Assume that the covariance between the marginal utilities and inflation is zero for simplicity. If the nominal interest rate i increases, holding inflation expectations E(pi) constant, that means that the real interest rate increases, since r = i - E(pi). If substitution effects carry the day, then demand for current consumption decreases, demand for future consumption increases (from standard intertemporal optimization), exerting downward pressure on current prices and upward pressure on future prices. This leads to higher inflation expectations (which in turn lowers the real rate of return, but of course this secondary effect cannot outweigh the primary effect).
Not saying that Williamson is right, but this could be an intuitive explanation for his claims. Or what is wrong with this reasoning?
Deflation in Sweden: Svensson's Advice is the Problem | Williamson
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Lol, this was a bit of a 180 wasn't it? One day, QE and zero interest rates were sure to cause hyperinflation. SW then realized this didn't quite pan out, so he decides it's the QE and low interest rates that are causing the low inflation.
Just priceless logic...
Fit for a JME editor: http://www.journals.elsevier.com/journal-of-monetary-economics/editorial-board/.
One can only fathom some of the nonsense arguments he must have penned as a referee/editorial decisions he's made. At a LAC near U there are are probably teaching professors who lost tenure decisions because they wrote down models where monetary policy had the standard impact on the economy. You can see where his self confidence comes from -- few people tells a Senior Associate Editor at JME editor he knows nothing of his field. There's no way he can ever admit a mistake in this context -- if he confesses to being wrong about basic Macro 101 stuff, he'd have to admit to himself that he's more or less a fraud, and that all those Macro models he's spent years inflicting on students were in essence a waste of time.
SW sounds good but tastes rotten. Nothing there.
So, lots of people here diss Noah, but one of the most telling moments in the recent econoblogosphere was when SW arrived on Noah's site giving him all kinds of what for, and Noah very directly asked him to explain the failure of his repeated hysterical and overblown forecasts of impending inflation. Williamson has yet to respond. Until he does so, he is a worthless piece of garbage.
Williamson to the toilet, totally.
Williamson, if you are out there, answer Noah. I am not Noah, but in fact I am someone you know and respect, and I no longer respect. Clean up your act, boy. -
It always amazes me how much hatred people have for this one individual whose main fault, if any, is to be wrong on a fairly technical and uncertain subject (monetary economics).
I can only assume that EJMR is overrun with Krugmanites and Redditars who have everything figures out in terms of (monetary) policy and who are out on a witch hunt. Sad.
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Assume that the covariance between the marginal utilities and inflation is zero for simplicity. If the nominal interest rate i increases, holding inflation expectations E(pi) constant, that means that the real interest rate increases, since r = i - E(pi). If substitution effects carry the day, then demand for current consumption decreases, demand for future consumption increases (from standard intertemporal optimization), exerting downward pressure on current prices and upward pressure on future prices. This leads to higher inflation expectations (which in turn lowers the real rate of return, but of course this secondary effect cannot outweigh the primary effect).
Not saying that Williamson is right, but this could be an intuitive explanation for his claims. Or what is wrong with this reasoning?No boy, no boy, don’t do that. First, you start by saying
Assume that the covariance between the marginal utilities and inflations is zero
And you end up saying
then demand for current consumption decreases, demand for future consumption increases […]This leads to higher inflation expectations
Is the conditional covariance really zero here?! It is if you are able to systematically fool people, but at this point Lucas critique doesn’t hold and we can do many fancy things.
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Uh, dummies, his reasoning is based on his AER paper. Claiming he doesnt have a rigorous model is just ignorant.
Look, this is the problem. You see the paper published on AER and you automatically think it’s rigorous. Everything is based on eqs. (1),(2) and (3) which in turn are based on the unpleasant fiscal arithmetic. The basic idea is that the interest rate is constrained by Government future budgets. Everything follows trivially, for instance section 3.1 is totally useless since he could have done trick without introducing banks.
Read section 3.3.1 and see that :
In the liquidity trap case, \(\frac{1}{\mu} = r < \frac{1}{\beta}\), so the real rates of return on currency and interest-bearing assets are equal (the nominal interest rate is zero). However interest-bearing assets are scarce, as reflected in a real rate of return less than the rate of time preference.
The central idea of the liquidity trap equilibrium is that the rate is constrained by the Government budget.
So, how do you summarize their type of reasoning? Increase the interest rate hope that inflation will increase (how? he says via Fisher) and Government surplus/deficit will adjust. No Steve, no! You should have been a really bad student in the old days. I bet you come and follow some classes again. The Government increase the deficit, then inflation must increase to equate demand to supply etc...
