This is David Andolfatto's Typepad Profile.
Join Typepad and start following David Andolfatto's activity
Join Now!
Already a member? Sign In
David Andolfatto
Recent Activity
Nick: Not sure what point you are trying to make. Money is an asset. At any point in time, *somebody* (or some agency) is in possession of it. As an asset, it must compete with other assets in the wealth porfolios of individuals. Because money facilitates trade, its market price (purchasing power) trades above its "fundamental" value (there is a liquidity premium associated with liquid assets). The rate of return on non-interest-bearing money (the inverse of the inflation rate) reflects the collective demand for money, vis-a-vis other goods and assets. Individuals are perfectly capable of "hoarding" (not spending) money; banks are not a prerequisite. Am not sure what anything of this has to do with "excess supply" or "excess demand." In the spirit of Laplace, we have no need for that hypothesis.
1 reply
Nick: yes, sorry. What I said definitely did not come out right. And you nailed exactly what I meant!
1 reply
Nick, Glad to see that you've finally boiled the question down to a matter of religion and not evidence. One small thing to add. To the extent that inflation constitutes a tax on economic activity (many models have this property), the RBC theorist might actually believe that prices would have to rise *by more* than the fall in RGDP to keep NGDP on its path.
1 reply
What?! Nick takes vacations?! Thanks, Frances. Hope we get a chance for coffee on your western tour.
1 reply
Nick, after quickly glancing through your model above, I do have a few clarifying questions. [1] Your "aggregate demand" function Y = VM/P. The assertion built into this behavioral equation is that the aggregate demand for goods and services depends primarily on the household's sector real cash balances (at least, for fixed V). I just want to make sure that you want me to take this seriously. Cash is such a tiny fraction of household wealth, and the contemporaneous demand for output surely depends on forecasts of future income, etc. Maybe I'm just asking you for your favorite defense of this behavioral assumption (e.g., is it a good approximation for some questions and if so, why?) [2] The market-clearing wage W*(t). I think you mean this to be the *real* wage, not the nominal wage, right? And if so, then your nominal wage adjustment formula seems not quite right. [3] The nominal wage adjustment formula says something like "the contemporaneous nominal wage is determined by last period's expected nominal wage." But if your shocks are i.i.d., as you assume, I guess that this expected nominal wage must never vary over time, correct?
1 reply
Thanks for this Nick. Let me work on it; will get back to you soon(er or later). DA
1 reply
Sorry, I forgot to sign in. That last post by "David" was by me. Nick, I am still mulling over your assessment of my model. One thing that struck me was your claim that the model result was a complete fluke. That may be true, but notice that one can only make such a claim against a model that has been formalized the way I have done. I will never be able to make the same claim against you because, well, I am never really sure about the full set of assumptions you are employing to make the case for NGDP targeting.
1 reply
Great post, Stephen. I am wondering, however, what role the real estate market played in each of these scenarios? If you were to redraw your picture, replacing G with P (real estate prices), I think we know what we would find. So the question is whether Canada was saved by a fortuitous increase in G, or a fortuitous lack of decline in P. (Or a combination of both, and of other factors as well...)
