tag:blogger.com,1999:blog-17232051.post883111216178879748..comments2024-03-18T22:32:52.802-04:00Comments on Noahpinion: On the iatrogenic explanation of post-recession stagnationsNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger87125tag:blogger.com,1999:blog-17232051.post-65080438685863055982013-02-21T06:29:10.659-05:002013-02-21T06:29:10.659-05:00CA can you clarify one thing for me. When you say
...CA can you clarify one thing for me. When you say<br /><br />"In other words, the long-run supply of saving is perfectly elastic at the discount rate even if the short-run supply is upward sloping. "<br /><br />do you mean (and this is the only way I think I can interpret it) - in the long-run (which long-run precisely?) there is some magical interest rate above which people completely stop consuming and below which people completely stop saving?reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-43515629913645829332013-02-18T15:56:21.332-05:002013-02-18T15:56:21.332-05:00I've seen Cochrane respond to Econ Job Market ...I've seen Cochrane respond to Econ Job Market Rumors. Shocked he hasn't shown up here.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47889550276978570072013-02-18T06:37:26.906-05:002013-02-18T06:37:26.906-05:00Besides - this issue of a point or a curve is irre...Besides - this issue of a point or a curve is irrelevant (a red herring) - the curve or point can shift up or down. But ultimately the market is a cross and shifts up and down in the returns to capital can have the same effect.<br /><br />And why argue about the long term - I thought everybody agrees this is a short term issue - so why is Cochrane hung up about it.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-7544993823853075172013-02-18T06:34:37.930-05:002013-02-18T06:34:37.930-05:00"it is not demand for saved funds (for invest..."it is not demand for saved funds (for investment purposes)"<br /><br />Huh? What are you replying - I never implied that investment was an increasing function of the interest rate but the savings was.<br /><br />"The discount factor is NOT a point on a curve, this is what you do not understand. It is a stable preference parameter that determines the long-run interest rate. In other words, the long-run supply of saving is perfectly elastic at the discount rate even if the short-run supply is upward sloping. "<br /><br />This makes zero sense to me, sorry. If I save more now I have more income in the future. If I have more income in the future then the value of consumption NOW increases relative to income in the future. There is a a clear marginal trade off. This comes from people having finite lives. That people all would all infinitely reduce consumption at a particular interest rate defies rational explaination. I'm not even sure what you mean by "long-run" in this sense. Or why you think this particular value would be shared by many people - each individual has a different tradeoff. It seems to me you are assuming that such a value exists. Where does it come from and how would you measure it?reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-25092538980076904592013-02-11T21:44:37.179-05:002013-02-11T21:44:37.179-05:00reason,
it is not demand for saved funds (for inv...reason,<br /><br />it is not demand for saved funds (for investment purposes) that is an increasing function of the interest rate, but supply. Demand is decreasing, because of diminishing marginal returns to capital. The discount factor is NOT a point on a curve, this is what you do not understand. It is a stable preference parameter that determines the long-run interest rate. In other words, the long-run supply of saving is perfectly elastic at the discount rate even if the short-run supply is upward sloping. <br /><br />For example, suppose that saving rises. The ensuing decrease in interest rates should stimulate investment, which will cause a drop in the marginal product of capital. But the drop in the marginal product of capital should eventually restore consumption to its previous level, since people will not receive a reward big enough to compensate them for sacrificing current consumption for future consumption. Unless, of course, there has been an increase in people's patience (lower discount rate) so that people are willing to accept a lower interest rate (lower marginal product of capital) to save the same amount of funds as before. Cochrane is not saying, "that an increase in desired savings translates immediately to an increase in actual savings." He is saying that he does not buy that there has been such an outbreak of thrift, that people all of a sudden have become so much more patient. Of course, there can be other, structural reasons why people's saving behavior has changed. But New Keynesian models do not explicitly model these reasons, and instead try to capture such phenomena by modelling them as changes in people's patience. This is what Cochrane has a trouble with. CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-29283740424602544772013-02-09T08:46:31.209-05:002013-02-09T08:46:31.209-05:00I think in this case we are being tripped up by te...I think in this case we are being tripped up by terminology. I guess every individual, at any point of time has a decision about how much to save and how much to consume that is an increasing function of the interest rate. In other words it will be an equilibrium condition that FOR EVERY INDIVIDUAL the discount rate AT THAT RATE OF SAVINGS is equal to the interest rates. But this discount rate must change as savings changes - or else the individual will chose to save more or less. So the problem with quoting this as being something meaningful, is that it is turning causation on its head. It is the return on capital that determines how much incentive can be given to save. This "consumer's discount rate" is not some exogenous single rate. It is a point on a curve, the reading of which depends on interaction with other factors.<br /><br />So saying "Now, a spontaneous outbreak of thrift, to the point of valuing the future a lot more than the present, seems a bit of a strained diagnosis for the fundamental trouble of the US economy..." seems to me very confused! It assumes there can be an instantaneous adjustment - that an increase in desired savings translates immediately to an increase in actual savings.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47125677471882602432013-02-09T08:26:24.611-05:002013-02-09T08:26:24.611-05:00This comment has been removed by the author.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-45168176404367489552013-02-09T08:07:13.764-05:002013-02-09T08:07:13.764-05:00OK I'll put this slightly differently.
