Endogenous interest rates and aggregate demand
I’m still trying to figure out the MMT view of monetary policy. It’s not easy for me, because MMTers seem to think that “monetary policy ” and “changes in interest rates” are pretty much the same thing. I view that as reasoning from a price change, but even some conventional economists make that mistake.
For a brief moment on page 406 of Macroeconomics (by Mitchell, Wray and Watts) it seemed like they understood this distinction:
In a growing economy, it is likely that aggregate demand conditions will improve at times when the market rate of interest rises as the central bank often raises its target rate in an expansion.
Yes! Interest rates are largely endogenous, mostly reflecting changes in output and inflation expectations. When the economy is booming and/or inflation is rising, then market interest rates will also tend to increase. My only quibble is that the authors need not have added, “as the central bank often raises its target rate in an expansion”, as this relationship is true even in an economy that doesn’t have a central bank (say the US prior to 1913.)
But that minor quibble contains the seeds of a major problem, as I don’t know if MMTers even recognize the income and Fisher effects. At times they seem to assume that all changes in interest rates are “monetary policy”, i.e. the liquidity effect.
MWW continue:
[W]e would not observe investment falling when the market interest rate rose because the IRR of each project could also be increasing
So far so good. The internal rate of return will rise with inflation and/or output growth. But then this:
Thus, it is important to avoid applying a mechanical interpretation of the concept of the [Marginal Efficiency of Capital]. Keynes, in fact, did not think investment would be very responsive to changes in the market rate of interest, especially when the economy was in recession or boom.
Woah! The term “Thus” is mixing up two unrelated issues. First, the fact that because interest rates are largely endogenous you often observe interest rates move procyclically. The second (and more dubious) claim is that this is evidence that the economy is not very responsive to interest rate changes. But that doesn’t follow at all. As an analogy, it is true that budget deficits are usually high when the economy is very weak, but even a monetarist like me would never argue that this proves that exogenous increases in deficit spending are contractionary.
In fact, if interest rates decline due to a highly expansionary monetary policy, then it will have a big impact on aggregate demand. On the other hand, if interest rates decline due to the income and/or Fisher effect, then you should not expect an expansionary impact.
In mainstream economics, this can all be easily explained by referring to the gap between the target interest rate and the natural interest rate. But I’m told that MMTers don’t believe the natural interest rate matters, or they think it’s always zero, or something. (BTW, Do they think the real or nominal natural interest rate is zero?)
On the next page (407):
The extreme optimism that typically accompanies a boom also would reduce the sensitivity of investment to changes in the market rate of interest. With high expected returns, firms would be prepared to pay higher borrowing costs.
That seems to confuse shifts in the MEC with changes in the elasticity of demand for investment (as a function of interest rates), unless I’m misinterpreting their claim. The fact that interest rates are higher during a boom doesn’t mean that investment is less sensitive to changes in interest rates.
On page 464, you can see where MMTers’ confused ideas about endogeniety cause them to really go off the rails:
The fact that the money supply is endogenously determined means that the LM schedule will be horizontal at the policy interest rate. All shifts in the interest rates are thus set by the central bank and funds are supplied elastically at that rate in response to the demand. In this case, shifts in the IS curve would not impact on interest rates. From a policy perspective this means the simple notion that the central bank can solve unemployment by increasing the money supply is flawed.
No, no, a thousand times no!!! The final two sentences absolutely do not follow from the first two sentences, which leads me to believe that MMTers misunderstand the concept of endogeniety.
It’s cheating to claim the money supply is “endogenous” and then completely ignore the fact that the interest rate is also endogenous. In the second sentence they mention that central banks “shift” the interest rate. Yes they do, and they do so to prevent shifts in the IS curve from destabilizing the economy. As a result, shifts in the IS curve absolutely do impact interest rates. A rightward shift in the IS curve right after Trump was elected caused interest rates to go up. I could cite 1000 similar examples. Central banks are like the child that runs out in front of a parade and then has the delusion that he is determining the route of the parade.
So the third sentence is wrong; IS shocks do affect interest rates. But the fourth sentence is even worse. The facts cited in the first two sentences absolutely do not imply that the central bank can’t address unemployment by increasing the money supply.