1 reply
Nick, Thanks for taking the time to reply to my query. However, I don't think you've answered my questions. Let me first address this comment of yours: Sure, debt contracts can always be renegotiated. But the whole point of having a long-term contract is because you don't want to renegotiate it every year or every day when circumstances might change. If the expectation of renegotiation weren't a problem, we wouldn't have agreed to a long-term contract in the first place. "Here's $100; let's leave it open for future negotiation how much you pay me." That's not a contract. I might say that to my kids or close friends, but I wouldn't do business on that basis. A debt contract is characterized by a flat payoff schedule over most, but not all, states of the world. The "bankruptcy" state can be thought of as a form of renegotation, if you like. In this sense, debt contracts are state-contingent. And before we can talk sensibly about debt, we need a theory of debt. If the private sector has a rationale for the form that debt takes, why should the monetary authority do things that undoes these things? What are the consequences? How do you know without a theory of debt, or any evidence for that matter? (And who really cares about how you would do business...I was asking for evidence on how businessmen do business out there.) I am not going to speak to your points 2,3 and 4. I'm willing to grant all those points to you (for now) and allow that an NGDP target is a good policy to adopt for all the reasons you state above. I am interested in a different question. Sumner and Beckworth (and others) vehemently argue for the Fed to adopt a NGDP target *right now.* Immediately. That is, 3 years after the negative price level surprise. The theoretical justification for this (Beckworth, at least) view is what you call "risk sharing." I think that's a bad label for it. Clearly, what people have in mind right now is some "debt overhang" problem. The idea is that debt is crippling aggregate demand and that this is inefficient for a host of reasons. And so, my question was really about the empirical evidence supporting the strongly held view that the Fed should adopt a NGDP target *right now* to stimulate the economy back to what people imagine to be "potential." (As opposed to adopting the policy to mitigate future business cycles.) So to sum up, I think that you have given a nice summary as to why you believe a NGDP target is a good policy to adopt for the purpose of mitigating the bad effects of future business cycles. But I do not believe you answered the question I posed in my post. (I could have been clearer, of course!) If you have some thoughts to share on this, please let me know. Thanks again! David
1 reply
Nick, Here is my model. There are 8 workers producing output for themselves. There are 2 workers who are doing nothing, even though they could be doing what the other 8 are doing (these 2 are non-optimizing, say). There is no money. The government forces the two unemployed workers to work; the government pays them wages equal to their output (collects taxes in the form of their output to repay in the form of wages). The government balanced budget multiplier is one. This is not rocket science.
1 reply
Nick, I have not read Woodford (yet), but let me wade in here briefly. First, on your property [2]. C+I is defined as output that is produced and sold for "money." For a monetary theorist, you are rather vague about how you define money here. Are these transactions cash purchases? Is there another subset of goods purchased with credit? Or did you mean to define C+I as output produced and *exchanged* on a market (which is how I would define GDP); whether or not money (cash) mediated the exchange? Second, wrt your experiment of the government conscripting labor to produce G. Note that your story here in no way relies on outdated concepts like "involuntary" unemployment or "sticky prices" or whatever. Suppose people want to work 8 hours a day, but that the government forces them to work 10. Now, in terms of GDP, what are we talking about here? It seems to me that the distinction is between actual and measured GDP. If the output produced by this forced labor is truly worth X (people would be willing to buy it), then we add X to our measure of GDP and the actual multiplier is 1. If X is considered waste, the actual multiplier is zero; although the measured multiplier is 1. Or have I missed something in this discussion?
1 reply
Nick, excellent post. A good way to start the morning. Thanks!
1 reply
Nick, love the slogan. Of course, I can't help pointing out that that people cannot be located in IS-LM analysis (and the like). They are, however, easily located and emphasized in modern macro theory.
1 reply
Simon, The economics profession has been appropriately criticized for its failure to forecast the large fall in U.S. house prices and the subsequent propagation first into an unprecedented financial crisis and then into the Great Recession. As a member of the economics profession, I take issue with you lumping me into a group of people that(according to someone's infallible judgement) are to be "appropriately criticized" for their apparent lack of skill in the divine art of haruspicy. You are giving people the impression that economists should be able to forecast business cycle turning points and asset price movements with precision. All we can really do is predict that crises will occur; and then make conditional forecasts about how things are likely to evolve after that. We know that the people of Naples are one day going to suffer from the wrath of Vesuvius. Everyone knows this (but choose to ignore it, because the probability is small). But when that mountain blows, or when the tsunami hits the coast of California, you can bet there will be people complaining that the "authorities failed to predict...and that therefore I am entitled to...)
