tag:blogger.com,1999:blog-6704573462403312459.post4865673134861584686..comments2024-03-19T04:32:14.899-04:00Comments on Moneyness: Give Bernanke a long enough lever and a fulcrum on which to place it, and he'll move NGDPJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger30125tag:blogger.com,1999:blog-6704573462403312459.post-37421172163993982382013-10-03T02:10:39.767-04:002013-10-03T02:10:39.767-04:00JP, I think you may be the best blogger to take up...JP, I think you may be the best blogger to take up the challenge of mapping NGDP targeting to the supposedly common framework for designing monetary policy that I lay out here: http://macromoneymarkets.blogspot.com/2013/10/monetary-policy-implementation-vs.html .<br /><br />I imagine you may have some issues with how things are laid out there, but if possible, I'd love to see your attempt.ATRhttps://www.blogger.com/profile/16839382132670051736noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-10164659219952479962013-09-10T10:04:27.000-04:002013-09-10T10:04:27.000-04:00We can keep pushing the convenience yield on all m...We can keep pushing the convenience yield on all maturities to zero, thereby pushing NGDP up, until we reach the point at which all convenience yields along the term structure actually hit zero, at which point we hit Scott's 5b at which "nothing happens".JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-59188587648671070302013-09-10T08:19:14.695-04:002013-09-10T08:19:14.695-04:00JP, in trying to resolve this with Sumner's re...JP, in trying to resolve this with Sumner's recent post on HPE Explained, I'm having trouble. Your method 3. above: to promise to keeps the rates lower than they should be for longer than they should. And you method 4. as well... it seems this puts us somewhere between Scott's case 5b and 5c. The longer you promise to keep rates zero, or the longer you promise to keep the marginal convenience yield zero the further we move towards Scott's case 5b. But Scott's case 5b is "nothing happens." What am I missing?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-72871376299761056422013-09-05T19:27:46.130-04:002013-09-05T19:27:46.130-04:00JP,
"But we're living in a world in whi...JP, <br /><br />"But we're living in a world in which dollars are not convertible into CPI baskets. There is no CPI window. Rather, open market operations are used to manipulate the dollar's purchasing power as-if it was directly convertible into that basket. This indirect mechanism introduces all sorts of complexities that direct convertibility regimes don't face, and we should be curious about them."<br /><br />That's exactly what I was trying to get at a couple of days ago on another blog. Thanks for saying it so clearly here.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-88231015415616363962013-08-19T18:31:17.785-04:002013-08-19T18:31:17.785-04:00You know your Greek mythology. I'd say that fo... You know your Greek mythology. I'd say that for the MMers Bernanke is a Sisyphean heroMike Saxhttps://www.blogger.com/profile/01360689916550576484noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-12400263162434791852013-08-18T16:08:03.215-04:002013-08-18T16:08:03.215-04:00It was Sisyphus with the boulder, and it actually ...It was Sisyphus with the boulder, and it actually rolled back down the hill every time he got near the top, so a Sisyphean Task is an impossible one, kind of the opposite of Archimedes lever. Prometheus had his guts eaten every day by a bird as punishment for bringing fire to humans.John Hawkinsnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-9825505410146535152013-08-18T11:43:11.177-04:002013-08-18T11:43:11.177-04:00The Market Monetarists' biggest weakness is th...The Market Monetarists' biggest weakness is the mechanics of reaching a target level. Let's say the NGDP target is $17tr. The CB promises $100b/mo QE until we reach it. At $16.7tr, the target is in sight, and the CB elects to start tapering QE. The markets, seeing the taper, get nervous and plunge. To console the markets, the CB resumes $100b/mo, but now it must cut off QE abruptly at $17tr. This fails to appease markets. So now, the CB must commit to starting taper above $17tr and allow an overshoot. This is a recipe for market-enforced recklessness. <br /><br />I think an MM would argue that the CB need only convince markets that it will "park" the economy at the next stable equilibrium. Markets, seeing that multiple equilibria exist, will believe this and enable it. In other words, there is something so stable about the equilibrium itself that momentum and inertia disappear as we approach it. Diego Espinosanoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-61580061264607327432013-08-18T11:00:47.334-04:002013-08-18T11:00:47.334-04:00"...nominal interest rates (and probably real..."...nominal interest rates (and probably real too) will *actually* be higher than they would otherwise have been. "<br /><br />I agree. But they would still be lower than the natural rate.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-42790230873326429002013-08-18T10:57:30.669-04:002013-08-18T10:57:30.669-04:00"he argues that the distribution must be, if ..."he argues that the distribution must be, if anything, asymmetric to the downside."<br /><br />Hi Diego. I was trying to convey that asymmetry when I wrote the phrase "Krugman's New Keynesian credible commitment to keep future interest rates too low" but perhaps I didn't go about it properly. Keeping interest rates too low is allowing inflation to overshoot. <br /><br />I agree that "recklessness" is a good way to lower the future return on deposits -- ie it'll produce the asymmetry that you describe. I'm not sure how the market monetarist commitment to increase NGDP can work without creating asymmetry via some sort of recklessness. I've proposed one form or market monetarist recklessness -- committing to keeping excess reserves outstanding for longer than normal, thereby reducing the future non-pecuniary return provided by those deposits. But they seem to envision something different. I'm still confused.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-67461716461120404712013-08-17T23:02:22.907-04:002013-08-17T23:02:22.907-04:00JPKoning,
