tag:blogger.com,1999:blog-6704573462403312459.post103744785278519277..comments2024-03-19T07:46:09.811-04:00Comments on Moneyness: Floors v corridorsJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger58125tag:blogger.com,1999:blog-6704573462403312459.post-16818892551867441362018-01-26T16:35:02.287-05:002018-01-26T16:35:02.287-05:00Martin, I wish I could drag them back, but that...Martin, I wish I could drag them back, but that's out of my control. Maybe they'll come back of their own accord. Glad you are enjoying the debate, though.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-30071627325331160982018-01-26T14:32:53.488-05:002018-01-26T14:32:53.488-05:00If JP does not mind, could you please keep the deb...If JP does not mind, could you please keep the debate going here George and JKH? I am currently reading the pdf, interesting reading. My views are close to JKH/JP on this but I would rather see the debate on this paper carried on here, rather than second guess JKH's questions and criticisms (and I will stay silent in the peanut gallery).Martin Freedmanhttps://www.blogger.com/profile/16952072422175870627noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-63896424835402023762018-01-20T05:57:37.184-05:002018-01-20T05:57:37.184-05:00If the decline doesn't persist then then the d...If the decline doesn't persist then then the differential persists even more so.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-45228761144870346242018-01-19T22:33:37.470-05:002018-01-19T22:33:37.470-05:00"But this was manifestly not the Fed's ex..."But this was manifestly not the Fed's experience during the last months of 2008, when the overnight (fed funds) rate fell increasingly further below its target."<br /><br />Just because it can always hit its rate target doesn't mean it will always choose to hit it. <br /><br />"I think some semantics here need clarifying. A central bank cannot have any short-term rate that it wants AND meet any inflation target it sets, because there is a real short term natural rate, as there are other natural rates, that lie beyond its control."<br /><br />Yep, you won't get any debate from me on that.<br /><br />Where we seem to differ is on the relative merits of the two mechanisms for setting short term rates at a level consistent with the central bank's inflation target. You say that a floor system suffers from "unfortunate monetary control shortcomings." I say a floor and a corridor have the exact same monetary control properties. In the BoC example we just worked through, it seems we at least agree (sort of) on what sort of conditions might lead the two systems to provide the same degree of monetary stimulus to the economy. After all, in both the corridor and floor the Canadian overnight rate instantaneously fell to 0%.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-6829439217438804072018-01-19T17:42:37.291-05:002018-01-19T17:42:37.291-05:00I don't offend all that easily, JKH. I've ...I don't offend all that easily, JKH. I've even been known to dish it our myself every now and then!George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-47743133158831825562018-01-19T15:06:37.806-05:002018-01-19T15:06:37.806-05:00Perhaps a cynic’s view of the natural rate idea is...Perhaps a cynic’s view of the natural rate idea is that CB’s can’t opt out of the actual future path of their own policy actions. Whether they are steered at the time by the natural rate, God, foreign exchange responses, or what they ate for breakfast doesn’t seem to matter in that way.<br /><br />I'm actually not that cynical, but I remain to be persuaded on the idea.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-5537842811340001922018-01-19T14:56:15.839-05:002018-01-19T14:56:15.839-05:00“Central banks must at least implicitly take exoge...“Central banks must at least implicitly take exogenous r* (real natural rate) changes into account in setting their policy rates.”<br /><br />That sentence and the full paragraph of your comment are quite understandable. The Wicksell cumulative process and your 1980’s counterfactual are very intuitive and realistic. And while I’m not an academic, it seems to me that the r* idea could allow a fair bit of philosophical debate about what it really means or could be allowed to mean relative to policy and market actions around r.<br /><br />But again, you seem to be referring to a rate path as reflected in the term structure of rates and the inevitable groping of policy rates along that path, with the inevitable corrections that will occur in revised expectations and in the term structure. And this seems to be a very different issue than how the overnight term structure of the full constellation of different rate types will align itself to a particular actual Fed policy target, and how that gets reflected in the relationships of the target policy rate, IOER, or corridor bound rates.