tag:blogger.com,1999:blog-2546602206734889307.post594081772877992067..comments2024-03-29T12:16:15.785+00:00Comments on mainly macro: Werning on Liquidity Trap PolicyMainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-2546602206734889307.post-88924300949574783742014-01-07T11:10:08.118+00:002014-01-07T11:10:08.118+00:00Thanks for the answers, these help me understand i...Thanks for the answers, these help me understand it better. Still struggling with understand the implication of price flexibility, but I guess I just have to think a bit harder.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-32335453026232649352014-01-06T18:31:55.235+00:002014-01-06T18:31:55.235+00:00In Werning's paper G is not wasteful - hence t...In Werning's paper G is not wasteful - hence the confusion. Let's stick to the Cochrane paper to avoid this. As Cochrane says, the choice of equilibrium is the Feds, and I think the conventional choice is both what the Fed will do and what people expect them to do. So its the right choice for analysis.<br /><br />Cochrane says that this is odd, because paths before T are explosive backwards. I do not find it odd. Think about UIP, where you impose interest rates to be above world rates for T periods. The exchange rate appreciates and then converges. All that is happening here is that you add feedback from inflation to the output gap. I also do not find the price flexibility result odd either, using the same logic. However take Cochrane's alternative local to frictionless path. That has inflation jumping up to 5% as the ZLB constraint hits, and the output gap is positive while the constraint holds. That is weird, as there is no recession! Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-64512473006554282912014-01-06T17:09:58.954+00:002014-01-06T17:09:58.954+00:00I am referring to Cochrane's paper The New-Key...I am referring to Cochrane's paper The New-Keynesian Liquidity Trap, (I thought that was what daniels was referring to, and what we were talking about) http://faculty.chicagobooth.edu/john.cochrane/research/papers/zero_bound_2.pdf, not the one about the Determinacy and Identification with Taylor Rules. Maybe that is why we are talking past each other. Anyway Cochrane add a shifter variable to the Phillips curve which represents wasted government spending, and find that because it creates inflation then it has a large positive multiplier and it increases when price become less rigid. I hope this had cleared things up. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-34036428126163807882014-01-06T16:00:13.868+00:002014-01-06T16:00:13.868+00:00My discussion of why Werning's equilibrium is ...My discussion of why Werning's equilibrium is the right one to choose in an economy with a clear inflation target is in the post that I reference at the start of this thread - please read and then comment. But I'm curious - why do you call it "wasted government spending"? Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-20410126208053795282014-01-06T12:27:22.197+00:002014-01-06T12:27:22.197+00:00I am not sure I understand it completely. It still...I am not sure I understand it completely. It still seems to me that the equilibrium that Werning(2012) has chosen leads to some weird/counter intuitive results, such as large multipliers to wasted government spending and these increase when price become less rigid. These results are according to Cochrane a direct result of the choice of equilibrium. Anyway what do you think of the alternative equilibrium suggestion by Cochrane. The local-to-frictionless equilibrium in which the economy approaches the steady state as t goes backwards in time. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-20824955821886870782014-01-05T13:10:37.907+00:002014-01-05T13:10:37.907+00:00Anon: As we do not observe worlds where prices ar...Anon: As we do not observe worlds where prices are sticky and worlds where they are not, how can we say something is weird. We should choose an equilibrium concept that makes sense given the information people have, and that is what Werning, Woodford and others do. I have yet to read any good justification that the indeterminate equilibrium makes sense in a world with clear inflation targets. If you know of one, please let me know. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-20583951620002723332014-01-05T11:38:07.271+00:002014-01-05T11:38:07.271+00:00The choice of equilibrium of Werning(2012) still h...The choice of equilibrium of Werning(2012) still have weird properties as shown by Cochrane, for example the output gab is larger when the prices are less sticky. So I don't see that the right equilibrium is chosen by Werning. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-14513608280532142462014-01-02T20:33:55.236+00:002014-01-02T20:33:55.236+00:00I addressed the issue of equilibrium selection in ...I addressed the issue of equilibrium selection in this post: http://mainlymacro.blogspot.co.uk/2013/08/expectations-driven-liquidity-traps.html<br />which you commented on. There I argue that the indeterminate equilibrium is not a plausible one for the UK or US. Tell me why you disagree.