tag:blogger.com,1999:blog-2499715909956774229.post891589208272226988..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: The Fed and InflationStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger35125tag:blogger.com,1999:blog-2499715909956774229.post-7358333461935412562011-03-24T13:14:03.630-07:002011-03-24T13:14:03.630-07:00Hi Richard,
Notice I did not say much about what ...Hi Richard,<br /><br />Notice I did not say much about what is going on in the labor market. That does not matter for the argument, other than that what is going on in the labor market will, I think, make the Fed reluctant to raise the interest rate on reserves when inflation gets high.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-15621154177641466892011-03-24T00:07:39.321-07:002011-03-24T00:07:39.321-07:00And I see you answer my first question later:
&qu...And I see you answer my first question later:<br /><br />"The Fed can make reserves more desirable to hold by increasing the interest rate on reserves, thus cutting off the incipient inflation, but it will have a hard time doing that. Unemployment may still be high and employment growth slow, and the Fed may not want to be blamed for slowing the recovery."<br /><br />But I think Duy has a good reply:<br /><br />"Here Williamson is making an argument that much of the increase in unemployment is structural. Despite another study suggesting the opposite, I concede there is a reasonable chance that some of the unemployment increase is structural (see David Altig here and here). What I don't agree with is the assumption the Fed will unwittingly miss the shift. Of course, they won't if they are watching wages, which should start to rise earlier than anticipated in the event of a significantly higher structural rate of unemployment."<br /><br />And I think Duy also makes a good reply at the end:<br /><br />"And don't fall into the trap that some hyperinflation scenario will suddenly sneak up on us. The signs will be evident long in advance, notably sharply rising unit labor costs and nominal interest rates. Those conditions simply have not been yet, leaving no reason to believe we need to rush into policy reversal, either monetary or fiscal."<br /><br />I'll add that a general criticism you have of Krugman/DeLong is that the government increasing employment could, over the long run, be hard to ratchet down and translate into increased private sector employment. But I think the government greatly underspends on high return public investment anyway, so a long term increase in this would be a good thing. <br /><br />In addition, the psychological costs of long term unemployment, the destruction of human capital, the costs to children, the suffering, are such that it's worth some misdistribution anyway to decrease that.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-24596166251124507742011-03-23T23:47:23.324-07:002011-03-23T23:47:23.324-07:00Oh sorry I misread that, I put the pause in the wr...Oh sorry I misread that, I put the pause in the wrong place:<br /><br />While it is certainly true that there is nothing alarming on the inflation front<br /><br />Pause<br /><br />if we look at what forecasters are predicting and the yields on TIPS maybe we should examine some other evidence.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-6120094745199459302011-03-23T23:41:52.943-07:002011-03-23T23:41:52.943-07:00First you say:
"While it is certainly true ...First you say:<br /><br /><br />"While it is certainly true that there is nothing alarming on the inflation front if we look at what forecasters are predicting and the yields on TIPS, maybe we should examine some other evidence."<br /><br />But then later you say the yield on TIPS reflects "modest anticipated inflation":<br /><br />"The margin between TIPS yields and nominal Treasury yields is not very large, reflecting modest anticipated inflation."<br /><br />Did you just mistakenly contradict yourself?Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55513502792101533442011-03-23T23:33:43.591-07:002011-03-23T23:33:43.591-07:00"The total stock of reserves will rise to abo..."The total stock of reserves will rise to about $1.6 trillion by the end of June, and that represents an accident waiting to happen."<br /><br />Can't that money just be trapped at the Fed instantly if inflation starts to rise by raising the interest rate on reserves?Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-10833973818201435152011-03-23T20:05:23.976-07:002011-03-23T20:05:23.976-07:00Mark,
I think in general monetary economics has b...Mark,<br /><br />I think in general monetary economics has been ignored - both by the neoclassical growth types and by the New Keynesians. There is a group of people out there who I talk to a lot who have been doing monetary economics for a long time - this started with Neil Wallace and his students in the 1980s - Bruce Smith, Rao Aiyagari, for example. There's also the more applied monetary people - Chicago cash-in-advance, Christiano/Eichenbaum, etc. Does "monetary economics" mean something entirely different for you? I get the sense you are much more empirical.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-71133062103864335772011-03-23T19:59:13.656-07:002011-03-23T19:59:13.656-07:00David,
I think the experience in the Volcker regi...David,<br /><br />I think the experience in the Volcker regime with targeting of non-borrowed reserves was a failure. Given day-to-day and week-to-week payments systems shocks, a fed funds rate target (except of course with positive excess reserves) as a directive to the open market desk works best. Given that, your NGDP target does indeed seem to be a special case Taylor rule. How can I say, for example, that 5% nominal GDP growth is optimal. Presumably that might mean something like: I think that the optimal inflation rate is 2%, and I think potential real GDP grows at 3%. But just like the New Keynesians, you have to take a stand on what potential GDP is. Seems the output gap is in there, and you have the same conceptual problems as those guys have.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-78038331203119803282011-03-23T14:02:40.935-07:002011-03-23T14:02:40.935-07:00David: what if NGDP has a unit-root?
