Mark Sadowski recently discussed a study by Harald Uhlig on the effects of monetary shocks on RGDP.  Uhlig didn’t find much effect.  I suggested that there is a severe identification problem, and that NGDP fluctuations are the best indicator of monetary shocks.  Mark replied as follows:

Scott,
Well if all NGDP shocks were treated as monetary shocks then we’re assuming that AD shocks are purely monetary in origin. Obviously that would result in much larger estimates for the proportion of RGDP variation attributable to monetary policy shocks.

That also seems like too strong an assumption to me. That is, I think that it is implicit that monetary policy is ultimately responsible for the level of NGDP at any point in time, but that doesn’t necessarily mean monetary policy is solely responsible for every shock to AD.

I don’t think there is any question that the vast majority of economists would agree with Mark and not me on this issue.  Let me try to explain why this stuff makes me a bit uncomfortable.  Here are some possible definitions of monetary shocks:

1.  Unexpected changes in the fed funds target

2.  Deviations of the fed funds target from the Taylor Rule value

3.  Unexpected changes in the monetary base

4.  Unexpected changes in M2

And there are many more.  For each proposed definition of a “monetary shock” you will get a different answer to the question; “How much impact do monetary shocks have on real output?” That makes it all seem quite arbitrary.

It might be helpful to return to the fiscal multiplier question as a point of comparison.  The multiplier might be defined as the impact of federal spending shocks on RGDP, holding both private investment and S&L spending fixed.  In fact, as far as I know economists tend to hold state and local spending fixed but not investment spending, which is allowed to vary for “crowding out” reasons when estimating the multiplier.  This makes no sense to me.  Federal authorities have no control over S&L spending.  Almost everyone agrees that the multiplier should be estimated holding monetary policy fixed, but no one seems to know what that means.

I have a completely different view.  I’m a pragmatist.  For me “the” fiscal multiplier is what happens when the federal fiscal authorities change federal spending, and all other sectors of the economy (S&L, the Fed, private investment) respond to that action in the way they actually do respond in the real world.  In other words, I want to know the counterfactual change in RGDP with or without that federal action, holding nothing constant.

Now let’s return to the puzzling problem of identifying monetary shocks.  To me the only interesting question is how much more volatile is RGDP as compared to an economy where the Fed has adopted the optimal policy.  That’s a pragmatic way to define the real effects of monetary policy.  It’s a definition with policy implications.  It tells us how much we can hope to improve things.  So if I knew how much more unstable RGDP has been over the past few decades, as compared to the volatility of RGDP in a policy regime that pegs the price of NGDP futures contracts to rise at 5% per year (assuming that policy is optimal), then that seems to me to be the most useful definition of the contribution of monetary shocks to the business cycle.  It’s a bit arbitrary, but every other definition I can think of is essentially 100% arbitrary.

Mark might reply that NGDP targeting cannot prevent all fluctuations in NGDP, which is true.  This is another reason why we need an NGDP futures market.  That market would provide a very good estimate of the amount of NGDP variation that was predictable, and hence preventable.  If we had that market, and if it was not targeted (and hence was volatile) it would be the ideal monetary shock indicator to put into these VAR studies.

Vaidas reminded me that today is the 5 year anniversary of my blog.  I had totally forgotten that, but somehow remembered the 5 year anniversary of the Mankiw/Krugman dispute. I feel burned out, so I’m going to relax today and do a file dump of stuff I wrote a while back.

Here are all the films I saw at the theatre last year, including a bunch that were made years earlier (warning; don’t see them based on my recommendation):

In the Mood For Love (Hong Kong)  4.0  This 2000 Wong Kar Wai film was voted by film critics the best movie of the past 20 years.  Indeed one of only two recent films to even make the Top 50 of All Time list (along with Mulholland Drive.)

Fallen Angels (Hong Kong)  3.9  A 1995 film from Wong Kar Wai’s golden age (1991-2004.)  How many modern directors produced 7 masterpieces in a row?  One of the coolest films ever made and just a blast to watch on the big screen.  I enjoyed it more the second time, as I went in understanding there wasn’t much plot.