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-43505742021663719832014-01-01T16:50:24.102+00:002014-01-01T16:50:24.102+00:00I'm happy you finally got around to reading We...I'm happy you finally got around to reading Werning's paper. Now maybe you should read John Cochrane's paper recent paper on the zero lower bound/ New Keyenesian liquidity trap theory. Even if you don't agree with his conclusions, you should at least be aware of the possibility of multiple equilibria here and the difficulties this poses for deciding what to do in the real world (since it's as if we live in a regime switching world without knowing clearly in which regime we are in, and good government policy depends a lot on which regime you're in).danielshttps://www.blogger.com/profile/01799942447501959179noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-20002893968869463242013-12-30T09:39:02.149+00:002013-12-30T09:39:02.149+00:00It's not just a phobia of trying fiscal policy...It's not just a phobia of trying fiscal policy, it's even a failure to believe your lying eyes when it's happening.<br /><br />The BBC 'Japan moves close to beating 15 years of falling prices' 27 December 2013 has it that:<br /><br />"Japan is now more than half-way towards meeting the central bank's goal of achieving 2% inflation by about 2015. This has been due to a massive monetary stimulus policy aimed at weakening the currency and spurring more spending."<br /><br />Whereas Stiglitz article 'The Promise of Abenomics' and Krugman and Eichengreen all have it as the catchy "three arrows" policy in which one of the arrows is fiscal stimulus. <br /><br />I've been watching the BBC on Japan since the right-wing Abe started his (weaponised) Keynesianism. <br /><br />The BBC has editorially banned the term 'fiscal stimulus' and I want to know who is responsible. <br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-27400773684379492652013-12-30T08:08:56.603+00:002013-12-30T08:08:56.603+00:00This seems to support the conclusion that combinin...This seems to support the conclusion that combining monetary and fiscal policies (in the extreme, through helicopter drops) is the most effective way to escape the liquidity trap (see http://www.voxeu.org/article/unconventional-monetary-policies-revisited-part-ii), a point made since the very old days by such eminent and diverse economists as Henry Simon, Irving Fisher, John Maynard Keynes, Abba Lerner, and Milton Friedman, resurrected by Bernanke in the early 2000s, and recently re-articulated by McCullay and Pozsar, Turner, Wood and the Neo-chartalists or MMTers. <br /><br />One quick comment on Jason Dick's, with which I fully agree when the issue is one efficiency. Yet, when it comes to trying to move the economy out of prolonged depression or outright deflation, effectiveness might have priority over efficiency, and trasfering public money or reducing taxes to (credit constrained) households and firms can be more rapidly engineered than spending on infrastructures, which typically requires long gestation periods before the money can be actually spent. Biagio Bossonehttps://www.blogger.com/profile/12192990143588037522noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-18134417437962494262013-12-29T22:22:42.780+00:002013-12-29T22:22:42.780+00:00The assumption that government spending is less ef...The assumption that government spending is less efficient than private spending is probably a bad assumption. Whether or not this is the case comes down to what sorts of projects money can be spent on. Surely infrastructure spending, aid to states so they can restore normal levels of spending, and investments in renewable energy sources are actually more efficient than what the private sector would do, for the reason that the private sector would not do those things (or, at least, not to the same degree), but they are nevertheless beneficial to society (and the economy). I'm sure there are situations where we have a government that is currently pursuing an optimal budget where it is doing all of the tasks that are economically most efficient for it to do, and in that situation stimulus will necessarily be a reduction in efficiency.<br /><br />But I don't think we're anywhere close to that situation in the US, at the very least. And probably not in the UK either after a number of years of austerity. Public spending is far too low, and there are huge numbers of possible programs to spend money on that would increase rather than decrease economic efficiency of said spending.Kimberly Dickhttps://www.blogger.com/profile/13930917517196516292noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-69109308150408844762013-12-29T20:48:24.409+00:002013-12-29T20:48:24.409+00:00Good post. Thanks for doing ones like this.
"...Good post. Thanks for doing ones like this.<br /><br />"What I had not taken on board is that the optimal path for government spending might involve a prolonged period where government spending is lower (below its natural level)."<br /><br />That's what I've been trying to say!<br /><br />In a NK model, it is not a *high level* of G that increases the natural rate; it is a *low growth rate* of G.<br /><br />Ideally, if G is initially at the microeconomic optimal level G*, and at time t0 you suddenly hit a liquidity trap that lasts T periods, you jump G above G*, then make G steadily decline to below G* at t0+T, then start increasing G again towards G*.<br /><br />But if G can't jump (because there are no shovel-ready projects and it takes time to change G), the third best fiscal policy is to make Gdot negative for T periods. Which is very different from Old Keynesian fiscal policy.<br /><br />"Here is a picture from the paper, where the output gap is on the vertical axis and inflation the horizontal..."<br /><br />It is murder on my neck when people draw Phillips Curves with the axes the wrong way round!Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com