Thanks for this excellent post. I thin...JPKoning,<br /><br />Thanks for this excellent post. I think Paul Krugman introduces a nuance that perhaps you have missed.<br /><br />IMO, you're on the right track in targeting the value of CB deposits. Krugman suggests that threats over that future value must have a particular payoff distribution. Specifically, he argues that the distribution must be, if anything, asymmetric to the downside. To produce that asymmetry, the central bank must appear willing to be "reckless" in allowing inflation to overshoot.<br /><br />The market monetarists, as far as I can tell, argue for an asymmetric structure to the upside. Yes, NGDP targeting does allow for more inflation than than inflation targeting. However, they also stress that volatile inflation is unlikely under their regime (due to the Phillips Curve and the power of targeting to create a stable equilibrium around long run NGDP trend). So even if NGDP targeting allows for some degree of "recklessness", they payoff to market agents still seems asymmetric against inflation. Since this is the case, why should they hedge against inflation? This hedging behavior, the market monetarists argue, is an unalloyed positive to the economy (something I disagree with).<br /><br />So yes, a determined central bank can threaten agents into hedging behavior that sparks a feedback loop of inflation. But there is a tradeoff of unanchoring inflation expectations. Paul Krugman admits this tradeoff exists and says it's worth it. The market monetarists argue you can achieve an NGDP target without it. Diego Espinosanoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-15515909722712824292013-08-17T22:24:19.694-04:002013-08-17T22:24:19.694-04:00Max, you sound like Lars Svensson:
"Dependi...Max, you sound like Lars Svensson: <br /><br />"Depending on how quickly the peg becomes credible, the central bank may have to buy more or less foreign exchange, thus adding to its foreign exchange reserves. Interestingly, the existence of these reserves gives the central bank an internal balance-sheet incentive to maintain the peg, since abandoning the peg and allowing the currency to depreciate back to its initial level would result in a capital loss for the central bank. Thus, the central bank is actually putting its money where its mouth is, thereby reinforcing the commitment."JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-26998435133931436412013-08-17T13:28:17.043-04:002013-08-17T13:28:17.043-04:00JP:
For example, suppose that zim$ are used to tra...JP:<br />For example, suppose that zim$ are used to trade 2% of the real value of all goods in the US. Then the zim$ loses half its value. US nominal income, measured in zim$, will double. Nobody will care, except that we would expect that people would stop using the zim$ and switch to other moneys.<br /><br />Now substitute 'US$' for 'zim$', and plug in a figure a lot bigger than 2%, and you have the effect of inflating the US$.mike sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-34306210751639402762013-08-17T11:08:34.001-04:002013-08-17T11:08:34.001-04:00Suppose some people think that $35 gold is too hig...Suppose some people think that $35 gold is too high and the Fed will later want to bring it down. In that case, even with an interest rate of 0%, gold will flood into the Fed.<br /><br />At this point, one of two things happens. Either the central bank gets cold feet and lowers the gold price, or else it buys up all the skeptic's gold. If it buys the gold, then it's somewhat committed, because lowering the price would create a loss (adding to the national debt if we consolidate the finances of the CB and government).<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-42724170949677708452013-08-17T08:41:27.322-04:002013-08-17T08:41:27.322-04:00Maybe some versions of Sumner's proposal use t...Maybe some versions of Sumner's proposal use this mechanism too to some degree. However, when writing this, I wanted to produce a closed economy version of Svensson's foolproof way of escaping liquidity trap.Vaidashttps://twitter.com/VaidasUrbanoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-58053412581757508612013-08-17T06:59:28.031-04:002013-08-17T06:59:28.031-04:00Nice post however I would quibble that while any s...Nice post however I would quibble that while any sufficiently ruthless central banker can force NGDP to increase this is not exactly the same as forcing it to increase by some specific amount.Donald F. Lintonhttps://www.blogger.com/profile/07503949724806402186noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-88952930338615948302013-08-16T23:29:25.787-04:002013-08-16T23:29:25.787-04:00Well whaddaya know. 2009? I'm surprised he has...Well whaddaya know. 2009? I'm surprised he hasn't reused the analogy since then -- I think it's a good one. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-25765752659100233642013-08-16T23:26:45.366-04:002013-08-16T23:26:45.366-04:00Are you talking about Scott Sumner's NGDP futu...Are you talking about Scott Sumner's NGDP futures market?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-84696186263822741942013-08-16T23:24:43.892-04:002013-08-16T23:24:43.892-04:00Mike, I haven't thought about that side of the...Mike, I haven't thought about that side of the equation enough to have an answer that I'm confident in. I'm still absorbing information and ideas.