Go back to the late 1970s or the early 1980s, when interest rates were in the 10% to 15% range. Does anyone seriously believe that a huge increase in the money supply would have failed to boost employment, at least until sticky wages caught up?
MMTers would say a big increase in the money supply is impossible because it would push interest rates to zero. But that completely misses the point. Let’s say the Fed just increased the money supply enough to push rates from 12% to 2%. Does that not boost employment?
Another argument I’ve heard is that lower rates don’t matter because interest payments are a zero sum game. Some people pay less interest but others earn less interest. Yes, they may not matter for consumption in a simple Keynesian cross model, but they certainly do matter for investment, even in the simple Keynesian model. Of course I think that the Keynesian cross model is wrong, but excess cash balances also drive NGDP in the monetarist model, so either way (exogenous and permanent) money creation is expansionary, at least when rates are positive (and in reality even when they are zero.)
Just to be clear, I don’t agree with the Keynesian view that easy money lowers interest rates, nor do I agree with the NeoFisherian view that easy money raises interest rates. Both are reasoning from a price change. But even using the flawed Keynesian model (where easy money lowers interest rates), the MMT people are mistaken about endogenous money, unless I’m missing something. And after three weeks of arguing with commenters, I’m finding it harder and harder to imagine that I’ve missed some brilliant MMT insight that explains all of this.
Because they get monetary policy wrong, they also get fiscal policy wrong. Thus on page 506 we are told that one reason why “fiscal deficits do not place upward pressure on interest rates” is because “The official interest rate is set by the central bank”.
Thus in the MMT world, the interest rate is not subject to macroeconomic shocks like other macro variables, it’s just an arbitrary number set by the central bank. IS shocks and fiscal stimulus don’t raise rates because the rates are set by the central bank. And the central bank has no discretion to change the money supply, because doing so would cause interest rates to change. And that would be bad because . . .
Again, I don’t believe “endogenous” means what MMTers think it means.
PS. I have a related critique of MMT over at Econlog.
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9. December 2020 at 12:22
When the MMT authors says ‘From a policy perspective this means the simple notion that the central bank can solve unemployment by increasing the money supply is flawed.’ I wonder if they just mean that if the CB tried to solve unemployment by increasing the money supply while holding the ‘policy interest rate’ unchanged then this will fail? As the money supply is endogenously determined (in their model) at any given rate of interest there is no way the CB could do this other than by paying more IOR and this would indeed have no effect on anything much real.
From what I have read elsewhere (and I think implicit in some of the passages you quote) while MMT does downplay it a bit I think they do hold that other things equal a change in the policy rate of interest (and the change in the endogenously determined money supply this will lead to) will at least have some short term effects on the real economy.
It is a bit weird though that they seem to think that interest rate targeting is some sort of universal principal rather than just a policy that most central banks have chosen to adopt.
9. December 2020 at 12:27
A lot of MMT comes from making observations. MMT says that looking at how central banks operate today leads to the conclusion that what they are doing is targeting an interest rate- Fed Funds in the US. Are they actually doing that? MMT makes a good case that is what they are doing. You don’t seem so sure. I would think that if you can’t agree that is what central banks are actually doing, then you probably won’t agree with anything else MMT says about monetary policy.
9. December 2020 at 14:40
Market Fiscalist, One thing that is very clear (in the textbook I’ve been reading) is that they think their model also applies to the pre-2008 system of no IOR. So that doesn’t explain the anomaly. The book is full of criticism of Friedman-style monetarism.
In a previous post I pointed to a contradiction, where they seem to say that OMOs are irrelevant, but aren’t willing to deny that interest rate changes can be relevant. And yet they say that OMOs affect interest rates. What gives???
Jerry, No, everyone agrees that the Fed is targeting an interest rate; but that fact doesn’t mean what they think it means. It doesn’t mean that the interest rate is a constant. And it doesn’t mean that the central bank cannot control the money supply. They can do so by changing their interest rate target.
9. December 2020 at 15:52
If the Fed targets the Fed Funds rate, then the Fed will have to supply reserves as demanded, or remove excess reserves, in order to maintain their target. Or pay interest on reserves at the target interest rate.
