I don’t even want to comment on this one: “EU reaches deal on naked CDS ban law”
Shoot the messenger and the problem will go away? I think not…
Share your views of the quality of policy makers in Europe please.
All posts for the month October, 2011
Killing the messenger won’t solve the debt crisis
Posted by Lars Christensen on October 19, 2011
https://marketmonetarist.com/2011/10/19/killing-the-messenger-wont-solve-the-debt-crisis/
The Hottest Idea In Monetary Policy
Its pretty simple – Scott Sumner is a revolutionary with revolutionary idea and he is breaking through big time.
He is a story from businessinsider.com: “The Hottest Idea In Monetary Policy”.
I fundamentally think that if the Federal Reserve was to start listening to Scott then a whole lot of other economic and monetary problems would be a lot easy to solve – so that’s our hope in Europe.
Share this:
Posted by Lars Christensen on October 19, 2011
https://marketmonetarist.com/2011/10/19/the-hottest-idea-in-monetary-policy/
Chuck Norris on monetary policy #2
I am continuing my tribute to the great Chuck Norris.
Here this it truth from http://www.chucknorrisfacts.com
“If Chuck Norris goes to the bank to get money, all banks go on a world crisis. It happened on 2008”
Well, you are quite right it was not the collapse of Lehman Brothers, which triggered the kind of mess we are in now. Rather it was Chuck Norris who increased his demand for dollars. Or maybe it was not Chuck, but somebody else, but nonetheless the increase in demand for dollars both in the US and from Europe lead to an “passive” tightening of US monetary policy, which the Federal Reserve failed to respond forcefully enough to.
PS both Nick Rowe and David Beckworth are now picking up the Chuck theme…
Share this:
Posted by Lars Christensen on October 18, 2011
https://marketmonetarist.com/2011/10/18/chuck-norris-on-monetary-policy-2/
The open-minded Krugman
I didn’t expect this ever to happen, but I have to say something nice about Paul Krugman’s comments on his New York Times blog. Well, there is actually a lot of positive to say about Paul Krugman, but we just tend to forget it when he is giving us free market economists a hard time. However, the story today is not about what we think, but “where” we express our views and share our research.
As I have tried to argue in my paper “Market Monetarism – the second Monetarist counter-revolution” Market Monetarism is a school of economic thought basically born and shaped in the blogosphere.
Krugman has a positive view on what the blogosphere has done to open up the economic profession and haow the blogoshere is helping improve economic research.
Here is Krugman:
“What the blogs have done, in a way, is open up that process. Twenty years ago it was possible and even normal to get research into circulation and have everyone talking about it without having gone through the refereeing process – but you had to be part of a certain circle, and basically had to have graduated from a prestigious department, to be part of that game. Now you can break in from anywhere; although there’s still at any given time a sort of magic circle that’s hard to get into, it’s less formal and less defined by where you sit or where you went to school.
Since there’s some kind of conservation principle here, the fact that it’s easier for people with less formal credentials to get heard means that people who have those credentials are less guaranteed of respectful treatment. So yes, we’ve seen some famous names run into firestorms of criticism — *justified* criticism – even as some “nobodies” become players. That’s a good thing! Famous economists have been saying foolish things forever; now they get called on it.
And this process has showed what things are really like. If some famous economists seem to be showing themselves intellectually naked, it’s not really a change in their wardrobe, it’s the fact that it’s easier than it used to be for little boys to get a word in.”
So here we go again – I agree with Krugman. The blogosphere is opening up our profession and Krugman deserves credit for taking this debate serious. Have a look at Krugman’s comment here and share you views both here and on Krugman’s blog.
PS Krugman is still wrong about fiscal policy and his odd views of China – after all he is just a Keynesian, but nonetheless quite open-minded and probably more open-minded that I am…
HT Benjamin “Mr. PR” Cole
Share this:
Posted by Lars Christensen on October 18, 2011
https://marketmonetarist.com/2011/10/18/the-open-minded-krugman/
NGDP targeting is not about ”stimulus”
Market Monetarists are often misunderstood to think that monetary policy should “stimulate” growth and that monetary policy is like a joystick that can be used to fine-tune the economic development. Our view is in fact rather the opposite. Most Market Monetarists believe that the economy should be left to its own devises and that the more policy makers stay out of the “game” the better as we in general believe that the market rather than governments ensure the most efficient allocation of resources.
Exactly because we believe more in the market than in fine-tuning and government intervention we stress how important it is for monetary policy to provide a transparent, stable and predictable “nominal anchor”. A nominal GDP target could be such an anchor. A price level target could be another.
