Mishkin’s revealing omissions

I’m not happy about having to criticize Frederic Mishkin’s money textbook.  He was my teacher at Chicago and he seems like a great guy.  I’ve used his text for roughly 20 years and it’s a fine book.  Even worse, he was recently victimized by an unfair and misleading ambush interview.  But I must pursue The Truth wherever it takes me.

One of my favorite things about Mishkin’s text was that it presented aggregate demand curve in two ways.  At the beginning of chapter 22 it developed what is sometimes called the “monetarist” version of AD, which shows the curve as a fixed level of nominal GDP, i.e.  a rectangular hyperbola in P-Y space.  Only then does he present the so-called “Keynesian” version of AD, which is so hard to understand that I won’t even try to explain it.  And if I can’t understand it, I’m pretty sure our undergraduate students can’t either.  BTW, I have no idea why an AD curve shaped like a rectangular hyperbola is called “monetarist.”  It has nothing to do with whether V is constant or not (although Mishkin implies it does.)

Thus I was very disappointed to see Mishkin drop the monetarist AD curve from the new edition.  Textbook changes are usually made under the influence of criticism from professors at obscure community colleges, and perhaps that happened here as well.  I guess most professors prefer to teach a model that no undergraduate is likely to understand, rather than a simple and elegant framework that partitions macro into two parts; models that explain changes in nominal spending, and models that explain how nominal shocks get partitioned into output and inflation.  What could be simpler? 

If I was a conspiracy buff, I would note that this change occurred right after the biggest fall in NGDP since 1938.  If one used the monetarist framework, it might lead students to ask uncomfortable questions about why the monetary policymakers allowed M*V to fall so sharply.  But I’m not a conspiracy buff.

Another thing I really liked about the 7th edition was the following question (on p. 368) about IOR:

10.  The Fed has discussed the possibility of paying interest on reserves.  If this occurred, what would happen to the level of e [the excess reserve ratio]?

I loved this question.  And when it actually happened, I couldn’t wait to show my students how Mishkin’s book predicted the dire consequences of the Fed’s October 2008 decision to adopt IOR. 

So you can imagine how disappointed I was to find the question mysteriously deleted from the 8th edition.  If I was a conspiracy buff I’d wonder whether Mishkin was trying to hide something.  Surely students who did this question would be inclined to ask why the Fed did a highly contractionary policy in the midst of the biggest fall in AD since 1938 (that is if they still understood that AD=NGDP, which is doubtful.)

You might ask whether I am being too suspicious, after all, authors extensively revise texts with each new edition.  Times change, books need to reflect issues of current importance.  Actually, one of the dirty little secrets of the publishing world is that new editions are almost identical to old editions.  The publishers frequently revise editions so that they can sell new copies to students at $124 each, rather than have students buy old copies from previous students.  And of course far from being an obsolete question, the IOR question could hardly have been timelier. 

Fortunately I’m not a conspiracy buff, so I’m willing to give Mishkin a pass.

A year ago I did a long post discussing how Mishkin’s text provided a template for my critique of the conventional wisdom circa October 2008.  I specifically cited 3 of the 4 key principles that Mishkin identified in his summary of the monetary policy transmission mechanism (pp. 610-11):

1.  It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates.

2.  Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

3.  Monetary policy can be highly effective in reviving a weak economy even if short term rates are already near zero.

I had thought that all economists accepted these propositions, as they are taught in the number one undergraduate money text.   And not just taught; they are the summation of the most important chapter in the text.   And they also happen to be true.  But I found out in late 2008 that very few economists accept these propositions. 

I was anxious to get Mishkin’s new text, where he could take a sort of victory lap.  He could show how the Fed made a huge mistake allowing all sorts of asset prices to crash in late 2008, which signaled ultra-tight money.  But before I got the new edition, I read some articles where Mishkin seemed to be defending Bernanke’s moves.  I guess I shouldn’t have been so naive.  Mishkin and Bernanke are both center-right New Keynesians.  Both served on the Federal Reserve Board.  And of course Bernanke had also held similar views in the early 2000s, when he insisted that BOJ policy was far too tight, despite low rates.  So if Bernanke did a complete flip flop, why should I be surprised if Mishkin did as well?

Still, there was the question of how he would reconcile his views of the 2008 crisis with those three key principles of monetary policy.  I know what you are thinking—he dropped the key principles.  No, those are far too important to eliminate.  Did he refrain from discussing the crisis?  No, how could he do that?  Instead, he stated his view of the crisis just one page before the three principles that completely conflict with his view of the crisis.  That takes chutzpah!

Here’s what he says about the crisis on page 609:

With the advent of the subprime financial crisis in the summer of 2007, the Fed began a very aggressive easing of monetary policy.  The Fed dropped the fed funds rate from 5 1/4% to 0% over a fifteen-month period from September 2007 to December 2008.

Wait a minute; doesn’t he say just one page later than low rates don’t mean easy money—that you have to look at other asset prices?  Yes, but perhaps Mishkin didn’t know about all the other asset markets (TIPS, stocks, commodities, forex, commercial real estate, etc), which all started screaming that money was too tight in late 2008, as rates were gradually cut from 2% to 0%.

After discussing the crisis, Mishkin continues (p 610):

The decline in the stock market and housing prices also weakened the economy, because it lowered household wealth.  The decrease in household wealth led to restrained consumer spending and weaker investment, because of the resulting drop in Tobin’s q.

With all these channels operating, it is no surprise that despite the Fed’s aggressive lowering of the fed funds rate, the economy still took a bit [sic] hit.

