Sunday, February 02, 2014

What can Abenomics teach us about macro (so far)?



It's very hard to draw definitive conclusions about macroeconomics from eyeballing aggregate time series. But suppose we grant that Abenomics represents a real regime change in monetary policy (but not to fiscal or structural policy), and suppose for the moment that no other big "shocks" hit Japan's economy at the same time. What conclusions can we draw with these assumptions?

For reference material, here is an excellent David Andolfatto post summarizing most of the things that have happened to Japan since Abe took office. Basically, what has happened is:

* Headline and core inflation are both up, now into positive territory. Core inflation is higher than it has been in decades.

* Real GDP growth is up, but current growth levels are not higher than other peaks that have been observed since 2000.

Imports and exports are both up, with imports up more than exports, increasing the size of Japan's trade deficit.

So what does this tell us?


1. QE does not cause deflation.

A couple months ago the blogosphere was rocked by Steve Williamson's claim that QE is deflationary. Frances Coppola has made a similar claim in the past. It seemed like a wild idea, but the failure of QE in the U.S. and in Japan in the mid-2000s to boost inflation seemed to lend a bit of plausibility to that claim. But the sudden jump in inflation since Abenomics seems to put paid to the "QE = deflation" hypothesis (at least if we accept the assumptions I mentioned before). Andolfatto has more here.

(Of course, neither has Abenomics caused runaway inflation. In fact, inflation appears to be slowly crawling toward the Bank of Japan's 2% target.)


2. QE is not a surefire way to stimulate an export boom.

Both Abenomics and Japan's earlier QE have been followed by an increase in balanced trade, but not in net exports. QE has succeeded in cheapening the Japanese currency, but so far, this has not resulted in an increase in net exports. The idea of QE as a mercantilist policy to boost net exports is thus called into question.


These would be the definite conclusions we could draw, but there are some more tentative suggestions as well. Anecdotally, consumption in Japan has increased since the advent of Abenomics, but business investment, not so much (I could not find an up-to-date time series of these, so if someone can find one, I'd appreciate it). That fits with the boom in balanced trade - consumption is up, which increases demand for imports, even as the cheaper yen encourages exports. This implies that QE, if it boosts the economy, does so mainly through consumption channels (like in a traditional New Keynesian model) rather than investment channels (as in a more modern New Keynesian model with capital). The story we might be seeing is that QE's biggest effect is to boost asset prices, which boosts consumption; a smaller, secondary effect is to boost exports by weakening the currency.

So is Abenomics good for Japan? The answer is: So far, it's looking that way. Mild inflation is probably better than mild deflation, so this shift is a healthy one. Any adverse effects have yet to emerge. It's too soon to call the policy a success, but it is certainly looking a lot better than its numerous naysayers have predicted. Monetary policy skeptics will doubtless still find no end of reasons to denigrate Abenomics, but so far their warnings have not been borne out.

56 comments:

  1. Anonymous5:36 PM

    See also Marcus Nunes post on Abenomics. http://thefaintofheart.wordpress.com/2014/01/16/abenomics-one-year-on/

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  2. The problems with QE in the US are that: (1) it has let Congress off the hook on doing anything about structural problems (like transfer pricing fraud) and has allowed the Republicans to live their austerity fantasy without having to face the consequences; and (2) it has hidden the cost of the stimulus in the form of pregnant risks in the Fed balance sheet.

    The taper of course does not stop the bleeding at the Fed, just gradually slows down the flow so in 2014 the Fed will ONLY be pumping a half a trillion dollars into the economy through QE. If the Republicans do something stupid later this month with the debt ceiling we can expect the Fed to reverse course and bail them out again.

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  3. Heh. Can't win 'em all!

    Actually, after much debate and considerable thought, I concluded that QE itself is pretty neutral, and whether the effect is inflationary or deflationary depends mainly on the fiscal stance. So as Abenomics is also fiscally expansionary, I would expect QE to be inflationary not deflationary in this case.

