markets (not me) are the ones who could best answer your question.<br /><br />But this is really a part of a more general question: how can we ever really tell if any policy worked? We don't have a control group and a randomised experiment, so can't really tell what would have happened otherwise.<br /><br />Sometimes we look for "natural experiments". Sometimes we get the theory to tell us what co-movements to expect. My theory says that a successful monetary policy announcement (one that was better than expected) should cause: expected future price level to rise; expected future real income to rise; stock prices to rise; real commodity prices (like oil) to rise; and the yield spreads between risky and safe bonds should come down. That's falsifiable. (But in this game, since we are so bad at it, I would count getting 4 out of 5 right as doing OK!)Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-40406675069201157022011-09-23T04:36:09.532-07:002011-09-23T04:36:09.532-07:00Justin,
Yes, exactly. The Fed's arguments rel...Justin,<br /><br />Yes, exactly. The Fed's arguments rely on market segmentation. Put another way, they are saying that the Fed can intermediate across maturities of Treasuries, and that will matter. The problem is that the private sector can do that intermediation just as well. The Fed does more of this intermediation, and the private sector undoes that by doing less.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.com