tag:blogger.com,1999:blog-6837159629100463303.post7000129093337282669..comments2023-06-18T01:25:08.748-07:00Comments on Information Transfer Economics: The unobservablesJason Smithhttp://www.blogger.com/profile/12680061127040420047noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-6837159629100463303.post-7997803225508094412015-09-29T04:15:40.848-07:002015-09-29T04:15:40.848-07:00I often wonder how economists envisage certain con...I often wonder how economists envisage certain concepts but economists don’t often use visual imagery. Take velocity of money.<br /><br />Do they see it like the horses on a merry-go-round where all the horses have the same velocity? The merry-go-round may speed up or slow down but all the horses change velocity in tandem.<br /><br />Alternatively, do they see it like the wind where some areas might have a high velocity while other areas are becalmed, and velocity of money is just some sort of overall average?<br /><br />This matters. In the first model, any injection of money should give the same result. In the second model, the result would depend on where and how the money was injected and may be random. My feeling is that even asking this question is highly political.<br /><br />The key point here is that economists appear to calculate velocity of money only at an economy-wide level. Hence, either interpretation might be consistent with the available measurements. The obvious question would then be to ask if we might obtain more granular measurements to assess variations in velocity or even just carry out some thought experiments. However, economists don’t appear to ask these questions. I find this apparent lack of curiosity troubling. <br />Jamienoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-74360217034328118612015-09-26T10:07:02.077-07:002015-09-26T10:07:02.077-07:00Actually, that is the same link. :)Actually, that is the same link. :)Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-87355162342176214562015-09-26T10:05:39.281-07:002015-09-26T10:05:39.281-07:00And another:
http://economistsview.typepad.com/ec...And another:<br /><br />http://economistsview.typepad.com/economistsview/2015/09/can-we-rely-on-market-based-inflation-forecasts.html<br /><br />"Our results add to the discussion about how much attention policymakers and professional forecasters should pay to market-based inflation forecasts. These measures mostly reflect current and past inflation movements, and do not contain a lot of useful forward-looking information."Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-61060843947863719862015-09-26T10:03:56.206-07:002015-09-26T10:03:56.206-07:00Since most economists today seem to eschew the equ...Since most economists today seem to eschew the equation of exchange, that's probably the more common way to do it.<br /><br />Interestingly, in the information transfer model velocity is actually a price of money (a detector of information flow), not a demand for money (a source of of information):<br /><br />p ≡ dN/dM = k N/M<br /><br />N ≡ PY<br /><br />"V" ≡ p/k = PY/M <br />Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-74957394439777519482015-09-25T15:26:48.489-07:002015-09-25T15:26:48.489-07:00Wouldn't 'stable money demand function'...Wouldn't 'stable money demand function' be better than 'velocity' then?John Handleyhttps://www.blogger.com/profile/16057855086740377031noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-63981131609723953662015-09-25T14:31:22.676-07:002015-09-25T14:31:22.676-07:00Also relevant:
http://economistsview.typepad.com/...Also relevant:<br /><br />http://economistsview.typepad.com/economistsview/2015/09/can-we-rely-on-market-based-inflation-forecasts.htmlJason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-80162437984775682562015-09-25T12:17:04.855-07:002015-09-25T12:17:04.855-07:00Note to self:
All of these would be great theoret...Note to self:<br /><br />All of these would be great theoretical advances if they were constant (or in the case of expectations, measurable and accurate).Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-5481513158214176292015-09-25T08:50:35.951-07:002015-09-25T08:50:35.951-07:00Yes, I should be more clear about that. The previo...Yes, I should be more clear about that. The previous post referred to the Wicksellian rate that determines inflation.<br /><br />When I said "the best" above, I meant that it was the best you could do. Not that there was a specific mechanism with regard to inflation.<br /><br />The ITM version is the only "meaningful" definition of some typical rate (if the ITM is correct, of course).Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-2198091472584868242015-09-25T08:44:58.967-07:002015-09-25T08:44:58.967-07:00I have no problem with definitions used to systema...I have no problem with definitions used to systematize. And looking at the long run trend of NGDP doesn't actually work because there was a significant change in that path in the late 70s.