I unde...OK I'll put this slightly differently.<br /><br />I understand perfectly that the demand for savings is an upward sloping function of interest rates, which is all your argument says. But markets have two sides. And the THEORY (and it is just a theory) about long run interest rates being DETERMINED SOLELY by preference for consumption today as against tomorrow looks decided wonky empirically. That Cochrane treats it as a fact says a lot about him.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-6770197448870719262013-02-08T22:59:42.987-05:002013-02-08T22:59:42.987-05:00Why is this
It has to do with the way their impul...<i>Why is this</i><br /><br />It has to do with the way their impulse responses work.<br /><br /><i>what is the standard explanation for why the Fed has been able to lower rates for the past 30 years while seeing inflation drop? What if there's a persistent deflationary pressure that is being offset by the Fed's low interest rates?</i><br /><br />Well, and now we run into the bigger problem of the near-impossibility of generating a counterfactual in macroeconomics...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-84996157759295176462013-02-08T21:23:52.089-05:002013-02-08T21:23:52.089-05:00the lack of deflation since 2009 is a problem for ...<i>the lack of deflation since 2009 is a problem for some New Keynesian models</i><br />Why is this, and what is the standard explanation for why the Fed has been able to lower rates for the past 30 years while seeing inflation drop? What if there's a persistent deflationary pressure that is being offset by the Fed's low interest rates? My pet theory (of course I have a pet theory) is that the wealthy are acting as a money sink, removing it from the real economy at increasing rates. Globalization and, increasingly, labor-saving technology have shifted economic power to capital, who are by definition net savers, and the effect on consumption was hidden by a massive credit expansion which ended suddenly, as such things tend to do.<br />LarsAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-75841022457351159522013-02-08T18:45:29.346-05:002013-02-08T18:45:29.346-05:00I recently wrote about my feelings about "The...I recently wrote about my feelings about "The Economist": <br />http://lazyfairyecon.tumblr.com/post/42208462291/the-economist-magazine-no-analysis-and-cowardly<br /><br />Dimitarhttp://lazyfairyecon.tumblr.com/noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-52661250007832328592013-02-08T16:40:09.134-05:002013-02-08T16:40:09.134-05:00reason,
my time is limited but, OK, let me provid...reason,<br /><br />my time is limited but, OK, let me provide a few more details.<br /><br />a) The full employment rate of interest is an ill-defined concept because your definition is ill-defined! What constitutes full employment? 0% unemployment? 1% unemployment? What? And according to what criteria? Moreover, you assume that the government (e.g. the Fed) can determine the real rate of interest not only in the short run but also in the long run. Theory says that it cannot. If you believe that it can, you need to specify how and where theory is wrong.<br /><br />b) I am not sure I understand your first post. The concept is quite clear. Most people prefer to consume now rather than later. This is what the discount rate is about, impatience. However, consuming more now is costly because, by collecting interest, by sacrificing a unit of consumption today you can earn more than a unit in the future. If people's impatience is greater than the reward from saving (the interest rate), people will move consumption from the future to the present by saving less now. The decrease in saving will drive the interest rate up until the two are equal. If the opposite is true then people will increase current saving, driving the interest rate down. This is a simple, intuitive result. Now, you can add income growth, heterogeneous preferences, risk aversion (preference for smoothed consumption), etc. Does any of this change the basic idea? No! It is just a smoke-screen. <br /><br />c) Your explanation in your second post shows confusion. Cochrane talked about the long run. It is hard to justify the existence of a negative long-run rate, particularly if income is expected to grow as it has been doing since the industrial revolution due to technological progress. Your analysis pertains to the interest rate response during a recession, when GDP deviates from its long run trend. Regardless of whether what you wrote is correct, it is therefore clearly not a response to what Cochrane was saying. Unless, of course, you are willing to argue that people view the current drop in income not as a temporary phenomenon, but rather as part of a long-run negative trend that defies the experience of the last few centuries.<br /><br />In conclusion, I understand that you don't like Cochrane. That's fine. All I ask is that you please take him on when he says things that are obviously rubbish and not on every technical issue he happens to mention, particularly when he happens to be correct. CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-48586228354704602282013-02-08T10:56:44.739-05:002013-02-08T10:56:44.739-05:00Sorry for the multiple posts - but I hope CA will ...Sorry for the multiple posts - but I hope CA will reply a little less glibly.