tag:blogger.com,1999:blog-5362801348602268473.post8940494147601163053..comments2023-11-22T00:49:32.887-08:00Comments on Reflections on Monetary Economics: "Neo-Fisherites" and Fiscal PolicyNick Edmondshttp://www.blogger.com/profile/15342983814699700396noreply@blogger.comBlogger37125tag:blogger.com,1999:blog-5362801348602268473.post-72167132991578733372014-05-15T12:28:14.516-07:002014-05-15T12:28:14.516-07:00I guess the issue is what causes money to filter o...I guess the issue is what causes money to filter out. Doing an asset swap, exchanging currency for some other store of value might just result in the currency being held as a store of value and so not filtering out at all.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-487445374333093722014-05-15T10:10:57.292-07:002014-05-15T10:10:57.292-07:00It could be like the dog's nose. In that case ...It could be like the dog's nose. In that case the underlying 'microfoundations' are wrong and the theory is wrong. If the theory is correct, then it doesn't matter how the money filters out (the theory is agnostic about the mechanism).Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-87757783124641417782014-05-15T01:11:09.565-07:002014-05-15T01:11:09.565-07:00Jason, I totally agree that "spending capacit...Jason, I totally agree that "spending capacity in the hands of people wishing to spend it on consumption" could be much like the water in your semi permeable membrane analogy and it could feed through to adjust the price level. The real life example that springs to mind is how Deutsche Marks were introduced in 1948 with everyone just being given DM60 to start things off. That was a flat outright gift (theft ?!?), not an exchange for any other form of spending capacity. It was not monetary policy. It was redistributionist fiscal policy. That got aggregate demand back on track and started off the post war economic miracle. <br /><br />What I fear could break down in a Lucas critique type of way is the way that currency in circulation stands in as a proxy for "spending capacity in the hands of people wishing to spend it on consumption". You empirically found that, over the historical period you looked at, currency in circulation has been a good proxy but there seems no reason to be confident that it would continue to do so if efforts were made to induce exchange of currency for other forms of money as a way to boost NGDP. That could be like wetting the sick dog's nose.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-13547593721925869612014-05-14T15:11:49.923-07:002014-05-14T15:11:49.923-07:00@stone -- the potential for the relationship to br...@stone -- the potential for the relationship to break down is the basis of the Lucas critique. The information theory behind the model provides the 'microfoundations' that tell us the relationship won't break down** and that causality goes in either direction. The relevant analogy is an entropic force, not the dog's nose. Imagine a semi-permeable membrane with salt water on either side in equilibrium. Adding water to one side will cause water to move to the other to bring the concentrations back to equilibrium. However, adding salt to one side will cause water to move from the other side to that side. The entropic force works in both directions. Effectively you changed the number of possible states on each side of the membrane, making the final result the more likely state.<br /><br />In the case of money, simply printing the money (when the base is small compared to NGDP) will allow new possible of states with a higher NGDP and the economy will randomly walk there. In this model, the equilibrium is a dynamic equilibrium with money moving everywhere in the economy and finding every possible state -- like a smell of bacon cooking filling a house. No mechanism is causing the smell of bacon to fill the house. It fills the house because there are more states with the scent of bacon everywhere in the house than there are states with it near the source. The individual molecules are just doing their own Newtonian thing.<br /><br /><a href="http://en.wikipedia.org/wiki/Entropic_force" rel="nofollow">http://en.wikipedia.org/wiki/Entropic_force</a><br /><br />** If the relationship does break down, that tells us the theory is wrong.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-51492678702176909942014-05-14T11:38:18.062-07:002014-05-14T11:38:18.062-07:00Please excuse my goofy analogy but to me it is a b...Please excuse my goofy analogy but to me it is a bit like how although sick dogs have dry noses and healthy dogs have wet noses, wetting a sick dog's nose with some water won't make it any less sick.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-3377839079820888352014-05-14T11:22:26.143-07:002014-05-14T11:22:26.143-07:00@Jason, I think the currency thing is just a small...