tag:blogger.com,1999:blog-17232051.post1421004602979153433..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: Non-intuitive Neo-FisherismNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger68125tag:blogger.com,1999:blog-17232051.post-79446354802351657382015-09-03T22:51:10.831-04:002015-09-03T22:51:10.831-04:00"No one disagrees with the Volker disinflatio..."No one disagrees with the Volker disinflation." says Charles, but actually, during the Volcker era there were periods* were the Fed raised interest rates and inflation fell, the opposite of the conventional view.<br /><br />* Now notice that the Fed *lowered* interest rates from 20% to 10% from Feb 1980 to July 1980, and again no effect on inflation EXCEPT at the END of the period, in July, the CPI rate of increase actually *declined*! The *opposite* of the idea of ‘raise Fed rates to lower inflation’! The Fed then again raised interest rates from 10% to 20% from July 1980 until July 1981 but inflation continued during this time at roughly the same reduced pace as from July 1980. In other words, inflation broke on its own without much influence from the Fed, which yo-yo’d around with interest rates, following the market.Ray Lopezhttps://www.blogger.com/profile/11134761834999705305noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-12934874490536014772015-09-03T13:31:54.905-04:002015-09-03T13:31:54.905-04:00Cochrane: "But in 2008, interest rates hit z...Cochrane: "But in 2008, interest rates hit zero...The conventional view predicted that the broom will topple. Traditional Keynesians warned that a deflationary "spiral" or "vortex" would break out. Traditional monetarists looked at QE, and warned hyperinflation would break out... <br /><br /><br />The amazing thing about the last 7 years in the US and Europe -- and 20 in Japan -- is that nothing happened! After the recession ended, inflation continued its gently downward trend. "<br /><br />Please note that Mr. Cochrane is being quite dishonest. The 'traditional Keynsians' warned that a deflationary spiral would break out <b> unless something was done</b>.<br /><br />At this point Mr. Cochrane has passed deep into hack territory.<br /><br /><br />-Barry<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-15246859257701236632015-09-03T11:20:48.715-04:002015-09-03T11:20:48.715-04:00Various kinds. We use an app to order out. Various kinds. We use an app to order out. Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78197987775571996002015-09-03T10:48:45.446-04:002015-09-03T10:48:45.446-04:00Volcker's rate hikes in the early 1980s actual...<i>Volcker's rate hikes in the early 1980s actually made the inflation situation worse, and that it was his subsequent rate cuts that actually whipped inflation.</i><br /><br />Only someone who had no clue what happened in the early eighties could think that. I spent the early eighties foreclosing on people who could not afford Volcker's interest rates (and losing half the value of my house). <br /><br />A a general proposition, I think that neo-Fisherism is nonsense but one could probably write down a model where the middle class is trying to smooth out consumption over their life time and then if you drop the interest rates, savings go up and spending goes down for those people who are still working, putting downward pressure on prices.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-13135132319405608442015-09-03T07:55:57.153-04:002015-09-03T07:55:57.153-04:00Neo-Fisherians are trying to build an argument bas...Neo-Fisherians are trying to build an argument based on an ex-post identity without proper identification of causality! That's never a good idea! The most amazing thing is that not once have I heard the mention of Money Demand, which of course is the key to this puzzle! <br />First, let me address the NF claim regarding the real rate of interest. There is no evidence/theory as to why the real rate of interest should trend toward some long-term value that is exogenous to the economy, say 2%. People are willing to pay interest in order to borrow because they expect their incomes to grow in the future. Accordingly, the source of interest is income growth, and growth expectations determine interest rates (assuming the central bank supplies base money consistent with private agents' preferred allocation of their long-term savings between money and financial assets). In the aftermath of the Great Recessions, income growth expectations took a tumble. Furthermore, expectations are being further depressed by the burden of private debt, which agents no longer view as sustainable in the absence of housing appreciation. In other words, we have been operating in a world of depressed and even negative expectations. <br /><br />More importantly, money demand is inversely related to income expectations as agents with negative or stagnant income expectations attempt to hold their long-term savings in the form of money as opposed to financial assets. Since the Great Recession, money demand has risen dramatically to basically offset the monetary base expansion by the Fed. What this means is that monetary policy has been largely neutral despite 0% interest rates and three rounds of QE, which explains why inflation pressures have been so low!