tag:blogger.com,1999:blog-6245381193993153721.post2942942357726338430..comments2021-10-13T08:25:50.754-07:00Comments on Social Democracy for the 21st Century: A Realist Alternative to the Modern Left: The Natural Rate and New Consensus MacroeconomicsLKhttp://www.blogger.com/profile/06556863604205200159noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-6245381193993153721.post-11608083833774147152014-11-18T05:25:15.341-08:002014-11-18T05:25:15.341-08:00Good post. My own calculations of a variety of nat...Good post. My own calculations of a variety of natural rates of interest (weighted own rates of interest) highlights the significant differences with money rates and that a constant state of disequilibrium mostly exists. This provides empirical evidence that assumptions on perfect information, competition and rational expectations do not have much in common with reality. My interpretation of chapter 17 of the GT is that Keynes remained rather classical when it came to the investment function.<br /><br />http://www.creditcapitaladvisory.com/2014/09/04/swedish-perspective-equilibrium-level-interest/<br />Thomas Aubreyhttp://www.creditcapitaladvisory.com/noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-41831347198151039162014-11-17T11:13:08.761-08:002014-11-17T11:13:08.761-08:00On point (6), regarding central banks, one must ad...On point (6), regarding central banks, one must add the crucial factor of financial deregulation that occurred in the 1980s and 1990s; this has a lot to do with the re-emergence of large and destabilising asset bubbles in this period. <br /><br />If you don't believe that, then you must explain why in the 1940s-early 1970s, these sorts of problems either disappeared or were minimal, even though central banks also had an easy money policies and low interest rates.LKhttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-83640898923105708502014-11-17T10:30:23.542-08:002014-11-17T10:30:23.542-08:00Philip,
1) you still seem to think that all vario...Philip,<br /><br />1) you still seem to think that all various interest rates must move in lockstep with CB rate for NK model to work. That's just wrong. It's perfectly possible that there are other things going on in the economy which affect term premia, risk premia, default premia etc. AND at the same time CB policy also affects the economy.<br /><br />2) by the way, plotting Fed Funds rate with 30-year rate on mortgages is comparing apples and oranges. Plot mortgage rate with long-term yields on Treasury bonds instead and you'll get almost parallel curves ( http://research.stlouisfed.org/fred2/graph/?g=Riy ). That long-term rates don't react one-to-one to changes in short-rate is a standard result, implied e.g. by the simple expectation hypothesis of the term structure.<br /><br />3) if "marginal efficiency" of capital means its expected productivity, then that's already accounted for in New Keynesian models with capital (the model would have two rates of return - return on bonds and on capital, and two equations linking them to other variables). But because saving through bonds and investing into productive capital both mean (from individual's point of view) shifting consumption from today to the future, the two rates must be related in equilibrium.<br /><br />4) yes, there's some evidence questioning the textbook interest rate channel of monetary policy transmission. Focus on that, drop all the nonsense about EMH and you might get a reasonable paper.<br /> <br />5) I don't really care about Wicksell. The goal of economic theory is not to provide the most faithful representation of old masters, but to study causal mechanisms underlying the economy. If that requires "many approximations", so be it.<br /><br />6) inflation targeting also delivered few decades of Great Moderation, which wasn't so bad. Regarding whether and to what extent it caused the housing bubble, [citation needed], as they say. Otherwise, you are starting to sound a lot like deranged internet austrians.<br />ivansmlhttps://www.blogger.com/profile/00955626621561436702noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-67021928896200379592014-11-16T08:25:16.156-08:002014-11-16T08:25:16.156-08:00Well, I think that they have -- like Wicksell -- r...Well, I think that they have -- like Wicksell -- replaced the quantity theory with the idea of a natural rate. Actually these two theories are basically synonymous but to show that I would need a bit more space than this comment section allows for. Ultimately both theories are trying to neutralise the effects of (a) money and (b) intervention in what is thought to be a self-regulating economy.Philip Pilkingtonnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-23464026441019342352014-11-16T05:59:05.874-08:002014-11-16T05:59:05.874-08:00"But the issue is deeper than this (unfortuna...<i>"But the issue is deeper than this (unfortunately LK has left it out in this post but it is key). In the paper I also argued that the rate of investment is not simply determined by the rate of interest in a given market but rather by the marginal efficiency of capital. "</i><br /><br />Yes, an unfortunate omission by me. Also, I should have said that the quantity theory of money is false and this undermines the whole New consensus macro since they must assume it is true.LKhttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-46770307787771661332014-11-16T05:32:58.818-08:002014-11-16T05:32:58.818-08:00The first point has nothing to do with my paper.