Yes the Fed can change the rate it is targeting. Then the Fed will have to supply reserves or remove excess reserves to maintain the new target. Or adjust the interest it pays on reserves. This is why MMT says the money supply is ‘endogenous’ in my opinion. Because if the Fed targets an interest rate, it does not also have the ability to separately determine the amount of reserves it wants to supply.
9. December 2020 at 16:20
“In a previous post I pointed to a contradiction, where they seem to say that OMOs are irrelevant, but aren’t willing to deny that interest rate changes can be relevant. And yet they say that OMOs affect interest rates. What gives???”
Why is the MMT view on this so hard to understand? MMT says sure, OMO’s affect interest rates- but that changes in the interest rates do not necessarily affect those measures we care more about- employment or inflation. And, when they do affect those, it is not always in the direction that monetary policy makers desired to affect those. I really don’t see this as all that different, (or any more confusing), than what you say sometimes about changes in interest rates not reflecting changes in the ‘stance’ of monetary policy.
9. December 2020 at 16:51
Well, I will not get entangled in the whole MMT debate, but…
Suppose we have globalized capital markets, and chronic capital gluts due to repressed consumption in various and large Far East and Mideast economies, and some kleptocracies, and even drug-money being invested.
To be sure, there is no shortage of capital, although we seem to have chronic shortages of demand or consumption (set aside c-19).
Seems to me, the real interest rate should be negative, perhaps even deeply negative, around 5%.
Are the world’s central banks, far from repressing capital, actually trying to preserve capital against natural force or market forces?
If the world is “saving too much” (indeed there is over capacity in nearly any industry you can think of) and there is no mechanism to reduce savings, then perhaps the right solution is chronic national deficits, offset by QE.
9. December 2020 at 16:54
Rather, “chronic national deficits, financed by QE.”
9. December 2020 at 17:01
Jerry, You said:
“I really don’t see this as all that different, (or any more confusing), than what you say sometimes about changes in interest rates not reflecting changes in the ‘stance’ of monetary policy.”
It’s completely different. They are (supposedly) saying that interest rate reductions caused by monetary stimulus are “irrelevant”. That’s nuts, and something I’d never say.
As for your previous comment, MMTers don’t seem to understand what interest rate targeting means. It does not mean that IS shocks don’t affect interest rates. It does not mean the interest rate is fixed, it means the interest rate is being targeted. Those are very different concepts.
As far as the money supply being endogenous when interest rates are targeted, I could just as well say that interest rates are endogenous when expected inflation is being targeted.
More broadly, where are the income effect and the Fisher effect in the MMT model of interest rates?
9. December 2020 at 17:45
MMT would say that the Fed does ‘fix’ the Fed Funds rate at whatever rate it desires until it changes that desire. So any shock only changes rates if it induces the Fed to change it’s target, and until the Fed changes it’s target rate it has to react by allowing reserves to change while maintaining it’s target interest rate.
MMT does not have a model as far as the effects of changes in interest rates- in my opinion. MMT seems to say that moderate changes in interest rates have unpredictable effects and that is the reason they say that monetary policy as currently practiced is an uncertain and poor tool.
“I could just as well say that interest rates are endogenous when expected inflation is being targeted.” Well you just agreed that the Fed targets the Fed Funds rate. MMT says if the Fed targets the Fed Funds rate it will hit that target but won’t be able to determine the money supply while it does that.
9. December 2020 at 18:22
“This is why MMT says the money supply is ‘endogenous’ in my opinion. Because if the Fed targets an interest rate, it does not also have the ability to separately determine the amount of reserves it wants to supply.”
But the interest rate they target is not itself exogenous. You idiot. It is endogenous to the real targets of inflation and unemployment. How do you not get that?
9. December 2020 at 18:25
Add on:
Scott Sumner has evidently forgotten that in macroeconomics debates, no one is ever wrong.
Like Don Quixote….
MMT is a windmill….
10. December 2020 at 01:16
Dr. Sumner,
“Another argument I’ve heard is that lower rates don’t matter because interest payments are a zero sum game. Some people pay less interest but others earn less interest. Yes, they may not matter for consumption in a simple Keynesian cross model, but they certainly do matter for investment, even in the simple Keynesian model.”