<br />Second, let me address the velocity of money. Velocity is the most misunderstood macro-variable. It has nothing to do with the speed at which money circulates in the economy. As money is a liability that can be created and redeemed in the same period, such “speed of circulation” could be infinite. Nor is velocity an ex-post residual as in QP=MV. Rather, velocity is a measure of ex-ante money demand. The causality in QP=MV flows from MV with prices and employment being residuals (as the supply curve is fixed ex-ante by the available capital and technology, firms can respond to ex-ante change in aggregate demand(MV) only by changing prices (P) and employment (Q=K(E)) in the current period). With such understanding of velocity, a resort to Neo-Fisherian ideas is unnecessary and misguided (nor is there a need for price/wage stickiness to explain biz cycle – but that’s a different conversation).<br /><br />H. Publiushttps://www.blogger.com/profile/16019756383734059819noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-80413847140689728192015-09-02T20:12:43.936-04:002015-09-02T20:12:43.936-04:00I think you just misread Noah. He wrote that the p...I think you just misread Noah. He wrote that the proposition that printing money causes disinflation is counterintuitive. And of course it's not merely counterintuitive, it's goofball.<br /><br />Yes, increasing the money supply is a factor pushing up inflation. The only caveat is that it functions at least mainly by pushing down short rates, which is ineffective if already at the ZLB.<br /><br />The easiest way to test this is by looking at how prices of assets sensitive to inflation expectations react to unexpected loosening announcements. They adjust their expectations hotter, as a rule. That's one of the first things that gets automated (I'm talking about computers that read monetary policy announcements and move various prices in response, which in big markets happens incredibly quickly these days.) Granted, there's always some battle between the hotter push of the loosening and the signal that the economy has been cooling given by the central bank's unexpected decision to loosen. But as a rule, markets give greater weight to the former, at least in their first reaction.<br /><br /><br /><br /><br /><br />Tom Warnerhttps://www.blogger.com/profile/11247836188106712069noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-44580932757257847292015-09-02T18:17:24.195-04:002015-09-02T18:17:24.195-04:00"Dan, this is a short rates vs long rates iss..."Dan, this is a short rates vs long rates issue. Increasing the supply of money is a factor pushing down short rates by increasing the supply of money relative to demand to borrow it. But loosening also increases output and inflation expectations, which is a factor pushing up long rates."<br /><br />I still don't understand. Will increasing the money supply increase prices? That's the part Noah finds counter-intuitive. If you agree, then why are short-rates declining with increasing inflation? <br /><br />I suppose if the fed actions fix some inefficiency increasing output, that'd make future inflation higher which would increase long-term rates even more. But the short rates would still increase and the difference between short and long rates would depend on market frictions and investors ability to move consumption/investment over time (e.g. if you expect prices to increase you may want to buy stuff now, increasing prices today). <br /><br />What am I missing here?Dannoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-75383277653040740472015-09-02T16:31:28.468-04:002015-09-02T16:31:28.468-04:00Dan, this is a short rates vs long rates issue. In...Dan, this is a short rates vs long rates issue. Increasing the supply of money is a factor pushing down short rates by increasing the supply of money relative to demand to borrow it. But loosening also increases output and inflation expectations, which is a factor pushing up long rates.<br /><br />Hyperinflation is actually a fiscal phenomenon: a government with a captive monetary authority prints money and spends it. This might involve a nominal issuance of bonds and swap of them to the monetary authority at some notional interest rate, but there is no sovereign bond market interest rate in a hyperinflating economy.