    I agree with you that QE's principal effect is support of asset prices. So.... wealth effects?

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    1. I agree with you that QE's principal effect is support of asset prices. So.... wealth effects?

      The purchases of MBSs are probably directly stimulating housing prices and construction and seem closer to a fiscal policy than any traditional notion of monetary policy.

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    2. Frances, the fiscal stance did not change in 2013. At the least the cyclically-adjusted budget balance as a % of GDP did not. The big policy change was a regime change in monetary policy. That is, it wasn't so much QE as it was the new goal of raising the nominal size of the economy and credibly committing to it. This is why temporary vs. permanent monetary injections are usually such a big deal for monetary economists.

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    3. I would add to Noah's list that broad money supply (inside money) so far also appears to be breaking its old trend. If it holds up, then we will have a good example of how proper expectation management--the whole new monetary regime thing again--can catalyze inside money creation.

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    4. David, I don't disagree. My point was that Abenomics doesn't have a fiscal authority deliberately pulling in the opposite direction.

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  4. Has any Central bank simply deposited money on every taxpayer's bank account? Wouldn't this be the most efficient way to stimulate the economy?
    If they spend the money, well, they spend it, the lack of demand is solved. If they save it, well, demand doesn't grow, but neither does price inflation and each taxpayer simply becomes richer, which seems like a nice outcome.

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    1. Look up "Social Credit"

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    2. Redwood Rhiadra12:20 AM

      Is there even a country where the Central Bank is ALLOWED to do that? Most CBs are fairly restricted in what operations they're permitted. It's certainly illegal for the US Fed to deposit directly into a regular taxpayer's account.

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    3. Anonymous12:47 AM

      Australia, 2009!
      $950 for every Australian taxpayer who earned less than $80,000 during the 2007-8 financial year. Double for students and various other welfare recipients.

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  5. "Headline and core inflation are both up, now into positive territory. Core inflation is higher than it has been in decades."

    True. But Japan's basic "core inflation" rate excludes energy, which relies mostly on imports. Take energy out and the 2013 CPI yoy looks very different.

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    1. This will help you slice it every which way you need regarding Andolfatto's post.
      http://www.stat.go.jp/data/cpi/kako/pdf/201307-z.pdf
      For more recent stats:
      http://www.stat.go.jp/data/cpi/kako/index.htm

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    2. Sure Core Inflation (or Core Core Inflation) looks different - its a different indicator. But it doesn't change the fact that even Core inflation is rising at the fastest pace in 5 years (5 years ago coinciding with a commodities price spike). I'd say the performance of Core Inflation actually supports rather than detracts from the argument that Japanese inflation is meaningfully higher. Is that what you meant Jun?

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  6. Well, we are not really talking about Abenomics if we ignore the non-monetary parts, right? I'm mean there seems to be some redefining going on.

    Trying just one policy seems to me like a lack of commitment anyway. Israel defeated inflation with a mix of labor reform, less spending and fixing the currency.

    Why wouldn't you want to be using all of the guns at your disposal? Do everything that is expansionary in the book and you will have an expansion.

    Given the output ditches the the US, EU and Japan there isn't need for fine-tuning. Is there a scenario where you can overshoot from deflation to high inflation without going through at least a period of moderate inflation? Only small economies vulnerable to huge devaluations can experience such periods.

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  7. I was a naysayer. I didn't expect bad effects from Abe/Kuroda/nomics but I expected much smaller good effects. Then my fall back was to argue that QE works for Japan because the People's bank of China isn't pegging the value of the Yen. You will notice that this doesn't work. The Abe miniboom is not export led.

    Japan shows a shift in expected inflation (measured by indexed bond vs nominal bon breakevens) and an increase in building starts. That is the pure expectations Krugman/Woodford/Yglesias/Avent pathway. It can work. I thought the promise to create inflation in the future (when it would no longer be needed) would never be believed by investors and, especially, builders. I was wrong.

