macro

The entirely predictable recession by Simon Wren-Lewis

How did America's austerity beginning in 2011 compare? How did QE compenstate?

The Dismal Science 'Seven Bad Ideas,' by Jeff Madrick reviewed by Paul Krugman

NGDP path level targeting

Level versus Growth Targeting by Scott Sumner

Here’s Lars Christensen:

In fact I am pretty sure that if somebody had told Scott in July 2009 that from now on the Fed will follow a 4% NGDP target starting at the then level of NGDP then Scott would have applauded it. He might have said that he would have preferred a 5% trend rather than a 4% trend, but overall I think Scott would have been very happy to see a 4% NGDP target as official Fed policy. 

Actually I would have been very upset, as indeed I was as soon as I saw what they were doing. I favored a policy of level targeting, which meant returning to the previous trend line. 

Now of course if they had adopted a permanent policy of 4% NGDP targeting, I would have had the satisfaction of knowing that while the policy was inappropriate at the moment, in the long run it would be optimal. Alas, they did not do that. The recent 4% growth in NGDP is not the result of a credible policy regime, and hence won’t be maintained when there is a shock to the economy. 

However I do agree with Lars that the Fed has done much better than the ECB.

macro, Keynes and monetarism

Their Own Imaginary Keynes (Wonkish) by Krugman

IS-LM as “Obfuscation”? No: Thursday Focus for September 11, 2014 by DeLong

Nick Rowe on Money and Coordination Failures by David Glasner

What Is Special About Recessions in a “Monetary Economy”: Trollng Nick Rowe: Wednesday Focus for September 10, 2014 by DeLong

DeLong on Rowe and QE, monetary policy

THE TAPER, NICK ROWE, QUANTITATIVE EASING, AND INTELLECTUAL COORDINATION FAILURES: OVER AT EQUITABLE GROWTH: WEDNESDAY FOCUS FOR AUGUST 27, 2014/THE (NOT SO) HONEST BROKER FOR THE WEEK OF AUGUST 30, 2014 by DeLong

SecStags

Secular Stagnation: The Book by Krugman

Secular Stagnation: Missing the Forest for the Trees by David Beckworth

There is a new VoxEU ebook on secular stagnation. The book is a collection of essays by many prominent economists, most of whom are proponents of secular stagnation. As readers know, I am not convinced that this problem lingers over the U.S. economy and have explained why at the Washington Post and on this blog. This latest book does nothing to ease my skepticism. Many of the authors continue to mismeasure the real interest rate and ignore what I see as important technology and demographic developments that undermine the case for secular stagnation. Let's review these key issues. 

First, real interest rates adjusted for the risk premium have not been in a secular decline. Everyone from Larry Summers to Paul Krugman to Olivier Blanchard ignore this point in the book. They all claim that real interest rates have been trending down for decades. The editors of the book, Coen Teulings and Richard Baldwin, even claim that this development is the 'prima facie' evidence for secular stagnation. What they are doing wrong is only subtracting expected inflation from the observed nominal interest rate. They also need to subtract the risk premium to get the natural interest rate, the interest rate at the heart of the story. For it is the natural interest rate that is affected by expected growth of technology and the labor force.

Beckworth is optimistic saying we just had a bad business cycle. Edward Lambert says we'll have a startling bad recession in the next three years with signs showing the next six months because of the "effective demand" limit.

Sumner on Abenomics

What markets are telling us about Japan by Scott Sumner

Japan is a perfect case study. Asset markets took off after mid-November 2012, when then candidate Abe first indicated he was going to push for a 2% inflation target. The yen fell from about 80 to the dollar to 103 today, while the Nikkei rose from under 8700 to over 15,300 today. So the asset price gains have been sustained. And we did see a rise in the Japanese price level, RGDP and NGDP. So in one sense Abenomics “worked.” 