<br /><br />(The 1980’s was my time of action. There were many cases in which the Fed and the Bank of Canada would make massive injections or massive withdrawals of reserves in order to cause that entire overnight rate structure to respond in the most dramatic way in both directions as rates made their upward move to a 23 per cent bank prime rate in Canada and somewhat less I think in the US. And the term structure of market rates would respond to this policy volatility as well – in almost equally violent fashion in some cases. This market action all originated with very specific CB reserve setting changes and corresponding commercial bank behavior, spreading out to the rest of the community. Yes - the CBs and the commercial banks ruled the roost in terms of the epicenter of it all and its effect.)<br /><br /><br />JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-47897749971932224592018-01-19T14:13:47.120-05:002018-01-19T14:13:47.120-05:00I think some semantics here need clarifying. A cen...I think some semantics here need clarifying. A central bank cannot have any short-term rate that it wants AND meet any inflation target it sets, because there is a real short term natural rate, as there are other natural rates, that lie beyond its control. This is why the Fed, to stick for that examples, readily ponders r*, and why it worries about getting its future value wrong. Central banks must at least implicitly take exogenous r* (real natural rate) changes into account in setting their policy rates. Otherwise their rate settings will not prove sustainable given their ultimate objectives, or merely given their desire to avoid triggering a cumulative process. Back in the early 1980s, the ffr target briefly exceeded 20 percent. Could the Fed have kept it at 2% had it so wished? Not unless it wanted to see inflation spiral out of control. This is the old Wicksell story. The only point is that overnight rates are not exempt. Indeed, the Wicksell story was always, fundamentally, about the consequences of trying to peg the wrong policy (i.e., short-term or overnight)rate. George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-60257217366725557512018-01-19T14:01:40.818-05:002018-01-19T14:01:40.818-05:00"I agree. If a central bank wants the overnig..."I agree. If a central bank wants the overnight rate to be x%, then the overnight rate will be x%, whether it is running a floor or a corridor." But this was manifestly not the Fed's experience during the last months of 2008, when the overnight (fed funds) rate fell increasingly further below its target. I refer here not just to the "leaky" floor system but to what happened in the weeks prior to the implementation of IOER. On October 2, for example, the effective ffr dropped to .67% while the target rate was still 2%. George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-62848156401492498862018-01-19T10:38:00.956-05:002018-01-19T10:38:00.956-05:00George, you said:
"The overnight might drop ...George, you said:<br /><br />"The overnight might drop to 0 for a while,"<br /><br />Well, at least we seem to sorta agree on that point. The overnight rate drops to 0% *in the next instant*, just as it would if the BoC did open market operations in a corridor. You qualify it with the word *might*--which I think is wrong. It *must* fall to 0% given the assumption I've provided. But in any case, given that we sort of agree that it falls to 0%, then we should be able to agree that *in that instant*, a corridor and floor system provide the exact same monetary stimulus to the economy. <br /><br />JKH, you said:<br /><br />"But the other thing that is fundamentally wrong here – again in my opinion – is this idea that short dated market rates somehow exist independently of Fed policy in its targeting of funds rates and/or IOER. This is backwards. It is Fed policy from which the market takes its cue..."<br /><br />I agree. If a central bank wants the overnight rate to be x%, then the overnight rate will be x%, whether it is running a floor or a corridor. <br />JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-48961711742155373062018-01-19T10:15:25.534-05:002018-01-19T10:15:25.534-05:00It's not inconceivable I could adjust my think...It's not inconceivable I could adjust my thinking about this.<br /><br />But this part intersects with the multiplier causality part - where it is absolutely certain I could not adjust my thinking.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-27715030869256921432018-01-19T09:51:59.490-05:002018-01-19T09:51:59.490-05:00For sure - its a game where each anticipates the t...For sure - its a game where each anticipates the tendencies of the other. But that can compound like Keynes' beauty contest. <br /><br />And the Fed always has a choice about whether, when, and how much to change its policy rate. The market will then respond to that actual choice.