@Jason, I think the currency thing is just a small picky point and the rest of what you are saying is interesting and I want to check it out more. But I do still struggle with what you are saying about the currency. If the causality direction is that currency in circulation is merely symptomatic of NGDP, then any attempt to boost NGDP by exchanging currency for other money would merely cause the break down of the correlation you observed up until now. Your equation would need to use something else other than currency as a proxy for consumer demand or whatever.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-33098191715114648082014-05-14T10:34:48.272-07:002014-05-14T10:34:48.272-07:00@Nick -- yes, I sort of skipped over that piece of...@Nick -- yes, I sort of skipped over that piece of the argument. Expectations allow money to function as a store of value (what I meant by the colloquial "to have value") and that value allows it to function as a medium of exchange. I wasn't making a judgment on the validity of the argument, just that it exists and what it sort of says.<br /><br />@stone -- Tom is correct about the empirical motivation. The causality could potentially go from the central bank setting interest rates, allowing the base (and NGDP) to adjust endogenously (I think this is Nick Rowe's version that I look at <a href="http://informationtransfereconomics.blogspot.com/2014/03/nick-rowes-model-of-money-stock.html" rel="nofollow">here</a>). The equation I used above doesn't really say much about causality. The Fed doesn't usually conduct monetary policy via the currency component of the base, so I'd imagine they'd have to do something different -- like convert reserve balances into physical currency, buying assets with currency or printing money and mailing it to people. However it is not entirely out of the realm of possibility that the Treasury could simply print the currency, store it somewhere and it could cause the price level to rise and long term interest rates to fall. As a side note -- the seasonal fluctuations in the price level are commensurate with the <a href="http://informationtransfereconomics.blogspot.com/2014/02/this-model-is-sufficiently-awesome-to.html" rel="nofollow">seasonal fluctuations</a> of the currency in circulation in the model (well, potenially).Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-66961149823639654882014-05-14T09:30:34.197-07:002014-05-14T09:30:34.197-07:00stone, I'm going to go out on a limb and sugge...stone, I'm going to go out on a limb and suggest that Jason is probably aware of the causality problem you bring up. I think using currency in circulation rather than MB in some of his formulations was a case where he found a better empirical fit with currency in circulation. So when I read a sentence like that from Jason I don't necessarily think to myself that he's recommending that the Fed somehow force more curreny into circulation, but rather that if more currency were to be in circulation that would be correlated with the effects he describes.<br /><br />Actually, he has an even more radical idea for how the US and Japan might "escape" their current predicament: <br /><br />http://informationtransfereconomics.blogspot.com/2013/09/exit-through-hyperinflation.html<br /><br />But take what I say with a grain of salt, because I'm only a step or two ahead of you in familiarizing myself with Jason's ideas, and I may not be representing him well here!Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-1465978173727816212014-05-14T09:21:52.714-07:002014-05-14T09:21:52.714-07:00Jason, nice graph. So the the effective FFR is an ...Jason, nice graph. So the the effective FFR is an attempt to determine what's actually being paid for those funds or "cash" as the notes page on the FRED graph says (I'm almost positive they don't actually mean paper notes and coin by "cash"... which drives me nuts... because you can find other places where this is spelled out more clearly on Fed websites).Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-66866366925471091362014-05-14T02:13:03.720-07:002014-05-14T02:13:03.720-07:00Jason - I think the point of the OLG models of mon...Jason - I think the point of the OLG models of money is to show why people might use it as a store of value, rather than as a medium of exchange. I don't think all of them achieve this very well. However, once you have established the benefits of monetary assets as a store of value, you can then ask whether they would form a better exchange medium than anything else available. Why is it more beneficial to use bank acounts for payments than exchange of apples, say?Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-21466364577254074592014-05-13T23:10:37.858-07:002014-05-13T23:10:37.858-07:00Jason, I am keen to read through your blog more an...Jason, I am keen to read through your blog more and to try and get my head around your idea. On first impressions though it would gain a lot if the descriptions were more grounded in what the fed and the banks actually do.<br />eg one thing that puzzled me is that you thought, "further quantitative easing (QE) would likely not stimulate the economy. However, printing currency could lower long term rates and increase inflation."<br />To me that risks getting the causality back to front. The fed supplies currency at demand and takes back excess unwanted currency (there is far more currency during the holiday period and it is taken back afterwards). So more currency is symptomatic of more spending but that is quite different from implying that somehow foisting more currency on the population (how?) would induce more spending. <br /><br />eg check out:<br />http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html<br />"When the public's demand for cash declines—after the holiday season, for example—banks find they have more cash than they need and they deposit the excess at the Fed. Because banks pay the Fed for cash by having their reserve accounts debited, the level of reserves in the nation's banking system drops when the public's demand for cash rises; similarly, the level rises again when the public's demand for cash subsides and banks ship cash back to the Fed. The Fed offsets variations in the public's demand for cash that could introduce volatility into credit markets by implementing open market operations."stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-47927311092107094162014-05-13T17:17:06.023-07:002014-05-13T17:17:06.023-07:00Tom and Stone, here is a graph of the effective fe...Tom and Stone, here is a graph of the effective fed funds rate alongside the 3-month treasury rate, IOR and the information transfer model fit:<br /><br /><a href="http://research.stlouisfed.org/fred2/graph/?g=ACo" rel="nofollow">http://research.stlouisfed.org/fred2/graph/?g=ACo</a>Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-11763008854992308142014-05-13T16:51:16.225-07:002014-05-13T16:51:16.225-07:00Overlapping generations is an agent-based model th...Overlapping generations is an agent-based model that makes specific assumptions about how humans behave. One use of it is to come up with a reason why money works as a medium of exchange. Apparently, in the model, money gets its value because the future generations expect it to have value in the future. In OG models without expectations, the value of money has a tendency to collapse to zero. But expectations allow you to avoid that solution (by assumption).Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-25924126503562760822014-05-13T14:59:31.414-07:002014-05-13T14:59:31.414-07:00Jason, Thanks. Have you ever incorporated an overl...Jason, Thanks. Have you ever incorporated an overlapping generations model into your ITM framework?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-82284015044724326422014-05-13T14:51:08.379-07:002014-05-13T14:51:08.379-07:00Tom -- if you look at the difference between log E...Tom -- if you look at the difference between log EFFR and log IOR, it is more dramatic. EFFR is the effective FFR. And for the long rates I used rl = 10 year treasury and short rates either the EFFR or the 3-month secondary market rate.<br /><br />I will see if I can find a case where IOR seems to have an impact.<br /><br />stone -- the truck model sounds like queuing theory ... Related to communications theory and information theory :)Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-68650051707032854962014-05-13T14:23:05.038-07:002014-05-13T14:23:05.038-07:00Jason, in terms of IOR, have you examined the case...Jason, in terms of IOR, have you examined the case of Sweden's recent (within the past five years) experiment with negative IOR rates? The MMists tout that as a success. I'm pretty sure that program is no longer in effect. I think it was pushed by the now former Riksbank deputy governor Lars Svensson (who's a big critic of the current Riksbank leadership).Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-56257746301698140552014-05-13T14:20:09.762-07:002014-05-13T14:20:09.762-07:00@Jason, thanks for so robustly challenging what se...@Jason, thanks for so robustly challenging what seemed to me to be self evident. I'm a bit tied up now (time difference to here in UK) but I am really interested in getting my head around all of this.