<br /><br />M., most QE is not really a swap of assets with the private sector: it's just monetary financing (the central bank prints money, the government prints bonds and swaps them for money, the government spends money). The sovereign bond supply in private hands is not reduced unless the volume of central bank bond purchases exceeds net issuance by the government, which never happened in the US.<br /><br />The reason why printing money had such different effects in the US and Zimbabwe has to do with the mild and later zero fiscal expansion in one and the hyperexpansion in the other, the huge difference in scale of money printing relative to GDP, and the huge difference in people's willingness to hold the currency or bank deposits as savings.Tom Warnerhttps://www.blogger.com/profile/11247836188106712069noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-4833909701183357342015-09-02T16:22:59.223-04:002015-09-02T16:22:59.223-04:00Thanks Marcus!Thanks Marcus!Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-50654949287924574152015-09-02T14:28:19.559-04:002015-09-02T14:28:19.559-04:00You have the logic backward. The FED sets the inte...You have the logic backward. The FED sets the interest rate and commit to supply enough money to meet for the demand at the given interest rate.<br /><br />When interest rate goes down, investment / durable goods consumption gets cheaper. Thus, aggregate demand increases and so does inflation.<br /><br />"<br />For instance, if Zimbabwe central bank printed money to buy govt bonds, inflation would go through the roof, so would the interest rates on those bonds making them worthless."<br /><br />That's what the FED usually does (except unconventional monetary policy). It prints money to buy government bonds. It's conventional monetary policy: you change the composition of the liabilities of the government (total debt = money + bonds).M.noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-14403798098346497912015-09-02T13:48:39.265-04:002015-09-02T13:48:39.265-04:00"There are two extremely well defined and not..."There are two extremely well defined and not at all obscure supply shocks.... "<br /><br />Just as the oil shocks of the 1970s flummoxed economists of that era. Interesting symmetry from a number of perspectives.<br /><br />HenryAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-52295425193113638642015-09-02T13:41:18.443-04:002015-09-02T13:41:18.443-04:00Other factors in Japan can also be highlighted to ...Other factors in Japan can also be highlighted to explain the low interest rate disinflationary/deflationary behaviour. The Japanese banks were debt constrained following the collapse of the late 1980s Japanese property boom and Japan having become a relatively high cost economy saw Japanese business redirect investment to China. These demand and supply side pressures kept the Japanese economy relatively quiescent.<br /><br />HenryAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-45589341202120785132015-09-02T12:58:43.073-04:002015-09-02T12:58:43.073-04:00Noah, I believe the idea is that a monetary inject...Noah, I believe the idea is that a monetary injection raises the stock of money (and prices) relative to the future. This implies lower growth in the money stock and lower inflation. In essence, it is like saying that a monetary injection causes a "bubble" in the price of goods and services so their expected return in terms of money is lower. Constantine Alexandrakishttps://www.blogger.com/profile/03148709241309623293noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-87307016016469428622015-09-02T12:45:44.620-04:002015-09-02T12:45:44.620-04:00What kind of cookies?What kind of cookies?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-5396592866558659322015-09-02T11:50:32.970-04:002015-09-02T11:50:32.970-04:00I'm a little frustrated about the meaning of &...I'm a little frustrated about the meaning of ''short term" or "long term" or "very short term" in economics. Compared to physics, economics is stuck in the phase between the (mythological?) apple falling on Newton's head and him discovering the formula of gravitation. It would be useful to determine, exactly when New Keynesian mechanics are trumped by the Neo-Fisherian relation.<br />Or the price puzzle: anyone watching the daily stock market regularly knows that sometimes expectations of central bank decisions are guessed somewhat incorrectly, so basically, stock prices do not in relation to interest rate changes but to the deviation from market expectations. Does this behavior fall under "very short term"?