So I guess he did know.  But perhaps there is nothing more the Fed could have done once rates hit zero?  Surely I can’t seriously claim that monetary policy can be highly effective once rates hit zero?  Go back and read Mishkin’s third principle.

If I was a conspiracy buff, I’d say that Mishkin followed almost every other famous economist in assuming that Fed policy was easy during late 2008, despite plunging stock and commodity prices, soaring real interest rates on 5-year TIPS, plunging inflation expectations, a soaring dollar, and plunging real estate prices.  And he assumed there was nothing the Fed could do about it because they had already cut rates to zero.

If I was a conspiracy buff, I’d wonder if he knew there was a contradiction, and erased any passages of the book that might alert students to the possibility that the Fed policy was actually tight (such as the IOR question) or that the sharp fall in M*V was the big problem in 2008–i.e. the monetarist view of AD.

If I was a conspiracy buff I’d even wonder if he was so nervous and distracted typing the last line I quoted that he misspelled ‘big’.  That he was nervously looking ahead to the very next section in his textbook; the Lessons for Monetary Policy.

Fortunately I’m not a conspiracy buff.  But now I understand why so many people believe Bush was behind 9/11, or LBJ was behind the Kennedy assassination, or FDR knew about Pearl Harbor before it happened, or the CIA overthrew Allende.  It really is a lot of fun being a conspiracy buff.  What a satisfying view of the world!  Everything has an understandable cause, all loose ends tied up with a nice Christmas bow.

PS.  Cowen and Tabarrok do AD the correct way.

PPS.  In this earlier post I argued that confused professors probably forced Mankiw to remove the one question that actually taught S&D correctly, which showed students that one should not expect consumers to buy less after a rise in the price.

PPPS.  BTW, I really do think Mishkin was treated unfairly in the interview.  Keep in mind that this was done by a director who used Barney Frank to explain what went wrong in the sub-prime crisis.


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74 Responses to “Mishkin’s revealing omissions”

  1. Gravatar of W. Peden W. Peden
    12. December 2010 at 09:05

    I love looking at the changes in textbooks over periods of time. It can be a surprisingly broad guide to how economic opinion changes over time.

    It would be fascinating to find out (a) why, if there is a reason, Mishkin made these changes and (b) what he currently thinks about these issues, especially IOR. If I can just about get my head around the concept of IOR, I’m sure that Mishkin should be able to engulf it with ease.

  2. Gravatar of ssumner ssumner
    12. December 2010 at 11:04

    W. Peden, Yes, people have studied the changes in Samuelson’s text, for instance.

  3. Gravatar of W. Peden W. Peden
    12. December 2010 at 11:38

    Oddly enough, that’s exactly the textbook of which I’m going to be reading editions tomorrow. I’m looking at what Samuelson said about unemployment + inflation before 1958, 1958-1968ish, and then what the post-1970s editions say. This is part of an essay featuring the course of events of the Philipps Curve and particularly Friedman’s 1968 article “The Role of Monetary Policy”.

  4. Gravatar of Benjamin Cole Benjamin Cole
    12. December 2010 at 11:47

    Yes, I am not a conspiracy buff either.

    But explain why a John Taylor would write a recent review of Allan Meltzner’s new book on the Fed, and would comment that Carter pressured Volcker to ease up, without commenting on the much heavier pressure from the Reagan White House, including Don Regan,Tres. Secy, who went public in his criticism of Volcker?

    And then Taylor campaigned against QE2, when it is precisely the policy that a Milton Friedman would advocate?

    Everything has become politicized? I suspect so.

    The Palinized right-wing showed its power when it easily ousted long-time Republican stalwarts in several states. I have no doubt only a Palinite will win the R-Party nomination in 2012, probably Palin herself. I guess even right-wing academics and pundits are kow-towing.

    Yes, a rules-based monetary policy is a good thing–but when the economy has been torpedoed by trillions in bad real estate loans, and a Great Depression is looming, maybe it is time to seize the reins and turn off the robots.

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 13:16

    Scott,
    I’ve been staring in disbelief at some of the passages in the latest edition. It makes my work as tutor much more difficult as I had been an extremely vocal fan of Mishkin’s text in the past.

    To explain my differences now is somewhat embarrasing.

    I’ve actually gone to the extreme of telling my students to purchase earlier editions (used) of his text just to further their understanding of monetary policy at the zero bound.

    Most accept my explanation. Some ask me why I respect an author who has chosen so recently to casually contradict himself. And I say…..stutter, stutter

  6. Gravatar of Carl Lumma Carl Lumma
    12. December 2010 at 13:59

    The title should just be “Mishkin’s Omissions”!

  7. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 14:03

    Scott,
    By the way, in the tradition of John Nash I am indeed a loonie (certifiable), so, thus in fact, I am probably more a loonie than you are (not that there should be a competition). I’ve had a lot of support from others similarly impacted (especially during this Christmas season) and they have encouraged me with unfailing support based on my ability and my fledgling research.

    I’ve learned a lot from your website and enjoy the fact you have allowed me to participate despite my occasional tantrums.

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 14:53

    But I don’t want sympathy either. My weakness is my strength. You should all be lucky enough to have what I have.

    How’s that for cyclicality?

  9. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    12. December 2010 at 15:00

    Scott, excess reserve ratio is no longer important for the monetary policy, so there is nothing strange that Mishkin has removed the IOR question. My question is – did he replace it with something more useful, such as a discussion about the corridor or floor systems where IOR has no contractionary impact?

  10. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 15:06

    123,
    Mishkin draws strange diagrams where the ffr is above ier (is that true currently?). Go look! I had trouble explaining how such diagrams were even remotely relevant to my tutees.

