Saturday, April 5, 2014

What's up with M1?

A quick addendum to the previous post; I tried using M1 in the interest rate model, but it didn't work. However, it didn't work in an interesting way:


The vertical line represents the point where NOW accounts were introduced nationally in 1981 (here is the NY Fed and here is the NY Times), which should represent a big influx of money (and thus lower interest rates in the model since it depends on NGDP/M1). Starting in the 1990s, M1 is significantly lower than interest rates would suggest (if the model was correct). Maybe this has something to do with the reserve requirements on M2 components dropping to zero (which I learned from Tom Brown in comments), making banking products that are part of M2 more attractive than those that are part of M1 -- hence moving money out of being measured by the M1 aggregate and into being measured by the M2 aggregate.
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6 comments:

  1. Tom BrownApril 5, 2014 at 12:26 PM

    Interesting!

    ReplyDelete
  2. Tom BrownApril 5, 2014 at 2:24 PM

    Jason, JP Koning does a really nice recap of the debate (he's been following this debate between Glasner and Rowe now for years):
    http://jpkoning.blogspot.com/2014/04/rowe-v-glasner-round-33.html

    ReplyDelete
  3. Tom BrownApril 8, 2014 at 10:05 AM

    Jason, do you think you could simulate all the moving parts there that JP is describing in words? I've asked Nick Edmonds this same question:

    http://monetaryreflections.blogspot.com/2014/04/palley-on-keen-demand-and-debt.html?showComment=1396880462491#c1676875363474569731

    ReplyDelete
    Replies
    1. Jason SmithApril 9, 2014 at 7:08 AM

      I'd probably start with the basic premise at the top of the post about demand and debt ... From what I've been doing it really looks like demand is money plus random shocks

      http://informationtransfereconomics.blogspot.com/2014/03/the-monetary-base-as-sand-pile.html

      Or here

      http://informationtransfereconomics.blogspot.com/2014/02/extracting-shocks-again.html

      Delete
    2. Tom BrownApril 9, 2014 at 11:47 AM

      Thanks Jason, I'll take a look. I also asked JP if he was fairly taking into account Nick Rowe's setup: that "something changes" which causes the banks to want to increase lending to maximize profits. He seems to take it as a one time increase in loans and not be considering the banks' concern for maximizing profits. I propose one scenario here:
      http://jpkoning.blogspot.com/2014/04/rowe-v-glasner-round-33.html?showComment=1397005294113#c809789614390463886

      But I'm uncertain of my "word calculus." :D

      Delete

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