On the other hand the Japanese 10 year bond yield is 0.51%, vs. 2.50% in the US, and the 30 year bond yield is 1.67%, vs. 3.30% in the US. That tells me that the bond market probably expects Japanese inflation to remain well below US levels in the long run, perhaps close to zero. And that suggests that Japanese asset markets believe that the political obstacles remain formidable. After all, Abe won’t be the prime minister forever. 

So my overall views on Japan are mixed. I view the depreciation of the yen and the huge stock market rally as signals that the Abe government overcame formidable political odds. Good for them. I view the low bond yields as a sign that the markets now expect the BOJ to rest on its laurels, and not try to push the price level even higher. That’s not so good. The labor market is no longer the biggest problem in Japan; it’s the debt situation. As long as nominal interest rates are near-zero the BOJ is needlessly worsening Japan’s long term fiscal situation. 

Don’t pay any attention to GDP, which soared in Q1 and will plunge in Q2. The forex rate and stock prices are the best short term indicator of how the BOJ is doing. If the yen moves into the 110 to 120 range, that would suggest my political forecast was too pessimistic. If it moves below 95, I was too optimistic. 

PS. Matt Yglesias points out the absurdity of Obama touting the strong jobs market. But Yglesias’s post is marred by an unwillingness to mock Obama for saying this while also arguing for bringing back the emergency unemployment insurance program–intended for lousy job markets.

Andolfatto interviews Woodford

Then Woodford suggests that the relationship between long-term rates and the economy is not as clear as with traditional tools. We agree that it’s not at all clear (never reason from a price change), but we think that’s also true of traditional tools. One cannot assume that lower interest rates produced by the Fed will lead to strong growth in AD. It depends on the relative strength of the liquidity, income and Fisher effects. 

In the final paragraph I quote, Woodford points out that most people think that Fed purchases “obviously” boost the price of the asset being purchased. They misuse the S&D model. Some commenters are outraged that the Fed is helping group X, because group X owns lots of the assets that the Fed is buying. They see dark conspiracies. But the purchase of bonds is also the sale of cash. And more cash boosts inflation, which reduces bond prices. During the 1964-81 period the Fed radically increased the amount of bonds it was buying, this led to rapid growth in the monetary base, higher inflation, and much lower bond prices. So much for Cantillon effects.

Yes, there are cases where large asset purchases are associated with low inflation (such as recently); my point is that there is no consistent relationship between Fed asset purchases and the price of that asset.

Simon Wren-Lewis and Nick Rowe Annoy Each Other…: Friday Focus for August 1, 2014 by DeLong

...In the case of (2), the key shortage is not of the stock of the liquid medium exchange per se or an elevation of the entire risk spectrum of real interest rates above the Wicksellian natural rate because of the zero lower bound, but rather the inability of financial intermediaries to raise enough capital and trust to do the risk transformation. The consequence is safe interest rates at or below their first-best Wicksellian natural values and risky interest rates well above their first-best Wicksellian natural values. In this case a resort to monetary expansion–even if the economy is away from its zero interest-rate lower bound–provides incentives to invest too much of society’s wealth in long-duration assets, with the added complication that the financial sector has a difficult time distinguishing A valid long-duration asset from a Ponzi scheme because neither requires the investors be shown the money in any serious way.

Fed Watch: FOMC statement

Fed Watch: FOMC statement

Glasner on market monetarism

Monetarism and the Great Depression by David Glasner

...
Scott is totally right, of course, to point out that the fall in interest rates and the increase in the real quantity of money do not contradict the “money hypothesis.” However, he is also being selective and unfair in making that criticism, because, in the three slides immediately following the one to which Scott takes such offense, Foote actually explains that the simple IS-LM analysis presented in the previous slide requires modification to take into account expected deflation, because the demand for money depends on the nominal rate of interest while the amount of investment spending depends on the real rate of interest. Here are the slides: 

Thus, expected deflation raises the real rate of interest and causes the IS curve to shift to the left but leaves the LM curve where it was. Thus, expected deflation explains a fall in both nominal and real income as well as in the nominal rate of interest; it also explains an increase in the real rate of interest. Scott seems to be emotionally committed to the notion that the IS-LM model must lead to a misunderstanding of the effects of monetary policy, but Foote actually shows that it can accommodate a correct understanding of the role of monetary policy in the Great Depression. 

