Noah Smith on the Neo-Fisherites

Here’s Noah Smith:

First, the basic idea. The Fisher Relation says that nominal interest rates are the sum of real interest rates and inflation:

R = r + i

That’s not an assumption, that’s just a definition (actually it’s an approximation, but close enough). What I call the “Neo-Fisherite” assumption is that in the long term, r (the real interest rate) goes back to some equilibrium value, regardless of what the Fed does. So if the Fed holds R (the nominal interest rate) low for long enough, eventually inflation has to fall. This is exactly the opposite of the “monetarist” conclusion that if the Fed holds R very low for long enough, inflation will trend upward.

Noah Smith is making a very subtle error here, but before getting into the details let’s blow the neo-Fisherite model right out of the water.  We can do so with a couple points made in the comment section.  First Nick Rowe:

Here is one very big bit of empirical evidence against the “Neo-Fisherite” theory:

For the last 20 years the Bank of Canada has been targeting 2% inflation. And the average inflation rate over that same 20 years has been almost exactly 2%.

The Bank of Canada has said it has been doing the exact opposite to what Neo-Fisherites would recommend: whenever the BoC fears that inflation will rise above 2% it raises the nominal interest rate, and whenever it fears that inflation will fall below 2% it cuts the nominal interest rate.

If the BoC had been turning the steering wheel the wrong way this last 20 years, there is no way it could have kept the car anywhere near the centre of the road. Unless it was incredibly lucky. Or was lying to us all along.

No, they aren’t lying.  And if you don’t believe me, do you think financial and commodity market participants are also “lying,” and hence intentionally losing lots of money.  Here’s Kevin Donoghue, responding to Noah:

If the Neo-Fisherites are right, then not only is the Fed massively confused about what it’s doing, but much of the private sector may be reacting in the wrong way to monetary policy shifts.

The NFs are committed to RatEx, so if the private sector is reacting in the wrong way their theory has a serious problem.

So how come all these brilliant neo-Fisherite economists are making an elementary mistake?  It’s partly because the mainstream never really internalized Milton Friedman’s insight:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

.   .   .

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

At first glance that looks almost neo-Fisherite.  But of course Friedman had quite conventional views on the liquidity and Fisher effects.  Still it makes sense that if Friedman’s insights were mostly ignored, later economists who discovered the strong correlation between low rates and low inflation might easily draw the wrong conclusion.  Friedman believed that a tight money policy would initially raise rates, but over time would lower both interest rates and inflation.  So over the vast majority of time you’d see inflation move in roughly the same direction as the short term interest rate directly controlled by the central bank.  That’s the Fisher effect—conventional macroeconomics.  But because it was not internalized (remember how crazy everyone viewed me in 2009 when I said money was tight?), it pushed the door wide open for the neo-Fisherites and MMTers, and lots of other odd critters to walk into the house.

And now we can see the subtle error that Noah Smith made in the passage quoted at the beginning of the post:

This is exactly the opposite of the “monetarist” conclusion that if the Fed holds R very low for long enough, inflation will trend upward.

Reasoning from a price change!!!  If I had a crystal ball, and peered into that ball, and saw that Yellen was going to hold short term rates at zero for the next 10 years, I’d absolutely predict ultra-low inflation, condition on that interest rate forecast.  So no, the monetarist prediction is not that inflation will trend upward.  As Milton Friedman said, the monetarist prediction is that inflation would trend downward.

Noah Smith is thinking like a Keynesian.  He’s trying to translate monetarist ideas about monetary policy into a Keynesian (interest rate) language.  He knows that we think easy money is associated with higher inflation, so he assumes we must also think that an extended period of low interest rates is associated with higher inflation.  Not so.  We don’t think low rates imply easy money.

Noah Smith and the neo-Fisherites are confusing the situation described by Friedman, with a subtly different case. Suppose a madman is put in change of the Fed who is committed to zero rates over the next 10 years, come hell or high water.  Then I might forecast an upward drift in inflation; indeed I think hyperinflation would be quite possible.  It depends on what else the madman did. But if you simply told me that rates would be low over the next 10 years under Janet Yellen, I’d assume that inflation would be low, and that low inflation is precisely the reason why Yellen held rates down.

There are no paradoxes to be explained, and that’s why we need to keep the “market” in market monetarism.  Markets tell us that all theories of monetary policy ineffectiveness at the zero bound, and also all reverse causation theories, are wrong. (I.e. RBC, MMT, Neo-Fisherite, old Keynesian, etc., are all wrong.)  It doesn’t matter if your model predicts that a change on monetary policy should have X effect on the price level.  If commodity markets respond in the “wrong way” then you’ve lost.  Game over. Case closed.

PS.  Edward Lambert comments:

Noah,
You sense the same thing that I do. I commented on Williamson’s post pretty much your thoughts. I am in agreement with the Fisher effect.
I simply want to thank you for having sufficient wisdom and constitution to write this post.

Yikes, if Noah has a friend in Edward Lambert then he doesn’t need any more enemies.

HT.  Tom Brown, TravisV.


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58 Responses to “Noah Smith on the Neo-Fisherites”

  1. Gravatar of Tom Brown Tom Brown
    26. April 2014 at 12:47

    Thanks for taking a look Scott (and for the HT).

  2. Gravatar of Tom Brown Tom Brown
    26. April 2014 at 13:10

    Scott, BTW, these kinds of posts from you used to confuse me no end, but these days I can see (from my amateurish perspective) your logic now.

    Also, although you may think it silly, returning to my original question on this: if (for whatever reason: say we had a nation of committed neo-Fisherites) markets expected that if rates were raised now (for example in a situation like the US finds itself in right now) that this could lead to higher inflation (in both the short and long term)? Is it *theoretically* possible that could happen? I’m trying to get a feel for just how powerful you think expectations can be.

    For example, although Nick Rowe seems pretty committed to his idea that commercial banks can, in aggregate, create an excess supply of money (see his perpetual debate with David Glasner on this), when I asked him recently if people did not *expect* that excess supply to be permanent, then could you argue that this excess supply would have little effect (i.e. not raise the average price level). He agreed one could make that argument. Weak tea? Maybe, but it was still interesting to me.

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/04/temporary-vs-permanent-money-multipliers.html?cid=6a00d83451688169e201a511a55139970c#comment-6a00d83451688169e201a511a55139970c

  3. Gravatar of Major_Freedom Major_Freedom
    26. April 2014 at 13:19

    Markets tell us that all theories of monetary policy ineffectiveness at the zero bound, and also all reverse causation theories, are wrong.

    What market?

  4. Gravatar of Major_Freedom Major_Freedom
    26. April 2014 at 13:29

    If you do not understand that what you are observing is monopolist financial data and not market data, then you do not understand money.

    And this is not surprising. We’ve seen enough falsifications of what “market” monetarism predicts.

  5. Gravatar of tesc tesc
    26. April 2014 at 14:04

    Doc, correct me please if this is wrong, but I have heard you say that if FED expansion is credible, then interest rates ought to rise. Short term rates will drop because the monetary injection is in short term markets and medium/long term rates ought to rise because there is an increase investment demand.