Bad student, Steve -
Lol, this was a bit of a 180 wasn't it? One day, QE and zero interest rates were sure to cause hyperinflation. SW then realized this didn't quite pan out, so he decides it's the QE and low interest rates that are causing the low inflation.
Just priceless logic...
Fit for a JME editor: http://www.journals.elsevier.com/journal-of-monetary-economics/editorial-board/.
One can only fathom some of the nonsense arguments he must have penned as a referee/editorial decisions he's made. At a LAC near U there are are probably teaching professors who lost tenure decisions because they wrote down models where monetary policy had the standard impact on the economy. You can see where his self confidence comes from -- few people tells a Senior Associate Editor at JME editor he knows nothing of his field. There's no way he can ever admit a mistake in this context -- if he confesses to being wrong about basic Macro 101 stuff, he'd have to admit to himself that he's more or less a fraud, and that all those Macro models he's spent years inflicting on students were in essence a waste of time.
SW sounds good but tastes rotten. Nothing there.
So, lots of people here diss Noah, but one of the most telling moments in the recent econoblogosphere was when SW arrived on Noah's site giving him all kinds of what for, and Noah very directly asked him to explain the failure of his repeated hysterical and overblown forecasts of impending inflation. Williamson has yet to respond. Until he does so, he is a worthless piece of garbage.
Williamson to the toilet, totally.
Williamson, if you are out there, answer Noah. I am not Noah, but in fact I am someone you know and respect, and I no longer respect. Clean up your act, boy.No way this guy is the editor of JME, no way. It's like appointing Mengele director of the Jewish Museum of Berlin, no way
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Uh, dummies, his reasoning is based on his AER paper. Claiming he doesnt have a rigorous model is just ignorant.
Look, this is the problem. You see the paper published on AER and you automatically think it’s rigorous. Everything is based on eqs. (1),(2) and (3) which in turn are based on the unpleasant fiscal arithmetic. The basic idea is that the interest rate is constrained by Government future budgets. Everything follows trivially, for instance section 3.1 is totally useless since he could have done trick without introducing banks.
Read section 3.3.1 and see that :In the liquidity trap case, 1μ=r<1β\frac{1}{\mu} = r < \frac{1}{\beta}, so the real rates of return on currency and interest-bearing assets are equal (the nominal interest rate is zero). However interest-bearing assets are scarce, as reflected in a real rate of return less than the rate of time preference.
The central idea of the liquidity trap equilibrium is that the rate is constrained by the Government budget.
So, how do you summarize their type of reasoning? Increase the interest rate hope that inflation will increase (how? he says via Fisher) and Government surplus/deficit will adjust. No Steve, no! You should have been a really bad student in the old days. I bet you come and follow some classes again. The Government increase the deficit, then inflation must increase to equate demand to supply etc...
Bad student, SteveHis model: http://www.cafehayek.com/wp-content/uploads/2014/03/miracle_cartoon.jpg
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Hey, why don't you give ol' Steve a break.
He put his thoughts out there under his own name. That takes guts (or insanity, in my case, but in Steve's case it's guts). You guys who are calling him an idiot are hiding behind anonymity. I really hope none of the people talking anonymous s**t about Steve are tenured profs. At least if you're a grad student or untenured you have an excuse to be a s**t-talking coward.
Have a nice day. :-)
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I tend to agree with Noah here. Steve has ideas, works them out, publishes them and tries to see if they fit with the data. No reason to attack the person. Attack the model.
At the same time, I have this lingering feeling that there is something deeply wrong with the argument made.
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Hey, why don't you give ol' Steve a break.
He put his thoughts out there under his own name. That takes guts (or insanity, in my case, but in Steve's case it's guts). You guys who are calling him an idiot are hiding behind anonymity. I really hope none of the people talking anonymous s**t about Steve are tenured profs. At least if you're a grad student or untenured you have an excuse to be a s**t-talking coward.
Have a nice day. :-)Isn’t too late to be awake in the US?! Anyway, people are not attacking him in person (many posters said he’s nice and I tend to agree) but him as a blogger and as a modeller. I’m really sorry Noah, but there is no way you can possibly say this story about the reverse sign of monetary policy makes sense. Now if you said to Kruggles and DeLong to go back studying Monetary theory and then you make this kind of logical mistakes I think it’s fair enough to have fun of him
