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Monetary & Housing Policy Thread: Fed Adopts Evans Rule

Oh man I'm so giddy about this housing bottom. We're not out of it yet, though, as there's still so much negative equity floating around. What to do now?
 
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Gold bubble. Look for this to crash whenever real interest rates finally rise.
 
TuffaloDeac10 said:
1 From "That guy is quite the hardcore Keynesian," (point of order, Kimball describes himself as a "neo-Monetarist," whatever that might be) "That's only if you accept Keynesian theory from the outset. Also, if basic Keynesian theory were correct," and "Pure Keynesian theory is obnoxious." If the impression taken from those quotes is incorrect, I'll discard it.

2 Yes, it's quite a bane for the science. See here, here, and here. But let's not be too harsh on Mankiw, he did write this, which sounds good to me.

3 This is a monstrous lie. There is just about no relationship between the change in the money supply and the change in the CPI in the short term.

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The quarterly change in M2 money has a -.05 correlation coefficient with inflation. If we think price setters take a while to adjust to the money supply, lagging the change in money supply one quarter produces a -.089 correlation. This is not a convincing case that printing -> inflation.

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Likewise, there is almost no relationship whatsoever between the change in M1 and the inflation rate (-.01 correlation). I don't know who told you that the money supply is the greatest factor in inflation, but I'd suggest never listening to that person again. I mean, that idea is just wrong, except for Zimbabwe or other similarly insane situations. There's nothing to support it in the United States' case and there's no excuse for holding it, as it totally ignores the lesson of price instability under the Gold Standard. Inflation is determined by demand pushing up against the limits of supply. Right now we don't have demand stressing supply, and so we don't have inflation even with a ton of money (more reason to assume we haven't had enough stimulus). In the 1990s we have a big rise in productivity, and therefore supply, that coincided with a period of high demand and so we didn't have bad inflation. Score one for economy-wide models like AD-LRAS. That's a hell of a lot more explanatory and predictive power than assuming that the money supply determines inflation. Also check out the charts on the fourth page of this report.

I mean, why do you think Volcker's recessions were necessary to break the inflation fever? He didn't destroy any M1 money and the M2 series only starts in November 1980 so I can't see any changes. The recessions squelched demand and hence inflation/inflation expectations. Once the expectations were dead he could allow demand to pick up again, with relatively smooth growth in the money supply.

4 Because [drumroll], the Fed expects the shitty conditions to last until late 2014.

5 Two points. One, someone is being paid to build that capital. And two...

6 This is the paradox of toil in action. The capital substitutions push out AS and do nothing to restore AD, assuming, reasonably, that the capital substitution is being undertaken because it is cheaper than hiring new workers (the worker in the previous point is cheaper than the new hire). The way to restore demand is by stimulating demand, not by fiddling with aggregate supply. And that's exactly how the paradox of toil is intuitive, a collapse in demand got us into this Little Depression and demand will need to be re-inflated in order to get us out.

7 The President doesn't control the Fed's independence, Congress does. The President has hardly uttered a peep about the Fed, meanwhile the House GOP is doing its damnedest to audit the Fed, the GOP is going to put a plank in the platform about exploring reviving the Gold Standard, and it's VP nominee takes his monetary policy from some crank in a romance novel who was apparently a pretty disagreeable guest at someone's wedding reception. We're going to have to agree to disagree here, given that you hold your view without a shred of publicly-available evidence to support it.

8 You asked why I preferred spending increases to tax cuts. I believe that spending is less sticky than tax rates are and would end more quickly once demand is restored, so I support spending as the stimulative measure. The fact that our deficits haven't been big enough doesn't change that.
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1. Context, sir. Pure Keynesian theory refers to naive Keynesianism. When I said "if basic Keynesian theory were correct" I was referring to a specific implication of the model, not the veracity of the conclusions as a whole. But yeah, it doesn't really matter.

2. Of course economists of both ideologies do it. Pretty sure I never said any differently. Some are worse than others, though. I think you know who I'm talking about.

3. Obviously there is not going to be a correlation between money supply and inflation, because the money supply is exogenously controlled by the central bank. If money supply weren't seen as a key variable in the rate of inflation, then why would it be the number one tool of central bankers and economists to control the rate of inflation? It is precisely because it is used by policy makers to control inflation that there is little correlation. The inverse relationship between interest rates (which can be targeted using the money supply) and inflation is very close, according to even Keynesian theory, but obviously there is impact lag and other variables, which will screw up any basic regression.

Volcker was able to end the high inflation by selling treasuries, contracting, you guessed it, the money supply. Not sure where you got "the money supply is perfectly predictive of the rate of inflation!!!" from "the single greatest factor influencing the rate of inflation is the money supply". That's not saying there aren't other factors.

4. They have stated that they are not changing interest rates regardless of conditions.

5. So?

6. No, it's not. What you've just described is a liquidity trap, not the paradox of toil. The paradox of toil presupposes an upward sloping labor demand curve, meaning that the high cost of labor relative to physical capital should make firms demand more labor. Which makes absolutely no sense, of course, but apparently the planets change alignment at the zero lower bound. Obviously, under the paradox of toil, increasing aggregate labor supply would be counterproductive, but he seems to ignore the fact that cutting marginal rates will also increase aggregate demand.