    That is kind of what happened every time QE was announced.

    http://monetarypolicytesc.blogspot.com/2014/04/qe-raises-medium-and-long-term-interest.html

    “This is exactly the opposite of the “monetarist” conclusion that if the Fed holds R very low for long enough, inflation will trend upward.”

    Has anyone ask him where he got that from?

  6. Gravatar of Vince Cate Vince Cate
    26. April 2014 at 14:06

    Outside of “mad man gets in charge of central bank” can you explain another theory of hyperinflation? If we just use that one, then central bankers have like a 4% chance of going mad on any given year, which is just too high. I have a bunch already and am looking for more.

    http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html

  7. Gravatar of Tom Brown Tom Brown
    26. April 2014 at 14:20

    Mark A. Sadowski, in relation to Vincent’s question above, why on Earth did the Reichsbank (in Weimar) hold the rate at 5% from 1915 to 1922m7 when the lowest inflation was over that same period was 7.7% (and mostly it was running double or even triple digit)? Did they have a “madman” in charge?

  8. Gravatar of Tom Brown Tom Brown
    26. April 2014 at 14:35

    … excuse me: through 1922m6.

  9. Gravatar of youko youko
    26. April 2014 at 14:51

    I’ve always wondered: what if something like overshooting is going on in the commodity markets? The overshooting model uses market rationality, so it’s not denying that. But then the market reaction tells us much less (or the opposite!) of what you’d think (generic you).

  10. Gravatar of Kevin Erdmann Kevin Erdmann
    26. April 2014 at 15:06

    Your analogy about monetary policy being like backing up a truck with a trailer attached seems apropos here.

    http://research.stlouisfed.org/fred2/graph/?g=yIG

    It seems like the Fed are basically Bayesian. The hawkish bias of the Fed over the past 30 years plays out in that framework, where they update more readily when inflation seems to high than they do when inflation seems too low.

    So, in the late 1990’s, the notion of Fed changes in interest rates leading to changes in inflation works, because the trailer was trending toward a direction, and then the Fed would correct enough to change the direction. It seems clear to that when this is the operational effect, the changes in interest rates are happening within a narrow window, just like backing up with a trailer involves a lot of small adjustments in the steering wheel.

    Outside of that time, there are basically 3 episodes where the Fed Funds Rate goes from 10% to 3%, then 6.5% to 1%, then 5.25% to .25%. Obviously, the trailer started to veer in these cases, and the Fed said, well, let’s correct the steering just a little bit. But, it wasn’t enough. So, they corrected just a little bit more. But, it wasn’t enough. And, the trailer just kept cutting more and more sharply.

    If you just look at the chart, or plug these values into a regression, it looks like there is causation from lower rates to lower inflation. But, that’s just a product of a systematic error by the Fed. When short term interest rates are moving in a straight line for 4% or more, clearly we have moved outside of the realm of tweaks in the Fed Funds rate creating changes in the monetary base around a stable natural interest rate.

    Also, did you see Kevin Grier’s response to David Beckworth here:
    http://mungowitzend.blogspot.com/2014/04/frequent-fed-failure-foolishness.html

    Grier seems wrong here. His doubts about the Fed’s ability to commit seem reasonable at first blush. But, of course the Fed can commit to forward policy. There are countless commitments that they have made which are credible. They aren’t going to inject cash into the beanie baby market. I am certain that this is a tactic that they will not use. That’s one of a million credible commitments they have made.

    Beckworth’s graph seems like evidence of a commitment that the Fed has made, which the market took as credible. Grier seems to just be engaged in hand-waving. The only thing I would have liked to have seen would have been a QE1 that was 3 times more aggressive. That might have pushed up bank assets enough to actually create inflation pressures in the short run, and it would have been a test of the power of short term liquidity compared to long-run Fed targets. I guess Grier would say that inflation would have stayed low no matter how large QE1 would have been or what the Fed’s long term asset policy is.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. April 2014 at 15:20

    Tom Brown,
    For the sake of those who have no idea what you are talking about…

    http://rajivsethi.blogspot.com/2010/08/lessons-from-kocherlakota-controversy.html?showComment=1283121748455#c8952394443166180857

    Robert Waldmann:
    “The assumption that the economy will end up in a rational expecations equilibrium does not imply that a low nominal interest rate leads to an equilibrium with deflation. It might lead to an equilibrium in which dollars are worthless.

    I’d say the experiment has been performed. From 1918 through (most of) 1923 the Reichsbank kept the discount rate low (3.5% IIRC) and met demand for money at that rate.

    The result was not deflation. By October 1923 the Reichsmark was no longer used as a medium of exchange.”

    The Reichsbank pegged the discount rate at 5.0% from January 1914 through June 1922, a period of 8.5 years:

    https://research.stlouisfed.org/fred2/graph/?graph_id=174465

    If you look at the Index of Internal Prices on Table XIV (Pages 156-59):

    http://mises.org/books/hyperinflation.pdf

    You’ll note that inflation averaged 35.2% in 1915, 7.7% in 1916, 17.0% in 1917, 21.2% in 1918, 91.8% in 1919, 257.7% in 1920 and 28.6% in 1921. In June 1922, the last month that the discount rate was pegged at 5.0%, year on year inflation reached 413.1%.

    Here’s the discount rate and the year on year rate of inflation by month after that point:

    Month–interest–Inflation
    1922m7—5.1—–603.5
    1922m8—6.1—–900.0
    1922m9—7.3—1,286.5
    1922m11–9.2—3,274.3
    1922m12-10.0—4,126.4
    1923m1–10.9—7,488.6
    1923m2–12.0–13,522.0
    1923m4–13.6—8,095.0
    1923m5–18.0–11,447.0
    1923m8–29.6–53,142.8
    1923m9–62.0–75,446.8
    1923m10-90.0-122,291,313.4

    It seems to me we’ve already run this experiment (several times) with predictable results.

    (continued)

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. April 2014 at 15:28

    (continued)

    Why did Germany peg the discount rate to 5.0% for 8.5 years?

    WW I led to a major break in Reichsbank interest rate policy owing to German government’s need to finance the war (Page 501):

    http://piketty.pse.ens.fr/files/capitalisback/CountryData/Germany/Other/Pre1950Series/RefsHistoricalGermanAccounts/Webb84.pdf

    “…In Germany, the two major departures from the old rules dated from the beginning of war mobilization in 1914: suspension of convertibility at par and fixation of the discount rate at 5 percent from the end of 1914 to mid-1922. The other major change in conditions, although not in procedures, for determining the money supply was the vast increase in credit demands of the German government, which before 1914 had little debt but throughout the decade of 1914-1923 financed most of its expenditure by borrowing. Given the nominal credit demand of government and business, the private sector decided what portion of this total credit demand to hold as debt (paying some interest but unusable for most transactions) and what portion to hold as money. At least up to August 1923, the Reichsbank bank fully accommodated these decisions by discounting and monetizing what debt the private sector did not wish to hold.”