<br /><br />I saw the "non-linear" relationship between monetary base and interest rates as being a bit like how as a tunnel gets narrower, traffic slows -very messy. It is not like water in a tunnel, it is like trucks in a tunnel. Obviously if there was only one bank -no bank reserves would ever be needed for settlement. Obviously if frequency of settlement was infinitely long -no bank reserves would ever be needed.<br /><br />I just saw long term interest rates as being like a moving average of short term interest rates (with a time window of a few years).<br /><br />stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-40443897074921050812014-05-13T14:17:04.548-07:002014-05-13T14:17:04.548-07:00Jason, just now noticed you have both rl and rs? L...Jason, just now noticed you have both rl and rs? Long and short term interest rates resp?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-39442811996957073482014-05-13T14:12:15.675-07:002014-05-13T14:12:15.675-07:00I'm going to add that by "M0" I thin...I'm going to add that by "M0" I think Jason means currency in circulation, which is paper notes and coins either in bank vaults or held by the non-bank public: basically MB minus the Fed deposits.<br /><br />Jason, regarding IOR's effect on interest rates, when excess reserves (ER) are plentiful, then it does seem to set the overnight rate I think, i.e. FFR ~= IOR rate. I understand the real overnight rate is a little bit less than the IOR rate, and I think this has something to do with non-bank Fed deposit holders, which I don't think get paid IOR: I'm not very clear on this, but *I think* these deposit holders loan out their deposits for a bit less than the IOR rate... if anybody knows the real story there I'd be glad to hear it). So when you talk about "interest rates" I assume you're not talking about the FFR, correct? What do you mean? Like a 10 year T-bond or something? The rest of the yield curve in general?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-11442357593804371982014-05-13T11:32:13.707-07:002014-05-13T11:32:13.707-07:00@stone This "mundane operational view" s...@stone This "mundane operational view" seems like a just-so story. It doesn't seem to explain anything; it just tells us that's the way things are ... how was this mundane operational view constructed? Where does it come from? It doesn't even tell us how much interest rates would change given a change in NGDP or the base. I have some comments on the specific pieces below, a little out of order. The answers come from the new theory.<br /><br /><i>The relative variables are the size of the stock of bank reserves, the amount of payments and the time span between settlements. Extending settlement time will allow a given amount of bank reserves to suffice. Having less payments made (lower NGDP) will mean that the discrepancy between payments in and out for each bank over a given span of time between settlements will be less so less bank reserves will be needed.</i><br /><br />Why are those the relative variables? Assumption? [Answer: the variables are NGDP and the monetary base because NGDP represents aggregate demand and the base represents the aggregate supply and it is at its heart a supply and demand argument.]<br /><br /><i>I suppose the crucial point is that the relationship between the amount of monetary base and its effect of interest rates is so non-linear.</i><br /><br />Ok it's nonlinear -- what is the non-linearity? Is it r ~ MB^2 or r ~ log MB? r ~ 1/MB ... there are an infinite number of nonlinear functions. [Answer: log r ~ a log (NGDP/MB) + b] <br /><br /><i>If there is plenty then interest rates will be stuck on the zero bound (like in Japan) unless interest is paid on excess reserves by the central bank as a floor system (as in UK and USA). If there are insufficient bank reserves, then interest rates will spike up and the effect of further decreases will be an extremely steep and ever steeper increase (as during Volcker tightening in 1980).</i><br /><br />I assume you mean plenty of base money or insufficient base money relative to the amount/time span between payments as you stated above. How do you model this? Intertemporal optimization? There is also a missing time variable. The words plenty/insufficient should be compared with a dimensionless variable -- MB/NGDP works. But the time between payments -- what other time scale do you use to make that dimensionless? dMB/dt? The time for IOR to pay out? [Answer: MB/NGDP and log MB/log NGDP are all you need.]<br /><br />IOR is an ad hoc mechanism and appears to not have a large effect on interest rates (the BoJ did not pay IOR from 2000-2008, but did before and does now ... with no change in the behavior of interest rates). Why does IOR matter? [Answer: IOR does not matter to first order.]