tag:blogger.com,1999:blog-17232051.post4003695139805657248..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: John Taylor's austerity modelNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger63125tag:blogger.com,1999:blog-17232051.post-68854006835214533532013-03-26T00:29:53.024-04:002013-03-26T00:29:53.024-04:00More to the point, Taylor's model implicitly a...More to the point, Taylor's model implicitly assumes that if real interest rates ever did drop below zero, people wouldn't buy T-bills. But they do.<br /><br />You have to wonder what this says about mathematical economic models in general. The assumption appears to be that people who buy T-bills seek to maximize their utility function -- whereas Kahneman & Tvserky's results suggest that people actually seek to disproportionately minimize their perceived future losses, even if it means increasing their real present losses.<br /><br /><br />Unknownhttps://www.blogger.com/profile/10994509912655287453noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-39754548540239530672013-03-21T20:18:28.185-04:002013-03-21T20:18:28.185-04:00why would RE not hold? In the absence of liquidity...<i>why would RE not hold? In the absence of liquidity constraints, what is the intuition behind why sticky prices matter?</i><br /><br />I don't actually remember why this is the case; I think the argument is that debt financing acts like expansionary monetary policy. <br /><br />Also, you're right that in this model, the liquidity-constrained consumers are going to make a difference.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-39529703502834567842013-03-21T10:56:31.377-04:002013-03-21T10:56:31.377-04:00Noah,
why would RE not hold? In the absence of l...Noah, <br /><br />why would RE not hold? In the absence of liquidity constraints, what is the intuition behind why sticky prices matter? <br /><br />In the model, Taylor assumes that 27% of households are in fact constrained (can smooth consumption only by holding cash). However, the remaining 73% has access to domestic and foreign capital markets. Whether this number is reasonable I cannot say. My guess is that, given the current credit condition, he is underestimating the fraction of liquidity-constrained households.CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-61398193605441813142013-03-21T01:39:17.324-04:002013-03-21T01:39:17.324-04:00CA: This is not quite my understanding of how it w...CA: This is not quite my understanding of how it works. Since there are sticky wages and prices, Ricardian Equivalence will not hold in this model even in the absence of distortionary taxation. To see this, take a standard sticky-price New Keynesian model, hold the nominal interest rate constant, and change the timing of transfers; I believe that there will be a nonzero impulse response of GDP and other variables. But put in an optimal Taylor-type rule and these go away, restoring Ricardian Equivalence...I think.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47133415365833575302013-03-20T23:42:16.934-04:002013-03-20T23:42:16.934-04:00K,
"And why would he have gone out of his wa...K,<br /><br />"And why would he have gone out of his way to avoid the ZLB"<br /><br />Because it is not relevant to his results. Why make the model more complex by adding a detail that is not important to your results? Read my reply to Noah above about where I see his results coming from.CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-20133997418737224712013-03-20T23:37:05.369-04:002013-03-20T23:37:05.369-04:00Noah,
on the first point, fair enough, my bad! St...Noah,<br /><br />on the first point, fair enough, my bad! Still friends? <br /><br />On the second point, these values are in his 1993 paper, where he introduced the rule. Maybe he thinks people who are reading it should be familiar with this by now since it is pretty standard, but yes, it would be better if he mentioned them in the paper.<br /><br />In terms of the dynamics, this is what I understand from my brief encounter with the paper (I hope I am not wrong).<br />People pay taxes that reduce their disposable income. They also receive transfer payments that add to their income. People decide how much of that income, including the transfers, to consume and how much to save given their life-time income. Now suppose that the govt gradually cuts transfer payments thereby reducing the taxes that people expect to pay during their life-time. Since every dollar less received in transfer payments is a dollar less paid in taxes the two should be a wash, having no impact on income or spending. They are not because of the reduced distortion in the labor market. A drop in the labor income tax rate raises the after-tax wage that workers receive and lowers the pre-tax wage that firms pay. In response households are willing to work more and firms are willing to hire more, so overall employment rises as tax-rates go down. Consequently, potential income rises over time. However, actual income rises more than potential because people, to smooth consumption, increase consumption now in anticipation of the future incease in income, so spending (AD) rises faster than AS causing output to over-respond in the short run (the hump in the curve). This is why the Fed does not lower the interest rate, but in fact raises it temporarily. Things work differently when the government cuts government purchases instead, as government spending is used to buy goods and services directly. The increase in current consumption spending in anticipation of the future income increase is not high enough to cover the drop in government spending, so AD falls. With it so does output, which recovers over time. CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-86408688587985619532013-03-20T23:06:30.971-04:002013-03-20T23:06:30.971-04:00Dohsan,