  13. Gravatar of Tom Brown Tom Brown
    26. April 2014 at 15:37

    Mark thanks for the information.

  14. Gravatar of Michael Byrnes Michael Byrnes
    26. April 2014 at 16:06

    Kevin Erdmann wrote:

    “TBut, of course the Fed can commit to forward policy. There are countless commitments that they have made which are credible. They aren’t going to inject cash into the beanie baby market. I am certain that this is a tactic that they will not use. That’s one of a million credible commitments they have made.”

    I would say that the very fact that we have had minimal inflation during the past five years despite the massive increase in the monetary base is evidence, in and of itself, of the Fed’s credibility.

    If enough market actors believed that the Fed was very likely to lose control of inflation due to the base expansion, inflation would not be running below target today.

    Beckworth is exactly right.

    On a different note, here is an optimistic post from Lars Christensen:

    http://marketmonetarist.com/2014/04/24/how-stan-fischer-predicted-the-crisis-and-saved-israel-from-it/

  15. Gravatar of Undergrad Undergrad
    26. April 2014 at 17:07

    Thank you for making the distinction between *pegging* the nominal interest rates at very low levels over a long period of time and *observing* that interest rates has been a very low levels over a long period of time. The former is likely to cause inflation to rise (theoretically with bound due to dynamic instability) and the latter which would imply that inflation must have been low over that period. The latter case can still be understood if you think in terms of a central banks interest rate *rule*. I think a lot the problem is that people tend to think in terms of the fact that the central bank pegs the nominal interest rate *between* rate setting meetings, rather than the fact that central banks follow an interest rate *rule* when deciding how to change its interest rate peg.

    In short, I think the problem is thinking in terms of interest rates rather than interest rate rules.

    Furthermore, in the long run (in the aperiodic sense), central banks *cannot* peg the nominal interest rate since prices are fully flexible, and thus, they do not have leverage over real cash balances. Instead, in the long run. the central bank influences the nominal interest rate through inflation expectations, which are in turn a function of the central bank’s interest rate rule.

  16. Gravatar of Undergrad Undergrad
    26. April 2014 at 17:14

    You make the important distinction between *pegging* nominal interest rates at very low levels over a long period of time and *observing* that nominal interest rates has been at very low levels over a long period of time. The former is likely to cause inflation to rise (theoretically with bound due to dynamic instability) and the latter would imply that inflation must have been low over that period (assuming the central bank is following a sensible interest rate rule). The latter case can still be understood if you think in terms of a central bank’s interest rate *rule*. I think a lot of the problem is that people tend to think in terms of the fact that the central bank pegs the nominal interest rate *between rate setting meetings*, rather than the fact that central banks follow an interest rate *rule* when deciding how to change its interest rate peg in response to data on economic activity and inflation.

    In short, I think the problem is thinking in terms of interest rates rather than interest rate *rules*.

    Furthermore, in the long run (in the aperiodic sense), central banks *cannot* peg the nominal interest rate since prices are fully flexible, and thus, they do not have leverage over real cash balances. Instead, in the long run, the central bank influences the nominal interest rate through inflation expectations which are in turn a function of the central bank’s interest rate rule.

    *I edited some grammatical mistakes that I made above.

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. April 2014 at 17:35

    Scott,
    Edward Lambert butchers a FRED formula and reveals his ignorance of Japanese economic policy and economic history in his latest post in support of the theory that umbrellas cause rain.

    http://angrybearblog.com/2014/04/will-japan-ever-understand-the-fisher-effect.html

    April 25, 2014

    Will Japan ever understand the Fisher Effect?
    By Edward Lambert

    “Japan has had its discount rate in the zero lower bound range for many years. If the Fisher effect had any truth to it, we should have seen the real interest rate return back to its natural level of 1% or so. What do we see? (link to graph) – See more at:

    [Graph]

    The graph shows Japan’s central bank discount rate, GDP yoy growth rate, CPI minus food and energy and the real interest rate. The real rate (green line) did in fact return to and stabilize around its natural rate of 1% just as the Fisher effect would expect. This evidence supports the long run Fisher effect.

    Inflation did jump up in the late 1990″²s which looks to reflect GDP reaching its natural level. GDP (red line) rose and then declined transferring the momentum of nominal GDP into prices (violet line).

    The real interest rate stayed close to its natural rate from 2000 until the crisis. Then after the crisis, the real rate returned once again to its natural rate until Abenomics pushed inflation up above the discount rate. The real rate fell again.

    The question now is… Is the inflation in Japan temporary? Will the real rate return to its 1% natural rate pushing inflation back down? Will Japan’s central bank keep the discount rate near the zero lower bound?

    Will Japan ever understand the Fisher effect?

    Update: I do not know what is wrong with the real interest rate line in the FRED graph above. So I downloaded the data and made a new graph just for the real interest rate. Here it is…

    [Updated Graph]”

    ———————————————————-

    I respond in comments:

    1) “Update: I do not know what is wrong with the real interest rate line in the FRED graph above.”

    Your formula reads:

    b-a

    Where:

    b=the change in the Discount Rate from a year ago

    And:

    a=the change in core-core CPI from a year ago

    If you want line #3 to represent the “real Discount Rate” you need to change b so that it is equal to the Discount Rate and not the change in the Discount Rate.

    2) The Discount Rate is *not* the BOJ’s policy rate.

    The BOJ’s policy rate is the *Call Rate*. The Discount Rate is the rate at which the BOJ makes loans to the private sector. The Call Rate is the unsecured overnight interbank lending rate and so is the equivalent of the Fed Funds Rate in the US.

    There are several places you can find the Call Rate but FRED is not one of them. You can find the Call Rate in column 11 (end of month) and 12 (average for month) here:

    http://www.stat-search.boj.or.jp/ssi/mtshtml/m_en.html

    Prior to 1995 the Call Rate was always more than the Discount Rate and often significantly more. Since 1998 the Call Rate has been between 10 and 50 basis points less than the Discount Rate.

    3) Line #2 is NGDP.

    There is nothing wrong with that, but given your other errors it is not clear to me if you know that is Nominal GDP (NGDP) and that it is not real GDP (RGDP).

    4) “Inflation did jump up in the late 1990″²s which looks to reflect GDP reaching its natural level.”

    This is absolutely false.

    Japan raised its Consumption Tax from 3% to 5% at the beginning of the 1997 Fiscal Year on April 1, 1997. This artificially boosts the year on year core-core CPI from April 1997 through March 1998. Unfortunately there is no tax adjusted CPI series. You either have to make your own adjustment or make note of it.

    5) This post is rife with elementary errors.