And Keynes said that if W always adjusted to ensure full employment, this would be "monetary policy by the trades unions" (not the exact words). This could not have been part of this General Theory (though it may have been part of the opening chapters of the GT, where he invokes sticky wages as a simplification). I say this because he later explains how flexible wages are likely to exacerbate coordination failure. Or am I wrong?
1 reply
Nick, Nice post; thanks for the reference! On your point 2, I'm not sure what you are talking about. I presume you mean sticky nominal prices. Sticky real prices are easy to generate in a search model, since the time path of the real wage in a wage bargain is (under some conditions) indeterminate (i.e., there are many different ways to split the present value of match surplus). And now if we a rationale for money in our model, pay workers in $, I'm not sure why this should change anything. A given split of the match surplus may be implemented even with a nominal wage path that displayed "steps" over the duration of the match. At least, this is what I think...I'm not sure that I can point you to any papers that actually do this! On your third point, I guess I meant search models with or without multiple equilibria. I think what you say is true under some commonly employed bargaining solutions (like the Nash Bargain). But Hall (and Shimer, I think) have recently written papers that depart from standard bargaining solutions (solutions that entail much more real wage rigidity, in particular). I see now that Hall has an even more recent paper (the one cited by Krugman)...haven't read it yet.
1 reply
Patrick: Very interesting, don't you think? When one starts to look at all the different ways in which people in relationships start adjusting their practices in response to changes in economic circumstances, then the de facto real price of goods and services are changing, even if their stipulated nominal levels do not. The econometrician, or Nick Rowe looking at newspapers, sees that nominal prices do not adjust a lot. But maybe they don't have to when resources are allocated in relationship mechanisms (as opposed to the anonymous spot market). Nick: You do not distinguish between sticky nominal wages and prices? I think it matters, does it not? For example, if both are sticky, then the real wage is sticky. As for your "easy to buy, difficult to sell goods in recession" idea, I agree with it. I might note, however, that this property falls naturally out of search models that feature thin-market and congestion externalities--it has nothing to do with sticky prices. I think you keep referencing sticky prices because your mind has been seduced by the vision of Marshall's scissors. Come to the dark (search) side, Nick! ;)
1 reply
K: Yes, I am aware that the distribution of nominal wage changes (among continuing workers) is frequently skewed in this manner (there is considerable heterogeneity across countries as well). My experience in the construction sector during a severe recession (early 80s) leads me to question to what extent this sort of data captures the full degree of wage flexibility in the labour market (workers also adjust labour effort along various dimensions which are de facto real wage changes not captured in the data). Moreover, this type of "snapshot" data is irrelevant from the perspective of surplus division in ongoing relationships. The wage path is largely indeterminate in relationships. In labour market search models, the relevant degree of wage flexibility is in terms of new hires. I have read papers where the degree of wage flexibility among new hires is much greater than in ongoing relationships. In short, Krugman's piece is uninformative and misguided. Scott: The manner in which you would have contested your own argument was precisely what I had in mind. Thanks for this--I must make an effort to read your blog on a more regular basis. Patrick: Thanks for your anecdotal evidence. Yes, I believe you when you say the price point is set in part based on contract. But in a contractual relationship, there are other dimensions of adjustment, no? One might want to work a little harder to satisfy a long-time customer at the same price--is this not a de facto price cut (unmeasured in the data)? During a boom, do you tend to spread your resources thinner (per customer) if price is inflexible? I am just wondering here. It's just not as obvious to me that rigidities in the terms-of-trade are responsible for year-long (or longer) recessions. But maybe they are! (I just don't know.)
1 reply
Scott, The point of my "critique" of the sticky-price-hypothesis was, in a nutshell, that price dynamics are largely indeterminate in enduring relationships (the typical firm-worker relationship, in particular). Consequently, even if (say) wages appear to be sticky, this is unimportant, because the wage path is not "allocative" in a wage bargain. My only point was that is a necessary condition for NK-type models. And my point is that the NK model, like so much of neoclassical analysis, assumes that labor is traded on anonymous spot markets. Some way is needed to hamper the operation of these markets (from a theoretical perspective). And the natural candidate that people like to pick is price stickiness. Why? Because prices appear "sticky" in the data. This makes no sense to me. I'd rather drop the assumption of anonymous spot markets. In any case, my question to all of you is this: Look out there...in the real world, I mean. The US GDP path appears to be below linear trend...for years now. Can you tell me where the sticky nominal prices are that are hampering the recovery (and that led to the recession). Point me to something concrete.