Traditional monetarists used to think that central banks should provide a stable nominal anchor through a fixed money supply growth rule. Market Monetarists do not disagree with the fundamental thinking behind this. We, however, are sceptical about money supply targeting because of technical and regulatory develops mean that velocity is not constant and because we from time to time see shocks to money demand – as for example during the Great Recession.
A way to illustrate this is the equation of exchange:
M*V=P*Y
If the traditional monetarist assumption hold and V (velocity) is constant then the traditional monetarist rule of a constant growth rate of M equals the Market Monetarist call for a constant growth rate of nominal GDP (PY). There is another crucial difference and that is that Market Monetarists are in favour of targeting the level of PY, while traditional monetarists favours a target of the growth of M. That means that a NGDP level rule has “memory” – if the target overshots one period then growth in NGDP need to be higher the following period.
In the light in the Great Recession what US based Market Monetarists like Bill Woolsey or Scott Sumner have been calling for is basically that M should be expanded to make up for the drop in V we have seen on the back of the Great Recession and bring PY back to its old level path. This is not “stimulus” in the traditional Keynesian sense. Rather it is about re-establishing the “old” monetary equilibrium.
In some way Market Monetarists are to blame for the misunderstandings themselves as they from time to time are calling for “monetary stimulus” and have supported QE1 and QE2. However, in the Market Monetarists sense “monetary stimulus” basically means to fill the whole created by the drop in velocity and while Market Monetarists have supported QE1 and QE2 they have surely been very critical about how quantitative easing has been conducted in the US by the Federal Reserve.
Another way to address the issue is to say that the task of the central bank is to ensure “monetary neutrality”. Normally economists talk about monetary neutrality in a “positive” sense meaning that monetary policy cannot affect real GDP growth and employment in the long run. However, “monetary neutrality” can also be see in a “normative” sense to mean that monetary policy should not influence the allocation of economic resource. The central bank ensures monetary neutrality in a normative sense by always ensuring that the growth of money supply equals that growth of the money demand.
George Selgin and other Free Banking theorists have shown that in a Free Banking world where the money supply has been privatised the money supply is perfectly elastic to changes in money demand. In a Free Banking world an “automatic” increase in M will compensate for any drop V and visa versa. So in that sense a NGDP level target is basically committing the central bank to emulate the Free Banking (the Free Market) outcome in monetary matters.
The believe in the market rather than in “centralized control mechanisms” is also illustrated by the fact that Market Monetarists advocate using market indicators and preferably NGDP futures in the conduct of monetary policy rather than the central bank’s own subjective forecasts. In a world where monetary policy is linked to NGDP futures (or other market prices) the central bank basically do not need a research department to make forecasts. The market will take care of that. In fact monetary policy monetary policy will be completely automatic in the same way a gold standard or a fixed exchange rate policy is “automatic”.
Therefore Market Monetarists are certainly not Keynesian interventionist, but rather Free Banking Theorists that accept that central banks do exists – for now at least. If one wants to take the argument even further one could argue that NGDP level targeting is the first step toward the total privatisation of the money supply.
Share this:
Posted by Lars Christensen on October 18, 2011
https://marketmonetarist.com/2011/10/18/ngdp-targeting-is-not-about-%e2%80%9dstimulus%e2%80%9d/
Fear, hope, doubt and resignation
Sunday October 9:
Sarkozy: “By the end of the month, we will have responded to the crisis issue”
Merkel: “We are determined to do everything necessary to ensure the recapitalization of our banks”
Monday October 17:
German Finance Minister Schaeuble: “Upcoming EU Summit will not present final solution for euro zone debt crisis”
Seibert (Advisor to Merkel): “Dreams that everything will be solved on euro crisis next Monday can not be met”
Share this:
Posted by Lars Christensen on October 18, 2011
https://marketmonetarist.com/2011/10/18/fear-hope-doubt-and-resignation/
Nick, Chuck and the central banks
Here is Nick Rowe on central banks and Chuck Norris. If you don’t understand Chuck you don’t understand central banks.
Share this:
Posted by Lars Christensen on October 18, 2011
https://marketmonetarist.com/2011/10/18/nick-chuck-and-the-central-banks/
Gold, France and book recommendations
Can you recommend a book that you haven’t read yet? I am not sure, but I will do it anyway. I believe we can learn a lot from the Great Depression and I am especially preoccupied with the international monetary consequences and causes of the Great Depression.