    If you can’t correctly construct a simple FRED formula, don’t know which interest rate is the official BOJ policy rate, and don’t know the history of how Japanese tax policy has affected the CPI, you have no business attempting to do a post on Japan supporting your gross miscomprehension of the Fisher Effect.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. April 2014 at 18:17

    Scott,
    On a related note, Stephen Williamson butchers the Japanese inflation rate in his latest post in support of the theory that umbrellas cause rain.

    http://newmonetarism.blogspot.com/2014/04/deflation-in-sweden-svenssons-advice-is.html

    April 20, 2014

    Deflation in Sweden: Svensson’s Advice is the Problem, Not the Solution
    By Stephen Williamson

    “…Another notable experiment is the Bank of Japan’s “Quantitative and Qualitative Monetary Easing Program,” which began in April 2013. Here’s how that’s going:

    [Graph]

    While there was a bit of a burst in inflation toward the end of 2013, the year-over-year inflation rate in Japan is now less than 1/2%.***…”

    “…***Addendum: I made an error in the chart by including a March observation which was a preliminary estimate for something that was not in fact the national CPI. Here’s the chart that (correctly) drops the last observation:

    [Updated Graph]

    So that doesn’t give the dramatic story I thought it did, i.e. year-over-year inflation is still up around 1.5%, though short of the Bank of Japan’s 2% inflation target. Note as well, that if we look at the levels, in January the CPI fell, and there was no change in February.

    [Graph]

    Further, if we take a longer view:

    [Graph]

    So, in spite of the recent blip in inflation, the average rate of inflation in Japan over the last twenty years is about zero, and in that 20-year period we have seen other short bursts of inflation. Thus, the Bank of Japan seems to have had some difficulty in producing inflation – but this time may be different. Given that the Bank seems intent on holding the short-term nominal interest rate at zero (essentially), I don’t see it, but I’m curious to see how the data unfolds.”

    ——————————————————–

    How did Williamson learn about his error? In comments we read: (Links are in brackets to deactivate them.)

    “Charlie Clarke April 22, 2014 at 5:47 PM
    Where did you get the inflation data for Japan? I can’t find a series that looks like that. I think the official inflation data is here: [http://www.stat.go.jp/english/data/cpi/]

    The most recent report is here: [http://www.stat.go.jp/english/data/cpi/1581.htm]

    It shows in February year over year the cpi index rose 1.5%.

    For March, it only lists preliminary Tokyo results. CPI for the Tokyo area is up 1.3%. The only .4% numbers I see are core year over year for Tokyo area or .4% monthly headline.

    Maybe there is an error?”

    “Stephen Williamson April 22, 2014 at 7:02 PM
    I got up to December from FRED:

    [http://research.stlouisfed.org/fred2/series/JPNCPIALLMINMEI]

    Then, January, February, and March (preliminary) came from the Bank of Japan’s web site.”

    Stephen Williamson’s newest best friend Edward Lambert chimes in:

    “Edward Lambert April 22, 2014 at 7:05 PM
    Charlie,
    here is a direct link to one of the FRED charts that I use in looking at Japan. It includes Japan’s unit labor cost, inflation and labor share. You can change the parameters as you wish.
    [http://research.stlouisfed.org/fred2/graph/?g=ydJ]”

    “Stephen Williamson April 22, 2014 at 7:19 PM
    I checked this again and it looks right. I didn’t splice times series with different base years, or something like that. The weird part is that the Bank of Japan’s year-over-year numbers don’t look right. Notice, as well, that, from here:

    [http://www.stat.go.jp/english/data/cpi/1581.htm]

    (which is the same place I got the 3 observations for this year), the B of J’s claim is that the monthly increase in the CPI in March is 0.4%, but you can see that it’s actually about -0.9%.”

    “Charlie Clarke April 22, 2014 at 8:46 PM
    The March numbers won’t be available until April 30th. The March you see at that site is only for the “Ku-area of Tokyo.” So the year over year is against a totally different series. The January and February numbers are from all of Japan. I think you are correct until you put the March data. That data is from a completely different series for Tokyo. That’s why the year over year look wrong, they are compared to the rest of the Tokyo series.”

    Incidentally the latest Japanese inflation report came out yesterday and year on year headline CPI is back up to 1.6%.

    The interesting thing is that it never once crossed Stephen Williamson’s mind that there was something odd about the year on year Japanese CPI rate dropping all the way from 1.5% to 0.5% in a single month.

    The last time a drop of that magnitude in the Japanese year on year headline CPI inflation rate occured was in April 1998, after exactly a year had elapsed following the increase in the Consumption Tax from 3% to 5% in April 1997.

    So I wonder, is a talent for making elementary data and/or arithmetic errors a necessary attribute in order for one to be a Neo-Fisherite?

    Or has their theory that umbrellas cause rain so entranced them that they have become blind to empirical reality?

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. April 2014 at 19:14

    Edward Lambert is a relatively harmless, in part because Angry Bear has degraded itself to the point where few people take the blog seriously anymore. (“Rabid Bear” probably needs to put down just to end its misery.)

    Lambert is symptomatic of that degradation. His routine misappropriations of basic economic terminology, misinterpretations of basic economic concepts, elementary math errors, use of the incorrect data and lapses into fits of deranged martyrdom coupled with taoistic mystical flights of fancy whenever he is criticized, show that anyone and anything can become a blogger at Angry Bear these days.

    But Stephen Williamson is a different matter. People take him *very, very* seriously because of his position at the St. Louis Fed and as Senior Associate Editor at Journal of Monetary Economics. So seriously that everybody, and I mean *everybody* is afraid to speak plainly and tell him to his face that his theories are utter BS.

    Here’s a comment that I found at Noahpinion yesterday that I think is worth sharing (links bracketed):

    http://noahpinionblog.blogspot.com/2014/04/the-neo-fisherite-rebellion.html?showComment=1398321900014#c1965483145151635

    “Anonymous 2:45 AM
    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.”

    Followed by this comment:

    “Anonymous 2:57 AM
    Everyone is making fun of him on : [http://www.econjobrumors.com/topic/deflation-in-sweden-svenssons-advice-is-the-problem-williamson]

    from where your post have been copied”

    And true enough, if you go to econjobrumors you find the following:

    http://www.econjobrumors.com/topic/deflation-in-sweden-svenssons-advice-is-the-problem-williamson

    “Economist 5b45
    I think many of you missed another bad move by our beloved monetarist economist, SW. In this post ( [http://bit.ly/1eYYPLK] ) he went on saying that lower rates are the problem and all that crap he and 12 cent dude [John Cochrane] are repeating.

    Then Lars Svensson directly commented the post saying:…”

    “Economist 6da5
    The whole post was based on a data error using Japan data. See the comments. He had a March drop of inflation from you 1.5% down to .4%. But that actually didn’t happen. Not sure how much longer it will be up. It dramatically effects the analysis.”

    “Economist cd45
    Apparently Williamson is even more incompetent than what I thought.”

    “Economist e2ee
    Lol, Stephen Williamson writes: “I see what’s going on. Thanks. I’ll just scratch the last number, and fix the chart when I get a chance.”

    Not even the funniest part of the post: “…the Fisher relation guarantees that. In order to meet its inflation target, the Riksbank has to increase the policy rate – there’s no other way to do it.