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    1. Anonymous8:25 AM

      Krugman/Woodford/Yglesias/Avent? Krugman now believes that monetary policy doesn't work on the lower zero bound (flip flop); Woodford came late to the party; Yglesias and Avent are blogger who credit their broad macroeconomics view to Scott Sumner and other market monetarists.

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  8. "Any adverse effects have yet to emerge"

    i dunno

    http://www.bbc.co.uk/news/business-25908413

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  9. Abenomics at Crossroads

    February 3, 2014

    Needless to say, it is the Abenomics that drastically changed the economic policy regime in Japan for the better, and brought about the surge in Tokyo stock market in 2013, being accompanied by the Japanese currency’s rapid depreciation against the US dollar and the other major currencies. With close to 60% annual gain in price appreciation in the past year, the Tokyo stock market was clearly one of the best performers in the global equity markets. The yen/dollar rate now stands more or less in line with the PPP, the long run fundamental value. (See my book entitled by Japan’s Great Comeback with Abenomics (February 2013))


    Unfortunately, the Abenomics is now at great risk, however. The government’s fourth arrow of large fiscal consolidation program starting from April 2014, contradicts the expansionary fiscal policy, the second arrow of the Abenomics.

    In fact, 10 trillion yen (2.1% of the GDP) fiscal expansion mainly through public works under the supplemental budget in FY2013 has been playing the major role in boosting the economic recovery under the Abenomics. By contrast, it is difficult to assess how much the BOJ’s doubling the size of the monetary base itself has been contributing to the strong recovery of employment and the robust economic growth in general, although it has been successful for addressing the currency misalignments since 2008, and for boosting corporate earnings mostly for the major exporters.

    In particular, the sales tax hike to 8% as of April 2014 is highly likely to bring Japan back to the secular stagnation and deflation, as forcefully advocated by Mr. Summers in the IMF seminar last November. The depressed private consumption due to the tax increase is highly likely to contract the Japan’s aggregate demand by about 8 trillion yen (1.8% of the GDP).

    In order to offset such economic contraction, the government has proposed 5 trillion yen (1.2% of the GDP) supplementary budget including public works. Nevertheless, it would fall short of the size of the public expenditure in the previous supplemental budget by about 5 trillion yen. In other words, in FY2014, the government expenditures will decline by the same magnitude.

    Clearly, the Japanese economy is highly unlikely to be able to ward off such large negative fiscal shocks due to both large tax hike and significant reduction of the government expenditure. Given such large negative fiscal disturbances, the BOJ’s quantitative monetary easing will become ineffective.

    Moreover, unlike the US Fed now in the process of tapering the QE3, the BOJ would continue to commit itself to increase its monetary base. It seems to be self-evident under the Japanese government’s policy mix of large fiscal contraction and aggressive monetary expansion that the yen is going to further depreciate sharply, which could trigger the repeat of vicious cycle between Japan’s sales tax hike and the Asian currency crisis in 1997.

    Sincerely,

    Tomo Nakamaru
    An Ex-World Banker

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    1. "In fact, 10 trillion yen (2.1% of the GDP) fiscal expansion mainly through public works under the supplemental budget in FY2013 has been playing the major role in boosting the economic recovery under the Abenomics."

      In my opinion the most objective way of measuring fiscal policy stance is the change in the general government cyclically adjusted balance, particularly the cyclically adjusted primary balance (CAPB). The cyclically adjusted balance takes into account any changes in the general government budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus. The CAPB goes a step further, factoring out changes in net interest on government debt and thus ensuring that practically all of the changes in fiscal balance are discretionary in nature. The best place to find CAPB data is the IMF Fiscal Monitor. You can find the CAPB on the bottom half of Table 2 on page 70:

      http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

      Japan's CAPB is estimated to be (-7.7%), (-8.4%), (-8.5%) and (-6.0%) of potential GDP in calendar years 2012-15 respectively. Thus the change in CAPB is (-0.7%), (-0.1%) and (+2.5%) of potential GDP in calendar years 2013-15 respectively. In other words fiscal policy is estimated to have been mildly expansionary in 2013, to be largely balanced in 2014, and to be significantly contractionary in 2015.