  11. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    12. December 2010 at 15:24

    Mark, I guess those diagrams refer to the corridor system, they are the bread and butter for ECB and other foreign central banks. The Fed hopes to switch to this system after the financial crisis is over. The current mode of operation is different – it is the floor system, and it is more suitable during the financial crisis. The benefit of the floor system is that it greatly reduces the risk of damaging increases of effective ffr (such increases happened three times after Lehman!), the downside of the floor system is that the Fed is not properly compensated for the risk created by the commercial banking system.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 15:37

    123,
    So you’re saying to me that I’m supposed to say to my students it’s “the floor system”? What bull#$%^ is that? It still doesn’t explain why the ffr is below the ier! Mishkin’s new text is freaking @#$%^&*(!

  13. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    12. December 2010 at 15:55

    Mark, yes it’s the floor system. You should thank Norvegians who stumbled upon it ten years ago when they started inflation targeting, although they are implementing a switch to Mishkin’s corridor diagram now. You should look for a textbook that includes the floor system. Why ffr is below the IOR floor? It’s because Fannie and Freddie receive zero return on their Fed balances, so they lend it out at below-IOR rates. You should tell your students it’s the floor system with the Fannie-hole and the Freddie-hole in the floor.

  14. Gravatar of JTapp JTapp
    12. December 2010 at 15:59

    I switched from Mishkin to Ball after 2008. Mishkin’s text didn’t have enough info relevant to the financial crisis, didn’t do a lot of things that I felt were relevant for students in my class, and basically felt too theoretical for non-economics majors. (I actually enjoyed teaching the corridor system, though, because when they started paying ior I could explain “this is how it works.” Ah, but when students asked “why did they start paying ior now?” there was no easy answer). Ball’s text is great for exploring other topics in a readable way, like asymmetric info, the EMH, inflation bias, and both New Keynesian and monetarist perspectives. Mishkin’s mentions “liquidity trap” in one place in passing, Ball’s text at least explains what it is supposed to be. That’s relevant if people like Krugman are trumpeting it.

    Now Mankiw has an intermediate macro with a financial markets add-on co-authored with Ball. From what I’ve seen, it looks good. Ball’s Money text doesn’t have a full IS-LM treatment, he combines an IS curve with a Phillips curve and keeps it simple. His text presupposes the students have used Mankiw for macro and keeps it on that level.

    That’s my sales pitch. And Mishkin has been pretty critical over the past year of talk of QE, saying just a few months ago that “it may be unnecessary.”

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 16:04

    123,
    If reserves are lent out at below ioer how much are lent out and why would banks lend them at that rate? (Obviously no American textbook detail such transactions.) It doesn’t make sense.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 16:15

    JTapp,
    I’ve had a student with a Ball textbook approach me for tutoring (my dissertation adviser’s [Bukiewicz] selection) approach me. I still have not seen the book. What makes it so great?

    It seems to use weird terminology (what the #%^&( is AE and PC in the context of interest rates?).

  17. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    12. December 2010 at 16:19

    Mark, Fannie and Freddie have two alternatives – receive zero on reserve balances (stupid law), or lend reserves out at rates slightly lower than IOR.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 16:27

    123,
    I don’t follow you. Are you saying that F&F receive 0% on reserve balances and that they would receive more if they lent out to banks?

  19. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    12. December 2010 at 16:34

    Mark, yes.

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 16:37

    123,
    Interesting,
    But money is like water, it seeks its level.

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 16:46

    123,
    In any case, you’re talking to a crazy person. I need to go to bed for my own sake and for my students. You should argue with someone who has a level (there that word comes up again) head.

  22. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    12. December 2010 at 17:14

    Mark, dobranoc.

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. December 2010 at 17:27

    123,
    Mówisz po Polsku?
    Don’t get me started. I should sleep. Otherwise I get a little strange (aggressive, or that is, Mr. Hydeish).

  24. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    12. December 2010 at 18:27

    Mark, nie mówię. Nauczyłem się kilku słów po polsku. Google Translate, memories of Bolek i Lolek cartoons and knowledge of Indo-European linguistics is a powerful combination :)

  25. Gravatar of JTapp JTapp
    12. December 2010 at 19:21

    Mark,
    Ball’s AE curve is just the IS curve. Since the IS curve is the link between interest rates and aggregate expenditure, he just calls it an AE curve. Philips curve just shows a short-run relationship between output and actual inflation. It’s New Keynesian all around, gels with the Mankiw principles text. He’s using Okun’s law and other basics in that chapter. I like how he later incorporates some detailed discussion of a Taylor Rule as well.

    I liked it because it has the Mankiw style of keeping it clear and simple for a broad audience. If I had only economics majors in the course I would probably use a different text.

  26. Gravatar of Doc Merlin Doc Merlin
    13. December 2010 at 02:25

    So he removes the question about IOR after IOR is implemented….?

    …ok…

    @JTapp

    The philips curve doesn’t actually exist, it was a spurious correlation that ended up being enshrined as gospel.