    Lol @ the wrong-signers…”

    “Economist 2652
    It happens always in basic courses that students misunderstand Fisher Relation, but what about two self proclaimed top monetary economists? It’s really depressing”

    “Economist cd45
    …Really depressing since they seem to have no clue about stable equilibria and sunspot equilibria”

    “Economist 4fb5
    Man, I used to think that Williamson was a misguided and sometimes obtuse but at least reasonably intelligent person. He is challenging that belief right now…”

    “Economist 2915
    Then you write a paper and you find a referee like him or JC. Then people wonder why Macro No Giod”

    “Economist f087
    …This is really a serious issue since many hacks like Williamson control many top journals”

    “Economist b540
    …Williamson the blog hack is very different than Williamson the editor.”

    “Economist 4dd4
    …Really? Why should he understand Fisher relations while editing a journal but suddenly forget about it while blogging?”

    “Economist 589a
    In his blog, he is having fun asserting his speculative theories as fact. In real life, he is willing to consider other theories.”

    “Economist 8799
    Ugh, enough with minissota…”

    “Economist cd45
    …It’s not a matter of speculating, but of being ignorant of basic economic relations. I always thought I was wrong and unable to understand their argument, but lately I’m starting to realize they are ignorant of economics”

    “Economist dccb
    Is williamson still misunderstanding the fisher equation? arggh”

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. April 2014 at 19:56

    Correction:
    In my comment at “26. April 2014 at 15:20”

    “The Reichsbank pegged the discount rate at 5.0% from January 1914 through June 1922, a period of 8.5 years:…”

    Should read:

    “The Reichsbank pegged the discount rate at 5.0% from January 1915 through June 1922, a period of 7.5 years:…”

  21. Gravatar of Benjamin Cole Benjamin Cole
    26. April 2014 at 20:04

    Excellent blogging.

    My Uncle Jerry used to day, “You know, traffic cops with white gloves in the middle of the intersection cause traffic jams. Every time you see a guy there in his white glove, you have terrible traffic jams.”

  22. Gravatar of Benjamin Cole Benjamin Cole
    26. April 2014 at 20:08

    Question for Mark Sadowski:

    Mark, do you know how large (relative to GDP) was the QE practiced by the Bank of Japan 20010-2006?

    I ask this, as that BoJ QE program did not lead to inflation, although it was associated with growth. I am wondering if the Fed’s QE program is relatively larger.

    I am wondering if a moderate level of QE could become a long-term Fed tool. I mean, five years was not long enough n Japan….

  23. Gravatar of rob rob
    26. April 2014 at 20:16

    I would like to see even a crazy fed chairmen keep interest rates at zero during a hyperinflation. The problem most have is that they are treating the natural(Wicksellian) interest rate as fixed and unresponsive to monetary policy, when really it is highly dependent on the future of the macroeconomy which is highly dependent on… you guessed it monetary policy!
    We have Japan to point to, we have the 70s to point to, we have the great depression to point to, really I cannot for the life of me understand how so many economists are making such a fundamental error.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. April 2014 at 20:33

    Benjamin Cole,
    “Mark, do you know how large (relative to GDP) was the QE practiced by the Bank of Japan 20010-2006?”

    The Japanese monetary base increased from 12.7% of GDP in 2000Q4 to 22.1% of GDP in 2006Q1.

    “I ask this, as that BoJ QE program did not lead to inflation, although it was associated with growth.”

    Here’s a graph of Japans’ annual CPI inflation and harmonized unemployment rate:

    http://thefaintofheart.files.wordpress.com/2013/06/sadowski2b_5.png

    Note that aside from the consumption tax induced increase in 1997, Japan’s inflation rate dropped nearly every year from 1991 through 2002 and then increased until there was consecutive years of consumer price inflation in 2006-07 for the first time in nearly a decade.

    “I am wondering if the Fed’s QE program is relatively larger.”

    The US monetary base increased from 5.6% of GDP in 2008Q2 to 21.4% of GDP in 2013Q4. So yes, the increase has been larger.

  25. Gravatar of Tom Brown Tom Brown
    26. April 2014 at 20:46

    Mark I’m curious: why put some of those links in square brackets to deactivate them? Because if you have too many links your post goes into moderation?

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. April 2014 at 20:56

    Tom Brown,
    Exactly.

  27. Gravatar of Saturos Saturos
    26. April 2014 at 21:48

    My guess is that Noah Smith is wrong again: https://twitter.com/Noahpinion/status/460227830199357440

  28. Gravatar of Tom Brown Tom Brown
    26. April 2014 at 23:38

    Scott, I think Ryan Avent answered my question (above, at top) here:

    http://www.economist.com/blogs/freeexchange/2014/04/monetary-policy?fsrc=scn/tw_ec/on_umbrellas_causing_rain

    “The central bank might possible be able to overcome this with a sufficiently powerful psychological signal. But it will be difficult for a central bank to argue that it’s easing, for instance, when it’s actually raising rates.”

    Do you agree?

  29. Gravatar of Tom Brown Tom Brown
    27. April 2014 at 00:52

    Mark, in these comments it didn’t seem like Williamson and Rowe were on *completely* different worlds:

    http://newmonetarism.blogspot.com/2013/12/volcker-and-bernanke.html?showComment=1386553357239#c8287838279011253372

    But still I don’t think Rowe convinced him.

    Also, I noticed that Noah swooped in to take a jab at the anonymous economist critics of Williamson you linked to above:

    “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. :-)”

  30. Gravatar of Kenneth Duda Kenneth Duda
    27. April 2014 at 03:56

    Noah Smith writes:

    > What I call the “Neo-Fisherite” assumption is that in the
    > long term, r (the real interest rate) goes back to some
    > equilibrium value, regardless of what the Fed does.

    Scott objects that Noah has mis-interpreted the empirical evidence, confusing cause and effect, which seems right.

    But Scott does not address Noah’s thought experiment:

    > The thought experiment is this: Suppose there was no government debt,
    > and the Fed raised nominal interest rates to 20% and held them there
    > forever. What would happen to real rates? Well, they wouldn’t rise to
    > 20% forever, because there’s just no way that our society can
    > physically, technologically deliver a 20% riskless rate of return to
    > bondholders. Eventually, one of two things would have to happen: either
    > 1) the Fed’s control over the nominal interest rate would break down, or
    > 2) inflation would rise (the Neo-Fisherite result). If the Fed can’t
    > control the nominal interest rate, then our standard models of monetary
    > policy all break down, and we have to think about the microeconomics of
    > money demand, which is hard to do. But the only alternative would be the
    > Neo-Fisherite result.

    Noah reveals a second basic error here. He is assuming convergence of a system that may not converge. (The computer-science equivalent is assuming that an algorithm terminates when it may not — you can solve the halting problem if you ignore this little detail.)