...The first point has nothing to do with my paper.<br /><br />The second point is equivalent to stating "Pilkington may be right in theory, but in practice this shouldn't make a difference". If this were true then we could find no empirical instance when the divergence of one interest rate in the economy from the central bank rate contributed to overinvestment. Of course, anyone familiar with the data would be able to think of one straight away:<br /><br />http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=R9R<br /><br />Indeed, it would be difficult to say that many interest rates prior to 2008 were at their natural rates. Rather they seemed to be determined by the unusually lax liquidity preference stance (i.e. the reckless Bullishness) of the capital markets. To simply handwave this away seems to me an act of intellectual repression. <br /><br />But the issue is deeper than this (unfortunately LK has left it out in this post but it is key). In the paper I also argued that the rate of investment is not simply determined by the rate of interest in a given market but rather by the marginal efficiency of capital. This means that even if the interest rates all line up in some approximation of the EMH there is still no guarantee that investment will behave in a linear manner.<br /><br />Now, ivansml will say "oh yes, but again we are dealing with an approximation, we know that generally speaking investment rises as interest rates fall". Actually there is little if any evidence for this and many New Keynesians today argue that the channel through which interest rates effect economic activity. See:<br /><br />http://fixingtheeconomists.wordpress.com/2014/07/17/mainstream-economists-completely-incoherent-on-the-effects-of-monetary-policy/<br /><br />Now, how far are we away from the Wicksell theory? We have made so many approximations at this stage. Does the theory really have any legs at all? A reasonable person would respond in the negative. But let's give the theory the benefit of the doubt: how did it perform since it has been implemented?<br /><br />Answer: terribly. Interest rate targeting has been disastrous. During the 1990s New Keynesian economists were all convinced that the natural rate of unemployment (a key component of the Taylor Rule approach) was much, much higher than it actually was. Greenspan let unemployment fall. No inflation resulted. The profession then rejigged their models post factum to excuse themselves for their collective incompetence. More intellectual repression.<br /><br />And what about the 2000s? Need it even be said? Need it be pointed out that the haphazard policies implemented were partially responsible for the mess we are in? Low interest rates were used, not to generate real capital investment, but to bump up a stock market and then a housing market bubbles. The whole Taylor Rule schlock was just ideology covering over the fact that central banks were engaged in trying to steer a bubble economy. Because that is what New Keynesian theory is: ideology that helps economists ignore what is actually going one. Simple as.<br /><br />Philip Pilkingtonhttp://fixingtheeconomists.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-5592711286438230702014-11-15T06:31:05.701-08:002014-11-15T06:31:05.701-08:00This post mixes some things up in a rather confusi...This post mixes some things up in a rather confusing way. I see two unrelated issues:<br /><br />1) the concept of natural rate<br /><br />Here we must distinguish between long-run and short-run horizon. In NK models, long-run is understood as the "steady state" - an allocation to which the economy would converge if there were no exogenous shocks (and around which it fluctuates if there are). Assuming zero-inflation in steady state, nominal rate of interest will be equal to real rate determined by time preference and marginal productivity of capital (it's a simultaneous relationship, so it doesn't make sense to argue which causes what). In practice, all this means is just that a Taylor rule must be consistent *on average* with these steady state relationships - if long-run real rate is 2%, yet Taylor rule implies average nominal interest rate 4%, then there must be on average 2% inflation. This is hardly controversial.<br /><br />From a short-run view, one can define natural rate as the real rate that would hold in an alternate version of the economy without nominal frictions (but with all other state variables otherwise the same). In simpler versions of NK model, an optimal policy would be to set nominal interest rate in each period to this hypothetical natural rate, which would stabilize inflation at zero. In practice, presence of cost-push shocks would prevent perfect inflation stabilization, and short-run natural rate is unobservable anyway. Many NK models thus simply assume that the central bank follows a Taylor rule depending on observables only, and short-run natural rate plays no practical role in monetary policy.<br /><br />2) transmission of short-run rate set by CB to the rest of the economy<br /><br />Here, all the claims that NK models rely in crucial way on EMH are, frankly, nonsense. Yes, it's true that models often assume that all asset prices are set by rational, risk-adjusted expectations because it's *analytically convenient* - but even if they weren't, there's clearly a great deal of comovement between various interest rates, both empirically and theoretically due to no-arbitrage restrictions (and in modern financial markets, any arbitrage opportunities won't last long).<br /><br />So let's assume for example that agents in the economy have biased expectations about future riskiness of capital, which will affect their investment decisions. Does this make NK model incoherent? No - central bank actions will still impact the rest of the economy, and the overall logic of Taylor rule (i.e. increase interest rate if inflation is higher than usual) will most likely stay the same. Sure, maybe the transmission mechanism will be quantitatively different, and maybe the optimal monetary policy should take the bias into account - but all such features can be incorporated into the model (and I would be surprised if somebody hasn't done so already).ivansmlhttps://www.blogger.com/profile/00955626621561436702noreply@blogger.com