1 reply
Nick: Sorry for side-tracking you here. But I am teaching this "excess demand for money" hypothesis to my students right now and I was curious to know the best way to defend the sticky price hypothesis. Let me comment on your points. [1] Wage and prices indices are relatively forecastable. I never thought of characterizing stickiness in this manner. Let me think about this. (And can you point me to papers that forecast these objects?) [2] Because recessions are times when it gets much harder to sell stuff and easier to buy stuff, except that stuff whose prices are hard to forecast. Again, can you point to the empirical studies that support this claim; or is it just something you "see" out there? (And if so, please elaborate.) Scott: I am not convinced by the "mountains" of evidence you suggest exist in your point [1]. My views on that literature are summarized here: http://andolfatto.blogspot.com/2010/07/sticky-price-hypothesis-critique.html As for your point [2], this sounds promising. Except that I am not interested in history per se; rather, I asked whether these forces are still quantitatively important today--i.e., over the last 3 years. Still, can you point me to a post of yours that elaborates on this? And I disagree with your point [3]. Flexible price models with heterogeneous portfolios can generate real effects from nominal shocks (though, I presume you might argue that these are not plausible). One more thing: most of the discussion appears to be in terms of sticky goods and labor prices. What about nominal debt contracts? Oh, and hurry up with your answers...I lecture next week...lol.
1 reply
Nick, can you point to the evidence you use to convince yourself that nominal price rigidities are quantitatively important in terms of explaining the recent recession and weak recovery dynamic we have experienced in the U.S.?
1 reply
We’ve given the market economy 40 years to solve the problem of growing inequality, and the result has been even more inequality. Not sure I fully understand this statement, Mark. Is there anyone who believes that it is the market's "job" to solve the "problem of inequality?" The job of markets is to allocate resources efficiently. The job of looking after the less fortunate is something that responsible and caring citizens should take on for themselves or through their elected representatives.
Toggle Commented Jan 5, 2011 on A Laffer Curve for Inequality? at Economist's View
1 reply
Nick: As I am not that much younger than you, I feel obliged to join you in "old geezer mode." Comparing my own generation with that of my children (in their early-mid 20's), and purely anecdotally, I notice two big differences: 1. Their material expectations are in many ways much higher now. Stuff like electronic gizmos, new furniture, clothes, eating out, etc. This is true, I think, and perfectly natural for an economy that grows its wealth over time. Still, it is interesting to see how little correlation there appears to be between the level of material wealth and measures of "happiness." 2. But in terms of the basics, like getting onto the ladder of career-path jobs and buying a house, they are worse off. I don't think the statement applies in general. And I'm not sure why the young should be worried about buying a house. The housing stock must pass from one generation to the next (supply will create its own demand). :) Finally, I want to share my own weird thought with you. We teach the young that there are no jobs because of deficient demand (something beyond their control). So the young give up; they wait for the deficient demand to go away. But it might not go away for a long time. Their passivity--the belief we encourage that their destiny is beyond their control--leads them into a self-reinforcing poverty trap. In this way then, deficient demand might indeed become a self-fullfilling prophesy...though perhaps not for the reasons imagined by Keynes.
1 reply
Goldilocks, Oh dear, you fear for you life, do you? I wouldn't worry, if I were you...your ideas do not seem that important or threatening. Good luck in your ignorance and paranoia. DA
1 reply
Yes, it looks like the employment/population ratio is still way too high, relative to those halcyon days in the 50s/60s. We need more subsidies for the leisure sector!
1 reply