    In reality, if the Fed pegs nominal short-term interest rates forever, come hell or high water, the economy won’t converge. Sure, *if* the economy were to converge, it would converge to R=r+i. But if the Fed pegs rates too high, we will go into deflationary collapse, and if too low, then hyperinflation. Either way, then indeed, the Fed’s control over nominal rates would break down, but “our standard models of monetary” are working just fine, thank you very much.

    This seems like yet another elementary conceptual error. Sad, I really like Noah. His article on bullshit is just wonderful, http://noahpinionblog.blogspot.com/2014/01/tribal-reality-and-extant-reality.html. I could finally make sense of the liberal vs conservative “debates” in this country.

    -Ken

  31. Gravatar of ssumner ssumner
    27. April 2014 at 05:48

    Tom, Yes, there are regimes where that is possible, but it’s highly unlikely, and we don’t have that regime.

    tesc, That’s a good point.

    Vince Cate, Hyperinflation is often caused by non-madmen central bankers monetizing debts. I’m no expert here, and would defer to Mark Sadowski. But my sense is that the problem is partly budget deficits, but also partly an inability to borrow sufficient funds. Thus if Zimbabwe tried to borrow as much as the US government did in recent years, they would face resistance from lenders. So they print money.

    Youko, Look at commodity futures.

    Kevin, Great analogy.

    Undergrad, Good comment, but I’d go further. Rather than switching from interest rates to interest rate rules, I’d switch from interest rates to the supply and demand for base money.

    Mark, Thanks for all that info–Angry Bear does seem to be hitting new lows.

    The other thing about Japan is that the base increases were partly reversed in 2006.

    Kenneth Yes, a lot of these hypotheticals that get discussed are not feasible policy regimes.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. April 2014 at 06:12

    Tom Brown,
    “Mark, in these comments it didn’t seem like Williamson and Rowe were on *completely* different worlds:…”

    Nick Rowe deserves *a lot* of credit for trying to politely engage with Stephen Williamson.

    “Also, I noticed that Noah swooped in to take a jab at the anonymous economist critics of Williamson you linked to above:…”

    That occurs on page 3. I should have mentioned there are at least three more pages of comments like that, some better than others.

    These commenters are not completely anonymous of course. They have identification codes and I imagine it’s possible if one is a frequent reader of econjobrumours to figure out who some of the frequent commenters are.

    But notice that Williamson’s own blog is stuffed to the gills with commenters who call themselves “anonymous”. There’s also an inordinate number of such commenters at Noahpinion.

    And that’s part of my point. There’s lot’s of economists who think Williamson is full of “stuff” but are afraid to say anything about it out it in the open.

    P.S. I recently had a back and forth with one particularly abusive “anonymous” at David Beckworth’s blog that lasted nearly a week. This one revealed a gift for googling but also a minimal understanding of the literature on wages and inflation, econometrics, the economics of public debt dynamics and elementary algebra/arithmetic.

    In short he/she was a sad combination of rudeness, stupidity and cowardice. (Whereas I like to think I’m just rude.)

  33. Gravatar of Morgan Warstler Morgan Warstler
    27. April 2014 at 07:10

    Scott,

    “The economy has an equilibrium real, or inflation-adjusted, interest rate.”

    Here’s the model I want your feedback on: what if the equilibrium real interest rate is negative forever?

    And, yes I know this is just a hypothetical (but it is realistic one) idea that we are headed to a world without any credit / debt?

    Meaning in the future there are rents and purchases, but basically no one will loan you money to buy a thing to live your life or to start a business.

    This occurs, is occurring, because software eats the world.

    The fastest growing businesses cannot borrow money when they start, so that selling equity in business ventures becomes the standard, and they either die or turn a profit fast enough, that they do not need to borrow money.

    The the old dying slow non-software based companies that have debts find overtime the cost of borrowing money increases, because their market share is shrinking.

    The closes thing to loans in this future economy is taxes / wealth transfers (via GI/CYB). You can get free stuff if you are poor, and live a decent life, but if you hit it big time, you are paying to give everyone free stuff.

    OK, so I’ve described it to best of my ability, what if the real interest rate is negative from now until there are no loans of any kind? We have entered the End of Credit?

    “The real interest rate is essentially the nominal interest rate minus the inflation rate.”

    If the real interest rate must always be negative, the higher inflations is, the lower the nominal rate must be, right?

    If the real interest rate must always be negative, the higher the positive nominal interest rate is, the more negative the inflation rate must be, right?

    If you are the Central Bank and you appear to be targeting 2% inflation, but you keep coming in at 1%, doesn’t that mean you are reducing for how low the nominal rate must be?

    If inflation is 2%, and the real interest rate must be negative, the nominal rate would have to be < -2%.

    If inflation is 1%, and the real interest rate must be negative, the nominal rate would have to be < -1%.

    If inflation approaches 0%, or even say .2% deflation, the nominal rate could get as high as .1%.

    So IF you are the Central Bank, and you DON"T KNOW that the economy now requires that real interest rates be negative, what if you haven't accepted the End of Credit…

    If you raised nominal interest rates past zero, you'd get deflation.

    If you hit lower bound, and can't do negative nominal interest rates, you say "OK, let's do QE"

    QE is is basically deflation in a world where CB hasn't yet realized End of Credit is nigh?

    The economy is on balance demanding negative real interest.

    The CB doesn't / can't quite accept this fact yet.

    Each round of QE, protects the old big companies, including the Govt., but it REALLY increases the relative valuations of the software / equity based ones, it lets them sell off equity cheaper, have more to spend, but give less away.

    What I can't figure out is: which would be faster to End Credit?

    1. QE sustains the status quo longer while the real forces of the economy (Equity based software companies) build and grow outside the gates until they simply charge in an overwhelm?

    2. QE stops, negative interest rates are not possible, the real economy demands negative interest rates, and current debt structures cannot get turned over, and desperately trying to survive a massive liquidation bloodletting, the big old companies get taken over and gutted by software based ones.

    I don't know which one to root for?

    I assume that eventually the CB wakes up to the End of Credit, and when they do they adopt a very low NGDPLT, something like 1%, in order to make the conversion of Debt to Equity as painless as possible to status quo.

    Either way, it seems like you "could" see inflation BOUNCE up and down, if you raised nominal Interest rates.

    Each interest rate increase, suddenly makes the old status quo players pay more to borrow money. Software companies don't borrow money.

    So debt based atomic companies raise prices. This cause a rush of users to the new software base systems, killing off more of the atomic companies – inflation drops back to nothing.

  34. Gravatar of Dustin Dustin
    27. April 2014 at 07:17

    Kenneth,

    Thank you for addressing that thought experiment – it is what I was hung up on ever since SW’s famous post that riled everyone up so.

    That said, I don’t quite understand your explaining it away as non-convergence.

  35. Gravatar of Tom Brown Tom Brown
    27. April 2014 at 07:18

    “Whereas I like to think I’m just rude.” Nice!