I think you’re misrepresenting Keynes here. Here’s what Keynesian economist Alvin Hansen wrote in 1939:
“I venture to assert that the role of the rate of interest as a determinant of investment has occupied a place larger than it deserves in our thinking.”
Bill Mitchell then says:
“The clue is that firms will not invest in new productive capacity no matter how cheap the funds to engage in that investment become if they do not expect to be able to sell the extra output.
The central bank can drive the interest rate down to low levels and firms will still not borrow and spend. The similarities with the situation today are strong in this regard.
The reliance on monetary policy to get the advanced economies out of the crisis was misplaced and reflected a poor understanding of what drives national income growth. Hansen clearly knew this in 1939 as did many other Keynesian economists.
It was the classical/neo-classical economists who were unable to let go of the loanable funds doctrine, which said that saving and investment are brought into balance with interest rate adjustments. So if consumers do not want to spend they must be saving and that extra spending can come from investment if interest rates fall.
The loanable funds doctrine remains a central part of the mainstream neo-liberal economic theory and is wrong to the core.”
10. December 2020 at 03:18
Ahmed Fares (or anyone):
The world is glutted with capacity, in everything from cars to smartphones to rice to clothes to steel to anything you can name, even oil.
This is “real” investment, in actual capacity, not financial investment.
So why, oh why, is anyone concerned about “boosting investment”?
We have had “too much” investment. (The lone exception is tight housing markets, caused by property zoning, limiting investment).
In contrast, there is not enough demand, or consumption!
So…QE alone, by putting more money into investor hands, is on the wrong track (unless they decide to spend the money).
Lowering interest rates is small potatoes.
But larger government programs almost always flop (including military).
So…tax cuts, married to QE. Tax cuts financed by helicopter drops. That’s the answer.
Boost demand through tax cuts, financed by QE. The rest is just jibber-jabber.
10. December 2020 at 06:21
MMT is denigrated for very simple reasons. Treasury-Federal Reserve collaboration exists in its present state, because whenever in the past the FED’s responsibilities were subordinate to the Treasury’s, this country experienced intolerable rates of inflation.
“Subject to the limitation that the Reserve banks may not hold at any one time more than $5 billion of securities purchased DIRECTLY from the Treasury. This is regarded by many, including members of Congress and some Secretaries of the Treasury, as being more in the nature of an “overdraft” privilege. This Treasury borrowing privilege amends Sec. 14 (b) of the Federal Reserve Act.”
“It has been extended from time to time by Congress. The reasons given for this direct borrowing amendment are the convenience of the Treasury, economy in the amount of cash the Treasury would otherwise consider it prudent to hold, the smoothing out of interest rates in the money markets, an immediate source of funds for temporary financing in the event of a national emergency.”
The Scorpion and Frog fable is apropos.
“A scorpion asks a frog to carry it across a river. The frog hesitates, afraid of being stung, but the scorpion argues that if it did so, they would both drown. Considering this, the frog agrees, but midway across the river the scorpion does indeed sting the frog, dooming them both. When the frog asks the scorpion why, the scorpion replies that it was in its nature to do so.”
10. December 2020 at 06:24
Benjamin,
Can you expand on what you mean by “tax cuts financed by QE”? Isn’t QE typically affected through OMO, rather than direct transfers to Treasury. This statement strikes me as similar to MMT support of deficits, but in favor of tax cuts?
10. December 2020 at 09:02
Jerry, You said:
“So any shock only changes rates if it induces the Fed to change it’s target, and until the Fed changes it’s target rate it has to react by allowing reserves to change while maintaining it’s target interest rate.”
But if it’s targeting inflation it has to adjust its interest rate target, just as if it’s targeting interest rates it must adjust the money supply.
I would add that IS shocks immediately affect MARKET interest rates, and the Fed’s target interest rate adjusts with a short lag.
BTW, I certainly don’t agree with Trevor that you are an “idiot”. I appreciate that you are not a troll, as there are far too many trolls in the blogosphere. Thanks for commenting.
Ahmed, You said:
“I think you’re misrepresenting Keynes here.”
No, I believe it is you who are misrepresenting Keynes. It’s well known that one can find Keynes quotes for almost any position, including opposition to fiat money (how do MMTers feel about that?) That quote is taken completely out of context, and there’s no doubt that Keynes thought that interest rate changes induced by monetary policy are “relevant”. He would have been horrified by MMT.