Her (US)  3.8  Thought-provoking on many different levels. Almost flawlessly directed.  The one must see film of 2013.

Sunless (French) 3.8   A 1982 Chris Marker philosophical meditation on Iceland, Africa, Tarkovsky’s Stalker, cats, Vertigo, and above all Japan.  How good is it?  The narrative is dense and elliptical and comes at you fast.  Enough of the ideas hit home with me to make it work, but it would take a much brighter person (Tyler Cowen?) to review this film properly.

20 Feet from Stardom  (US)  3.5  A very enjoyable documentary about backup singers.  Was Merry Clayton’s singing on Gimme Shelter the high point of 1960s rock?

Post Tenebras Lux  (Mexican) 3.5  Less than the sum of its parts, but the parts are occasionally sublime.  Especially the intro.  Had very vivid dreams after this film—is there any higher praise?

American Hustle  (US)  3.5  Perhaps because I’m nostalgic for the 1970s (which may go down in history as the decade of “peak privacy”) I really enjoyed this film, despite its Hollywood formulaic style.

The Grandmaster  (Hong Kong)  3.4  I tend to get bored with kung fu fight scenes, but this was better than most.  We’ll have to wait ten years for the “director’s cut” to find out how good this film actually is (I either under or overrated it.)  Its length was sharply reduced for American audiences and it shows.  Like Post Tenebras Lux it is less than the sum of its parts, but it does have some glorious parts.

Inside Llewyn Davis (US) 3.3  A typical Coen brothers film. Made with great skill, but more interesting as a concept than in execution.

Stoker  (Korean/American) 3.3  Nowhere near as interesting as Park’s “Vengeance Trilogy,” but skillfully directed.  Spike Lee remade Oldboy?  I think I’ll pass.

Design for Living (US)  3.3  A Ernst Lubitsch comedy from 1933.  Not as good as his best work.

Bad Blood  (French)  3.3  Leos Carax’s second film, from 1986.  The director gave a very interesting talk after the film.  Very good at using visuals and sound to create certain moods.  He was strongly influenced by silent films.

Like Someone in Love  (Japanese/Iranian)  3.3  Kairostami continues to do films in non-Iranian settings.  A few echoes of Ozu in this intriguing film set in Tokyo.

Spring Breakers (US)  3.2  Almost a campy masterpiece, but the film gradually ran out of steam.  I don’t think the director had a clear plan.  But maybe that’s for the best, as it was an entertaining ride.

The Enforcer (US)  3.2  This 1951 noir was the first film to use mob terms like “contract” and “hit.”  The NYT review in 1951 called the film extremely violent, which seems almost laughable today.  There is virtually no violence at all! I knew that 1950s people would be shocked by the sex in modern movies, but they’d be even more shocked by the violence.  What would shock us about the films of 2075?  Raoul Walsh actually directed, but someone else was credited.

A Touch of Sin  (China) 3.2  A bit of a disappointment considering the director.  It’s hard to make a movie work when it is a collection of mostly unrelated short stories.  Only a few directors can pull that off, and Jia Zhangke doesn’t seem to be one of them.

Oblivian  (US)  3.2,  Very nice visuals, and reasonably entertaining, but it’s still a sort of “tweener.”  Way too derivative to be a creative Sci-fi breakthrough like 2001 or Solaris, and not nearly as entertaining as Star Wars.  Watch on big screen or not at all.

All is Lost (US)  3.1  Somewhat interesting story of a man lost at sea.  I would have preferred an ending like Bruegel’s painting “Fall of Icarus”, but that’s not feel good enough for Hollywood.

L’Amour  (French)  3.0  I could never get interested in this film, despite the fine acting and direction.  Everyone else thinks it’s a great film, so I suppose it is.

The Wolf of Wall Street (US)  3.0  Shows how the power to make any sort of film a director wants gradually leads him to indulge in filming mindless drug-fueled orgies with beautiful actresses because . . . because he can.  Also about corruption on Wall Street (not just Hollywood), although it’s not really clear in the film exactly what these guys did wrong (in a legal sense.)  Presumably insider trading and unethical marketing practices.  Martin Scorcese could make a 3.0 star film in his sleep, and he did.  At least it’s never boring.