KPDavid: what if NGDP has a unit-root? <br /><br />KPAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-28724427885328897262011-03-22T22:28:07.184-07:002011-03-22T22:28:07.184-07:00Stephen,
I'm curious if we can't find a po...Stephen,<br />I'm curious if we can't find a point of intersection. From my observation of a lecture delivered by Alice Rivlin last night there are precious few people (even those who evidently should know much better) who truly understand monetary economics. Join us.Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-91023526894069984152011-03-22T21:16:10.800-07:002011-03-22T21:16:10.800-07:00I'm enourmously gratified if I had any influen...I'm enourmously gratified if I had any influence in drawing Quasimonetarist David Beckworth into this discussion. But I'm too tired to discuss this topic any further just now. I have to lecture a class on Development Economics on the topic of Health at 8AM at Rowan U. tomorrow. And I'm not an expert on HIV, TB, Malaria or Diarheal ailments by any means.Mark A. Sadowskinoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-68546593552491636082011-03-22T14:43:11.764-07:002011-03-22T14:43:11.764-07:00Stephen:
Regarding NGDP targeting, here are sever...Stephen:<br /><br />Regarding NGDP targeting, here are several thoughts.<br /><br />(1) My preference would be to adopt a NGDP level target. This would be analogous to a price level target in that it would allow catch-up growth to the NGDP target trend and vice versa. It could be implemented via an interest rate or a monetary base instrument. <br /><br />(2) Level targets are great at keeping expectations anchored while providing short-run flexibility for monetary policy. For example, if the Fed had a 5% NGDP level target and one year it unexpectedly had 2% NGDP growth then the following year it would aim for 8% NGDP growth to catch up to trend. If this approach were understood and believed as credible by the public, then they would know that though there may be unusually high NGDP growth one year to make up for below trend growth, in the long-run NGDP growth would be stable. Thus, nominal contracts could be made with more certainty. <br /><br />(3) NGDP level targeting makes more sense then price level targeting because the former only responds to demand shocks while the latter responds to both demand and supply shocks. See <a href="http://macromarketmusings.blogspot.com/2010/11/why-ngdp-level-target-trumps-price.html" rel="nofollow">here</a> for more on this point.<br /><br />(4) Though similar, a simple NGDP target dominates a Taylor Rule. This is because the Taylor Rule requires knowing controversial and hard-to-measure variables. For example, what measure of inflation should be in the Taylor rule: headline, core, foward-looking? Also, how can one really measure the output gap accurately and in real time? All NGDP requires is the total current dollar size of the economy. It is already available in monthly form. But there is even better way to measure it as explained in the next point.<br /><br />(5) Though NGDP level targeting would be an improvement in my view, I wouldn't stop there. I would have the Fed target the market's forecast of the NGDP level. This would require something like the creation of a NGDP futures market to really work. The advantage of this is that it would be forward looking and better anchor nominal spending expectations. Stabilizing the expected path of NGDP would in turn bring more stability to current NGDP spending. Scott Sumner has been a really original thinker here. See this <a href="http://www.bepress.com/bejm/contributions/vol6/iss1/art8/" rel="nofollow">article</a> of his on futures targeting.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-34651246248747287942011-03-22T13:59:21.938-07:002011-03-22T13:59:21.938-07:00KP,
Yes, I agree on the "engineering" p...KP,<br /><br />Yes, I agree on the "engineering" part. On the price level targeting, I was thinking that you always know what to expect, but this would mean having to go to the Board of Governors web page and determine where we currently are relative to the price level target path. Maybe it's too complicated and, like you say, you are pretty much stuck with inflation rate targeting.<br /><br />On another point, I'm never quite sure what people mean when they talk about "anchoring expectations." It's standard Fed talk. Do we mean that the policy rule somehow rules out some bad equilibria where inflation is high?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59266147784389432412011-03-22T13:13:13.981-07:002011-03-22T13:13:13.981-07:00Macro-economists gave up on fine-tuninig the econo...Macro-economists gave up on fine-tuninig the economy, back in the 1980s after failing terrible at it during the 1970s.