tag:blogger.com,1999:blog-6837159629100463303.post1647757426476468143..comments2023-06-18T01:25:08.748-07:00Comments on Information Transfer Economics: Do macro models need a financial sector?Jason Smithhttp://www.blogger.com/profile/12680061127040420047noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-6837159629100463303.post-32313421584592813172015-04-24T11:56:27.796-07:002015-04-24T11:56:27.796-07:00For some reason your comment got filtered; I fishe...For some reason your comment got filtered; I fished it out.<br /><br />I didn't call it out above, but in saying there is an F component that was analogous to the G in NGDP = C + I + F + G + NX was implicitly including things like 'Keynesian mutlipliers', so that the fall in GDP due to the direct contribution of F was increased due to multiplier effects (possibly the entropy loss calculated above is that multiplier).<br /><br />Now the detailed effects behind the Keynesian multiplier -- regardless of whether it applies to F or G -- is something that the model I'm looking at is agnostic about. It could well be explained by endogenous money. However, with the limited number of observations of recessions (or the relatively limited time series in general) it is unlikely that detailed models could be unambiguously identified. That's the heart of this piece by Noah Smith:<br /><br /><a href="http://noahpinionblog.blogspot.com/2013/04/the-reason-macroeconomics-doesnt-work.html" rel="nofollow">http://noahpinionblog.blogspot.com/2013/04/the-reason-macroeconomics-doesnt-work.html</a><br /><br />Alternative models don't give you alternate empirical data.<br /><br />For example, in one of the BoE papers you cite above, they produce this graph (Chart A) of various measures of the 'money supply':<br /><br /><a href="https://twitter.com/infotranecon/status/591660381858242560" rel="nofollow">https://twitter.com/infotranecon/status/591660381858242560</a><br /><br />Given the relative size of the fluctuations in the data and how closely they follow each other, there is not much you can do empirically to distinguish them. A model that uses notes and coin is not much different from M1 which is not much different from MZM; depending on the complexity of the model, it is unlikely you can rule out any of those choices. That is to say you can't differentiate empirically between a model that involves just the central bank (M0/notes and coins) and one that involves commercial banks (M1 or MZM).<br /><br />That's one of the reasons I started working on the information equilibrium approach ... the model is so simplistic that there is enough empirical data to make a case for a particular version of the money supply.<br /><br />That's not to say an endogenous money approach isn't the correct underlying model of the F-multiplier. I'm just saying there isn't enough data to distinguish the different detailed models of the F-multiplier.<br /><br />Although the information equilibrium model also provides a mechanism (entropic forces) that doesn't need a detailed underlying model. Whether that explains all of the multiplier, or whether there are additional effects hasn't been determined.<br /><br />In a sense, we have this model:<br /><br />ΔNGDP ≈ (1 + e + x + y ...) ΔF<br /><br />Where 1 is the direct impact of ΔF on NGDP, e is the entropic modification of the multiplier and x, y, ... etc are due to other impacts (like endogenous money or expectations or other effects).Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-25889723934174581022015-04-24T05:16:32.759-07:002015-04-24T05:16:32.759-07:00The arguments about including the financial sector...The arguments about including the financial sector in macro models are not so much about the financial sector’s own contribution to GDP. Rather, they are about the financial sector’s contribution to the money supply.<br /><br />A cartoon version of the mainstream’s view of money is that money is created by the central bank and that commercial banks merely act as an intermediary between savers and borrowers. At the macro level, it doesn’t matter who is spending the money so banks don’t matter.<br /><br />A cartoon version of the alternative ‘endogenous money’ view is that commercial banks create money when they make loans, and borrowers destroy money when they repay those loans, so banks and lending do matter. The endogenous money people use the term ‘loanable funds’ to describe the mainstream view.<br /><br />This is at the very heart of macro. The mainstream appears to think that central banks push money into the economy. Endogenous money says that demand for goods and services in the economy pulls money out of the banking system. We discussed this briefly previously when I used the analogy of whether a car will be driven further because it has more fuel (like money push) or whether the driver’s desire to drive the car further will cause more fuel to be used (like money pull). <br /><br />I agree with your comment about recessions being like avalanches. Banks can create avalanches in other sectors by forcing debtor businesses into bankruptcy. This then removes those businesses’ contributions to GDP. That then impacts on the customers and suppliers of the removed businesses e.g. a supplier will not get paid for recent business and will not get future business. This can cause an avalanche effect. Also, banks borrow from other banks so, if one bank gets into trouble, it can also threaten an avalanche within the banking system. Also, if a bank failure were to cause business or household savings to be lost, that could cause a further avalanche and general panic in the wider economy. (We have deposit insurance to prevent / contain this type of panic).<br /><br />The Bank of England published a couple of papers last year which supported the endogenous money perspective.<br /><br />http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneyintro.pdf<br /><br />http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf<br /><br />There are endless discussions between economists on this as it is one of the main dividing lines between New Keynesians and Post Keynesians. Here is a random example from Steve Keen.<br /><br />https://www.creditwritedowns.com/2013/11/paul-krugman-nick-rowe-endogenous-money.html<br /><br />Steve Keen also has a series of videos on this on his YouTube channel. Here is an example where he seems to be talking to a group of econophysicists. It includes a demo of his open source modelling software showing the difference between loanable funds and endogenous money. <br /><br />https://www.youtube.com/watch?v=ICKD83sZ-qg<br />Jamienoreply@blogger.com