<br /><br />And I've seen too much in olden days Bank of Canada to know that mighty CB resistance and victory over market interest rate expectations is very possible. JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-27157407912329788142018-01-19T09:38:56.966-05:002018-01-19T09:38:56.966-05:00Referring to above chart, you will see that increa...Referring to above chart, you will see that increases in Treasury rates, and in the longer-term rates especially (which are most independent of Fed policy rate) anticipate IOER increases, typically by more than a month. Yes, markets may be anticipating the Fed; but it is far from evident that the Fed is not anticipating market tendencies, as it is indeed expected to do. George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-10254524424445715372018-01-19T09:29:59.589-05:002018-01-19T09:29:59.589-05:00Yes - but there's term structure in those comp...Yes - but there's term structure in those comparisons, an effect which I noted in my comment above. That doesn't disprove the Fed as the origin of causality in spread outcomes across the same term - i.e. overnight.<br /><br />I also don't think episodes where the market correctly forecasts future Fed moves through term structure means that the Fed "follows" the market in all cases. This just isn't so, even if the market's forecasts turn out to be correct. I think the converse is demonstrated logically by the market's dynamic rate response out the term structure to Fed rate announcements that are not preceded by near certainty of expectation. Anything that is not absolutely certain is in some sense a surprise, instilling a further market reaction.<br /><br />The Fed can resist anything - provided it is prepared to live with all peripheral consequences such as an exchange rate effects, etc. But those are issues that are separate from that of identifying the true origin of causality in respect of actual policy rates and the comparable short term market rate structure.<br /><br />As I said above, I think the causality flows from the Fed to the market across the overnight term structure. That's where the actual Fed action is - normally. The game from there in the context of term structure and future actual Fed action is one of interacting expectations and confirmation or not of expectations - via term structure. JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-23623466295781121812018-01-19T08:59:03.197-05:002018-01-19T08:59:03.197-05:00" Finally, it’s not 1923 anymore. The suggest..." Finally, it’s not 1923 anymore. The suggestion that commercial banks somehow assume a mission of converting several trillion in excess reserves to required reserves requires a scenarios of astronomical balance sheet expansion that is simply too absurd to even consider in a modern banking system." It is, in fact, 1923 still in all places where vast reserve expansion is not offset by high reserve deposit rates. Look at any recent hyperinflation if you doubt this. <br /><br />As for the Fed ruling the interest rate roost, that is the superficial view. The relatively sophisticated one is still Wicksell's. ca. 1898. Sometimes, newer isn't better. The Fed's post-2008 IOER rate adjustments have been made in response to prior upward movements in market rates, not the other way around. If you don't believe it, eyeball this chart: https://fred.stlouisfed.org/graph/fredgraph.png?g=hCLO<br /><br />George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-35400954049042593412018-01-19T08:36:14.321-05:002018-01-19T08:36:14.321-05:00thanks George
Hope you don't take too much of...thanks George<br /><br />Hope you don't take too much offense to my slightly blistering missive of 8:10 above, which I submitted just before seeing this<br /><br />Sometimes I drop thoughts that are compressed due to my own time constraints - and there were a couple of ideas there that I thought were relevant to emphasize in terms of watching the dialogue between JP and yourselfJKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-439462959134259482018-01-19T08:10:53.978-05:002018-01-19T08:10:53.978-05:00Forgive me for interrupting, but the last two comm...Forgive me for interrupting, but the last two comments are a clean illustration of the erroneous causalities embedded in orthodox monetarism.<br /><br />The stimulus that JP is referring to directly in his entire sequence of comments is the stimulus from a policy rate decline – NOT the stimulus from any particular bank reserve effect (correct me if I’m wrong JP). I agree with JP’s rate analysis throughout these comments.<br /><br />By contrast, the legitimacy of the entire monetarist story of stimulus according to excess reserves is one of the core, underlying issues here. This story is fundamentally wrong according to some opinions (including mine) – i.e. the entire multiplier causality story is wrong. We’ve been over that many times.