<br /><br />All this talk about the Fed should be doing x,y, and z is engineering talk. The economy is not like a well oiled machine which behavior we can finely adjusted simply by turning a knob here and pushing a contact there.<br /><br />While flexible inflation targeting and NGDP targeting works well theoretically, these don't work in practice. To be sure, anything that involves output or the output-gap is doomed to fail in real-life as the estimation uncertainty is huge.<br /><br />Price level targeting could potentially work, but you could end up messing badly with peoples inflation expectations, making them less anchored. Market participants need a fixed number, not something that is time-varying.<br /><br />Inflation targeting - say, 2% average during a 5 year period - is the only viable solution.<br /><br />KPAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-68148612039014740282011-03-21T18:10:34.416-07:002011-03-21T18:10:34.416-07:00Yes, it's true the Fed was initially too compl...Yes, it's true the Fed was initially too complacent - i.e. going back to Spring 2008. I'm still puzzled though about how the NGDP target works. What's the operating strategy behind it. The Fed has to decide on something at the FOMC meeting and give a directive to the Open Market Desk. What do they do?<br /><br />Yes, I see what you're after. That's exactly what New Monetarist models can capture (see work by yours truly, Randy Wright, Rocheteau, and Lagos, for example). In those models you can get asset shortages reflected in real rates that are too low. It's not a traditional liquidity problem that you would correct with a cash injection, as the liquid assets that are scarce in financial trade are Treasuries.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-53623659212629823752011-03-21T12:57:23.944-07:002011-03-21T12:57:23.944-07:00Stephen:
1. Expected inflation from TIPS start d...Stephen:<br /><br />1. Expected inflation from TIPS start declining by mid-2008. So does nominal GDP. And of course, after September, 2008 they free fall. The argument is that while the Fed threw everything at the financial system, it ignored these signs that velocity and thus nominal spending were falling. It probably wasn't a conscious thing, but by failing to respond to the decline in velocity the Fed passively tightened monetary policy. Had there been an explicit nominal target that anchored nominal expectations better the collapse of nominal spending would have been far milder. In short, the Fed failed to handle nominal expectations properly and, as a result, a mild recession got turned into the Great Recession.<br /> <br />A case in point is the September, 2008 meeting. The Fed chose to leave the ffr at 2%, because they were concerned about rising inflation. The rising inflation, however, was the result of commodity prices. Had they been looking more closely at the forward-looking TIPS inflation they would have seen the market already pricing in a steep decline in nominal spending. Instead they ignored it.<br /><br />3. I know the term "disequilibrium" is a no-no in a modeling sense, but they idea is there suddenly arose a surge in demand for highly liquid assets. So yes, there was a shortage of liquid assets, but only because the demand for them suddenly spiked. The Fed should have (1) supplied more by buying up more longer-term assets or (2) have established a credible nominal target that would have caused the demand for such assets to subside by bettering anchoring expectations.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-37036278523781300542011-03-21T12:32:18.786-07:002011-03-21T12:32:18.786-07:00Hi David,
1. I think that case is hard to make. T...Hi David,<br /><br />1. I think that case is hard to make. The Fed funds rate goes to zero in late 2008, and then there is massive credit market intervention - lending to everyone in sight.<br /><br />2. I agree that the zero lower bound is not a bound, but maybe for different reasons than what you have in mind.<br /><br />3. I'm not sure how I can think about this in a coherent way. I know there was an old Keynesian language used the term "disequilibrium," but there is always some well-defined equilibrium in those setups. The prices or the wages are fixed, and then there are specific rules about how everything is determined in those models. A modern New Keynesian model has a well-defined equilibrium. Monopolistically competitive firms play a particular game, and we're looking at the equilibrium of that game. Do you mean that there is some kind of shortage of liquid assets? If so, I've thought about similar things.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7176914647341937232011-03-21T12:09:05.910-07:002011-03-21T12:09:05.910-07:00Stephen,