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-37038643410624827002013-08-16T23:22:24.598-04:002013-08-16T23:22:24.598-04:00Mike, I don't quite get your Zimbabwe example....Mike, I don't quite get your Zimbabwe example. <br /><br />How big is the 'moneyness premium'? I can hold my $1000 bill under my bed or I can invest it a Canadian term deposit for 10 years at 2.3% compounded annually. If I choose the first, then at the end of the ten years I'll end with my $1000 bill and 10 years worth of comfort provided by that bill's superior liquidity. If I choose the second, I'll end up with $1255, but I'll have foregone the bill's liquidity services since term deposits are locked and not exchangeable. The $255 is the reward for foregoing moneyness. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-28973366981695636842013-08-16T23:01:49.034-04:002013-08-16T23:01:49.034-04:00Nick, you're invoking one of my favorite blog ...Nick, you're invoking one of my favorite <a href="http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/04/from-gold-standard-to-cpi-standard.html" rel="nofollow">blog posts</a>. <br /><br />I agree that when the dollar was convertible into gold, an announcement to move the peg from $22 to $35/oz would rapidly change the price level. That's because dollars were directly convertible -- the moment the central banker made the announcement, the teller at the central bank's "gold window" would simultaneously move their redemption rate up to $35.<br /><br />Same if the dollar were convertible directly into CPI baskets. An announcement that dollars will be worth 50% of yesterday's CPI basket will be effective, thanks to the teller behind the CPI window simultaneously changing their conversion rate of dollars into baskets.<br /><br />But we're living in a world in which dollars are not convertible into CPI baskets. There is no CPI window. Rather, open market operations are used to manipulate the dollar's purchasing power as-if it was directly convertible into that basket. This indirect mechanism introduces all sorts of complexities that direct convertibility regimes don't face, and we should be curious about them. <br /><br />So I would disagree with your implied point that today's mechanism is identical to the mechanism in 1933.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-62415046865327123722013-08-16T20:00:09.184-04:002013-08-16T20:00:09.184-04:00So Nick should we just forget a 'transmission ... So Nick should we just forget a 'transmission mechanism' altogether? Note that Sumner took umbrage with Unlearing Econ for saying that MM has no TM. <br /><br /> Is it that TMs don't matter or is the Hot Potato effect a TM?Mike Saxhttps://www.blogger.com/profile/01360689916550576484noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-6676314183370823112013-08-16T19:59:19.624-04:002013-08-16T19:59:19.624-04:00TravisV here.
Mike Sax, you asked
"JP if yo...TravisV here.<br /><br />Mike Sax, you asked<br /><br />"JP if you believe that the Fed can-short of any political limits-jack up NGDP what about the other question Unlearning onsidered? Assuming that the Fed could-in a perhaps unsettling way-is able to raise it ot any level it wants is NGDP what drives growth in the economy?"<br /><br />The answer depends on whether or not there is mass unemployment. Imagine the U.S. economy as a factory. When there is lots of excess capacity (unemployment), the Fed can push the factory to full capacity by increasing expectations of NGDP. That increase from excess to full capacity creates higher resource utilization / return on investment / faster RGDP (real growth).<br /><br />If the factory is already at 100% capacity (full employment), then any increase in NGDP expecations only results in higher prices (inflation), not more output (real growth). Since it's already at full capacity, the factory can't make any more widgets. All it can do is increase the price of its widgets. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-63969232438677587282013-08-16T19:53:38.943-04:002013-08-16T19:53:38.943-04:00TravisV here.
In 2009, Prof. Sumner himself actua...TravisV here.<br /><br />In 2009, Prof. Sumner himself actually said:<br /><br />"Archimedes claimed that given a fulcrum and a long enough lever (and a place to stand), he could move the world. I believe that the Fed is that fulcrum and the control of the supply (and perhaps demand) for base money is the lever. Give me (or anyone with similar views) control over that policy and we could stop the world’s nominal GDP from falling, and lift it back up. And do it surprisingly quickly."<br /><br />http://www.themoneyillusion.com/?p=461Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-28304079432738415412013-08-16T19:40:59.359-04:002013-08-16T19:40:59.359-04:00Foolproof exit from liquidity trap with concrete s...Foolproof exit from liquidity trap with concrete steps and financial derivatives. To exit the liquidity trap, central bank can purchase financial derivatives at market value with zero payoffs when NGDP is below target, and positive payoffs when it is above target.Vaidashttps://twitter.com/VaidasUrbanoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-63210867946707485792013-08-16T19:37:15.765-04:002013-08-16T19:37:15.765-04:00 JP if you believe that the Fed can-short of any... JP if you believe that the Fed can-short of any political limits-jack up NGDP what about the other question Unlearning onsidered? Assuming that the Fed could-in a perhaps unsettling way-is able to raise it ot any level it wants is NGDP what drives growth in the economy?Mike Saxhttps://www.blogger.com/profile/01360689916550576484noreply@blogger.com