      How has the 10.3 trillion yen, or about 2.1% of GDP, FY 2013 fiscal stimulus affected this result?

      For the sake of tractability let's assume the additional spending under the fiscal stimulus is evenly distributed throughout FY 2013. Given Japanese fiscal years start on April 1, this implies that in the absence of the fiscal stimulus Japan's CAPB would have been roughly (-6.9%) and (-8.0%) in calendar years 2013 and 2014 respectively. Thus the CAPB would have changed by (+0.8%), (-1.1%) and (+2.0%) of potential GDP in calendar years 2013-15 respectively without the fiscal stimulus.

      In other words, in the absence of fiscal stimulus, fiscal policy would have been mildly contractionary in 2013, mildly expansionary in 2014, and significantly contractionary in 2015. The effect of the fiscal stimulus therefore seems to have been to shift fiscal policy stance from mildly contractionary to mildly expansionary in 2013, mostly at the expense of shifting fiscal policy stance from mildly expansionary to balanced in 2014.

      In short, as I hope this simple analysis makes clear, I'm not sure it's at all fair to describe fiscal policy as "playing the major role in boosting the economic recovery under the Abenomics".

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  10. It seems difficult to isolate the impact of QE in isolation from the Abenomics experiment since Abenomics famously has "three arrows." To draw a conclusion about the impact of QE we need to be able to draw simultaneous conclusions about the relative impact of the other two arrows.

    Even people who believe QE to be deflationary still have the option of arguing that QE would be deflationary in the absence of the fiscal policy changes, the growth strategy, the structural reforms, etc., and that the deflationary force exerted by QE is being more than offset by inflationary forces exerted by the other elements of the policy shift.

    And all three of those policy impacts need to be analytically isolated from the "Ballyhoo effect": the impact of an announced policy change on "animal spirits" that is independent of the exact substance of the policy itself. That is, when a prominent leader dramatically announces "We're going to do somethin' somethin', and we expect it to increase inflation and business activity" then under favorable political and public relations conditions the announcement alone might succeed in raising inflation expectations - and consequently inflation - as well as business activity via psychological mechanisms that are not that sensitive to the exact nature of the policy announced.

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    1. Anonymous8:33 AM

      Moving the goalposts... much? It is really so difficult to admit that Market Monetarists were right, and you -- Dan Kervick -- wrong in so many different comment threads? Fiscal stance didn't change so much in the previous year, and anyway haven't the oomph to explain these recent events. I think this commenter of Marcus Nunes post (the blogger quoted in the post by Andolfatto linked by Noah) had it exactly right: "[Market Monetarists] You guys should invent some wacky new terminology, post-modernist style, and inject some meaningless math into the thing so that your colleagues can feel more impressive explaining this thing, and so that they don’t realize that you’re retiring their field of research."

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    2. Not moving the goalposts at all. My comment was a completely neutral remark about approaching these questions with something approaching a scientific method.

      Since Abenomics began, there has been a persistent effort to portray it as purely an exercise in "monetary policy." But in fact it is a complex policy package consisting in monetary, fiscal and regulatory changes along with a a high profile government PR operation to change expectations about inflation and growth.

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    3. Dan, you may not have moved the goal posts. But many MMTers were saying when the Abenomics QE program started that it would not amount to anything. It had been tried before, they said, to no avail. I won't mention any names but it is really easy to find prominent MMTers saying this.

      Implicit in these claims made by MMTers was a recognition that fiscal policy was not going to be a big part of the policy package in 2013. This, in fact, was borne out according to the IMF. They show that the cyclically-adjusted balance budget was practically unchanged in 2013. In other words, the stance of fiscal policy did change. What did significantly change is the monetary regime. Therefore, Abenomics so far doesprovide a good demonstration of monetary policy. (Actually, it provides a good demonstration of what a permanent change in monetary policy does versus temporary injections.)