I can't speak for all, but here is m...Stephen, <br />I can't speak for all, but here is my quick (probably inadequate) summary of what quasi-monetarists believe.<br /><br />1. The Fed effectively tightened monetary policy in 2008 and helped turn a recession into a 'Great Recession.' For example, see <a href="http://www.voxeu.org/index.php?q=node/3961" rel="nofollow"> here</a> or <a href="http://macromarketmusings.blogspot.com/2011/01/further-evidence-against-recaluation.html" rel="nofollow">here</a>.<br /><br />2. Monetary policy is not constrained by by the zero lower bound; it is a red-herring and the by-product of central banks using a short-term interest rate as the instrument of monetary policy. Nick Rowe has a good post on this <a href="http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/11/interest-rate-targeting-as-a-social-construction.html" rel="nofollow">here</a> Along these same lines they argue that such short-term rates are often not a good gauge on the stance of monetary policy. For example, if the neutral interest rate is at 0% and the federal funds rate is at 1%, monetary policy could be tight even though the absolute value of the policy rate is low.<br /><br />3. Monetary disequilibrium is the key reason for recessions. Nick Rowe had an excellent recent post on this issue <a href="http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/03/do-keynesians-understand-their-own-models.html" rel="nofollow">here</a>. And yes, an excess demand for money is the culprit <a href="http://macromarketmusings.blogspot.com/2011/03/why-ongoing-weakness-in-nominal.html" rel="nofollow">here</a>.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-24923144604439427902011-03-21T09:20:30.972-07:002011-03-21T09:20:30.972-07:00You mean Nick Rowe, Scott Sumner, etc., right? Fil...You mean Nick Rowe, Scott Sumner, etc., right? Fill me in on what they're thinking. I remember something about an excess demand for money.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81065085558636557512011-03-21T08:11:44.636-07:002011-03-21T08:11:44.636-07:00Why are the "New-Monetarists" more conce...Why are the "New-Monetarists" more concerned about potential inflation taking off, while the "Quasi-Monetarists" are more concerned about monetary policy being too restrictive?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-2016760124391565752011-03-20T20:20:26.893-07:002011-03-20T20:20:26.893-07:00A big difference in Canada is the overnight market...A big difference in Canada is the overnight market. The fed funds market has orders of magnitude more participants. But you could run the IOR system here in the same way if it was set up properly. We have some goofy rules about not paying interest to GSEs for example.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-17393310319142702952011-03-20T19:25:43.788-07:002011-03-20T19:25:43.788-07:00Stephen,
I have to get up early so excuse me for m...Stephen,<br />I have to get up early so excuse me for my brief response:<br /><br />1)As I understand the Dallas procedure it is simply a matter of dropping those items that change the most from month to month.<br /><br />2)The CB under NGDP level targeting does exactly what it always does: open market operations. But it does this by targeting NGDP expectations.<br /><br />3)I don't think the distinction between headline and core is that important over the long run because empirically over the long run they are no different. The main reason for the use of core measurements is the elimination of volatility in the short run.<br /><br />4)It would appear on first glance at your description that the Canadian IOR system is very different from ours.Mark A. Sadowskinoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-18489759239141120552011-03-20T18:57:49.823-07:002011-03-20T18:57:49.823-07:001. Maybe I'm good at faking that I know someth...1. Maybe I'm good at faking that I know something. The Atlanta Fed sticky price index uses some kind of trimming procedure, but it's not period-by-period, but based on the Bils-Klenow data, I think. I think you drop specific prices from the index, much like the CPI ex food and energy. Do you have a theory for the PCE trimming procedure?<br /><br />2. But with NGDP targeting, there must be something the central bank is supposed to do to achieve the target. What is it?<br /><br />3. Another thing I thought of is that TIPS are actually indexed to the headline CPI (not seasonally adjusted). How do you think that matters for what we think we are measuring as anticipated inflation?<br /><br />4. Canada works on a channel system. There is the overnight target rate, and the Bank of Canada typically lends at that rate plus 0.25%, and pays interest on reserves at that rate minus 0.25%. Typically, essentially zero reserves are held overnight. The Bank of Canada appears to extend intraday credit in the payments system to facilitate clearing and settlement, and that outside money disappears at the end of the day. No surging bank reserves, and they have had some pretty low inflation in Canada. Who wants to hold reserves overnight when you can earn a quarter point more in the overnight market? The efficiency argument is essentially a Friedman rule argument. One way to implement the Friedman rule is by paying interest on all outside money. It's not feasible to pay interest on currency, but you can certainly pay interest on reserves.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11573645069645129242011-03-20T15:38:12.217-07:002011-03-20T15:38:12.217-07:00Stephen,
