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Nick Rowe
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Sketch of a response to Brad: What is a "root cause" of a recession? I say it is always and everywhere an excess demand for the medium of exchange. In a barter economy, the Keynesian shortage of savings vehicles, or the Minskyian disruption of borrowing and lending, could cause problems, but they would never cause a recession. The unemployed hairdresser who wants her nails done, the unemployed manicurist who wants a massage, and the unemployed masseuse who wants a haircut, would all get together and do a 3-way barter deal. But in a monetary economy, where there's an excess demand for money, neither will spend unless the others agree to spend too. The excess demand for money is the root (essential?) cause. Almost anything could cause an excess demand for money. Some of those things could be bad things. Like robbers, who steal cows, but who can't steal money, which is easier to hide. And hiring more police, not printing more money, is the first-best solution. The central bank can't stop the robbers, but it can stop the recession. Back to Metzler and Minsky: If M and B are perfect substitutes, an OMO of M for B won't work. But an OMO of M for J would work. Think of a continuum of other assets, some more and some less like money, so that the central bank is always at the ZLB for some assets. As it expands M, it moves the ZLB along the continuum, by buying more and more assets. Still thinking, as always, in response to your posts.
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Metzler, short version: in a world where there are no nominal bonds, and all prices are flexible, helicopter money will be neutral, because M/P will not change. But if the central bank is owned by a foreigner, who issues new money by buying shares, money will be non-neutral. Proof by contradiction: assume it is neutral, so M/P is unchanged. But the real stock of shares in public hands will be smaller, because the foreigner now owns some. So it is exactly as if the foreigner stole some of the shares, which will have real effects, including, in general, on the rate of interest. The first paragraph on page 112 gives the intuition, where he compares an open market operation to a capital levy.
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Re-reading Metzler, after many decades. Typo? "Such expansions of B would drive the interest rate i down [should be *up*?] further, and with enough bonds the interest rate would be high enough..."
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Owen: "Let's make government spending decline over time, until the threat of recession is past" Is that fiscal "stimulus", or "austerity"? Woodford says it is stimulus. Would you agree? Or can't you see the difference? You need to make up your mind about this, Owen, and stop ducking the question.
Toggle Commented 3 days ago on Links for 7-24-14 at Economist's View
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Which policy? What united state action? Increase G? Or reduce Gdot? When you Old Keynesian and New Keynesian guys figure it out, let us know. And explain why the other policy is wrong.
Toggle Commented 3 days ago on Links for 7-24-14 at Economist's View
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djb: "so where does rowe get this from" I get it straight from the New Keynesian IS curve. In the Old Keynesian IS equation, the *level* of private demand (consumption and investment) is a negative function of the real rate of interest. Which means the natural rate of interest is a positive function of the level of government spending. Which agrees perfectly with what you are saying. But in the New Keynesian IS equation, the *expected growth rate* of private demand is a *positive* function of the real rate of interest. So you get a very different result.
Toggle Commented 4 days ago on Links for 7-24-14 at Economist's View
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Rubenstein and Piccione miss the time inconsistency point. The Hobbesian jungle equilibrium is the "discretion" equilibrium. What we call "society" is the "rules" equilibrium. We draw some line in the sand where we are both better off staying our own side of that line rather than wasting resources by discretionary self-cancelling pushes against each other, and we enforce that line by following rules like tit for tat. [But the "rules" equilibrium is *not* Pareto-preferred over the "discretion" equilibrium.]
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Canadian unemployment rate is currently 6.9%. But we measure it differently to the US. It would be lower if we used the US definition. (I saw the exact number recently, and think it was below 6%, but I can't remember exactly.) Our (Conservative) government increased infrastructure investment during the recession. (And gave subsidies to municipalities and universities etc to do the same. My university grabbed the cash and built two new large buildings). Now the recession is mostly over they are tightening up fiscal policy again. It is not obvious (to me) whether we need more or less infrastructure investment. But I think it was obviously right to have done the extra spending we did during the recession. You don't have to be a keynesian to argue you should invest more when real interest rates are very low and builders are cheap.
Toggle Commented Dec 14, 2013 on Links for 12-14-2013 at Economist's View
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Women live longer than men. And if these studies are to be believed, an extra dollar spent on men's health will have a bigger effect than an extra dollar spent on women's health. Both equity and efficiency argue we should therefore spend more on men's health relative to our spending on women's health. Men should go to the front of the line at the doctor's office.
Toggle Commented Dec 14, 2013 on Links for 12-14-2013 at Economist's View
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Andy Harless' post = Samuelson 58 + assets differ in risk. My post = Samuelson 58 + assets differ in liquidity. The two posts are complementary and closely related.
Toggle Commented Dec 14, 2013 on Links for 12-14-2013 at Economist's View
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Chris: "But I'm trying to get at something here - that we're not just products of our genes and/or class, but also of our age." Hang on. There's age, and cohort. And a big multicolinearity problem distinguishing the two. I think you are talking about cohort.
Matt: you missed the point of my post. My title was ironic. And it's got nothing to do with heteroskedasticity of anything. And if money *did* have high(er) utility, that would make it *more* likely inflation would fall.