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    4. David, I'm not talking about MMT. I'm just asking about what is actually behind the uptick in Japanese growth, and pointing out that if one is going to say that it is X, then one should be prepared to give some actual evidence as to why it is not Y, Z, or W when Y, Z and W were done at the same time.

      On fiscal policy, the issue isn't just the size of the anticipated deficit, but changes in the kinds of spending that are carried out. Also the structural reforms seem very important, possibly more than the monetary and fiscal and a strong enticement to renewed private sector investment in medicine and technology.

      Also, the great "success" people seem to be seeing in Japan seems so far to consist only in getting Japan closer to the American post-crisis trickle-down model: that is, modest partial inflation (rather than skirting deflation), a stock and asset price surge, stagnant or declining real wages, a growing gap between the top and the bottom, positive but sluggish growth concentrated at the top of the economy. Since I view US policy since 2008 to be an utter disaster and criminally corrupt plot to use the crisis to further disempower and subordinate US working people, and to concentrate capital, to disembowel functioning democracy, and to more deeply entrench the neoliberal dystopia of radical commercialization, the US is a very bad standard against which to measure Japan, or anywhere else.

      What I'm worried about in part is that the Japanese upturn is due mainly to the fact that Japan has basically decided to play ball with the prescription the developed world financial elites have been pushing since 2008: structural reforms to reduce the real wages of working people and make them more "competitive" with their Chinese fellows, while allowing capitalists to engorge themselves. Hollande seems to have been pushed recently to move in the same direction in France.

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  11. Hi Noah. I use to have a long interest in US-Japan trade (auto; gov-industry development), but not so much in economics. My recollection of the 80's and 90's, was inflation was correlated with the currency, and the currency was talked up and down (esp. in high profile events like the Plaza Accord). I seem to be recall how little actually CB forex reserves changed so, literally the currencies were talked up/down. You're a long time Japanophile so what's your take on this, and if you agree, do you think QE is just a modern version of verbal currency manipulation? Should we (like David A's analysis) be looking back to even the 80-90's period to see if QE really stands out? Keep it up, I really enjoy your Japan posts.

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  12. "A couple months ago the blogosphere was rocked by Steve Williamson's claim that QE is deflationary."

    That was what you chose to emphasize. In what I was discussing, that was a very small part of what I was talking about. Further, it's less inflation, not necessarily deflation, and it's a long run proposition. I'm quite willing to consider the possibility that QE works in the short run much like conventional monetary policy, and you get some more inflation - in the short run. But, it's a little silly to conclude, as you do, that the higher inflation that Japan is seeing is due to QE. You need a theory of QE, and some serious empirical work, to conclude anything about what is going on in Japan. Certainly you haven't done the work, and neither has David Andolfatto.

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    1. it's a long run proposition

      Can you explain succinctly why this is the case? I didn't think there was a "short run" or "long run" in your model.

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    2. It's a model which doesn't have any of the short run mechanisms in it - sticky prices, market segmentation, signal extraction, or whatever is going to give you the transient nonneutralities of money that people typically think about. Not that I think any of those mechanisms explains what we see in the short run. While the data seems consistent with short run nonneutralities, I don't think we understand that very well.

      In any case, there are a couple of issues here:

      1. If we say that QE matters, we're saying that the maturity structure of the outstanding consolidated government debt (central bank and federal government consolidated) matters. So, in making statements about QE, we can't just look at the central bank's balance sheet. In the Japanese case, it would be useful to have a time series on the average duration of the consolidated government debt.

      2. We can't draw conclusions on a policy experiment like this after such a short period of time. It's an innovative project that depends in part on how asset prices respond. Particularly in the short run, some of what is going on could be purely wishful thinking. We don't know as yet, I think.

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    3. "In the Long Run we are all........" Yeah I know, I know, I know you know.