I am an almost 40 years-old-non-virgin, f...Dohsan,<br /><br />I am an almost 40 years-old-non-virgin, father of two, citizen of two countries and permanent resident of a third...I can keep going on, but no, I am not a student. <br /><br />1. "inflation is very hard to move upwards". <br />Hard and impossible are not the same. Anyway, again, this is a minor point and not significant in the discussion regarding Taylor's results.<br /><br />2. First, you tell me how distortive Taylor is assuming taxes to be, and how distortive you think they are. For the record, for the whole thing to work they need to be distortive to any extent. See also my response to Noah below. Taylor bases his parameter values regarding the elasticity of labor supply on commonly accepted microeconomic studies. Where do you base yours? And, by the way, when he talks in his model about tax cuts on LABOR income he does not necessarly mean high-income earners! <br /><br />4. From what I understand Taylor simply put out an idea, substantianted by a scientific paper. I have no clue what Taylor thinks the GOP will do if they get into power, but I assume he wants to push his idea to both parties. I personally supported Obama and have made repeated donations to the DNC congressional campaign committee. But Taylor has earned enough of my respect as an economist that when he puts a proposal out there I need to consider it seriously and evaluate it fairly. CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-90692895311393411562013-03-20T20:10:29.611-04:002013-03-20T20:10:29.611-04:00CA:
The question is whether one believes that at ...CA:<br /><br /><i>The question is whether one believes that at the ZLB monetary policy is ineffective, or that measures like QE are having an impact.</i><br /><br />Isn't this exactly what I meant when I wrote "there is no ZLB" in Taylor's model? Yep.<br /><br /><i>Typically, the Taylor rule involves parameter values that are multiples of 2. So my guess is that he is using as the neutral nominal rate R^4=4%</i><br /><br />OK but there is no reason not to give those parameters in the paper...he probably just forgot.<br /><br /><i>My main point is that there is no drop in the real interest rate in the simulation. This implies that it is not monetary policy that is absorbing the shock, so I am not sure where Kimbal gets his result.</i><br /><br />Ah, but that could just be down to expectation effects. Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78458863930719104952013-03-20T18:10:52.981-04:002013-03-20T18:10:52.981-04:00So CA, are you a student? The impression I get is...So CA, are you a student? The impression I get is that you don't know much about our current real world very well.<br /><br />Anyway, on to your points:<br /><br />1. Yes in theory, inflation does not have an upper bound. In the real world (specifically, the US after what would have been a depression with a debt-deflation spiral if not for massive unorthodox political and monetary maneuvers), inflation is very hard to move upwards. Certainly much harder than cutting rates when they are far from zero, so any model that doesn't take in to account the possibility of a lower bound (soft or hard) in rates (real or nominal) is probably not going to model our current reality very well.<br /><br />2. Assumptions on Fed actions: I'll concede here and let others tackle this.<br /><br />3. Distortionary effects of taxes: I would like to see research to empirically support the distortions that Taylor assumes, considering that effective taxes as a percentage of GDP are as low as they have been in a very long time. Considering that they are a key part of his argument, I would expect him or his defenders to have the onus of coming up with that research, rather than those of us who doubt those distortions.<br /><br />4. I notice that you completely ignored a key point I mad: assumptions on where spending cuts would happen. Are you conceding that Taylor is unrealistic about what the GOP would cut if they could pass their budget? Yet if you do, how can you support Taylor's overall argument that the GOP budget would help the economy? After all, does not his own model show that if the GOP gets the cuts that they purportedly want the way that they are likely to want it, the economy would go in to a deep recession?Dohsanhttps://www.blogger.com/profile/07884148005077602324noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-33429448014439779902013-03-20T17:27:54.754-04:002013-03-20T17:27:54.754-04:00CA,