The Great Depression was triggered by a deflationary scramble for gold associated with an uncoordinated restoration of the gold standard by the major European countries in the late 1920s, especially France and its insane central bank. On top of this, the Federal Reserve, succumbing to political pressure to stop stock market speculation, raised its discount rate to a near record 6.5%, adding to the pressure on gold reserves, thereby driving up the value of gold, and leading to expectations of further deflation. It was thus a rise in the value of gold, not a reduction in the money supply (and thus no shift in the LM curve), which was the source of the monetary shock that produced the Great Depression. IS-LM is not necessarily the best model with which to describe this monetary shock, but the basic story can be expressed in terms of the IS-LM model. 

So you may be asking yourself why, if I don’t think that Foote’s exposition of the IS-LM model seriously misrepresents what happened in the Great Depression, did I say at beginning of this post that Foote’s slides really annoy me? Well, the reason is simply that Foote seems to think that the only monetary explanation of the Great Depression is that of Milton Friedman: that the Great Depression was caused by an exogenous contraction in the US money supply. That is totally wrong. What caused the Great Depression was an international disturbance to the value of gold, caused by the independent actions of a number of central banks, most notably the insane Bank of France, which was maniacally trying to convert all its foreign exchange reserves into gold, and the Federal Reserve, which was obsessed with the suppression of a non-existent stock market bubble on Wall Street. It was a bubble only because the combined policies of the Bank of France and Fed wrecked the world economy and drove into Depression. The decline in the nominal quantity of money in the US, the great bugaboo of Milton Friedman, was truly an epiphenomenon. But as Ron Batchelder and I have shown, Gustav Cassel and Ralph Hawtrey had already diagnosed and explained the causes of the Great Depression fully a decade before it happened. Unfortunately whenever people think of a monetary explanation of the Great Depression, they think of Milton Friedman, not Hawtrey and Cassel. Scott Sumner understands all this, he’s even written a book – a wonderful book – about it. But he’s gets all worked up about IS-LM. I could not care less about IS-LM, it’s idea that monetary cause of the Great Depression was discovered by Milton Friedman that annoys the [redacted] out of me.

market monetarism

Tony Yates on market monetarism by Scott Sumner

Understanding the Crank Epidemic by Krugman

James Pethokoukis and Ramesh Ponnuru are frustrated. They’ve been trying to convert Republicans to market monetarism, but the right’s favorite intellectuals keep turning to cranks peddling conspiracy theories about inflation. Three years ago it was Niall Ferguson, citing a bogus source. Ferguson was widely ridiculed, by moderate conservatives as well as liberals — but here comes Amity Shlaes, making the same argument and citing the same source. The “reform conservatives” have made no headway at all. 

Why this lack of progress? 

The answer is that inflation paranoia isn’t a simple misunderstanding that can be corrected by pointing to evidence. It’s deeply embedded in the modern conservative psyche. Government action must, by definition, have disastrous results; and whatever market monetarists may try to say, their political comrades will continue to lump monetary policy in with fiscal stimulus and Obamacare. And fiat money can’t work — Francisco D’Anconia said so, and it must be true. So it’s always the 70s, if not Weimar, and if the numbers say otherwise, they must be cooked. Evidence has a well-known liberal bias. 

Even the rare conservative willing to admit that we don’t yet have high inflation won’t admit that this suggests something wrong with models that predicted a huge inflation surge. No, it’s just a miracle. 

So market monetarism isn’t going anywhere, politically. It was conspicuously absent in the Eric Cantor-sponsored book of supposed new ideas — and Cantor himself was knocked out of Congress by a faith-based Randite (which doesn’t make sense, but sense also has a well-known liberal bias.) 

Sorry, guys, but you have no home.

