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.
Jason, JP Koning does a really nice recap of the debate (he's been following this debate between Glasner and Rowe now for years):ReplyDelete
Thanks for the link!Delete
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:ReplyDelete
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 shocksDelete
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:Delete
But I'm uncertain of my "word calculus." :D