  36. Gravatar of Tom Brown Tom Brown
    27. April 2014 at 07:35

    @Scott, thanks for your response. On the subject of the power of expectations, do you have anything to add to Marcus Nunes’ answer to me here?:

    http://thefaintofheart.wordpress.com/2014/04/26/how-to-make-a-great-stagnation-come-true/#comment-13798

    @Mark, I think I saw that interchange you had with your anonymous critic. My eyes glazed over a bit at your interchange, so I didn’t delve in… I figured that anonymous must have known something about the subject, and had encountered you before too. Someday I’m going to have to learn what “at the 5% significance level” means and how “Granger causality” is calculated so I can follow along. The one and only reason I’d love to see you get a blog is that I’d hope you’d put up a tutorial page so us amateur hacks like me could at least get an idea what it is you’re talking about half the time (otherwise I think it’s kind of unique/interesting/funny how easy it is to get a hold of you: you’re like the wandering hobo economist… like Dilbert’s garbage man maybe). And regarding Granger: maybe Wikipedia will do.

    But if what you say about anonymous is true, he/she had me fooled… I didn’t know that was just Googling skill. Shoot I have a bit of that I can call on when I’m not being lazy. To tell you the truth, just from the general tone, I figured anonymous was Marko (again based on the little bit of your interaction with him I bothered to actually try to grasp).

  37. Gravatar of Jim Scheltens Jim Scheltens
    27. April 2014 at 07:58

    When you quote Milton Friedman’s insight on interest rates:
    Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.
    You seem to jump from “has been” to “is”. If you leave the “has been” in the sentence, the insight seems uncontroversial or even obvious. Jumping from “has been” to “is” when interest rates are above the lower bound seems very dubious to me. If (“if” being the big qualifier) the central bank limits its tools to interest rates than very low rates are as loose as money can get. As much as you don’t like using interest rates to signal monetary policy, they seem to work quite well as if one is away from the lower limit (as the Canadian example shows). If the lower bond comes into play than policies like quantitative easing are all you have left on the monetary side, and they were used in the great recession. I didn’t see the economy bounce when QE started.

  38. Gravatar of Don Geddis Don Geddis
    27. April 2014 at 10:45

    @ Jim Scheltens: There is no jump from “has been” to “is”. The relationship between current nominal rates, and whether money is currently easy or tight, is not at all a simple one, and nobody (here) is suggesting a simple relationship.

    “limits its tools to interest rates”. That would be a silly, self-imposed, restriction. (Which of course doesn’t prevent many real-world central banks from making this exact mistake.)

    “QE [is] all you have left”. Not true. There are a number of other technical actions that can also be taken (interest on reserves, etc.). But what you’re actually mostly missing is forward expectations, which is vastly more powerful than either interest rates or QE. NGDPLT is mostly about setting a clear target. You may wish to read Nick Rowe’s Concrete Steppes.

  39. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. April 2014 at 14:01

    Tom Brown,
    “To tell you the truth, just from the general tone, I figured anonymous was Marko (again based on the little bit of your interaction with him I bothered to actually try to grasp).”

    It could be “Marko”. But rude, stupid, and obsessed with private sector debt is a very common type in the econblogosphere, and he/she almost always operates under a pseudonym of some form. If I ever do start a blog I should do a troll bestiary a la Noah Smith.

  40. Gravatar of Kenneth Duda Kenneth Duda
    27. April 2014 at 17:01

    @Dustin:

    ≥ That said, I don’t quite understand your explaining
    > it away as non-convergence.

    Well, if I understand Noah’s argument, it’s that in the long run, R=r+i. It just must. That means if the Fed pegs nominal short-term rates at 20% forever, and the natural real rate of interest is 2%, then inflation just must be 18%.

    But that assumes we reach a happy stable operating point.

    What would much more likely happen is that once people realized that short-term rates were really going to be 20% forevermore, then long-term rates would quickly adjust accordingly (because long-term rates are just the expected short-term rates averaged out over the period with a little premium for loss of liquidity). So now all borrowers at all terms and all risk profiles are facing nominal rates of 20% or higher.

    So much for credit. Commercial credit would seize up. Many buyers would become unable to buy and would cancel orders or reduce their forecasts. Sellers would cut production. People would be laid off and prices would start to fall. All transactions would have to be cash based because no one can afford credit. I don’t know what the end-game of that nightmare looks like, but it certainly is not headed in the direction of 18% annual inflation. More like deflationary death spiral.

    The reverse is, well, the reverse. If the Fed pegged short-term rates at zero, injecting as much cash into the economy as needed to achieve that, people would realize these cash injections are not temporary and thus inflation was inevitable as the cash enters the non-financial economy. As inflation increases, it becomes obvious that you can make money by borrowing, hoarding commodities, and selling them later, paying back the loan with cheaper dollars. Hyperinflation comes after that. This is nothing like the neo-fisherite fantasy of 2% deflation required for R=r+i.

    I’m pretty sure this is what Krugman is trying to say here:

    http://krugman.blogs.nytimes.com/2013/11/29/on-the-importance-of-little-arrows-wonkish/?_php=true&_type=blogs&_r=0

    I must admit, I don’t fully understand Krugman’s post, but I think it boils down to the equilibrium that the neo-Fisherites have discovered, where we have short-term rates pegged at 0, 2% deflation each year, is not a stable equilibrium because the constant money supply increases needed to hold nominal rates at zero will not be met in reality by an ever-spiraling demand to hold cash. Once people start spending the money and inflation goes positive, the whole thing explodes in hyperinflation as it becomes profitable to hoard commodities and pay back with dollars worth less than the ones you borrowed at 0% nominal.

    -Ken

  41. Gravatar of Kenneth Duda Kenneth Duda
    27. April 2014 at 17:08

    Sorry, one more thought.

    It is *so frustrating* to me as a non-economist to see professional economists debating this ridiculous neo-Fisherite idea, that somehow low interest rates could cause deflation, and that we must raise them to increase spending in our economy. It’s an up-is-down proposition, leading to obviously wrong policy. It would be challenging enough for Yellen to do the right thing (e.g. NGDPLT) with a professional economist consensus behind her. WIth the headwinds from total nonsense from the “professionals”, her job got 10 times harder. And it matters, for the millions of needlessly unemployed.

    I know that the academic computer scientists generate mountains of gibberish while us professionals in industry march along innovating in useful ways, so it’s not surprising that economics looks similar. Except in the case of economics, the true professional economists (the ones making a fortune in the financial sector) aren’t advising the Fed properly. The closest thing we have to a “Fed” in computer science is what, IANA? IEEE? IETF? But even when the IETF becomes paralyzed by lunacy and politics, we can still get innovations like VXLAN to happen — the standards can follow a little later. It is too bad we can’t really put the “market” into market monetarism, with competing policies for regulating the supply of fiat money, from which we could pick the winner by the policy that led to the most stable NGPD growth… oh, wait…

    -Ken

  42. Gravatar of Tom Brown Tom Brown
    27. April 2014 at 20:03

    Ken, perhaps Brad DeLong’s explanation is more understandable:
    http://equitablegrowth.org/2013/11/29/understanding-the-stability-of-general-equilibrium-as-a-requirement-for-getting-a-union-card-as-an-economist-friday-focus/
    Or Rowe’s (link in DeLong’s)
    Or more recently, Ryan Avent’s:
    http://www.economist.com/blogs/freeexchange/2014/04/monetary-policy?fsrc=scn/tw_ec/on_umbrellas_causing_rain
    I couldn’t make sense of Rowe’s, but I liked the other two better than Krugman’s.