<br /><br />Let us think about what the real natural interest rates equalling the personal discount rate tells us NOW, when we have a liquidity trap (i.e. the real natural interest rate is negative). It says that NOW people are much less "greedy" than they were in the 50s when they were saving much more. Huh?reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-10854664313084202592013-02-08T04:32:57.521-05:002013-02-08T04:32:57.521-05:00By the way the throw away line about "full em...By the way the throw away line about "full employment rate of interest is an ill-defined concept" is just that - a throw away line. The definition is in the name - and it is not a difficult concept to understand -the rate of interest at which ex-ante savings and investment plans match at a NAIRU level of income. <br /><br />How you measure it is another problem. But how do you measure the aggregate pure personal discount rate?<br /><br />As for the previous issue - it is easier to see if you think of the negative case - where income is expected to fall. Then people regardless of their preference to consume now or consume in the future, will accept even a negative rate of return on savings to ensure that they can eat tomorrow. That is because of diminishing marginal utility of consumption. You can sort of argue around this by saying that income expectations are included in the personal discount rate (i.e. you are comparing the marginal dollar with a marginal dollar at a lower income tomorrow) - but then it becomes endogenous and ceases to be an explaining factor. Partial analysis (ceterus parabus) may be fun, but it is often totally misleading.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-21486372278616750122013-02-07T16:27:34.558-05:002013-02-07T16:27:34.558-05:00"in the long run, the real interest rate shou..."in the long run, the real interest rate should equal the personal discount rate." - whose - and aren't you assuming it is constant? And what about the rate of growth of income - doesn't that have an influence too? If I consume more now then the rate of investment falls so my income falls in the future. And then depends on the expected return to investment not my discount rate.<br />Aggegating spending is easy. Aggegating a personal discount rate - um????<br /><br />Seems to me a lot of silly assumptions gives a silly result.<br /><br />reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-21893748437494027212013-02-07T13:35:12.095-05:002013-02-07T13:35:12.095-05:00Full-employment rate of interest is an ill-defined...Full-employment rate of interest is an ill-defined concept. <br /><br />The Euler equation in continuous-time models predicts that, in the long run, the real interest rate should equal the personal discount rate. If it doesn't then people will re-arrange their consumption time-path. They will consuming more now (save less) and less later if the interest rate on saving is not high enough to compensate their impatience, thereby causing the interest rate to rise, or less now and more later if the opposite is true. So Cochrane is not saying anything out of mainstream here.<br /><br />As for your question, how do you aggregate anything?CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68631586455857035612013-02-07T13:29:08.505-05:002013-02-07T13:29:08.505-05:00I understand the inverse relationship between inte...I understand the inverse relationship between interest rates and C, I, and Nx. However, I don't believe that consumption is highly dependent on interest rates. It is more dependent on income. <br /><br />While income is dependent on capital, it is not evenly distributed. Capital's share of income is highly evenly and a cause of widening income inequality.<br />http://www.clevelandfed.org/research/commentary/2012/2012-13.cfm<br /><br />Plus, incomes used to rise in tangent with labor productivity. While increases in capital make worker's more productive, the link between labor productivity and income has broken down over the past few decades. <br />http://www.bls.gov/opub/mlr/2011/01/art3full.pdf<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-7092016063146494092013-02-07T11:45:20.643-05:002013-02-07T11:45:20.643-05:00By the way I don't really even to pretend to u...By the way I don't really even to pretend to understand what an aggegate consumer rate of discount means (given that each individual has an individual rate of discount). How do you meaningfully aggegate them?reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-82969714113372879112013-02-07T10:39:28.951-05:002013-02-07T10:39:28.951-05:00Noah Smith: "NK models are popular but I thin...Noah Smith: "NK models are popular but I think they're probably a bust. They seem to me like exercises in curve-fitting with no out-of-sample predictive power (i.e. overfitting)."<br /><br />I find that disconcerting. Overfitting is not that difficult to avoid, as a technical matter. Mark Thoma has also made comments that suggest (to me, anyway) that overfitting is common. {sigh}Minnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-4111555963018114382013-02-07T10:25:49.176-05:002013-02-07T10:25:49.176-05:00Good idea!