    Here is more about it, download the powerpoint slide and look through it, its pretty funny.

    https://sites.google.com/site/davidandolfatto/teaching-tools/pcurve.ppt?attredirects=0&d=1

  27. Gravatar of Doc Merlin Doc Merlin
    13. December 2010 at 02:26

    If that link doesn’t work, try this one.
    https://sites.google.com/site/davidandolfatto/teaching-tools/pcurve.ppt

  28. Gravatar of Scott Somner の最初のエントリ About this blog – 道草 Scott Somner の最初のエントリ About this blog – 道草
    13. December 2010 at 02:58

    [...] とはいえ、Sumner の読者は、これと内容と後日 About this blog に追加されたFAQ(himaginary氏の紹介)を読んでおくといいでしょう。本人もそう言ってます。このFAQもちょっとややこしくて、今回のAbout this blogにコピーを追加しているものの、元のFAQページの方だけアップデートしてたりします(だからリンクを張れば…) というわけで、 ここでゃAbout this blog の内容を紹介します(FAQ部分以外)。彼はこの時から気持ちがいいほど一貫していて2008年暮の引き締め(超過準備金へ付利)を問題にし続けていますい。昨日も(2010.12.11)、そして今日も(2010.12.12。ずっと激賞していたMishkinの教科書↓は改訂で改悪されてしまったとのこと)。  [...]

  29. Gravatar of James in London James in London
    13. December 2010 at 05:54

    Scott
    Do you ever stop to think why Bernanke (an honourable man, most of us agree) didn’t pump yet more money into the economy in late 2008? It was because of moral hazard. The FRBNY was bailing US and other developed banks out so hard that he feared for the lesson they would (not) learn if he bailed even more.

    In the real world bailing out banksters is a massive political issue. Revolutions are fought on such things. Sitting safely in Bentley you couldn’t see the pressure he was under from banks screaming for (discreet, of course) help. Other Central Bankers also tried to resist (viz Meryvn King at the BoE). That they were eventually swamped doesn’t mean they were wrong to try to hold out against these forces.

    LOLR is a very dangerous thing to work with in the real (micro) world. In you macro, aggregate, world, you don’t have to deal with these people. I feel a bit sorry for Mishkin, he’s been gulled by these banksters too, and now feels bad about it. I bet that you’d get fed up with these (several times) millionare bankster gusy coming knocking on the door telling you to save the economy (by saving them). The real world is messy. Central (banking) planning fails in the end.

    Better to get people used to the idea of no easy money when money demand rises for some reason or other, and prices and wages have to adjust. Money is a store of wealth and not just a medium of exchange, after all.

  30. Gravatar of Doc Merlin Doc Merlin
    13. December 2010 at 07:03

    @James:
    “Do you ever stop to think why Bernanke (an honourable man, most of us agree) didn’t pump yet more money into the economy in late 2008? It was because of moral hazard. The FRBNY was bailing US and other developed banks out so hard that he feared for the lesson they would (not) learn if he bailed even more.”

    My theory is that he was too busy tightening money to cut off the rather insane PPI inflation that had been occurring, and sterilizing the bailouts to notice the problem. But by doing so he compounded an NGDP shock to a adverse supply shock and an adverse regulatory policy shock.

  31. Gravatar of Bill Gee Bill Gee
    13. December 2010 at 09:05

    Scott,

    I found it interesting that you nor any of your other commentators mentioned anything about the McConnell/Brue/Flynn textbook that I have had the misfortune to teach from for the last three years. (The department chooses the book, so I don’t have a say)

    The Macroeconimic chapters are particularly interesting because in the 17th Edition, I found myself spending many hours sanitizing the Right-Wing political leanings from the chapters on monetary policy. However, in the 18th edition, rather than offer an alternative view, it just simply left those chapters out leaving professors to fill in the blanks themselves.

    I’m not a “conspiracy buff” either, but anyone who says that the teaching of macroeconimics can be taught in a political vacuum is fooling themselves.

  32. Gravatar of mobile mobile
    13. December 2010 at 14:20

    Wait a minute; doesn’t he say just one page later than low rates don’t mean easy money

    To be more charitable, Mishkin said “the Fed began a very aggressive easing“, which is certainly true, even if money was still too tight.

  33. Gravatar of ssumner ssumner
    13. December 2010 at 15:04

    W. Peden, That sounds interesting.

    Benjamin, If Palin is nominated in 2012, Obama will be re-elected.

    Mark, You said;

    “I’ve actually gone to the extreme of telling my students to purchase earlier editions (used) of his text just to further their understanding of monetary policy at the zero bound.”

    Maybe it will be like “Classic Coke” and “New Coke”, the market will force him to go back.

    And thanks for the support–I wish you well.

    Carl, Maybe.

    123, Suppose the Fed had done that amount of OMPs, and e had not gone up at all. Wouldn’t that have been expansionary?

    JTapp, How much does Ball do with the role of expectations in monetary policy? When I spoke with him a couple years ago he seemed skeptical about the idea that policy works through expectations.

    Doc Merlin, The Phillips curve existed until we started using it for policy, then it vanished, as the natural rate hypothesis would predict.

    James, I wanted him to bail out the economy, not the banks. Instead he bailed out the banks, but not the economy.

    Bill Gee. I agree, although the subject seemed to be getting less political during the Great Moderation.

  34. Gravatar of ssumner ssumner
    13. December 2010 at 15:05

    mobile, How do you know the Fed eased? Surely not because they lowered interest rates?

  35. Gravatar of mobile mobile
    13. December 2010 at 15:44

    On reflection, I see I was too charitable.

  36. Gravatar of JTapp JTapp
    13. December 2010 at 17:47

    Scott,
    Ball doesn’t deal much with expectations other than Kydland-Prescott and the public expecting the central bank to create more inflation than it promises. I believe it does mention how the ECB targets the expected rate of inflation instead of the actual (but I don’t think it mentions the other “twin pillar” of the 4.5% monetary growth target.)

    I sent you that paper he wrote on how unemployment hysteresis is an AD problem (and thus can be solved by monetary policy). He doesn’t mention that in his book, though.