Toggle Commented Nov 29, 2013 on Links for 11-29-2013 at Economist's View
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YEP! It's working! A big THANKS to whoever did that for me. BTW, the people I really ought to be blaming for all this are the spammers. Why can't some of those teenage hackers do something socially useful for once, like taking down all the spammers?
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Hang on! Something's happened! I think maybe Typepad have whitelisted me, or something! Because I managed to post a comment on Mark Thoma's blog. And now just managed to post one here, under Nick Rowe with a space! (And I think I managed to re-set my Google password! Fingers crossed...
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Testing.
Toggle Commented Nov 4, 2013 on Links for 11-04-2013 at Economist's View
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My thoughts too. It takes a helluva lot of monetary and fiscal profligacy to destroy a currency completely. Robert Mugabe succeeded, but the UK would have to do a helluva lot worse to match his success.
Toggle Commented Oct 22, 2013 on Links for 10-22-2013 at Economist's View
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OK. But the Old Keynesian deep inside me is struggling to get out and yell: "No! It is NOT OK just to assume an eventual return to full employment! We need to understand what, if anything, would lead the economy back to full employment (somehow defined)! There is no more important question in the whole of macro, and it's not one we can duck!" And the policymaker inside me is yelling: "No! Either the New Keynesian model is right, and there really are multiple equilibria, so we get to full employment only if we believe we will get there, in which case we need to start sacrificing some goats fast, on prime time TV, and make sure everyone believes that everyone else believes....that sacrificing goats will work. Or else the New Keynesian model is wrong, and the present and future stock of money really does matter, and it's not just all about interest rates, and we should totally change the way central banks do their work, stop them messing around with useless things like interest rates, and communicate that to the public. And fiscal policy won't work either, unless it's the government buying goats for sacrifice."
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Thanks for the link Brad. But the post on Mark Carney was by my co-blogger at WCI Livio Di Matteo. (Only the monetary policy is not interest rate policy post was mine.)
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Brad: "And come 2008-2009 everything collapsed. Construction collapsed, business investment collapsed--that’s what the spike in interest rates did. ... Then came 2008, which was a John Stuart Millian process: surprising losses in finance, a panic, everybody tries to run and shift their portfolio into something cashlike..." That's the bit where my own (not as good as yours) talk last week to my students fell apart as well. The US (and world) economy was doing fine 2005-2008. What happened in 2008? What caused the surprise? Did the panic cause the drop in expected AD? Or did the expected drop in AD cause the panic? My brain is mush nowadays.
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Ritwik: "What does the LM curve look like in a nominal Y (where Y is the path of nominal GDP rather than level) and real r world?" If we put nominal GDP on the horizontal axis, then if the BoC were targeting NGDP, the LM curve would be vertical, and it would never shift (more strictly, it would shift rightwards at a fixed 5% per year). If the BoC were targeting inflation, then it would still be vertical, but changes in AS would cause the division of PY into P and Y to change, and would cause the LM to shift right or left. You lost me on the 45 degree stuff. K: "1) It's not a problem so long as the system is meta stable by virtue of central bank interest rate policy." Possibly correct. But even then, if the central bank changes the interest rate "target" in response to what happens, it's no longer a target. 2. It doesn't matter how tiny the demand for money is. It is the fact that everything else is bought and sold for the medium of exchange (plus it's the medium of account) that makes money important. 3. If the price of peanuts were perfectly flexible, it would also be always possible to buy or sell money for peanuts. Does that make the price of peanuts the macroeconomically significant price, in addition to the (a) rate of interest?
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Where are all the PK's, Neo-Wicksellians, and MMTers? Should (could?) I have made this post even more provocative?
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Doc Why: I fished it out anyway, to try to train the spam filter not to make mistakes like that.
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I'm stuck in spam! (Feminist spam filter!)
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genauer: mind your manners please. And you are wrong, regardless of whether Simon or I is the one who is right on this. Hi Simon! 1. I think the horizontal LM curve is a fantasy (for any period longer than 6 weeks in Canada). Because the BoC adjusts the overnight rate target every 6 weeks to try to keep the output gap closed and try to keep inflation at the 2% target. A much better approximation to reality would be to draw the LM curve vertical, at that level of Y which the BoC thinks is potential output. Because the Mundell Fleming model (and ISLM too) was designed for short run analysis, and anything less than 6 weeks is very very short run indeed, where the economy can't hope to get anywhere near the IS curve (or even the LM curve, for that matter). 2. Even if you reject my vertical LM model, I think it would be closer to reality to say that central banks in a SOE with PCM choose the real exchange rate, rather than the real interest rate. (Of course, the BoC would never describe itself as doing that, because it would upset the Americans! But we don't have to buy into the same social construction of reality that central banks use to describe what they are doing.) 3. I wouldn't go to the wall on the question of whether the real exchange rate is a random walk or reverts to mean. I can see the merits of your way of doing it. I know it can't be a true random walk, because if it did then its long run variance would be infinite, and PPP wouldn't work any better than a random guess, and PPP does work better than a random guess. But *some* shocks will be permanent. And even if they aren't strictly permanent, it is possible for the shocks to increase over time, at least initially. And even if the shocks do decay over time, the rate of decay might be very slow, relative to the time period over which the MF model is useful, so a random walk might be a good approximation to reality. If I remember the empirical literature (Stephen did a post on this some time back) it is very hard to reject the random walk assumption over any moderate length of data.
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