I woke up this morning to find that my very useful commenters had provided me with information showing that 3 widely held economic theories were discredited last night between 12:45 and 12:50 am. These theories are Keynesian economics, RBC theory, and the theory of beggar-thy-neighbor policies. Yes, these theories have been totally discredited dozens of times before over the past few years (or decades if you wish), but piling on is fun!
Here’s the first comment, by Cameron:
BOJ announces it will expand its QE program, Nikkei rises 4.5%!
The liquidity trap theory is dead. Please please please follow in their footsteps ECB.
Of course Keynesian economics predicts the QE announcement would have no effect on stock prices, as the new money would just sit there as excess reserves. You are just swapping one low interest government asset for another low interest government asset. (In fairness, I don’t know what the BOJ is buying in this case, but we also see big market effects when central banks just buy government bonds.)
And yet the economic blogosphere is full of people telling us “we just don’t know” if QE has any effect. Yesterday I saw an article indicating that the “markets” were uncertain whether QE had had any effect.
Of course the real business cycle people will say; “yes, monetary stimulus will raise nominal stock prices, but that effect merely represents inflation.” On to comment number 2, from Steve:
BOJ expands monetary base to 80T yen per year
The central bank says it will expand annual bond purchases to 80 trillion yen a year, up from the current 50 trillion yen. It will also extend the duration of bonds it holds to about 7-10 years.
The impact on markets was swift: dollar-yen jumped 1 percent to 110.26, while the Nikkei surged over 4 percent to its highest levels since September 25.
So the Japanese stock market also soared in dollar terms, and if you look at the intraday data the huge spike was right after the announcement. RBC theory says it’s just inflation, and that real values should not be affected. And yet Noah Smith tells us that RBC theory is alive and well. And I’m sure it is, in the elite journals.
[As an aside, there are people who claim that some RBC models allow for nominal shocks. Sorry, but the sine qua non of RBC theory is that nominal shocks don’t matter. If both types of shocks matter it’s not an RBC model, it’s an NK model with both supply and demand shocks being important. When people say they don’t believe that RBC theory is correct, they mean that they think nominal shocks matter. Everyone believes that real shocks also matter. After all, the devastating earthquake/tsunami/shutdown of all nuclear power in Japan caused a . . . oh wait; it didn’t cause a recession, or an increase in unemployment. OK, everyone agrees that a real shock 10 times bigger than the Japanese tsunami could cause a recession. Say Godzilla destroying Tokyo.]
The last resort of the anti-QE crowd is to admit that it “works,” but only in a beggar-thy-neighbor way. Stealing growth from other countries via currency depreciation and trade surpluses. But macro is not a zero sum game. Commenter Steve also provides this information:
I was wondering why the S&P500 futures abruptly spiked 15 points (0.75%) at 12:45am EDT. TheMoneyIllusion has the answer!
Steve, I’m sure that was a coincidence. There must have been was lots of other news at 12:45 am that would have caused broad indices to spike sharply higher in the US. And if it was Japan, it was surely only stocks in US companies with operations in Japan.
Seriously, the extent to which people go to try to deny the obvious is almost comical. I think it has something to do with Bernanke’s comment that QE works in practice but not in theory. That’s not true of course, it works in theory by raising the expected future money supply and expected future NGDP, but it gets at reasons why economic bloggers deny the obvious. They live in a world of theories, of models, not reality.
PS. Cameron also provides this nugget:
Also debunked is the belief that consensus is more important than policy stance. The vote was 5-4 in favor of expansion.
Make that 4 theories debunked. Not a bad day’s work for my comment section! I don’t have links, but all comments are quoted in full, and are listed among the first 8 comments of the previous post. They are easy to find.
PPS. This is another reason why we need a NGDP futures market. Hypermind has started one, but it’s still small, and appears inefficient in my view. The market forecast 3.9% NGDP right before yesterday’s announcement, which seemed too low to me. The actual figure was 4.9%. So there are still $100 bills on the sidewalk. The prizes at Hypermind will grow sharply in a few days, so when I make the announcement get in there and start picking them up.
Maybe the economics profession doesn’t want NGDP and RGDP futures markets because deep down they know that Keynesian and RBC models would be totally discredited almost immediately. I can’t think of any other rational explanation.