  37. Gravatar of JTapp JTapp
    13. December 2010 at 18:26

    @Bill Gee. Micro can be political too. You’ll note the link on Mankiw’s blog to Yoram Bauman’s look at how each micro text treats climate change.

    Story: I had been using the Mankiw Principles of Macro text for the 2 years I’d been at my current position and decided to adopt his Micro this year in order to bring some symmetry and take advantage of his Aplia sets, etc. But I share Micro with other professors who would also be required to adopt it. One lodged a complaint when a Google search revealed Mankiw is a “New Keynesian,” which immediately raised a flag b/c anything with “Keynes” in it is problematic. Nevermind that the department, including this professor, had been using other New Keynesians, including Mishkin, for years in other classes and I’d been using Mankiw’s macro for years and adopted Ball in the M&B class– Micro was a step to far.

    He had our department chair (a marketing professor) take it home to check for subversive material. One of Mankiw’s 10 Principles of Economics being “government can sometimes improve market outcomes” was a red flag. In the end we adopted it b/c they trusted my judgment. In higher education, EVERYTHING is political, maybe worse than proper academia. (I sent the story to Mankiw who found it amusing, he commented that just working at Harvard made him a socialist to many.)

    I like texts that make it easy to supplement with thoughts from people like Krugman and Sumner and Beckworth (I assigned several Beckworth article readings this year. Wish Scott’s NRO piece had been sooner) because my own knowledge of the theory behind the textbook is lacking w/out a PhD.

  38. Gravatar of Is Scott Sumner Working on His Own Documentary? Is Scott Sumner Working on His Own Documentary?
    13. December 2010 at 22:20

    [...] example, Sumner starts off this recent post by expressing outrage at the hatchet job that his former professor, Frederic Mishkin, suffered at [...]

  39. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    14. December 2010 at 04:44

    Scott, you said:
    “Suppose the Fed had done that amount of OMPs, and e had not gone up at all. Wouldn’t that have been expansionary?”

    This could only happen if OMPs are perceived to be permanent, and this is absolutely unlikely.

  40. Gravatar of JTapp JTapp
    14. December 2010 at 06:05

    Has anyone ever read Mishkin’s Monetary Policy Strategy?

  41. Gravatar of Silas Barta Silas Barta
    14. December 2010 at 06:27

    Does Mishkin understand that faith does not count as verification? (When asked how he established the truth of the claims he made in his Iceland report, his answer was, 1) talking to people on the ground, and 2) having faith that they’re doing things right.)

  42. Gravatar of James in London James in London
    14. December 2010 at 07:52

    Scott
    Bernanke certainly bailed out the banks. But they are certainly not happy yet, not until the authorities are off their case, which thankfully (given the remote absence of any market discipline) is not yet. Once inflation is roaring they will be happy.

    Those idiots who regard money as a store of wealth won’t be happy, of course. Money is only to facilitate exchange in your world.

    Still almost silence from you on the insane double easing policy in the US, monetary and fiscal. At least the bond vigilantes are now on the case fearing for the solvency of the US – or are you claiming this current rise in US yields is “good” and shows QE2 is working?

  43. Gravatar of Bill Gee Bill Gee
    14. December 2010 at 09:03

    To JTapp,

    Thanks for the feedback. Not only is higher education VERY political, so is all levels of education. This is why I prefer being an Adjunct to being a full-time professor. On the one hand, I have to take the hand I’m delt from the department, but on the other hand, I don’t generally get caught up in all of the political in-fighting and ego-stroking that my full-time collegues have to endure.

  44. Gravatar of Jeff Hummel Jeff Hummel
    14. December 2010 at 10:32

    Scott,

    The reason that Mishkin calls the rectangular-hyperbolic AD curve “monetarist” is because if Py and M are constant, V must also be constant along the entire curve. Consequently V, like M, is only a shift variable. In contrast, because the Keynesian AD is not a rectangular hyperbola, Py varies along the length of the curve, and therefore if M is constant, V must also vary. Thus, V is NOT held constant when drawing the Keynesian AD curve, even though it is also still a shift variable.

    The difference arises because of the way the ISLM model treats interest rates in deriving the Keynesian AD curve. Keynesian AD only includes the Keynes effect from changing P, and therefore interest rates change along the curve, inducing a change in V. Monetarist AD adds to the Keynes effect the Pigou effect (i.e., the way changes in real cash balances also affect the demand for commodities and therefore shift the IS curve). Thus, interest rates remain constant (along with V) throughout the entire length of the curve.

    One way of conceptualizing the distinction is to borrow the terminology from Patinkin, and think of monetarist AD as a (long-run) market equilibrium curve, whereas Keynesian AD is a (short-run) demand curve.

    P.S. I also use Mishkin’s Money and Banking text, although I don’t think it is very good, and has gotten more poorly written with each new edition. It just happens to be the best of a bad lot.

  45. Gravatar of Fed Up Fed Up
    14. December 2010 at 14:44

    “He was my teacher at Chicago and he seems like a great guy.”

    mishkin is the worst, even worse than greenscam and bernanke. There is the problem with economics in general everybody knows each other and would not want to call them out for the rotten human beings they are.

  46. Gravatar of Fed Up Fed Up
    14. December 2010 at 14:51

    “Even worse, he was recently victimized by an unfair and misleading ambush interview. But I must pursue The Truth wherever it takes me.”

    The truth is mishkin was clueless about Iceland and is clueless about asset bubbles. IMO, he is clueless about asset bubbles because he likes them because he and his rich buddies can get richer from them just like greenscam and bernanke like asset bubbles.

    If you want the truth, try looking at the difference between price inflating with debt and price inflating with currency. Consider this as another “truth”. Is one of the reasons the fed exists is to prevent a wage bubble?