Night Across the Street  (Chile)  3.0  A highly intelligent film but it never really connected with me.

Upstream Color  (US)  2.8  The director of Primer has another intellectual sci-fi effort, but the final product just doesn’t seem as interesting as the concept.

Museum Hours  (Austrian)  2.8  It seemed like a film version of a Max Sebald novel.  But not nearly as good.

The Man With a Camera (Russian)  2.8  This “classic” silent film from 1929 left me cold.  It seemed too much like single stunt stretched out to 90 minutes.  Number 8 on the all time best film list””and rising.

Level Five  (French)  2.8  An old Chris Marker film/documentary on the Battle of Okinawa, where more than 200,000 Japanese died.  Convinced me that dropping the bomb on Hiroshima was the right move.

Blue Jasmine  (US)  2.7   One of Woody Allen’s weaker films.  The characters were not at all interesting, and the plot was somewhat predictable.  I don’t recall any great lines.  Some nice music and the lead actress was excellent.

Anna Karenina  (British?)  2.5  Probably even worse than 2.5, but since I’ve never read the novel, and the acting was pretty good, I was somewhat interested in what was transpiring.

The Hobbit, pt. 2  (New Zealand)  2.2  A big disappointment.  While watching this I found it hard to remember why the LOTR was so good.  The director got almost everything wrong.

I don’t have much time anymore for serious reading, but I did get through two long biographies of artists (Cezanne and Titian, two of my absolute favorites).  The most noteworthy novels I can recall reading last year were My Struggle (pt. 2) by Knausgaard, The Museum of Innocence by Orhan Pamuk, Your Face Tomorrow by Javier Marias, and Correction by Thomas Bernhard (an older book).  All four authors have very distinctive voices, but I’d say the Knausgaard was my favorite. Can’t wait for the rest of the volumes.

In an earlier post I made an off-hand comment about the explosion of pop music creativity between 1963 and 1969, and got a lot of criticism.  Let’s take a look at the Rolling Stone top 50 pop songs by year:

1955-56:  5

1957-58:  2

1959-60: 2

1961-62:  zero

1963-71:  34

1972-74:  zero

1975-1991:  7

1992-2013:  zero

I don’t know why they didn’t include songs from an earlier period, perhaps it was just meant to be top pop songs from the rock era.  So there’s a burst of creativity about the time Elvis bursts on the scene, then a slack period, then an explosion around the time the Beatles/Dylan/Stones show up (plus lots of Motown songs, etc.)  BTW, I believe the artists of today are at least as talented as those of the 1960s (probably more so)–that’s a different issue.

This is common in the arts, although not usually quite so pronounced.  Here’s the top 50 films of all time (actually 52), according to a poll of 846 film buffs:

1925-34:  7   (these are all silent, 5 are from 1925-27)

1939-41:  3

1948-49: 2

1950s: 12

1960s:  15

1970s:  7

1980s:  1

1990s:  3

2000-01:  2

2002-13:  zero

So in both cases the 1960s dominate, but much more in music.  That’s partly because the film list is global—different countries had their artistic peaks at different times.  The music list just looks at English language songs. It’s partly because the music list ignores the period before 1955.  But both lists have very few modern works.  Is that just boomer nostalgia?   Partly, but not entirely.  To me it’s also the “Renaissance phenomenon.”  When there are cultural and technological developments that open up vast new vistas of artistic possibilities, and economic conditions that allow people to explore those places, they fill up rapidly.  De Vinci, Michelangelo, Raphael, Titian, etc, quickly “invented” or “discovered” all the best picture ideas (Borges says the two words have the same meaning), forcing their successors to work in the margins (hence “mannerism.”)  David Lynch (the most recent director on the film list) is a sort of mannerist.  So is Radiohead.  The first flowering of film was the peak of the silent era, 1925-27.  The next was the post-WWII explosion of stylistic possibilities.  And then with Apocalypse Now and Stalker in 1979 it all ended.  Maybe that’s why Coppola burned out.  He saw there was no future.