  43. Gravatar of Tom Brown Tom Brown
    27. April 2014 at 20:07

    Which Fisher are we talking about here anyway (in “Neo-Fisherite”)? The one DeLong mentions: Franklin Fisher?

  44. Gravatar of Tom Brown Tom Brown
    27. April 2014 at 20:08

    Mark, we can always use another bestiary!

  45. Gravatar of Tom Brown Tom Brown
    27. April 2014 at 20:14

    … except I’d probably be in it. :(

  46. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. April 2014 at 07:01

    Tom Brown,
    “Which Fisher are we talking about here anyway (in “Neo-Fisherite”)? The one DeLong mentions: Franklin Fisher?”

    No, Irving Fisher.

    If Friedman was the father of Monetarism, Irving Fisher was the grandfather.

    That’s why Edward’s Lambert’s posts on the Fisher Effect are so ironic. It’s very much like his invocation of Keynes’ concept of Effective Demand to criticize aggregate demand stimulus. (Lambert is quite literally the biggest dufus in the econblogosphere.)

    Fisher’s achievements are so numerous and so varied it’s very hard to summarize.

    In addition to the Fisher Effect and his research on the quantity theory of money, he is also famous for his pioneering work in intertemporal choice and econometrics. An entire channel of the Monetary Transmission Mechanism (The Unanticipated Price Level Channel) can trace its existence to his Debt-Deflation Theory of depressions.

    Far less importantly, but of topical relevance right now:

    http://houseofdebt.org/2014/04/26/100-reserve-banking-the-history.html

    Fisher was one of the original gang of four (the others being Simons, Knight and Viner) that supported Full Reserve Banking during the Great Depression (i.e. “The Chicago Plan”).

  47. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. April 2014 at 07:16

    Tom Brown,
    “Mark, we can always use another bestiary!… except I’d probably be in it.”

    Noah Smith created Morgan Warstler a troll category all to himself. Given your monumental prolificness I think you would surely merit a similar honor.

    But unlike many of the other troll categories, I see you almost exclusively as a force for good.

    Your insatiable curiousity and eager willingness to share knowledge (in my readings I notice you often acting as a go-between, or “troll diplomat”) are coupled with an extremely good nature nature and ultra thick skin.

    There’s not much to cricize about that except that your enthusiasm can be a little trying at times.

  48. Gravatar of Tom Brown Tom Brown
    28. April 2014 at 07:19

    Mark, thanks. I’d been assuming it was Irving the whole time until I read Brad’s post which made me question that (I don’t think I’d seen anybody spell it out). Didn’t know the Chicago plan connection.

    “Lambert is quite literally the biggest dufus in the econblogosphere”

    Which means I’m not! Woo-hoo! I’ll take that as a compliment.

  49. Gravatar of Tom Brown Tom Brown
    28. April 2014 at 07:42

    Woo-hoo!… I’ve been promoted to “troll diplomat!”… and one’s that’s (mostly) a “force for good” to boot. Thanks for your generous compliments.

  50. Gravatar of Edward Lambert Edward Lambert
    28. April 2014 at 12:29

    Scott,
    The Fisher Effect is stable or unstable depending on inflationary pressures. The key is the autoregressive coefficient on inflation. My post today shows a model with actual data on CPI.
    http://angrybearblog.com/2014/04/is-the-fisher-effect-stable-or-unstable.html

    In David Beckworth’s attempt to disprove the Fisher Effect in his post today, he cites examples that prove an unstable Fisher Effect. The current cautionary atmosphere to mute inflationary forces is showing a stable Fisher Effect.

  51. Gravatar of Benny Lava Benny Lava
    28. April 2014 at 15:34

    The other day I read that Sweden was experiencing deflation. I thought “I bet deflation is a sign of tight money, and that their NGPD growth is in the tank and unemployment going up”. So I googled it and sure enough. Tight money usually means low growth, high unemployment, and low inflation. Finally, some economic theory that has predictative power.

  52. Gravatar of Dan Nile Dan Nile
    28. April 2014 at 18:32

    Let us imagine that Tom Brown owns a bank, and I own an autographed photo of Paul Krugman. I have assessed, and Tom agrees, that this photo is worth $1.1 trillion dollars. Assuming a 10% haircut, Tom’s bank loans me $1 trillion dollars, which I proceed to spend on multiple home delivery subscriptions of the New York Times, saving the newspaper industry.

    Later, I default, and Tom gets to put the Krugman photo onto its balance sheet as a non-marked-to-market Level III asset.

    Did Tom just create $1 trillion dollars with no help from monetary or fiscal policy? If not, why not?

  53. Gravatar of ssumner ssumner
    29. April 2014 at 04:34

    Morgan, You are making things too complicated. Target NGDP and let the chips fall where they may. We don’t need to worry about inflation, interest rates, productivity, etc.

    Jim, Sorry, but interest rates don’t work at all well as a signal of monetary policy. They are perhaps the very worst signal. You say that everyone knows that low rates means money has been tight. I see just the opposite. I claim money has been tight since 2008 and most people think I’m crazy.

    Dan, I consider base money to be “money”, so by that definition the bank has not created any money.

  54. Gravatar of ssumner ssumner
    29. April 2014 at 04:36

    Tom, nothing to add.

  55. Gravatar of Dan Nile Dan Nile
    29. April 2014 at 18:13

    That trillion dollars of credit spends just like “base money”, regardless of that tautological definition of money.

  56. Gravatar of ssumner ssumner
    1. May 2014 at 05:04

    Dan, Nope. Cash is very different from credit. It tends to be used for different types of transactions.

  57. Gravatar of Morgan Warstler Morgan Warstler
    1. May 2014 at 06:59

    Scott,

    What if the real interest rate is negative forever? Or the trend is that way.

    I’m asking BECAUSE:

    “Cash is very different from credit. It tends to be used for different types of transactions.”

    If we are moving to a cash + equity = wealth, with no debt, why doesn’t the % targeted in NGDPLT matter?

  58. Gravatar of Jason Jason
    8. May 2014 at 16:47

    These arguments don’t actually impact at least one version of the neo-Fisherite model:

    http://informationtransfereconomics.blogspot.com/2014/05/blowing-anti-neo-fisherite-model-out-of.html

    The graph of price level vs monetary base for several countries shows that Canada is basically where the US was in the 1990s (i.e. without a neo-Fisherite problem) and that combining that same price level model with a supply and demand model of interest rates only has a strong Fisher effect on rates during the 1970s and 80s.

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