That quote is from 1939, when the world was in a liquidity trap.
You said:
“Bill Mitchell then says:
The clue is that firms will not invest in new productive capacity no matter how cheap the funds to engage in that investment become if they do not expect to be able to sell the extra output.
The central bank can drive the interest rate down to low levels and firms will still not borrow and spend.”
As I pointed out in my post, that confuses shifts in the MEC (first part of the quote) with movements along the MEC (second part of the quote.)
Just to be clear, I don’t believe that monetary stimulus works through interest rates, it works by boosting NGDP expectations. But MMTers are wrong even in terms of a Keynesian model. They are also inconsistent, unable to make up their minds as to whether changes in interest rates are “irrelevant”.
I’d like to strap them to a lie detector and ask them whether the stock market would view a sudden rise in the fed funds target rate from 0% to 8% as “irrelevant”. How would they answer?
10. December 2020 at 11:38
“It’s well known that one can find Keynes quotes for almost any position”
Keynes was always learning which is why he said: ““When the facts change, I change my mind – what do you do, sir?” His later statements override his earlier statements. We keep adding to his knowledge.
“I’d like to strap them to a lie detector and ask them whether the stock market would view a sudden rise in the fed funds target rate from 0% to 8% as “irrelevant”. How would they answer?”
I’m not sure what the official position of MMT is on this but it would crash the market with a subsequent negative wealth effect on consumption. Which is why the Fed has been referred to as a serial bubble blower. I watch it all the time as it tries to talk the stock market up and down by changing a word here and there in its statements. That and trying to manipulate the exchange rate, until those other central banks respond in kind.
Incidentally, I read annual reports for a living. When central banks lower interest rates, it increases unfunded pension liabilities, transferring wealth from share owners to workers when a larger portion of earnings has to prop up pension funds. Which is why corporations are moving from defined benefit to defined contribution pension plans. That means that in the future, lower interest rates will strike directly at workers instead.
An example of distributional effects by a blunt tool.
10. December 2020 at 16:15
MMT reminds me of Das Kapital by Karl Marx.
Leftist intellectual hipsters love it, but it has no relevant value for economics. It is useful only in order to understand that people will believe anything if it is sold in a sophisticated propagandistic way. It might be a more modern form of Marxism.
It tries to cover its complete emptiness of content and non-statements by using the most complicated language possible. A bit like Hegel, but with Hegel at least there is content and genuine thought.
The followers are religious believers, they are not open to rational arguments. One could as well “discuss” chemtrails and tinfoil hats.
Any discussion of MMT only valorizes it unnecessarily. It might be best to completely ignore it.
10. December 2020 at 16:16
To anyone: https://www.zerohedge.com/markets/us-starts-fiscal-2021-largest-two-month-budget-deficit-record
Even without the stimulus bill the US is running a large fiscal deficit, and simultaneously conducting quantitative easing.
To bb:
I am a fan of money-financed fiscal programs, as advocated by Ben Bernanke for Japan in 2002. Money-financed fiscal programs are also how Japan sidestepped the Great Depression.
Prominent economist Michael Woodford contends that quantitative easing in combination with federal fiscal deficits is in fact a money-financed fiscal program, aka “helicopter drops.”
I can’t tell the difference between what is fiscal policy and Keynesianism or what is monetary policy, when quantitative easing is introduced to the picture. Nomura recently said the lines between fiscal and monetary policy have “blurred.”
Add in that we have globalized capital markets, perhaps $500 trillion in assets.
Conventional economics is like reading pre-Darwin evolutionary biology.
10. December 2020 at 16:24
MMT is a pipe dream. Inflation is already a constraint. The money #s just jumped by a trillion dollars over last month. And that’s still not enough to fill the output gap.
Inflation is set to temporarily accelerate. You can see it in break evens and oil. Long-term money flows are up. It will spike in Jan. AIT be damned. That’s called stagflation.
It’s time to get religion. Lending by the Reserve and commercial banks is inflationary. Lending by the nonbanks is noninflationary. It’s time to drive the member banks out of the savings business.