Didn’t Kurt Cobain say he’d been born too late? (The good songs were taken.)  Right before killing himself?  He’s got the most recent song on the list.

Be careful what you wish for.  I’m in the slightly embarrassing position of having my favorite song and film top the two critics lists.  You’d think that would be great, but now that it’s happened I’d much rather pick some unconventional choice; an obscure film from Taiwan, Thailand or Turkey. Or a great schlocky film like Titanic.  Or a quiet modest film like Local Hero that others overlook. But I can’t, I’m as boring as that composite face generated by averaging 1000s of faces on a computer.

PS.  I saw Tarkovsky’s Mirror for the second time at Harvard last night.  It will probably top my 2014 list.

1.  The market monetarist view that tight money caused the recession is getting some play in the press. Here’s an excellent piece by Ramesh Ponnuru:

There’s another view of the Fed’s role in the crisis, though, that has been voiced by economists such as Scott Sumner of Bentley University, David Beckworth of Western Kentucky University and Robert Hetzel of the Richmond Fed. They dissent from the prevailing view that the Fed has been extremely loose since the crisis hit. Instead, they argue that the Fed has actually been extremely tight, and that when its performance during the crisis is measured against the proper yardstick, the central bank emerges as the chief villain of the story.

In the second half of 2008, housing prices, many commodity prices, inflation expectations and stocks all suggested deflation was coming. Fed officials, though, kept talking about backward-looking measures of inflation that made it look high. Their hawkish pronouncements effectively tightened monetary policy by shaping market expectations about its future direction. In August 2008, the Fed minutes explicitly said to expect tighter money. Even after Lehman Brothers Holdings Inc. collapsed the following month, the Fed refused to cut rates and fretted about inflation (which didn’t arrive). A few weeks later, the Fed decided to pay banks interest on excess reserves, a contractionary move. Only then did it cut interest rates.

2.  A few comments on the unit root debate in the earlier comment section.  I probably erred by leaving the impression I was a big “unit root” fan.  I just thought it was interesting to update the proposed bet now that 5 years has passed.   I do think there are interesting studies that suggest something close to a unit root, but also think there are stories that are consistent with demand shocks still having a transitory effect on output.  But give the unit root people kudos on one point.  It seems to me that the theory has done better “out of sample” than in sample, which is pretty rare in macro.  (The fact that it’s rare suggests a whole lotta data mining is going on.)

This claim is non-scientific, but look at this times series of RGDP growth.  The 1950s sure look like trend reversion to me.  What would a unit root look like? Perhaps a recession would be followed by slower growth than in the preceding cycle, and hence no recovery to trend.  This seems to be roughly true of the last several recessions, doesn’t it?  That’s out of sample success.

3.  In the discussion of Ben Bernanke’s performance a lot of people thought I was too kind, as I expected. Perhaps the following analogy I left in the comment section helps.  BTW, this is why I believe that history as a field is fundamentally “wrong,” even though I have enormous respect for the field of history:

Suppose someone else had been elected in 1928 (not Hoover). Say Coolidge. And suppose that because of the policy differences from this counterfactual president the Great Contraction of 1929-33 was only 2/3rds as bad. That person would have been a GREAT president. And yet ALL historians would have said he was horrible. That’s what people miss.

Why do I have great respect for history?  Because historians still come up with great insights under very difficult circumstances.  Learning lessons from history is incredibly hard.  Quite a few alternative monetary policies in the interwar period, either much more liberal (Keynesian/monetarist) or much more conservative (Austrian), would have been better than what actually happened, and yet would probably be viewed by historians as a failure.  They never would have known that the monetary policy in the universe we happen to live in was an unusually bad draw. But the circumstances of the interwar period were so bad that most draws were on the bad side. Just as most possible post-1933 governments in Germany would have been bad, but again this universe happened to end up with an unusually bad draw.  I think historians understand this problem, but in the end it is still too much to overcome in many situations.

[On the other hand the post-WWII draw was very good—no nuclear war (knock on wood.)]

4.  Here’s an interesting video by Dan Klein showing where the word liberal came from.  Adam Smith plays a role.

Update:  This Marcus Nunes post relates to the unit root issue.