Well if Taylor's result survives the liqu...CA,<br /><br />Well if Taylor's result survives the liquidity trap, he *should* have shown us. And why would he have gone out of his way to avoid the ZLB in that case? Why is he not trumpeting an article titled "Austerity as an Escape From the Liquidity Trap"? *That* would have been worth shouting about!Khttps://www.blogger.com/profile/09226058602565040485noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-53524732617234814102013-03-20T11:16:09.724-04:002013-03-20T11:16:09.724-04:00K, please see my response to Noah in a thread abov...K, please see my response to Noah in a thread above. CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-64323871094655861312013-03-20T11:12:22.464-04:002013-03-20T11:12:22.464-04:00Noah, yes, I did not express myself properly. Here...Noah, yes, I did not express myself properly. Here is another attempt:<br /><br />1) In the model what matters is the real interest rate. This is controlled by changing the nominal interest rate (assuming sticky inflation). However, the question is whether the Fed can influence the inflation rate via other means. The question is whether one believes that at the ZLB monetary policy is ineffective, or that measures like QE are having an impact. If so, one can lower the real rate even if the nominal rate is zero, by raising the inflation rate. There is no agreement on this issue, but all I am saying is that it is a possibility. This is a minor point anyway.<br /><br />2) Typically, the Taylor rule involves parameter values that are multiples of 2. So my guess is that he is using as the neutral nominal rate R^4=4% (2% inflation plus 2% real interest rate), phi_pi = 1/2, phi_gy = 1/2. I am not sure what value he he is using for the smoothing parameter phi_R, but in any case, with these parameters the rule predicts a positive nominal rate if one assumes that the targeted inflation is equal to 2% and the targeted growth or GDP is 5%. Basically, the current nominal rate is below what a Taylor rule would suggest. <br /><br />3) My main point is that there is no drop in the real interest rate in the simulation. This implies that it is not monetary policy that is absorbing the shock, so I am not sure where Kimbal gets his result. If one reads the sensitivity analysis it is clear that the results are driven by the effect that the reduction in the tax rate is having on employment, and on consumption through the increase in expected disposable income. This is why the results are not as good when the cuts are made in government purchases or if the cuts are met by a reduction in the tax on capital income rather than labor income. Taylor's model clearly favors tax cuts on labor income. <br /><br />Now, one can argue that monetary policy should not adhere to the Taylor rule (Greenspan has argued that), that people are not that forward looking, that the political realities are such that cuts will affect purchases also, and so on. These are valid points. However, once again, I do not see how the problem with Taylor's model is that the results are driven by him violating the ZLB in the model!CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72479962287498551762013-03-19T21:10:15.967-04:002013-03-19T21:10:15.967-04:00Costas, I'm pretty sure you're wrong. Here...Costas, I'm pretty sure you're wrong. Here's how Taylor introduces the monetary policy rule:<br /><br />"The monetary authority sets the interest rate according to the following Taylor-type rule with interest rate smoothing, where the <b>nominal</b> interest rate responds to deviations of CPI inflation from the inflation target and output growth from steady state output growth"<br /><br />(emphasis mine)<br /><br />And there's no ZLB there.<br /><br />In his simulations he does show real interest rates, but the fact that they don't go below zero just shows that something's odd about his parametrization. Since real rates are now negative, I'd say this should be a bigger concern than it is.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-18130988569260855552013-03-19T21:04:33.131-04:002013-03-19T21:04:33.131-04:00Thanks! :-)Thanks! :-)Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-16437773834547858772013-03-19T21:01:40.125-04:002013-03-19T21:01:40.125-04:00Glad you liked it. :-)Glad you liked it. :-)Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68207602032935410532013-03-19T20:41:36.525-04:002013-03-19T20:41:36.525-04:00I think that this is right, and that Taylor could ...I think that this is right, and that Taylor could easily take his model and show that short-term govt spending doesn't really make a big quantitative difference to the effects of the long-run fiscal consolidation. But of course, that's not the rhetorical point he's trying to make.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-87055849485217810152013-03-19T20:33:45.661-04:002013-03-19T20:33:45.661-04:00Pemakin,
All this assumes the CB can steer NGDP a...Pemakin,<br /><br />All this assumes the CB can steer NGDP anywhere it chooses. When asked about specific actions Sumner quotes mechanisms that are then shown to him to work the other way round to what he imagines, then he simply falls quiet and does another post on NGDP targeting.<br /><br />Again, if fiscal policy has automatic stabilizers it is hard to decide what is offsetting what. You could as well argue that monetary policy is always ineffective when fiscal policy is active enough. It is like saying a cancer drug is ineffective because if it works I can always shoot the patient. Without actually having a gun r bullets or giving a plausible mechanism of how I would actually be able to kill the person. Smoke and mirrors.<br /><br />PeterPhttps://www.blogger.com/profile/02032621777697914182noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-18978992565354092652013-03-19T20:31:13.003-04:002013-03-19T20:31:13.003-04:00CA,
"Come on, use your brains man!"