It ought to buy labor, too. Bring back...Good idea!<br /><br />It ought to buy labor, too. Bring back the WPA and CCC. Per capita grants to states would be good, too. (Per capita for the sake of fairness. :))<br /><br />Another way to get out of a suboptimal equilibrium is to change the payoffs. What changes would be good?<br /><br />Minnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-52735368796918800302013-02-07T10:05:29.573-05:002013-02-07T10:05:29.573-05:00What? The US had "some" stimulus in 2009...What? The US had "some" stimulus in 2009 and the Cameron government instigated massive cuts. Are we supposed to take into account government policy too? I thought the exercise was - why has the recovery been weak all across the globe? In some countries the economy is weaker than others but why isn't that just differences in their economies and policy responses by different governments.Pinkybumhttps://www.blogger.com/profile/14966880596265799283noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-41925829554433053192013-02-07T07:47:30.669-05:002013-02-07T07:47:30.669-05:00@ivansml: in the end, ABM approach will be success...@ivansml: <i>in the end, ABM approach will be successful when it delivers better insights than alternative models. Has that happened so far?</i><br /><br />Not really. But I say the chicken comes before the egg: if relatively few people are pursuing an approach, then it is not likely that many insights are generated by said approach.felipenoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-25366864784669320842013-02-07T07:14:16.285-05:002013-02-07T07:14:16.285-05:00Noah, my I offer a slightly different take.
Could...Noah, my I offer a slightly different take.<br /><br />Could it be that "economics" has made a very simple subject needlessly into a very complex one, one that is not true (i.e., in the same way that physics created string theory). Aren't people going to look back at this era and lump the two together as "academic frauds on a system wide scale." The two have the all the characteristics: meaningless math,no experiments, no ability to forecast, and no connection to reality in their models.<br /><br />Keynes wrote a more than adequate description of depressions. His argument that countries with a current account surplus had to switch to a short term deficit was right on the mark. We have just spent 6 years proving him right.<br /><br />Isn't time to admit that life is a confidence game (which it is, for there is no law of the universe---or economics---that says that either a bushel of corn or a bar of gold has any set value) and that Chuck Prince was right when he said, "As long as the music is playing, you’ve got to get up and dance."<br /><br />"All we need is music, sweet sweet music."<br /><br />With that view, our mistakes are in not making all loans non-recourse and in failing to make bankruptcy a revolving turnstile, of no moment or consequence.<br /><br />And, the manual and definite book for this era has already been written, Confidence Men: Wall Street, Washington and the Education of a President by Ron SuskindAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-41179011179922405332013-02-07T06:58:47.845-05:002013-02-07T06:58:47.845-05:00No, that won't do. The US is actually less &qu...No, that won't do. The US is actually less "depressed" than other economies such as the UK that have not suffered such a major housing market correction. I really wish it were that simple, but I don't see how it can be. I think those who talk about a pandemic of pessimism and hair-shirt-wearing are on the right lines. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-8689275219118255502013-02-07T05:26:31.721-05:002013-02-07T05:26:31.721-05:00I realise of course having written this that Cochr...I realise of course having written this that Cochrane thinks the natural rate of interest (which I see as the full employment rate of interest) is the same thing as the consumer rate of discount (i.e. it doesn't depend on the marginal return to investment). I think this is rubbish, but maybe Noah might want to address this.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.com