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    4. Anonymous12:33 PM

      Williamson: "If we say that QE matters, we're saying that the maturity structure of the outstanding consolidated government debt (central bank and federal government consolidated) matters."

      Or maybe -- just maybe -- we're saying that the intentions and signals emitted by the monetary authority matters... A lot. More than fiscal policy shenanigans... In Japan, at least... And America, maybe.

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    5. It's a model which doesn't have any of the short run mechanisms in it

      To say that this makes it a model only of the long run seems a little off to me. More accurately, it seems like the model just doesn't give a time frame. So now the Abenomics evidence is showing that QE is not deflationary in the short run; the long run remains to be seen, though of course it will be much harder to tease out the effect.

      But unless you explicitly put a time frame in your model, I don't think you get to tack one on at the end with words!

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    6. Anonymous1:01 PM

      Noah Smith: "So now the Abenomics evidence is showing that QE is not deflationary in the short run; the long run remains to be seen, though of course it will be much harder to tease out the effect."

      Scott Sumner: "In fact, in all of world history no fiat money central bank has ever tried to inflate and failed. Elite economists glance at the WSJ or NYT, see something about the BOJ doing QE and having trouble getting out of deflation, and murmur to themselves; “someone really needs to model that.”

      Are Smith and Williamson "mysterians" when it comes to inflation? Is it not obvious to people yet that when a Central Bank wants to inflate, and commits to it, it just do it? No big mystery here.

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    7. No, no. It's not that there is no time frame. It's a matter of what the mechanism is.

      "So now the Abenomics evidence is showing that QE is not deflationary in the short run;"

      That's not correct. We know the Bank of Japan has been doing QE. We know the inflation rate has gone up in Japan. That's pretty slim "evidence." I thought you claimed to be a scientist.

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    8. To elaborate, my work is about exploring how QE might work in one particular way. The model is deliberately made as simple as possible, so that (hopefully) people can understand that particular mechanism. It's not intended to be taken directly to the data, and to capture all the dynamics of the effects of QE.

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    9. Stephen, there are good theories for why inflation and output are going up in Japan. The essence of them is that the Abenomics monetary injections are expected to be permanent whereas previous QE injections were expected to be temporary.

      See for example Auerbach and Obsfeldt (2005) or Woodford (2012). This ideas is even implicit in Krugman (1998). (Here is an ungated link to the first paper: http://elsa.berkeley.edu/~obstfeld/zerotrap_dec04.pdf). There are other papers and I make a similar point to these papers here. I suspect you already know this literature. So I am surprised you would claim there is no good theory that can explain what Noah is taking note of in Japan under Abenomics.

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    10. That's not correct. We know the Bank of Japan has been doing QE. We know the inflation rate has gone up in Japan. That's pretty slim "evidence."

      Note that at the beginning of my post, I wrote this:

      "It's very hard to draw definitive conclusions about macroeconomics from eyeballing aggregate time series. But suppose we grant that Abenomics represents a real regime change in monetary policy (but not to fiscal or structural policy), and suppose for the moment that no other big "shocks" hit Japan's economy at the same time. What conclusions can we draw with these assumptions?"

      The conclusion is conditional on those assumptions!

      To elaborate, my work is about exploring how QE might work in one particular way. The model is deliberately made as simple as possible, so that (hopefully) people can understand that particular mechanism. It's not intended to be taken directly to the data, and to capture all the dynamics of the effects of QE.

      Sure, fair enough. I didn't say that Abenomics proves your model is crap! I only said that if we accept certain assumptions, Abenomics proves that QE is not deflationary (on impact).

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    11. David,

      The experiment involves asset purchases at the zero lower bound. It's looking like what the Fed did is permanent too. Where's the extra inflation that came from that?

      Noah,

      "if we accept certain assumptions, Abenomics proves that QE is not deflationary (on impact)."

      "Proves" is a pretty strong word. You're looking at two variables, ignoring everything else that's going on, ignoring all other evidence on QE in other countries and other episodes, and you have no theory.