<br />It's hard to pin down the precise relationships if economic models continue to use the "t+n" system.Alexander Sebastian Schulzhttps://www.blogger.com/profile/15135338616598357444noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-9301027306139583182015-09-02T11:37:39.116-04:002015-09-02T11:37:39.116-04:00"Will we get inflation? The scenario leading ..."Will we get inflation? The scenario leading to inflation starts with poor growth, possibly reinforced by to larger government distortions, higher tax rates, and policy uncertainty. Lower growth is the single most important negative influence on the Federal budget. Then, the government may have to make good on its many credit guarantees. A wave of sovereign (Greece), semi-sovereign (California) and private (pension funds, mortgages) bailouts may pave the way. A failure to resolve entitlement programs that everyone sees lead to unsustainable deficits will not help. When investors see that path coming, they will quite suddenly try to sell government debt and dollar-denominated debt. We will see a rise in interest rates, reflecting expected inflation and a higher risk premium for U.S. government debt. The higher risk premium will exacerbate the inflationary decline in demand for U.S. debt. A substantial inflation will follow—and likely a ‘‘stagflation’’ not inflation associated with a boom. The interest rate rise and inflation can come long before the worst of the deficits and any monetization materialize. As with all forward-looking economics, no obvious piece of news will trigger these events. Officials may rail at ‘‘markets’’ and ‘‘speculators’’. Economists and the Fed may scratch their heads at the sudden ‘‘loss of anchoring’’ or ‘‘Phillips curve shift’’. This is a scenario, not a forecast. Whether it happens depends on the actions of our public officials, which are very hard to forecast."<br />http://faculty.chicagobooth.edu/john.cochrane/research/papers/understanding_policy_EER.pdfJoão Marcushttps://www.blogger.com/profile/13658264244033012660noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-17792509871850466752015-09-02T11:37:19.933-04:002015-09-02T11:37:19.933-04:00"Will we get inflation? The scenario leading ..."Will we get inflation? The scenario leading to inflation starts with poor growth, possibly reinforced by to larger government distortions, higher tax rates, and policy uncertainty. Lower growth is the single most important negative influence on the Federal budget. Then, the government may have to make good on its many credit guarantees. A wave of sovereign (Greece), semi-sovereign (California) and private (pension funds, mortgages) bailouts may pave the way. A failure to resolve entitlement programs that everyone sees lead to unsustainable deficits will not help. When investors see that path coming, they will quite suddenly try to sell government debt and dollar-denominated debt. We will see a rise in interest rates, reflecting expected inflation and a higher risk premium for U.S. government debt. The higher risk premium will exacerbate the inflationary decline in demand for U.S. debt. A substantial inflation will follow—and likely a ‘‘stagflation’’ not inflation associated with a boom. The interest rate rise and inflation can come long before the worst of the deficits and any monetization materialize. As with all forward-looking economics, no obvious piece of news will trigger these events. Officials may rail at ‘‘markets’’ and ‘‘speculators’’. Economists and the Fed may scratch their heads at the sudden ‘‘loss of anchoring’’ or ‘‘Phillips curve shift’’. This is a scenario, not a forecast. Whether it happens depends on the actions of our public officials, which are very hard to forecast."<br />http://faculty.chicagobooth.edu/john.cochrane/research/papers/understanding_policy_EER.pdfJoão Marcushttps://www.blogger.com/profile/13658264244033012660noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-49729533436866696182015-09-02T11:08:29.327-04:002015-09-02T11:08:29.327-04:00Cochrane made hyperinflation predictions? For the ...Cochrane made hyperinflation predictions? For the US... say around 2008 or 2009? Can you give a link? I haven't been following macro blogs all that long (a few years), but this surprises me. Thanks.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-18832506917752548192015-09-02T10:59:15.497-04:002015-09-02T10:59:15.497-04:00Priors matter in a big way. That doesn't stop ...<i>Priors matter in a big way. That doesn't stop anyone from using these things though, even though they don't fit the data. I could start sounding like you after a while - macro is bunk, etc.</i><br /><br />:D :D :D<br /><br />Come to the dark side, Steve. We have cookies.