tag:blogger.com,1999:blog-5362801348602268473.post8802971972075224726..comments2023-11-22T00:49:32.887-08:00Comments on Reflections on Monetary Economics: The Problem with Monetary PolicyNick Edmondshttp://www.blogger.com/profile/15342983814699700396noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-5362801348602268473.post-80959173473879819972015-07-25T01:53:53.892-07:002015-07-25T01:53:53.892-07:00The OBR are relying {up to 2020} upon a large? inc...The OBR are relying {up to 2020} upon a large? increase in household gross debt relative to income to increase aggregate demand? P76: <br />http://cdn.budgetresponsibility.independent.gov.uk/December_2014_EFO-web513.pdf<br />Postkeyhttps://www.blogger.com/profile/11747509012748106827noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-84793987308419713162015-02-01T03:27:17.708-08:002015-02-01T03:27:17.708-08:00Yes, I saw that when it came out and it's very...Yes, I saw that when it came out and it's very interesting. One thing it illustrates is the importance of recognising heterogeneity when it comes to looking at household spending. Households in the marginal position can have a big impact in variations in the aggregate.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-70559996607320480622015-02-01T03:16:30.432-08:002015-02-01T03:16:30.432-08:00I just saw something by the Bank of England where ...I just saw something by the Bank of England where they are I think effectively going along with the idea that increased indebtedness is deflationary, <br /><br />http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q304.pdf<br /><br />"The potential for household indebtedness to lead to large<br />adverse impacts on aggregate demand was an important<br />reason why the Financial Policy Committee took policy<br />action at its June 2014 meeting to insure against the risks<br />from a further significant increase in the number of highly<br />indebted households."<br /><br />It makes it all the more contrary that the only remedy from monetary policy is to try and get the banks lending again.<br /><br />Sorry if all of this is old hat.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-33351493312506011942015-01-25T02:04:39.715-08:002015-01-25T02:04:39.715-08:00Thanks. I wasn't aware of that.
Generally, t...Thanks. I wasn't aware of that.<br /><br />Generally, the point I'm making here shouldn't be a suprise to many people - certainly those of a post-Keynesian orientation. I just wanted to see if I could demonstrate it within a micro-founded framework. Although I have used specific assumptions (particularly the overlapping generations structure) I would expect the result to appear in most models of sufficient richness. Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-37714767075610051832015-01-25T01:58:17.837-08:002015-01-25T01:58:17.837-08:00I'd agree with your recap.
Ricardian equivale...I'd agree with your recap.<br /><br />Ricardian equivalence does not hold in this model because of the overlapping generation assumption. Households only care about utility over their life. The only people who care about future taxes are the future taxes and their decisions have no impact on current spending.<br /><br />I think there is something in what you say about the balance between current rates and expected future rates, but I don't think that is really captured in this model. Also, there is no uncertainty here - this is a model where agents have perfect foresight. That's not to say, of course, that I think uncertainty doesn't matter - it's just that I wanted to show how it is not necessary for the conclusion that interest rate management alone can be problematic.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-24413673567463893662015-01-24T08:25:03.044-08:002015-01-24T08:25:03.044-08:00I think your model nicely shows the phenomenon Mi...I think your model nicely shows the phenomenon Michal Kalecki talked about in his 1943 essay:<br />http://mrzine.monthlyreview.org/2010/kalecki220510.html<br /><br />"It may be shown, however, that the stimulation of private investment does not provide an adequate method for preventing mass unemployment. There are two alternatives to be considered here. (i) The rate of interest or income tax (or both) is reduced sharply in the slump and increased in the boom. In this case, both the period and the amplitude of the business cycle will be reduced, but employment not only in the slump but even in the boom may be far from full, i.e. the average unemployment may be considerable, although its fluctuations will be less marked. (ii) The rate of interest or income tax is reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously."<br /><br />Steve Waldman also wrote about that Michal Kalecki essay: http://www.interfluidity.com/v2/3451.html<br /><br />My impression was that reducing interest rates boosted credit expansion and so was inflationary but it is very much the rate of change of the interest rate that does that NOT the low absolute level of the interest rate. Expanded debt is deflationary even though expanding debt is inflationary. So monetary policy is painting itself into a corner. I guess you're just nicely showing that in a model.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-7061859011936699422015-01-23T08:15:44.288-08:002015-01-23T08:15:44.288-08:00To recap for dummies like myself:
According to yo...To recap for dummies like myself:<br /><br />According to your model, if a temporary reduction in government spending is countered by monetary policy (reducing interest rates), the spending gap is offset through an expansion of private balance sheets. This increased leverage then becomes a drag on output when interest rates are raised again.<br /><br />Now, the usual argument against fiscal policy is based on ricardian equivalence, if I'm not mistaken. Output does not increase because consumers expect taxes to rise in the next period and thus they save more this period.<br /><br />The interest rate case seems analogous in that private entities, fearing furure interest rate rises, would refrain from borrowing more, thus nullyfying monetary policy.<br /><br />Considering people and businesses are probably more careful when calculating their own financial risk, vs. that of their country, it would seem that this effect should, if anything, be stronger than the ricardian effect.<br /><br />Has any such effect been postulated? Or am I missing something obvious?Olivernoreply@blogger.com