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    12. all other evidence on QE in other countries and other episodes

      What other episodes of QE do you know of, besides the U.S.?

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    13. Stephen, the Fed's QE asset purchases have been widely understood to be temporary from the get go. The FOMC has said so, Bernanke said so, and the market says so in its long-term inflation forecasts. The Board's staff economist have even put out research papers showing how over time the Fed's balance sheet will return to normal. Michael Woodford's main critique all along has been that the Fed's QE programs have not committed to permanent expansions. Now QE3 marginally pushes the Fed's balance sheet closer to some permanence, but not much. Overall, the Fed has signaled its balance sheet expansion will be temporary. This is a big reason many of us have been calling for a NGDP level target. It would committ Fed to a permanent expansion of the monetary base.

      Regarding Japan, Abenomics is a clear departure from its previous QEs in this regard. Its first QE was temporary and the BoJ signalled as much (see this figure ). The BoJ has said Abenomics will lead to a permanently higher inflation rate and a permanent expansion of the monetary base. There is a big difference here.

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    14. Stephen, did you read the Auerback and Obsfedlt (2005) paper? It speaks directly to how a large scale asset purchases at the ZLB can be expansionary. The key, as I noted above, is that purchases are expected to be permanent.

      Even though the monetary base and treasuries may be near perfect substitutes today, they won't be in the future if the purchases are expected to be permanent. And investors make their decisions based largely on what they think will happen in the future. Thus, a monetary base injection today that is expected to be permanent and greater than the demand for the monetary base in the future is likely to affect spending today.

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    15. So... here would be a more Post-Keynesian viewpoint from 1943 that would tend to agree with Stephen Williamsons' viewpoint that lower interest rates would tend to be less inflationary in the long-term:

      "The rate of interest or income tax [might be] reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously."

      http://www.interfluidity.com/v2/3451.html

      nice graph too of interest rates in the Great Moderation. Makes you think a little bit of the New Keynesian consensus about the full effects of monetary policy. Personally, i'm beginning to believe Stephen's conclusion (maybe for different reasons) as I'd tend to think the inflationary pressures of lower interest rates via increased investment is inherently not very inflationary, and it may mostly take a recession for the disinflationary pressures to take effect, but I guess that's for another format for further ponderance.

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  13. For example, read this - the whole thing - and carefully, this time.

    http://newmonetarism.blogspot.com/2013/12/phillips-curves-and-fisher-relations.html

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  14. Is QE deflationary?

    Why not ask Kuroda or Abe? After all, they seem to have such little confidence in QE that they are boosting fiscal support by many billions of yen to compensate for the consumption tax hike. If they were confident in QE, they wouldn't have to add to fiscal stimulus, right?

    As for Noah's claim that QE is not deflationary...The jury is still out.
    Consumers are still adjusting to the higher prices by digging into savings. Just wait until the second half of 2014 when they cut their spending and maybe you'll change your tune.

    Keep in mind, wages are not going up, so something's gotta give.
    Your judgment is way premature.

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  15. Anonymous10:31 AM

    QE as practised previously by Japan, The US and UK was kept strictly within the banking system. It caused inflation exactly where anyone would predict in the places where banks spend 92% of money, speculation in property, commodities and financial speculation. No wonder business investment has fallen through the floor. Such an action is not Keynesian.

    The conclusion must be that Japan has adopted a wider fiscal policy to make sure the money enters the real economy but clearly not much has. QE was always first and foremost a mass bank bail out by another name.

    The money in our economy simply follows where QE goes hence for us plebs QE is indeed deflationary.

    bill40

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  16. Anonymous11:21 AM

    So inflation after all but only asset prices inflation. How many times until we realise that the world is suffering from a lack of global demand?

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  17. "A couple months ago the blogosphere was rocked by Steve Williamson's claim that QE is deflationary. Frances Coppola has made a similar claim in the past. "

    I also drank a few cups of espresso to see if it should calm my nerves. Did not work.