<br /><br />But the other thing that is fundamentally wrong here – again in my opinion – is this idea that short dated market rates somehow exist independently of Fed policy in its targeting of funds rates and/or IOER. This is backwards. It is Fed policy from which the market takes its cue in order to determine the constellation of short date interest rates – with all the noise and spread imperfection that is involved in GSE arbitrage, repo activity, Treasury bill liquidity, etc. That’s the anchor. The market then extrapolates that to the longer dated term structure across the full credit spectrum, taking into account expectations for Fed policy and even “natural rate” type assumptions about rates “should” be headed or where they “belong” as reflected in the existing term structure. But the causality of - Fed to market - rate determination at short dates is how it actually works – not the reverse. It is a fundamental error to suggest that the Fed somehow sets its short dated (i.e. overnight for the most part) policy rate structure “less than” or “greater than” “natural” market rates. The Fed is the anchor for short term market rates. And the reason for this is that the banks in the US and Canada and other modern economies are simply too big not to determine the arbitrage causality as flowing from the central bank rate - to commercial bank action - to general market rates. The reverse error seems to be another fundamental mistake of monetarism in this area of analysis, because it is ignoring institutional proportions. Finally, it’s not 1923 anymore. The suggestion that commercial banks somehow assume a mission of converting several trillion in excess reserves to required reserves requires a scenarios of astronomical balance sheet expansion that is simply too absurd to even consider in a modern banking system.<br /><br />JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-25361450773921896392018-01-19T08:00:29.286-05:002018-01-19T08:00:29.286-05:00Thanks JKH. I dashed that testimony off in several...Thanks JKH. I dashed that testimony off in several days, and am now reworking it. We should perhaps correspond about our different perspectives by email, so as not to impose on JP. My email is gselgin@cato.org<br /><br />George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-17817543446078396192018-01-19T07:32:03.497-05:002018-01-19T07:32:03.497-05:00The overnight might drop to 0 for a while, JP. Bu...The overnight might drop to 0 for a while, JP. But I must caution you that most analyses of floor systems do not ever imagine the temporary deviation from the floor your story entails, with its setting of a "sub-market" deposit rate. They assume that the deposit rate, even when reduced for the sake of easing the CB policy stance, remains continually at or above the market rates, so that reserves continue to have a zero opportunity cost (or, put another way, the Friedman rule, as they understand it, is always adhered to). The floor system monetary transmission mechanism works via a "portfolio" effect rather than by means of the conventional multiplier/hot potato mechanism to which your account refers. So you are telling a monetary easing story that is not fully consistent with the workings of an orthodox floor arrangement. It is instead a story in which the floor is at least temporarily abandoned. Moreover, for the reason I explained previously, it will also tend to involve a permanent abandonment of the floor is the new (0) deposit rate is not just "sub-market" but "sub-natural." George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-72304101330144039642018-01-19T06:50:51.023-05:002018-01-19T06:50:51.023-05:00George
Looks like an excellent paper (your July 2...George<br /><br />Looks like an excellent paper (your July 2017 testimony) as a representation of your views. Certainly worth reading in its entirety, and in some detail. I must say that the first 20 pages I’ve looked at so far only galvanizes the vast difference between your analysis and my own interpretation of things. But it is good writing, so I shall try to spend more time on it.<br /><br />My own views come from actual experience in the function, not from heterodox cults. But certain elements from those sources, along with more upscale central bank writing and other notable academic work (e.g. Godley and Lavoie 2008), fit with my own experience.<br /><br />If I can find the time to absorb your paper properly, I’ll drop a further comment here in a few days, regarding the paper.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-78335122186769407922018-01-18T22:57:00.630-05:002018-01-18T22:57:00.630-05:00Dunno Matt, not sure if you got my post. Probably ...Dunno Matt, not sure if you got my post. Probably my fault. Try summarizing my post in one paragraph using your own words and I'll tell you how close you are, and then once we're on the same page why don't you go ahead with your criticisms.