10. December 2020 at 16:34
Ahmed, I certainly agree that the Fed should not use interest rates as a policy tool.
As far as Keynes always learning, his 1940s work is to the “right” of the General Theory. Is that his last word?
10. December 2020 at 20:43
Dr. Sumner,
My clearest understanding of Keynes comes from this book:
What Keynes Means: A Critical Clarification of the Economic Theories of John Maynard Keynes
By Anatol Murad (published in 1962)
https://www.goodreads.com/en/book/show/1040400.What_Keynes_Means
Here’s what a reviewer wrote as a comment:
“The most clear explanation of why S=I that I’ve ever found.”
Incidentally, it was while trying to understand why Saving equals Investment that I ran across this book. Sadly, most economists were treating it as an equality instead of an identity, or worse, that investment is funded by saving. The fact that saving could never diverge from investment was one of Keynes’ key insights. Here’s what he wrote in “The Process of Capital Formation (Economic Journal – 1939)”.
“For example, [the reader] might naturally suppose — for anything the Committee say to the contrary — that the right way to prepare for an increase of investment is to save more at an appropriately prior date. But the corollary shows that this is impossible. Saving at the prior date cannot be greater than the investment at that date. Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving.”
10. December 2020 at 22:17
With respect to MMT—that’s why you need a pretext to just print money with the pretext also artificially limiting how much money you can print. That is why paying reparations to descendants of American slaves is the perfect pretext to print and distribute $1 trillion in 2021! But reparations would end up being very effective at turbocharging the economy and then in 15 years we could find another pretext to print and distribute $1 trillion. Reparations=“helicopter drop”/“burying jars of money”
11. December 2020 at 06:39
re: “paying reparations to descendants of American slaves”
Let their black brothers in Africa pay. Their the ones who sold them into slavery.
11. December 2020 at 06:53
Oil prices troughed in Jan 2016 as long-term money flows fell by 80 percent from 1/2013 to 1/2016. Oil fell by 70 percent during the same period.
Energy fell by -9.4 in the latest CPI release. That will be reversed in the next release.
11. December 2020 at 09:19
It is wonderful and funny to see mainstream economists really sincerely trying to understand MMT and being baffled by it. I suppose it’s no wonder they’re perplexed, since the fundamental lens is different.
11. December 2020 at 11:16
Spencer, the goal is turbocharging the economy and not actually righting past wrongs…that’s what a “pretext” is. So Trump used a trade war as a pretext to funnel billions to his supporters.
11. December 2020 at 12:55
Scott, I appreciate you saying what you did there. Thank you. There is a reason I have read you for a long time even if I don’t always agree, or perhaps, misunderstand you sometimes. I don’t think you are an idiot either. 🙂
12. December 2020 at 07:25
re: “turbocharging”
I know the GOSPEL, the narrow segment that I study. There’s not a single economist in the world that understands money and central banking.
Sumner’s right about AD being too low. Low AD caused the GFC. I.e., Ben Bernanke caused the GFC. But Sumner’s prescription today is wrong.
AIT and N-gDp Level targeting is just stagflation reincarnated. The FED’s already behind the curve, playing “catch up”.
We have already passed the point where the problem of servicing the national debt can be solved without violating the principles of a free economy.
12. December 2020 at 09:52
Spencer, I think we need a reset and reboot. We have created a permanent underclass of people living paycheck to paycheck which has caused a myriad of problems. Reparations just happens to target a group of people that live paycheck to paycheck and would probably be willing to move to a city like St Louis or Memphis to take advantage of owning a home by paying $400/month. So because one needs a home to live in I think having housing go up in value to such a degree many are priced out of the cities they live in might not be positive economically…especially when the stock market and businesses and bonds exist in which one can invest in. I get why the Hamptons and Palm Beach and Malibu have expensive housing but Inglewood???
12. December 2020 at 14:38
Wasshoi, You said:
“It is wonderful and funny to see mainstream economists really sincerely trying to understand MMT and being baffled by it.”
It’s not so much that we are baffled by MMT, it’s more that we are baffled that people find these approaches useful. How does MMT help the Fed hit its 2% inflation target?