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  18. Noah says: "Monetary policy skeptics will doubtless still find no end of reasons to denigrate Abenomics, but so far their warnings have not been borne out."

    Hmmm Are you following the turmoil in the emerging markets at all?
    QE doesn't need critics to "denigrate" it. It does a fine job by itself.

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    1. If you start with the conclusion that QE is bad, it's damn near certain you'll be able to find some kind of reason to support your conclusion!

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  19. Dan S2:10 PM

    Noah,

    I would point out that whether or not Abenomics causes Japan to grow faster is almost irrelevant. Why do I say this? Remember that the whole reason we're interested in Abenomics in the first place is because we're trying to answer the question of whether monetary policy still "works" at the zero bound, meaning boosts inflation or NGDP or pick your favorite nominal variable. Now, whether that boost in demand goes on to boost real GDP growth and employment is a perfectly fine test of demand-side business cycle theory, but that's equally true of Japan as it is true of the rest of the developed world prior to '08. Japan in particular interests us because they have been operating at the zero bound for so long and appear to have had a genuine regime shift.

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  20. For all the commentary about Japan's worsening trade deficit and what this means about the success/failure of Abenomics (plenty in the media seem inclined to judge it as the latter apparently), I think we are ignoring two big obvious issues:

    1. Japan has shut down all of its nuclear reactors. As a result, imports of alternative fuels (LNG/oil/coal) have absolutely skyrocketed. For example Japan paid a record 7.06 trillion yen for LNG alone in 2013. Since energy is one of the less elastic demands in the economy, usage has not declined in line with the price increase. So when we talk about the imports side of Japan's trade deficit, what we are really talking about is Japan's current energy policy choices. This is totally separate from Abenomics, yet tends to get lumped in because its easier to focus on one number "is the trade deficit up or down?" rather than think about the individual components.

    2. The other side of the trade deficit is exports, which are growing but not that much (an certainly not as much as energy costs). even though yen has depreciated some 25%. Is this because Abenomics is a failure? Try this simple experiment: Go to you local Toyota dealer in a country outside of Japan. Observe the price of cars there. Are the car prices 25% lower than they were around October 2012? I would hazard a guess that they are not in fact 25% lower. So what happened to the 25%? Well, you may have also noticed this bit of news:

    "Toyota raises FY 2013 operating profit outlook to record 2.4 tril. yen"

    So a single Japanese company now expects to earn 23.6 bil USD in profit (not revenues!) for the fiscal year 2013. That's where the 25% went. Companies like Toyota are recovering profitability before increasing production/taking market share. This is pretty reasonable because 1) they have excess capacity 2) they have not been profitable for a long time thanks to an overvalued JPY and 3) after 25 years of fiscal and monetary policy mismanagement (i.e. not enough of these things) they are cautious about assuming that the current situation will last. Eventually these Japanese exporters will increase production (and exports) to take advantage of their better profitability, or some other competitor will come along increase supply (and exports) to take advantage of the profits for themselves. Either way it won't happen overnight, but its either very short sighted or willfully deceptive to point out that exports aren't increasing yet when corporate profits are setting all time new records.

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    1. http://www.bbc.co.uk/news/business-25908413

      "The latest trade data showed that while Japan's imports of Liquefied Natural Gas (LNG) rose 0.2% by volume in 2013 from the previous year - the value of those imports surged nearly 18%."

      I think the cause of increasing trade deficit is pretty clear

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  21. I moved to Japan shortly before Abe's election. By way of anecdote, only recently have I seen prices for imported goods start to increase relative to domestic goods. I'm not an economist, but I think there's a stickiness when it comes to warehouse stocks and preexisting orders/contracts that didn't anticipate the monetary shifts. This might make it difficult to infer much from trade balance statistics from only a year or so of Abenomics.

    The one area that showed almost immediate inflation is energy (all imported gasoline, natural gas and coal where I am, but I think there are some national price controls). Unless the trade deficit stats exclude energy imports, I imagine this plays a big part in any changes.

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