  47. Gravatar of Fed Up Fed Up
    14. December 2010 at 14:53

    EDIT above from: “in general everybody knows”

    to: “in general. Everybody knows”

  48. Gravatar of Fed Up Fed Up
    14. December 2010 at 14:56

    “I’m not happy about having to criticize Frederic Mishkin’s money textbook.”

    I’m happy to criticize him until no one ever listens to him again. Let him go get a real job, preferably one where he will be fired when he is wrong, unlike economists who never get fired for being wrong.

  49. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. December 2010 at 15:43

    JTapp,
    wrote:
    In higher education, EVERYTHING is political, maybe worse than proper academia.

    One semester I had a Principles of Micro teaching load. One class on price controls I spent at most 5 minutes mentioning Card and Kreuger’s research on the minimum wage. I was called into the woodshed by my Chairman that very week. Evidently one of my students had a parent on the Board.

    I learned my lesson there and then. Don’t ever contradict the Man (or the Woman as it may be). Save it for the blogs.

  50. Gravatar of Benjamin Cole Benjamin Cole
    14. December 2010 at 17:19

    BTW, Mishkin gets bashed in 10/15 issue of Chronicle of Higher Education for taking $124,000 in 2007 from Icelandic Chamber of Commerce to sing praises of Iceland’s banking system. Their system later collapsed. Mishkin, btw, is very wealthy, with net worth of $6 mil. to $17 mil., reported COHR.

    In prison, they would say Mishkin is a “made man.” That means corrupted, bought and paid for. In prison, they are cynical.

  51. Gravatar of james in london james in london
    15. December 2010 at 00:16

    Mishkin says in his FT response that you should read the report he wrote. Read it and you can see that it doesn’t help his case at all. He says in the response that things got much worse later, after May 2006 publication. It’s clear the report was written because things were already deteriorating fast, as the report itself makes amply clear despite the “Minsky wash” in the text. The Icelandic banks were expanding even faster to escape the consequences, typical of Ponzi-like schemes towards their collapse. Minsky was brought in an attempt to defend the undefendable – he discredits himself even more by attempting to claim antyhing other than this truth.

    To be fair on one point the report is littered with section headings about why Icelandic “Financial Instability” wasn’t the case, and so the “In” typo might just have been a typo. Unless the .pdf document itself has been subsequently doctored. But then that would be a conspiracy theory and those don’t really wash.

  52. Gravatar of james in london james in london
    15. December 2010 at 00:22

    Not only facile, but completely misguided.
    From the report:
    “The academic literature on financial instability and the facts of the state of the Icelandic economy
    indicate that comparisons of Iceland with emerging market countries, such as Thailand or Turkey,
    are not only facile, but completely misguided”.

    “The analysis in this study suggests that although Iceland’s economy does have imbalances that will eventually
    be reversed, financial fragility is not high and the likelihood of a financial meltdown is very low. However, the
    possibility that multiple equilibria could occur in which self-fufilling prophecies could do serious damage to
    Iceland’s economy suggests that policies to bolster confidence in the Icelandic economy and financial system
    would be very beneficial in the current economic environment.”

  53. Gravatar of james in london james in london
    15. December 2010 at 00:23

    In fact Thailand and Turkey have done much better. Maybe that’s what Minsky meant, Iceland was no Thailand or Turkey.

  54. Gravatar of Doc Merlin Doc Merlin
    15. December 2010 at 02:10

    @Mark
    /OFF TOPIC/
    Card and Kreuger had problems, but most of my criticisms had to do with problems commonly found in attempts to do diff in diff on economic data.
    However they had a much more serious problem. They only looked at fast food labor. Fast food, is an inferior good; if a lot of people were harmed by the min wage, then you would expect fast food demand to go up, which could raise hiring in fast food.

    They didn’t account for this.

  55. Gravatar of Mattias Mattias
    15. December 2010 at 02:29

    Mishkin och Minsky are two different guys right?

  56. Gravatar of Doc Merlin Doc Merlin
    16. December 2010 at 05:23

    “2. Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.”

    I guess this is the point I have been harping on for about a year. Commodity prices /matter/ a lot, especially with the creation of ETFs.

  57. Gravatar of scott sumner scott sumner
    17. December 2010 at 19:42

    JTapp, I see expectations as central to monetary economics, so my hunch is that I wouldn’t like the book. But I’ll keep an open mind.

    123, You said;

    “This could only happen if OMPs are perceived to be permanent, and this is absolutely unlikely.”

    That’s not the issue, the issue is whether OMOs would be expansionary if e had not increased. Remember, it’s a homework problem, hence ceteris paribus.

    Silas, Maybe he had faith that Nordic countries were not corrupt. In any case, his faith was misplaced.

    James: You said;

    “or are you claiming this current rise in US yields is “good” and shows QE2 is working?”

    Yes, that’s my claim.

    Jeff Hummel; You said;

    “The reason that Mishkin calls the rectangular-hyperbolic AD curve “monetarist” is because if Py and M are constant, V must also be constant along the entire curve. Consequently V, like M, is only a shift variable. In contrast, because the Keynesian AD is not a rectangular hyperbola, Py varies along the length of the curve, and therefore if M is constant, V must also vary. Thus, V is NOT held constant when drawing the Keynesian AD curve, even though it is also still a shift variable.”

    Yes, for any given nominal NGDP a fixed M implies a fixed V. But that has no bearing on monetarist and Keynesian theory, that’s just an identity. I think some people falsely assume the V is constant along the monetarist AD curve, whereas of course it is M*V that is constant.

    Fed up, I don’t agree about Mishkin.