 And he doesn't mention Taylor's push to end the Fed's independence.

neomonetarists

Market monetarist views are a mish-mash of the good and the silly that don’t belong together anyway by Tony Yates

market monetarism

story and interview about market monetarism

Friedman vs. old Keynesians

Milton Friedman’s economics and political economy: an old Keynesian by Thomas Palley

market monetarists

Why are market monetarists such extremists on fiscal policy by Scott Sumner

SIMON WREN-LEWIS NEEDS HELP FIGURING OUT WHAT “NOTHING” AND “ZERO” MEAN, AND THE REAL ASYMMETRY BETWEEN MONETARISTS AND FISCALISTS by Mark Sadowski

Piketty, MM & MMT, Marx

OVER AT EQUITABLE GROWTH: DEPRECIATION RATES ON WEALTH IN THOMAS PIKETTY'S DATABASE: MONDAY FOCUS: JUNE 9, 2014 by DeLong

Monetarist vs Fiscalist by Simon Wren-Lewis

Henwood tweets: 

@rortybomb @delong my political coda was out of Marx. I’d be happy never to see another critique rooted in value theory though

low interest rates

For Bonds, This Time is Different by Krugman

Bloomberg has an interesting piece on how high bond prices and low yields have been shocking investors who relied on old models. Some of this, I suspect, is because many people still — after all these years — haven’t wrapped their minds around the implications of a zero-lower=bound economy and the risks of a low-inflation trap. 

But it’s also true that structural change is happening fast — just not the kind of structural change people like to talk about. Never mind the stuff about skill mismatches and all that. What’s really happening fast is the demographic transition, with Europe very quickly turning Japanese:

And the US, although growing faster, also turning down sharply. 

Add to this the fact that what we thought was normal actually depended on ever-growing household debt, and it becomes clear that historical expectations about normal interest rates are likely to be way off. You don’t have to believe in secular stagnation (although you should take it very seriously) to accept that low rates are very likely the new normal.

Tim Duy on how Fed Policy keeps rates low by Scott Sumner

Garrett pointed me to a very good Tim Duy post on Fed policy:

The Federal Reserve has set reasonably clear expectations that rates will remain low for a long time. That path, however, seems to be a consequence of doing too little now to ensure a stronger recovery. In other words, the Fed seems to be taking a lower-rate future as a given rather than as a result of insufficient policy. Instead of acting to ensure a stronger forecast, they seem more interesting in acting to lock-in the lower path of activity. And that in turn will tend to lock in a low level of long-term rates. This, I think, is the best explanation for the inability of markets to sustain higher rates. It is simply reasonable to expect that the conditions which justify higher long rates will be met with tighter policy sufficient to contain growth to something closer to the current path of output than to current estimates of potential output. 

This is actually pretty close to Milton Friedman’s 1998 claim that rates in Japan were low because money had been tight. Or Nick Rowe’s upward sloping IS curve. Duy doesn’t use the term “tight money”, but the phrase “doing too little now to ensure a stronger recovery” implies money is tighter than Duy and I might consider optimal, and that easier money would eventually lead to higher rates. If you put aside my idiosyncratic definition of “easy” and “tight” money (I use NGDP growth, not interest rates and money growth as policy indicators), my views are actually similar close to those of a mainstream macroeconomist like Tim Duy. The substance of what we are saying on monetary policy and interest rates (and also monetary offset) is very close, once you get beyond framing effects. 

Have our views always been close on these issues? I’m not sure.

monetary policy

Somewhere between rocket science and quantum mechanics by Scott Sumner

The market monetarists and me (Updated) by Izabella Kaminska

Can Somebody Please Check on Scott Sumner? In the Wake of the Nobel-Like Prize Announcement, He May Need His Meds Adjusted…: Noted by DeLong

So a “futures market” in Federal tax receipts would not be a bad approximation of a futures market in nominal GDP!

Why Scott Sumner should love the debt ceiling by Steve Randy Waldman