A...CA, <br /><br />"Come on, use your brains man!"<br /><br />Alright, here goes...<br /><br />"So it does not violate the bound, which is what Noah was claiming."<br /><br />a) Where? He said: "Taylor assumes what most New Keynesian models assume, which is that there is no Zero Lower Bound (or that we're always far from it)". That is exactly correct. Where did he say that Taylor lets the nominal rate go negative?<br /><br />The point that Noah is making is that Taylor assumes the CB is following a *Taylor* rule which they can only do if there is no Zero Lower Bound or "we're always far from it". That is a pretty specious modelling choice given the amount of Taylor Ruling going on right now, right? He engineered his world so he could just pretend the ZLB was irrelevant because the nominal natural rate just happens never to go below zero. You think he didn't notice that all the predictions of his model blow up in his face if the natural rate happened to be at the same level as in the real world? Did he just randomly choose nonsense parameters? Even with all his hyper-distortionary taxes, he couldn't make it work with a zero bound! So he shifted the natural rate up.<br /><br />b) Anyways, I was merely responding to you saying this in your first comment: "So I fail to see how the zero lower bound invalidates the predictions of the model." <br /><br />*That* statement is a total red herring. Taylor is very busy using his models to make predictions about *our world*, not about some obscure hypothetical world. But it just doesn't apply. There are a lot of modelling choices that reasonable people can disagree about. But choosing the wrong interest rate, and a central bank behavior that's impossible to execute? Seriously?<br />Khttps://www.blogger.com/profile/09226058602565040485noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-53354612517436715572013-03-19T20:01:19.887-04:002013-03-19T20:01:19.887-04:00This is a very nice exposition of Taylor's mod...This is a very nice exposition of Taylor's model.<br /><br />I don't think Miles Kimball's critique is quite right though, at least from a technical point of view, because the budget change and the tighter monetary policy Taylor would like to see aren't a single policy change. It's just a question of your counterfactual really. If we're considering the effect of the budget in Taylor's world, then the correct counterfactual is an increase in interest rates and no change in fiscal policy, rather than unchanged monetary and unchanged fiscal policy.<br /><br />He argues that monetary policy should be a lot tighter at the moment, which I think in the model means a change in the monetary rule. It's not clear to me that this model offers a sensible way to assess such a change, but in any case Taylor thinks that in the real world it would be expansionary. We would then be away from the zero-lower bound, so the Fed would have room to offset changes in fiscal policy (although they wouldn't necessarily have ENOUGH room). Thus in his model the Fed would react to consolidation as described, and it could be expansionary.<br /><br />So while I don't agree with Taylor's description of the world or policy prescriptions, I think it is still a coherent world view.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-53991519339430346122013-03-19T19:42:30.989-04:002013-03-19T19:42:30.989-04:00Noah: a different take: http://worthwhile.typepad....Noah: a different take: http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/03/fiscal-policy-with-old-and-new-keynesian-is-curves.htmlNick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-4715181889583353962013-03-19T17:51:54.891-04:002013-03-19T17:51:54.891-04:00Tom:
Diamond & Saez's 70% is more of a no...Tom:<br /><br />Diamond & Saez's 70% is more of a novel result than a political reality. The heart of your post was more "what can we actually do now though?!" And I agree with that sentiment.<br /><br />To further your & Dohsan's point, there are actually 4 ways to fix the deficit<br />1)cut expenses (spending)<br />2)raise revenues (taxes)<br />3)slow the rate expenses grow (entitlement cost control)<br />4)increase the rate revenues grow (GDP growth & inflation)<br /><br />So you're actually correct when you say that 1) and 2) are a crapshoot -- neither's a good option! 3) and 4) are actually the easiest and most effective ways to fix the deficit right now.