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-88125200177173972092018-01-18T22:27:01.869-05:002018-01-18T22:27:01.869-05:00"...it may not be possible for the BofC to pe..."...it may not be possible for the BofC to permanently drive the overnight rate to 0 by lowering its deposit rate to zero. In your example."<br /><br />But in the instant after the drop in the BoC's deposit rate to 0%, the overnight will rapidly follow to 0%. Right? Again, this is given my assumptions from January 18, 2018 @ 11:48 AM. And in those few instants, the BoC's floor system has provided the same sort of monetary stimulus that a corridor system would provide when open market operations drive the Canadian overnight rate from 0.25% to 0%. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-61657065300755580662018-01-18T21:02:28.649-05:002018-01-18T21:02:28.649-05:00There is no need to issue public debt
http://bilbo...There is no need to issue public debt<br />http://bilbo.economicoutlook.net/blog/?p=31715<br /><br />"Most of the arguments made in favour of sustaining public debt issuance can be reduced to special pleading by an industry sector for public assistance in the form of risk-free government bonds for investors as well as opportunities for trading profits, commissions, management fees, and consulting service and research fees.<br /><br />***<br /><br />On balance, public debt markets appear to serve minor functions at best and the interest rate support can be achieved simply via the central bank maintaining current support rate policy without negative financial consequences.<br /><br />The public debt markets add less value to national prosperity than their opportunity costs. A proper cost-benefit analysis would conclude that the market should be terminated."<br />Larry Kazdanhttps://www.blogger.com/profile/04756717838017050246noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-9602564944239311712018-01-18T20:43:27.477-05:002018-01-18T20:43:27.477-05:00I don't agree, JP--that is, it may not be poss...I don't agree, JP--that is, it may not be possible for the BofC to permanently drive the overnight rate to 0 by lowering its deposit rate to zero. In your example, you say that initially the 0 deposit rate is "sub-market," and that this means banks try to dispose of their surplus reserve balances, putting downward pressure on the overnight rate, and perhaps on some other rates. So far, so good. But in order for the long-run equilibrium to consist of the overnight rate and other market rates adjusting to conform with the new (0) deposit rate, that deposit rate has to be consistent with natural rates. If it is below, rising aggregate demand will eventually cause credit demand to rise, offsetting the outward supply shifts. This is just Wicksell's story of short run vs. long-run effects of expansionary policy. In that case, instead of establishing a new "floor" with overnight = deposit = 0, the BofC ends up switching to a corridor with overnight rate above deposit rate lower bound, and (if 0.25 was itself "natural" rate) perhaps no long-run change in overnight market rate at all. <br /><br />Note that, if BofC moves to 0 in sympathy with drop in natural rates from .25 to 0, then the move will go through as you suggest. But note that if bank is too concerned to keep floor system in place, it may be inclined to err on side of over-tightening, which though itself undesirable does not result in switch to corridor.George Selginhttps://www.blogger.com/profile/03106618641653835537noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-46270792280498904352018-01-18T13:07:40.133-05:002018-01-18T13:07:40.133-05:00I have the biggest problem of all in understanding...I have the biggest problem of all in understanding this:<br />How did we get from competitive supply and demand to monopoly central banking? <br /><br />When I look back to understand this I get the underpants theory:<br /><br />1) Chapter one, econ 101, competivie supply and demand including free entry and exit<br />2) Paul Samuelson makes an assumption that all money is monopoly<br />3) Chapter two, central banking can plan, competitive market gone./<br /><br />Paul Samuelson was dead wrong. Competitive currencies take up about 20-30% of the economy at any given time. Hence, any central bank is absolutely clueless about risk going forward, and has no way to set policy, except its own currency risk. 9% of the Canadian economy is US tourist dollars, another big percentage is tied to the petro dollar. The BOC is clueless, it should just keep its market making risk minimized and let the member banks set rates going forward. <br /><br />Matt Younghttps://www.blogger.com/profile/08404998406161097199noreply@blogger.com