7. Who controls Bernanke's job? All throughout post-WWII America central bankers have felt more pressure from Presidents than from Congress. So what if Obama hasn't said a peep? Did Richard Nixon say anything publicly? Don't think so, and yet it's an easily verifiable fact that he put the screws to Arthur Burns to keep policy easy in the runup to the '72 election.

8. And what about the argument that tax cuts create sustainable demand, whereas transient stimulus measures do not? Is there any evidence that firms will change their hiring policies based on short term spikes in demand for their products?
 
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TuffaloDeac10 said:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=137860

Interesting. Paradox of Toil implication here
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There is no implication for the paradox of toil here. The paradox of toil only occurs (allegedly) at the zero lower bound. Obviously some technological improvements are not labor-augmenting, but the vast majority are. The premise of that paper is kind of silly, given observed progressions in economic development. While some people may be out of a job, capital-augmenting technological improvements expand production possibilities, lowering prices, which stimulates more demand, creating an expansionary effect in the long run.
 
TR1982 said:
1. Context, sir. Pure Keynesian theory refers to naive Keynesianism. When I said "if basic Keynesian theory were correct" I was referring to a specific implication of the model, not the veracity of the conclusions as a whole. But yeah, it doesn't really matter.

2. Of course economists of both ideologies do it. Pretty sure I never said any differently. Some are worse than others, though. I think you know who I'm talking about.

3. Obviously there is not going to be a correlation between money supply and inflation, because the money supply is exogenously controlled by the central bank. If money supply weren't seen as a key variable in the rate of inflation, then why would it be the number one tool of central bankers and economists to control the rate of inflation? It is precisely because it is used by policy makers to control inflation that there is little correlation. The inverse relationship between interest rates (which can be targeted using the money supply) and inflation is very close, according to even Keynesian theory, but obviously there is impact lag and other variables, which will screw up any basic regression.

Volcker was able to end the high inflation by selling treasuries, contracting, you guessed it, the money supply. Not sure where you got "the money supply is perfectly predictive of the rate of inflation!!!" from "the single greatest factor influencing the rate of inflation is the money supply". That's not saying there aren't other factors.

4. They have stated that they are not changing interest rates regardless of conditions.

5. So?

6. No, it's not. What you've just described is a liquidity trap, not the paradox of toil. The paradox of toil presupposes an upward sloping labor demand curve, meaning that the high cost of labor relative to physical capital should make firms demand more labor. Which makes absolutely no sense, of course, but apparently the planets change alignment at the zero lower bound. Obviously, under the paradox of toil, increasing aggregate labor supply would be counterproductive, but he seems to ignore the fact that cutting marginal rates will also increase aggregate demand.

7. Who controls Bernanke's job? All throughout post-WWII America central bankers have felt more pressure from Presidents than from Congress. So what if Obama hasn't said a peep? Did Richard Nixon say anything publicly? Don't think so, and yet it's an easily verifiable fact that he put the screws to Arthur Burns to keep policy easy in the runup to the '72 election.

8. And what about the argument that tax cuts create sustainable demand, whereas transient stimulus measures do not? Is there any evidence that firms will change their hiring policies based on short term spikes in demand for their products?
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3. I guess I took your point as "Inflation is money chasing goods," which I think is naive and wrong in the short run. But if it's not what you're saying then we can put this with the JMK fake controvery.

The Phillips Curve doesn't do bad in the 80s or 00s, though. The 90s productivity spike messes with inflation and therefore the overall curve, but that's why ceteris paribus is useful.

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Looks especially good in the 00s

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6. I'm telling you, the paradox of toil makes sense, as long as an expansion of aggregate supply actually decreases the price level. You gotta remember that Krugman & Eggertson hit the ZLB because debtors suddenly decide they can't take on any more debt and the savers don't want to spend down their savings. So demand is then constrained by the real value of debts and that's how we get the backwards sloping AD curve. That sounds like a more or less accurate, though simplified, description of what happened to get us where we are in the real world. The lower price level = higher real debts -> less consumption -> contraction. ZLB = people who have cash just hold it. I think this fits with your own statements that the problem is too much debt.

7. Next POTUS controls Bernanke's job. Nixon's campaign was in a somewhat stronger place than Obama's is. Bernanke didn't get to where he is without having a concern for the Federal Reserve as an institution and I don't think he wants to go down in history as the last guy who lost the Fed's independence. I'm also not sure there's much reason to think he's not going to be re-appointed regardless of who wins. Barrack would probably prefer to have a Democrat manning the Fed for his second term and Mitt's said that he wouldn't reappoint Bernanke.

8. All manner of firms hire in response to short-term demand. And don't forget that recessions and depressions are alternator trouble, we don't need indefinite stimulus, just the right amount of it to get the economy turning over again.
 
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Maybe this is all just bunk and there's nothing policy can do because private jobs aren't a function of anything except sine (time).

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TR1982 said:
Yep. I expect resounding silence from the Paulites.
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Why? I don't think that is out of line with what most people investing in gold would think.

What they're betting on is that this cycle will repeat itself along with the dull but persistent inflation under Keynesian policy, and that the Fed isn't going to switch policy foci anytime soon, and interest rates will be kept low.
 
Justin Wolfers ‏@JustinWolfers
Bernanke claims credit for 2 million jobs gained, relative to no QE. But how many million jobs has he lost, relative to optimal policy?

Hmmm good question.
 
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