    Mark, That story about the minimum wage is discouraging. I’ve taught at three different schools and never known anything remotely like that. We have almost complete academic freedom here, and also the other places I taught.

    James, If the report makes the deterioration obvious, then it did a good job.

    Doc Merlin, I look at stock, commodity, real estate, forex and TIPS prices.

  58. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    18. December 2010 at 07:14

    Scott, you said:
    “That’s not the issue, the issue is whether OMOs would be expansionary if e had not increased. Remember, it’s a homework problem, hence ceteris paribus.”

    This homework problem has no practical relevance, and is misleading as the students will think that e is exogenous. The largest problem was the collapse of the ffr market and loss of Fed’s credibility, so it is a good thing that this IOR problem was replaced by the corridor system diagram that illustrates how the monetary policy is supposed to be credible at all times. It is a pity that Mishkin has omitted the floor system diagram that enhances Fed’s credibility at the expense of the subsidy to the private sector intermediaries.

  59. Gravatar of ssumner ssumner
    18. December 2010 at 11:08

    123, I think it does have practical relavance, as if the IOR had not been imposed, and the base had increased by exactly the same amount, policy would have been more expansionary. You may not think the base would have increased as much in that case, but students need to learn the impact of each policy tool on a ceteris paribus basis. And holding everything else constant, a higher IOR is contractionary.

  60. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    19. December 2010 at 07:21

    Scott, if the IOR had not been imposed, the Fed would have continued to use the Treasury supplemental funding program. On the other hand, if you assume a ceteris paribus condition, you would get a Zimbabwean scenario, but I really don’t see the real world relevance of Zimbabwean scenarios.

  61. Gravatar of ssumner ssumner
    19. December 2010 at 12:31

    123, The Zimbabwe case is very relevent as it shows the Fed wasn’t out of ammunition. 95% of economists assumed it was out of ammo. How is an undergrad homework problem not useful if it shows student that 95% of professional economists were wrong about an important issue?

    What it really shows (if you are right) is that the IOR rate was needed, but should have been somewhere in between the deflationary rate and the hyperinflationary rate.

  62. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    21. December 2010 at 04:42

    Scott, the IOR rate consistent with the constant e and Zimbabwean inflation is very negative. Even the IOR rate that is consistent with 5% NGDP growth was way below zero.

  63. Gravatar of ssumner ssumner
    22. December 2010 at 19:14

    123, We had much more than 5% NGDP growth with zero IOR, as did Zimbabwe.

  64. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    27. December 2010 at 10:27

    Scott, in those cases the quantity of money was reasonable, or in the case of Zimbabwe unreasonable, relative to demand. In 2008 and 2009 the quantity of money was too low. The quantity of money was sufficient in 2008-09 only if combined with negative 5% IOR.

  65. Gravatar of Scott Sumner Scott Sumner
    28. December 2010 at 09:20

    123, It sounds like you agree with me; we don’t need negative IOR, just more money. In any case I thought you said earlier that a 0% IOR qwould have been very expansionary–or was that someone else?

    If a strongly negative IOR was needed, then that’s the answer students should give.

  66. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    29. December 2010 at 01:49

    Scott, I never said that 0% IOR would have been very expansionary. I argued that high IOR doesn’t matter that much, as it is a substitute for treasury supplemental financing program and it is a substitute for a more speedy exit strategy. Higher IOR to some extent expansionary as the alternatives it replaces are more harmful for economic growth.

    You said:
    “If a strongly negative IOR was needed, then that’s the answer students should give.”

    But then I think the problem should focus on the determinants of e that have consequences for AD:
    “In February 2008, Nouriel Roubini has discussed the possibility of several systemically important financial institutions collapsing. If this occurred, what would happen to the level of e [the excess reserve ratio]?”
    On the other hand, if there is a switch to a corridor system as illustrated in a new diagram by Mishkin, there are no consequences for AD, as higher quantity of reserves offsets the impact for IOR.

  67. Gravatar of Scott Sumner Scott Sumner
    30. December 2010 at 09:24

    123. Regarding Roubini, in my view IOR made it much more likely that some big institutions would fail.

    Your view of “ceteris paribus” is very unconventional. It would be like a mugger saying “me punching you in the nose didn’t really hurt you, as my alternative strategy was to shoot you.” Obviously I can’t deny that if the Fed’s alternative was something worse (a quick exit strategy) then IOR wouldn’t hurt. But I’m not convinced that was it’s alternative. Even w/o IOR we might be sitting here with near-zero rates today, because of the weak economy.

    In any case, I think students first need to learn the direct effect of various actions, before they get into the nuances.

    BTW, I must have forgotten you IOR argument, or mixed you up with someone else. I thought you were arguing that lower IOR would be expansionary.

  68. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    1. January 2011 at 06:29

    Scott, Roubini was right in February 2008. But of course he was right for for quasi-monetarist reasons. If we translate his warning into the quasi-monetarist framework, it goes like this. Real losses in large leveraged financial institutions have sharply increased desired level of e. Roubini was certain the Fed will fail to provide enough reserves, and e will fail to increase, and AD will be too low instead. Bernanke had fears that Roubini might be right, so in May 2008 he unsuccessfully sought legislation that would allow him to sharply increase e.

    Mugger analogy doesn’t really work. Norwegians were constantly being punched in the nose since 2001, but you don’t see it in the macroeconomic data. Norway is in a liquidity trap since 2001, from that date Norwegian IOR is equal to the T-bill rate. And guess what? Because for any given interest rate higher IOR is stimulative, Norway has very high interest rates relative to inflation target.