<br /><br />Yes, you can add to that model things about monetary regime change, but the bigger issue is that figuring out "the trend" is model-dependent. In some models, there is an output gap. In others (e.g. the information transfer model) growth has never deviated from the trend for significant periods of time.<br /><br />I admit that it is possible to turn these insights into non-circular models using unobservables.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-7637567992712437512015-09-25T08:31:57.140-07:002015-09-25T08:31:57.140-07:00There is a way to calculate velocity (PY/M) and yo...There is a way to calculate velocity (PY/M) and you're right that it is more of a definition nowadays. I was careful to couple velocity with the model that makes it useful: that it is constant in the short run.<br /><br />If you take velocity to just be the definition, the model doesn't really have any theoretical content at all.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-66385430953120016232015-09-24T23:25:26.502-07:002015-09-24T23:25:26.502-07:00I suppose I get the 'we don't observe it d...I suppose I get the 'we don't observe it directly' logic, but that doesn't really apply to velocity because, unlike the other properties, it is a definition. I can know for certain what the velocity of the monetary base is; I can't know for certain what expected inflation, NAIRU, or the natural rate of interest are. The later the are undefined because of insufficient theory whereas velocity is <i>unexplained</i> because of insufficient theory.John Handleyhttps://www.blogger.com/profile/16057855086740377031noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-28270616974641726832015-09-24T22:46:01.488-07:002015-09-24T22:46:01.488-07:00Jason, it was only a few posts ago that I got the ...Jason, it was only a few posts ago that I got the impression from you that you were questioning if a "natural rate" exists at all... and now it looks like you've identified one. Here's the quote:<br /><br />"Maybe it's time to stop coming up with new frictions or expectations and just give up on the idea of a natural rate of interest."<br /><br />From <a href="http://informationtransfereconomics.blogspot.com/2015/09/the-classical-mechanics-of-wicksell.html" rel="nofollow">here.</a>Tom Brownhttp://www.google.comnoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-38483939629539468172015-09-24T22:26:06.366-07:002015-09-24T22:26:06.366-07:00" Mean reversion is a powerful thing"
E..." Mean reversion is a powerful thing"<br /><br />Except when it is regression towards the mean, in which case it is a statistical artifact.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-80970588306482731312015-09-24T22:23:34.096-07:002015-09-24T22:23:34.096-07:00The velocity is unobservable in similar fashion as...The velocity is unobservable in similar fashion as the force of gravity on a falling object in a vacuum is unobservable. We can derive it from the observation of its acceleration and mass. But how do we know its mass? We might weigh it, but that is a way of measuring the force of gravity upon it. <br /><br />Eddington paraphrased Newton's First Law of Motion something like this: "A body remains in a state of rest or of uniform motion, except inasmuch as it doesn't." ;) His point was that we infer the force from the acceleration.<br /><br />We can derive the velocity of money from the equation, MV = PQ, but we do not observe it directly.<br /><br />I wondered about Jason's inclusion of inflation expectations and money velocity, but he cleared that up for me when he said, "inflation expectations are backwards looking, money velocity isn't constant".<br /><br />To which I, as a non-economist, reply, "That's a big so what, good buddy!" ;)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-61546889089393732542015-09-24T21:58:05.615-07:002015-09-24T21:58:05.615-07:00Jason, there are a lot of tautologies / identities...Jason, there are a lot of tautologies / identities in economics: they are meant to systematize and clarify. So what if NGDP=stance? Derive something interesting, then. <br /><br />BTW, there is an observable benchmark: the LR trend. Mean reversion is a powerful thing, and deviations from the trend often have an exogenous, monetary stance cause. You are very correct with the NGDP-M0 path, also. It's baffling that it's not taught in macro 101.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-42416236710826948572015-09-24T21:38:17.340-07:002015-09-24T21:38:17.340-07:00I'm not sure what you mean by calling velocity...I'm not sure what you mean by calling velocity unobservable. Can you clarify that a bit for me?John Handleyhttps://www.blogger.com/profile/16057855086740377031noreply@blogger.com