12. December 2020 at 15:26
I’ve read too many to say which one is which, but I think inflation and deflation don’t matter to MMT, which is more of a human-centered view of the economy than an engineering argument. Just as Goethe’s color theory is much more human-centered than Newton’s optics, which does not directly reflect the colors we see, it seems to me that whether it is usable or not and whether it is human-centered are different issues.Feynman said that physics would be very difficult if electrons had emotions, and I think that since people in the economy have emotions, the lens that captures us(them) must be appropriate.
Doesn’t the data make mainstream economists wonder if their ideas are working for the people?
http://noahpinionblog.blogspot.com/2017/03/robuts-takin-jerbs.html
12. December 2020 at 19:43
Mainstream economics falls over thinking, reduces freedom and draws false conclusions, but MMT is true and makes people more free.” Did you understand “government spending first”? Major economists understand that the central bank guides the interest rate, but why shouldn’t the government decide the interest rate first? There is no need to issue government bonds in the first place. Both grasps are fine for saying the right thing in an after-the-fact analysis, but don’t you see how mainstream economics limits freedom? Grasping the “essence” or the “real cause” is one of the most important things in science, and you can’t set people free with the understanding of cause and effect reversed. If you don’t understand that there is a disease because there is a virus, and not a virus because there is a disease, you can’t fight epidemics, can you? Isn’t mainstream economics the kind of thinking that may be correct on the surface, but is rather harmful to decision making? If you are used to mainstream economics, it is not surprising that you understand “endogenous” differently from MMTers.
13. December 2020 at 11:18
Sumner writes:
On page 464, you can see where MMTers’ confused ideas about endogeniety cause them to really go off the rails:
[Quote from MWW] “The fact that the money supply is endogenously determined means that the LM schedule will be horizontal at the policy interest rate. All shifts in the interest rates are thus set by the central bank and funds are supplied elastically at that rate in response to the demand. In this case, shifts in the IS curve would not impact on interest rates. From a policy perspective this means the simple notion that the central bank can solve unemployment by increasing the money supply is flawed.” [END EQUOTE]
No, no, a thousand times no!!! The final two sentences absolutely do not follow from the first two sentences, which leads me to believe that MMTers misunderstand the concept of endogeniety.
It’s cheating to claim the money supply is “endogenous” and then completely ignore the fact that the interest rate is also endogenous. In the second sentence they mention that central banks “shift” the interest rate. Yes they do, and they do so to prevent shifts in the IS curve from destabilizing the economy. As a result, shifts in the IS curve absolutely do impact interest rates. A rightward shift in the IS curve right after Trump was elected caused interest rates to go up. I could cite 1000 similar examples. Central banks are like the child that runs out in front of a parade and then has the delusion that he is determining the route of the parade.
Once again, the quoted discussion from MWW is simplified, and Sumner just leaps off and discusses random advanced topics involving interest rates.
If we step back and look at this carefully, we just need to use the index of MWW. On page 363, they write:
MMT shares the view that the central bank cannot control either the money supply or the level of bank reserves. Thus, the supply of reserves is best described as horizontal, at the bank’s target rate. That is the endogenous money, horizontal reserve approach, which was developed over the 1970s and 1980s by Moore and other post-Keynesians [references] Most economists regardless of their schools of thought, now accept this is a correct representation of the operating procedures of modern central banks.
That’s largely all that should have been said on the topic. They are correct in that most economists accept this view; Sumner is one of the exceptions. However, this just means that Sumner’s understanding of central banking is completely out of step with everyone, and so he should be just as confused by any modern treatment of the topic. (Note that Economics 101 textbooks have silly Monetarist models in them, but most neoclassicals will just huff and explain that critics are not supposed to look at Economics 101 textbooks (insert reason here), and look at more advanced texts.)
One may note that MWW does not say that “interest rates are endogenous,” that is something that Sumner made up. The best way of understanding interest rates is that the reaction function of the central bank is exogenous, and thus the observed interest rate is thus determined by the conditions of the economy (“endogenous”). However, since the reaction function could be changed, this becomes extremely fuzzy, since the observed interest rate changes along with the reaction function. The endogenous/exogenous distinction that many economists love dropping into conversation is the wrong framing to use.
Note that the “reaction function” terminology is the preferred phrasing of neoclassicals, which might create some arcane objections from some post-Keynesians. However, this is the cleanest way of understanding the concept.