    You said:
    “Obviously I can’t deny that if the Fed’s alternative was something worse (a quick exit strategy) then IOR wouldn’t hurt. But I’m not convinced that was it’s alternative. Even w/o IOR we might be sitting here with near-zero rates today, because of the weak economy.”
    I’m sure that without IOR we would be sitting in a somewhat deeper recession with zero interest rates today. The root cause of the recession were hawkish intentions of the FOMC. As hawkish members of the FOMC mostly formulate their plans in terms of future fed funds rate path, Bernanke was able to cheat a bit, because with IOR he could credibly promise to expand the monetary base without any limit on October 13 2008, no matter what FOMC hawks were thinking. As a result, Bernanke has taught the hawks a monetarist lesson. Currently they know that in addition to interest rates, quantity of money also matters, so today they have two simultaneous goals – higher interest rates and smaller Fed’s balance sheet.

    You said:
    “In any case, I think students first need to learn the direct effect of various actions, before they get into the nuances.”
    I think that previous version was much too far away from the reality, as it relied on a misguided notion that the most important source of demand for reserves are reserve requirement laws. Replacing the flawed exercise with the corridor system diagram was a step in a right direction.

    You said:
    “BTW, I must have forgotten you IOR argument, or mixed you up with someone else. I thought you were arguing that lower IOR would be expansionary.”
    This is strange, as two months ago you published a post titled “Calling 123″, where you wrote:
    “The title of the post refers to frequent commenter (and blogger) 123, who knows more about the IOR program than I do, and disagrees with my view that it was contractionary. Indeed he argues it was beneficial.”

    BTW, I think there is slight contradiction in your writings. On one hand, you say that liquidity trap does not constrain monetary stimulus, on the other hand, you are always accusing Bernanke that he has created a liquidity trap during the October 2008 crash.

  69. Gravatar of Scott Sumner Scott Sumner
    1. January 2011 at 14:23

    123, I don’t understand the Norway example. Surely their interest rate has not been zero since 2001. And I don’t follow your claim that higher IOR is expansionary. If the interest rate stayed at zero in the US, a negative 5% IOR would be expansionary.

    The art of teaching monetary economics is the art of explaining why interest rates don’t matter, rather the supply and demand for base money matter. How does teaching the corridor system help students realize that interest rates don’t matter?

    I use the term “liquidity trap” in two ways, as a actual constraint on policy, and as a perceived constraint on policy. So you are right there is a contradiction. Obviously I believe there is no actual constraint on policy, and I was accusing Bernanke of pushing us into a situation where there was a perceived constraint on policy.

  70. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    2. January 2011 at 05:14

    Scott, in Norway IOR was equal to the T-bill rate all the time. Compared to the US, Norway did two things in 2001 – they increased demand for money by paying IOR, and they increased the quantity of money. The net result was expansionary in the sense of producing interest rates that are a bit higher – i.e. Norges bank had to raise interest rates a bit after switching to the permanent liquidity trap system in order to prevent overheating.
    If you reduce IOR to negative 5% in the US, you increase AD. But then, you reduce AD to prevent interest rates from falling to negative 5%, and the net result is lower AD.

    Teaching e is a wrong way of explaining monetary economics, as a result, many people failed to understand what has happened in 2008. Fortunately, Nick Rowe lives in Canada where there is no e, so it was very easy for him. You cannot avoid teaching the corridor system, as it is the system used by the majority of the world’s central banks.

    You said:
    “I use the term “liquidity trap” in two ways, as a actual constraint on policy, and as a perceived constraint on policy. So you are right there is a contradiction. Obviously I believe there is no actual constraint on policy, and I was accusing Bernanke of pushing us into a situation where there was a perceived constraint on policy.”
    I’m sure Bernanke started IOR to remove constraints on monetary policy. This is very important, as Norges bank triumphantly noticed, most of the world’s central banks have at least temporarily swithced to the Norwegian floor system.

  71. Gravatar of ssumner ssumner
    4. January 2011 at 10:36

    123, Saying IOR equals the T-bill rate is very different from saying Norway is in a liquidity “trap.” There is no “trap.” they can do as they please.

    I teach monetary policy as the supply and demand for base money, regardless of what system a central bank uses. Fundamental theory doesn’t change with a corridor system.

  72. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    5. January 2011 at 05:46

    Scott, there is no “trap” in Norway, as they can change the interest rate, and there is no trap in the US, as the Fed can increase the purchases of risky assets.

    Yes, fundamental theory doesn’t change with a corridor system. But I think it is important teach the theory at the right level of abstraction so you can understand the operation of all possible systems. In my view the deleted problem with “e” did not teach the theory at the right level of abstraction. To understand this better, imagine a Norwegian Mishkin with the following problem. “Norges bank has discussed a possibility of stopping paying interest on reserves. Calculate the level of hyperinflation that would result.” In my view, both the actual deleted problem and my hypothetical Norwegian problem are equally misleading.

  73. Gravatar of ssumner ssumner
    10. January 2011 at 19:34

    123, I don’t agree, the Norway question seems useful. If the answer is hyperinflation, this is good for students to know–so that when they grow up and become central bankers they know enough to decrease the base at the same time they stop IOR.

  74. Gravatar of Major_Freedom Major_Freedom
    26. February 2014 at 18:42

    How was the interview with Mishkin “unfair”?

    The interviewer asked why he altered the name of the paper on his CV, and why he didn’t disclose being paid by the Icelandic Chamber of Commerce.

    How are those questions “unfair”?

    If Mishkin were working in the financial advisory or equity analyst industries, he would likely be fired for not disclosing his compensation. He’s clearly a deceitful person.

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