<br /><br />Think about it, if we:<br />3)allowed Medicare & Medicaid the ability to negotiate drug prices <br />4)provided fiscal stimulus in government purchases towards infrastructure<br /><br />There would effectively be no deficit problem. That's really what Noah, Krugman, and everybody else here has been saying for 5 years now.Anonymoushttps://www.blogger.com/profile/08754870224347301158noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-30766003711002839852013-03-19T17:12:41.611-04:002013-03-19T17:12:41.611-04:00I came to this post trying to understand what the ...I came to this post trying to understand what the hell Krugman was going on about today. This is a fantastic explanation, and I'm adding your blog to my regular reading list. Thanks!John Madduxnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40572026520467113732013-03-19T16:57:18.751-04:002013-03-19T16:57:18.751-04:00"This week the House of Representatives will ..."This week the House of Representatives will vote on its Budget Committee plan, which would bring federal finances into balance by 2023. The plan would do so by gradually slowing the growth in federal spending without raising taxes."<br /><br />Ryan's plan calls for tax receipts to increase from the present amount of ~15.4% of GDP to 18.2% of GDP.<br /><br />Supposedly we're all going to hand over a smaller percent of our income to the Federal Gov't (no tax increases!), but in aggregate, we're all going to hand over a larger percent of our income to the Federal Gov't. So we each pay less, but when you add it up, it's vastly more. Reminds me of Lake Wogebon where 100% of the people are above average!<br /><br />What I'd want to see is how Taylor puts that in his model. Ryan's plan states that the percent of total income that's paid in taxes will increase. In a representative agent model, that would require that the percent of income paid in taxes for that agent would also have to increase. To actually meet Ryan's revenue figures, Taylor would have to model an increase in the tax rate, not a decrease.<br /><br />Of course, in the real world, there are many "agents." Ryan's plan can lower tax rates on some as long as the amount paid in taxes increases quite a bit for others (namely the so-called "47%" not to mention those with low, but non-zero effective tax rates). Overall though, Taylor (nor Ryan) has any right to claim there is no tax increase when, mathematically, there must be if you're going to have tax receipts increase by 3% of GDP. Even a "growing pie" argument won't work since Ryan specified not a specific dollar amount, but a percentage. You can't say a smaller slice from a bigger pie can be larger than a large slice from a small pie because he's specifying a specific percent of the pie...a percent larger than what we have now.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-38590384867871274322013-03-19T16:52:25.745-04:002013-03-19T16:52:25.745-04:00Taylor's Sep 2012 paper grossly misrepresents ...Taylor's Sep 2012 paper grossly misrepresents the actual fiscal situation in 2007, which he uses as a kind of base year for arguing against the need for higher tax rates. He says, "Because the U.S. federal budget was close to balance before the crisis, (the federal deficit was only 1.3 percent of GDP in 2007) this strategy would mitigate the size of any tax rate increase. Hence, relative to the 2012 policy baseline, long-run tax rates would be lower under this alternative strategy." I'm assuming he is referring to calendar year 2007 because the fiscal year deficit was actually 1.2% of GDP according to OMB tables. But in any event, his claim is dishonest because it was only the UNIFIED budget deficit was near balance, and only because there was a surplus of 1.3% in off-budget accounts (i.e., Social Security, etc.) for FY2007. The on-budget deficit was 2.5% for FY2007 at the peak of the business cycle, and it's the on-budget deficit that should be relevant for his analysis since he wants to cut back on transfer programs. In other words, Taylor wants to count the surplus receipts from the transfer programs, but then wants to renege on paying those bonds when the Trustees go to the Treasury for redemption. This is slimy analysis at its worst. The man should not be allowed to practice economics. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-41619280980345041522013-03-19T16:46:24.669-04:002013-03-19T16:46:24.669-04:00"No central bank actually targets NGDP."..."No central bank actually targets NGDP."<br /><br />Israel under Fisher?Dohsanhttps://www.blogger.com/profile/07884148005077602324noreply@blogger.com