An issue that especially have come to my attention is the hoarding of gold by central bank prior and during the Great Depression and here especially France’s hoarding of gold is interesting and have already blogged about Douglas Irwin’s excellent paper “Did France Cause the Great Depression?”
However, both Scott Sumner and Douglas Irwin have recommend to me that I should read H. Clark Johnson’s book “Gold, France and the Great Depression”. I don’t want to disappoint Scott and Doug – after all they are both big heroes of mine so I better start reading, but I haven’t been able to find the time yet – especially since taking up blogging. Between the day-job and an active family life reading is something I do at very odd hours. That said, I know I will have to read this book. The parts of it I have already read is very interesting and well-written so it is only time that have kept me from reading the book.
Anyway, what I really what to ask my readers is the following: What books have had the biggest influence on your thinking about monetary theory and monetary history? I would love to be able to make a top ten list of monetary must-read books for the readers of this blog. So please give me your input. I will keep asking this question until I got at least 10 books. If you don’t want to put your name out here in the comment section drop me a mail instead: lacsen@gmail.com
Share this:
Posted by Lars Christensen on October 17, 2011
https://marketmonetarist.com/2011/10/17/gold-france-and-book-recommendations/
“…political news kept slipping into the financial section”
As global stock markets once again takes another downturn on the back of renewed European worries I am reminded about a great blog post Scott Sumner wrote a couple a months ago about his studies of the Great Depression.
In its Scott says:
“And the worst part was the way political news kept slipping into the financial section. Nazis make ominous gains in the 1932 German elections, Spanish Civil War, etc, etc. In the 1930s the readers didn’t know what came next—but I did.”
Working and following the financial market on a daily basis, one gets the same feeling. Everything dependents on politics – who will bail out who and who will pay? I long for the day when the markets return to being markets and we will not have to worry about political news…However, I am afraid that that day is not around the corner anytime soon.
Share this:
Posted by Lars Christensen on October 17, 2011
https://marketmonetarist.com/2011/10/17/%e2%80%9c%e2%80%a6political-news-kept-slipping-into-the-financial-section%e2%80%9d/
Sexy new model could shed light on the Great Recession
Market Monetarists like myself claim that the Great Recession mostly was caused by the fact that the Federal Reserve and other central banks failed to meet a sharp increase in the demand for dollars. Hence, what we saw is what David Beckworth has termed a “passive” tightening of monetary policy.
I have come across a (rather) new paper that might be able to shed more light on what impact the increase in money demand had in the Great Recession.
Te paper by Irina A. Telyukova and Ludo Visschers presents a rather sexy model (that’s an economic model…), but has a rather unsexy title “Precautionary Demand for Money in a Monetary Business Cycle Model”. Here is the abstract:
“We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models, the only uncertainty affecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and find that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables.”
Hence, Telyukova and Visschers incorporate shocks to money velocity from increases in what they call “precautionary demand for money” into a dynamic business cycle model. The model is yielding rather interesting results, but it is also a rather technical paper so it might be hard to understand if you are a none-technical economist.
Anyway, the conclusion is relatively clear:
“By incorporating this idiosyncratic risk into a standard monetary model with aggregate risk, and by carefully calibrating the idiosyncratic shocks to data, we find that the model matches many dynamic moments of nominal variables well, and greatly improves on the performance of existing monetary models that do not incorporate such idiosyncratic shocks. We show that our results are robust to multiple possible ways of calibrating the model. We show also that omitting precautionary demand while targeting, in calibration, data properties of money demand – a standard calibration practice produces inferior performance in terms of matching the data, potentially misleading implications for parameters of the model, and may therefore adversely affect the model’s policy implications as well.”
The paper was first written back in June 2008 (talk about good timing) and then later updated in March 2011. Oddly enough the paper does not make any reference to the Great Recession! This is typical of this kind of technical papers – even though the results are highly relevant the authors fail to notice that (or ignore it). That does not, however, change the fact that Telyukova’s and Visschers’ paper could clearly shed new light on the Great Recession.
As I see it the Telyukova-Visschers model could be used in two ways which would be directly relevant for monetary policy making. 1) Use the model to simulate the Great Recession. Can the increase in precautionary demand for money account for the Great Recession? 2) The model can be used to test how different policy rules (NGDP targeting, price level, inflation targeting, a McCallum rule, Taylor rule etc.) will work and react to shocks to money demand. I hope that is the direction that Telyukova and Visschers will take their research in the future.
Share this:
Posted by Lars Christensen on October 17, 2011
https://marketmonetarist.com/2011/10/17/sexy-new-model-could-shed-light-on-the-great-recession/