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-13832717967268590242015-09-02T10:45:07.559-04:002015-09-02T10:45:07.559-04:00I think that Cochrane is trying to justify his pre...I think that Cochrane is trying to justify his predictions of hyperinflation with 'both sides do it'.<br /><br /><br />-BarryAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78157118757916944992015-09-02T09:28:50.285-04:002015-09-02T09:28:50.285-04:001. I figure Ramey's paper tells you all you ne...1. I figure Ramey's paper tells you all you need to know about that stuff. She's supposed to be capturing the state of the art in the VAR literature for the Handbook. Like you, I don't take the whole methodology very seriously, so it's not really worth trying to figure out how this NK model might match some VAR impulse responses. I shouldn't have even brought it up.<br /><br />2. We have models. We have data. You give the RBC guys a hard time, but they had a methodology, some notion of what they wanted to explain, and an idea about what success in explaining the data might be. NK models of the type that Cochrane is playing with have been fit to the data. Typically, researchers use Bayesian methods, and they do that for a reason, as maximum likelihood would give parameter estimates that they would not like - e.g. the Phillips curve might slope the wrong way, or some such. Priors matter in a big way. That doesn't stop anyone from using these things though, even though they don't fit the data. I could start sounding like you after a while - macro is bunk, etc.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-75836355516997359842015-09-02T08:23:51.402-04:002015-09-02T08:23:51.402-04:00"New Monetarist" aka "New Fisherite..."New Monetarist" aka "New Fisherite"!<br />https://thefaintofheart.wordpress.com/2015/09/01/steve-williamson-should-change-the-name-of-his-blog-from-new-monetarist-to-new-fisherite/João Marcushttps://www.blogger.com/profile/13658264244033012660noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-79162648711221047842015-09-02T08:23:11.628-04:002015-09-02T08:23:11.628-04:00"New Monetarist" aka "New Fisherite..."New Monetarist" aka "New Fisherite"!<br />https://thefaintofheart.wordpress.com/2015/09/01/steve-williamson-should-change-the-name-of-his-blog-from-new-monetarist-to-new-fisherite/João Marcushttps://www.blogger.com/profile/13658264244033012660noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-88595359717069853082015-09-01T21:29:19.899-04:002015-09-01T21:29:19.899-04:00re: Ari's comments on private sector debt, I a...re: Ari's comments on private sector debt, I am surprised there's not been more discussion of the possible macroeconomic benefits of easy bankruptcy, both as a way of deleveraging more quickly, and as a way of inhibiting bubbles, by encouraging lenders to pay more attention to whom they're lending to. It seems to me there's been hardly any discussion about repealing the 2005 bankruptcy reform, or the previous reforms which made it harder to discharge student loan debt, or medical debt. It seems to me one overlooked historical advantage of the American economy has been easy bankruptcy, and that suicide rates are linked both to unemployment/discouragement and to harsh bankruptcy laws.<br /><br />Easier bankruptcy may lead to higher interest rates, but a tradeoff of making debt more expensive in good times but easier to slough off in bad times seems to me beneficial.<br />roublennoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-37845537304706916022015-09-01T18:46:24.411-04:002015-09-01T18:46:24.411-04:00It seems most of the commenters trying to defend C...It seems most of the commenters trying to defend Cochrane are basically cheating, by introducing other complicating factors he didn't consider that according to the commenters might make Cochrane's nonsense become true.<br /><br />Arguments about the transmission mechanism from central bank rates to market rates, or to term spreads, or to fiscal policy, all may be worth looking at. Arguments about longer-run effects (eg tightening too much will damage potential and be followed by loosening and higher inflation) might be worth looking at. But they have nothing to do with Cochrane's argument. The model he uses has one single interest rate that stands in for the entire complex of central bank and market interest rates. Notice that he doesn't even try to explain why the model produces the result he says or relate any of its workings to anything real. He just plugs in some unusual inputs into a very limited-purpose model and says, look, unexpected results!<br /><br />To which I say: www.youtube.com/watch?v=LRopGnWIH3U<br /><br />Tom Warnerhttps://www.blogger.com/profile/11247836188106712069noreply@blogger.com