<br /><br />All of these relationships can be reduced to three functions with the new theory:<br /><br />rl = R(NGDP, M0)<br />rs = R(NGDP, MB)<br />P = P(NGDP, M0)<br /><br />And you even get an added bonus of being able to explain the price level and short and long term interest rates! How does this "mundane operational view" explain the price level or the difference between short and long term interest rates?Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-40540687551489546082014-05-13T05:05:56.832-07:002014-05-13T05:05:56.832-07:00Just to clarify, I'm not saying that understan...Just to clarify, I'm not saying that understanding of this requires any particular personal political outlook. I'm just saying that it only makes sense when it is appreciated that the mechanism is a politically motivated choice as to when and whether to impose a liquidity constraint. <br /><br />It is a bit like how biology is unfathomable if you don't view it in the context of evolution. You don't need to have an opinion as to whether viruses are nice or not, you just have to appreciate that things are as they are in biology due to evolution. Likewise things are like they are in economics due to politics.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-10664671528764252032014-05-13T03:45:36.275-07:002014-05-13T03:45:36.275-07:00I should have written "1970s stagflation"...I should have written "1970s stagflation" not "1970s stagnation". -sorrystonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-89803092956661638212014-05-13T01:54:16.678-07:002014-05-13T01:54:16.678-07:00Of course there is the added dimension of why the ...Of course there is the added dimension of why the choice is made to sometimes limit the amount of bank reserves made available. That is very much political economy. I think an un-muddled view requires requires an acknowledgement of just how political that decision process is. For me, the clearest view of all of that I've seen was from this 1943 essay by Michal Kalecki<br />http://mrzine.monthlyreview.org/2010/kalecki220510.html<br /><br />It also entails considerations of currency exchange rates, so conflicts between various interest groups within a country and also between countries. To me the whole Volcker tightening and Great Moderation was about ensuring that the developed world got all of the global output whilst the 1970s stagnation was all about the rest of the world starting to get a share of what the developed world previously had had to itself. <br />http://directeconomicdemocracy.wordpress.com/2013/05/09/isnt-a-financialized-economy-the-goose-that-lays-our-golden-eggs/stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-20616381159340052572014-05-13T01:32:46.239-07:002014-05-13T01:32:46.239-07:00I suppose the crucial point is that the relationsh...I suppose the crucial point is that the relationship between the amount of monetary base and its effect of interest rates is so non-linear. If there is plenty then interest rates will be stuck on the zero bound (like in Japan) unless interest is paid on excess reserves by the central bank as a floor system (as in UK and USA). If there are insufficient bank reserves, then interest rates will spike up and the effect of further decreases will be an extremely steep and ever steeper increase (as during Volcker tightening in 1980). <br />The relative variables are the size of the stock of bank reserves, the amount of payments and the time span between settlements. Extending settlement time will allow a given amount of bank reserves to suffice. Having less payments made (lower NGDP) will mean that the discrepancy between payments in and out for each bank over a given span of time between settlements will be less so less bank reserves will be needed.<br />I can't see that anything more theoretical is needed over and above that extremely mundane operational view. None of what we see seems paradoxical to me from the viewpoint of that mundane operational view.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-76869670184630329612014-05-12T16:57:12.565-07:002014-05-12T16:57:12.565-07:00stone: I was unaware of Gibson's paradox but i...stone: I was unaware of Gibson's paradox but if the "information transfer" picture is correct, then Gibson's paradox would be consistent with a high currency to NGDP ratio making the situation then much like today. In fact the information transfer picture "resolves" Gibson's paradox by saying the quantity theory view holds when the ratio of currency to NGDP is low and the paradoxical result holds when ratio is high.<br /><br /><a href="http://informationtransfereconomics.blogspot.com/2014/03/the-effects-that-move-interest-rates.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2014/03/the-effects-that-move-interest-rates.html</a>Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.com