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| A section of something cool I saw at the Tate Modern yesterday that is mildly relevant. Details to follow when I have a real computer. [Here is a link; it's part of a work by Alexander Brodsky and Ilya Utkin.] |
Gah! I always seem to miss the big macro debate flare ups when I'm on vacation.
So Paul Krugman called out monetarism and Scott Sumner and Nick Rowe responded (among others). I will add some links when I have access to a real computer and am not writing on my iPhone waiting to get on a bus to go Stonehenge for the winter solstice.
Summer touts his model getting e.g. the US and Australia right. Japan and Switzerland, too.
But why can't the BoJ get inflation, whereas Australia can reach NGDP targets? No, really. Why? The central banks are just organizations of humans ... If I took the BoJ and put it in charge of Australia and vice versa, would I get different results? Why? That actually implies that the specific humans in charge matter! Literally it matters that Greenspan or whoever is in charge -- the math is irrelevant, and it becomes a question similar to whether a president or general was a 'good leader'. Macroeconomics becomes a strange phrenology of money with lots of detailed equations and models that all purport to divine that ineffable quality of a "great man" (or woman) that could get the inflation target he or she wanted at any central bank.
And Nick Rowe's word games posit a central bank that "does nothing" that is massively deflationary. I don't think anyone has said that a central bank can't achieve deflation. But what really is problematic is that the definition of doing nothing is irrelevant to Japan. M(t) and m(t) both define the same path of the monetary base, both of which are increasing, and neither of which seem to affect the price level. It really doesn't matter how you word it.
However, the information transfer model shows how a Japan or an Australia can exist simultaneously in the same framework. If they traded central banks, they'd get largely the same results as they're getting now [i.e. Japan would be in a liquidity trap and Australia wouldn't]. And it shows how 'doing nothing' -- keeping a constantly increasing monetary base -- eventually leads to impotent monetary policy. And it shows how major increases in the base can have zero impact on inflation.
And the model isn't even that complicated.
So Paul Krugman called out monetarism and Scott Sumner and Nick Rowe responded (among others). I will add some links when I have access to a real computer and am not writing on my iPhone waiting to get on a bus to go Stonehenge for the winter solstice.
Summer touts his model getting e.g. the US and Australia right. Japan and Switzerland, too.
But why can't the BoJ get inflation, whereas Australia can reach NGDP targets? No, really. Why? The central banks are just organizations of humans ... If I took the BoJ and put it in charge of Australia and vice versa, would I get different results? Why? That actually implies that the specific humans in charge matter! Literally it matters that Greenspan or whoever is in charge -- the math is irrelevant, and it becomes a question similar to whether a president or general was a 'good leader'. Macroeconomics becomes a strange phrenology of money with lots of detailed equations and models that all purport to divine that ineffable quality of a "great man" (or woman) that could get the inflation target he or she wanted at any central bank.
And Nick Rowe's word games posit a central bank that "does nothing" that is massively deflationary. I don't think anyone has said that a central bank can't achieve deflation. But what really is problematic is that the definition of doing nothing is irrelevant to Japan. M(t) and m(t) both define the same path of the monetary base, both of which are increasing, and neither of which seem to affect the price level. It really doesn't matter how you word it.
However, the information transfer model shows how a Japan or an Australia can exist simultaneously in the same framework. If they traded central banks, they'd get largely the same results as they're getting now [i.e. Japan would be in a liquidity trap and Australia wouldn't]. And it shows how 'doing nothing' -- keeping a constantly increasing monetary base -- eventually leads to impotent monetary policy. And it shows how major increases in the base can have zero impact on inflation.
And the model isn't even that complicated.
[Updated 1/7/2015 with links and some bracketed comments.]
Well I guess you are busy, but we are still waiting for the data you mention above. Happy Holidays!
ReplyDeleteHappy holidays to you too. The links I'm going to put in are the recent posts about the liquidity trap that are responses to Krugman's post:
Deletehttp://krugman.blogs.nytimes.com/2014/12/20/more-macro-modeling-meta/
The information transfer model results for Japan and Australia can be found by searching this blog using the search box at the top or side of the page for now, but I'll add in-line links later.
Yes another reason you should write this stuff up and formally publish it- as it is now we readers have to do a lot of hard work chasing down your explanations and natural experiments in different parts of your blog to catch up with you... So trying to summarize at least a little of your thinking about an economy in an "information trap" (which Japan is firmly in, and the U.S. has flirted with), adding monetary base is useless to increase GDP or inflation. The only way increase GDP or inflation at this point is to increase aggregate demand. Therefore, if you were the Czar of Japanese Economics, you would have the Japanese Government spend money to hire lots of people, build more bullet trains and infrastructure, etc? Assuming that this happens effectively, you can increase nGDP to escape the information trap. Now would this then be self-sustaining, or does the model seem to indicate that the size of public services/spending/fiscal needs to keep increasing thereafter to keep up with the increasing nGDP? Or am I not understanding something (or everything)?
ReplyDeleteHi Todd,
DeleteSorry I didn't get to this -- I've only just returned from my vacation.
And yes, I probably should put out the preprint I've been (slowly) putting together. I did try to summarize the information transfer model take on the issues that most frequently come up in the econoblogosphere in this post:
http://informationtransfereconomics.blogspot.com/2014/11/the-information-transfer-model-and.html
Regarding the Japanese economy, I am not entirely sure of what the best course of action is. In the information transfer model, monetary expansion won't do anything without a "re-definition" of the Yen. There is a possibility of "exit through hyperinflation", but that seems to be difficult without significant political unity (e.g. a populist movement or war to unite a large segment of the population).
Government spending will increase NGDP, and since inflation won't rise much with the additional M0 needed to support it, RGDP will rise, leading to lower unemployment via Okun's law. However, unemployment doesn't seem to be a large problem (although I am not well versed enough in Japanese employment stats to know if the equivalent of U6 is the more relevant measure).
Overall, Japan seems to be doing just fine as a society. No widespread unrest. Infrastructure isn't falling apart. Maybe NGDP and recessions (i.e. changes in NGDP) lose their meaning for a country in an information trap. Maybe macroeconomics is only relevant when the quantity theory of money is a good approximation? Are we witnessing the end of macro?
Additionally, there doesn't seem to be a way for a country to move very far from the theoretical NGDP-M0 curve, or affect unemployment at all. Maybe the information transfer model is macroeconomic nihilism?
Again, I don't really know all the answers here. It will take the work of a lot more people to get to real macroeconomic policy advice. However, your suggestions of increasing government provision of infrastructure and employment is one way to keep NGDP up. It is not clear that keeping NGDP up should be the goal of macro policy (except for the temporary deviations during recessions).
Thanks for the answer and welcome back! It may well be that Information Transfer Economics will call for different policy prescriptions at different stages in the evolution of economies. It seems to me that unemployment can "always" be reduced- government needs to be the employer of last resort.
ReplyDelete