1. You're either being tremendously m...Stephen,<br />1. You're either being tremendously modest or you're playing with my mind. Any US economist who considers themselves an expert on Monetary Theory should know what trimmed mean PCE is if only to have an opinion about it.<br /> <br />However, calculating the trimmed mean PCE inflation rate for a given month involves looking at the price changes for each of the individual components of personal consumption expenditures. The individual price changes are sorted in ascending order from “fell the most” to “rose the most,” and a certain fraction of the most extreme observations at both ends of the spectrum are thrown out, or “trimmed.” The inflation rate is then calculated as a weighted average of the remaining components. For the Dallas Fed's series, 24 percent of the weight from the lower tail and 31 percent of the weight in the upper tail are trimmed. <br /><br />2. In many senses NGDP level targeting is the absolute antithesis of the Taylor Rule. It does not rely on interest rates as the policy instrument for example. It also gives no consideration to the precise mix of inflation and real growth. And it is pure level targeting, not rate targeting.<br /><br />Money is obviously nonneutral in the short run (or at least so my eyes tell me so). The most reasonable explanation for this phenomenon is sticky prices, a concept which you choose to reject.<br /><br />3. I don't think QE2 has gone overboard by the standpoint of market based inflation expectations. By those measures things are actually exactly where the Fed implicitly wants them to be in the 2, 5 and 10 year time frames.<br /><br />4. Yes, Canada apperently has implemented IOR without any major negative repurcussions. I'm not familiar with the efficiency arguments in favor of IOR so I can't speak to that. However, one side effect of IOR in a low inflation environment may be surging bank reserves. One can't reasonably complain about the dangerous inflationary potential of such reserves and then defend the reason for their very existence in the same breath.Mark A. Sadowskinoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55707759196523404192011-03-20T14:56:00.797-07:002011-03-20T14:56:00.797-07:00Mark,
1. I've heard about "trimmed mean ...Mark,<br /><br />1. I've heard about "trimmed mean PCE," but don't know what it is. How do you modify the raw PCE to get that?<br /><br />2. NGDP targeting seems a special case of a Taylor rule. To know whether this works well or not, you have to take a stand on where the nonneutrality of money is coming from.<br /><br />3. Yes, I think there was a bit of panic running through the Fed about the prospect of deflation. Whether that was a real threat, I'm not sure. In any event, judging from the TIPS/nominal yield margins, QE2 was a success in increasing anticipated inflation. But maybe they went overboard.<br /><br />4. Eliminating IOR is, I think, a bad idea. There are well-known efficiency arguments for it, and the Canadians and others have done a nice job of implementing it.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-76984349736954165692011-03-20T14:11:40.060-07:002011-03-20T14:11:40.060-07:00Stephen,
If we're going to do price level targ...Stephen,<br />If we're going to do price level targeting (and I agree that's a good idea) then the choice of base year matters less if you use core inflation (or better yet, my preference, trimmed mean PCE). NGDP level targeting however would be even better IMO.<br /><br />QE2 certainly has had a nominal effect as inflation expectations (by several measures) have recovered nicely since Jackson Hole. It is of course debatable whether it has had a real effect yet but it is worth noting that the unemployment rate has just had its first meaningful decline, and the household survey employment number its first meaningful increase, this "recovery".<br /><br />I think I understand your views concerning AS/AD but I respectfully disagree. (And I personally prefer Cowen/Tabarrok's treatment of the model.) <br /><br />And looking at your response to Alexander, I favor a gradual elimination of IOR. In fact I suspect without IOR, QE2 would probably have been unnecessary. Bernanke is a fan of the credit channel MTM, so it's implicit IMO that IOR is really a means of propping up the financial sector.Mark A. Sadowskinoreply@blogger.com