Meanwhile, Sumner jumped ahead to interest rates — plural — which is well out of scope for an Economics 101 model with one interest rate. Modern financial theory — which is compatible with many neoclassical models — tells us that the risk-free curve is mainly driven by rate expectations. In other words, a market-implied central bank reaction function. This means that the observed rates are in one sense endogenous, but at the same time, the central bank reaction function is exogenous.
Once again, some MMTers and most post-Keynesians will have terminology issues with that characterisation, but I see no major operational differences between what I wrote and advanced MMT discussions of interest rates. (Post-Keynesians are wedded to fairly ancient interest rate models — e.g., liquidity preference — and so they are less likely to be happy.) As such, the MMT view towards interest rates is not that different from consensus models within finance, and so should not confuse anyone who has read a text on interest rates written after 1990.
In summary, one needs to grasp the concept of a central bank reaction function to understand modern approaches to interest rates. One could try to replace them with something else, but the reality is that the resulting description will end up being textual hand-waving that is likely to be impossible to relate to observed interest rate behaviour.
14. December 2020 at 02:05
“central bank can’t address unemployment by increasing the money supply”
Base money and money supply does not mean ghe same thing. By mixing up those two terms you want to makr your logic true. But mixing up two diffefeent terms as the same you show how your models do not work.
Central banks can not increase the money supply but only base money. Base money is cash and bank reserves. Money supply is cash and digital money that circulate the economy. Cash is pretty much a constant and totaly out of CB perview.
CB can increase the base money but not money supply.
Your logicis totaly flawed so you use tricks to make it look reasonable.
Treasury can increase money supply, not the Fed. You do not want to understand institutional arangements which is what MMT describes, ao you do not want to understand MMT and keep using tricks to push false economics.
14. December 2020 at 02:13
“How does MMT help the Fed hit its 2% inflation target?”
Fed can not hit an inflation target. That is the job for Congress and that is what MMT keeps saying. Stop pretending thatmonetary policy can work now and start using a fiscal policy with Job Guarantee and investment projects. Why go for idiotic goal like inflation target when the real goal is peoples betterment? Ah yes, false economists make up useless goals using bad models.
14. December 2020 at 16:48
Kester, You said:
“That’s largely all that should have been said on the topic. They are correct in that most economists accept this view; Sumner is one of the exceptions.”
No, my view of the process is in the mainstream, at least when interest rates are positive. It is MMTers who are out of the mainstream. That’s not necessarily bad, but it’s important to understand.
To say “the money supply is endogenous when interest rates are pegged” is NOT the same thing as saying “The Fed can’t control the money supply” It can change the interest rate!
Do you really think the view that positive IS shocks don’t raise interest rates is “mainstream”?
Your “central bank reaction function” reminds me of the “reaction function” of the boy that runs out in front of the parade and thinks he’s controlling it. Sure, you can view the central bank as “controlling” interest rates, but it’s not a very useful assumption. In the real world, IS shocks do impact interest rates. The Fed doesn’t want the economy to go over the cliff.
Jure, You said:
“Fed can not hit an inflation target. That is the job for Congress”
LOL, So in 1990 our brilliant politicians up on Capitol Hill decided to target inflation at 2%, and that’s why inflation has averaged 2% since 1990? Sorry, I’ll stick with the “mainstream” view that the Fed targets inflation.
BTW, when Volcker brought inflation down in the early 1980s, Congress was running a highly expansionary fiscal policy.
16. December 2020 at 07:08
Benjamin Cole is making a lot sense. Consumption is far below capacity. Unemployment is higher than what is desirable. Asian countries including the huge economies of China and Japan were saving 35% of GDP before Covid. Ben Bernanke talked about a savings glut.
Scott points out that MMTers don’t understand the true economic effects of MMT. Of course they don’t. They don’t understand economics or how current Fed policies work either. What fraction of the population actually understands these things?
Scott asks how MMT can help hit the 2% inflation target. I say that it is easy if I am in charge of MMT. If inflation is too low, I lower taxes or increase government spending. Maybe I send checks for $1200 to all taxpayers. If inflation is too high, I raise taxes to drain money out of the economy. Do any real economists think that these simple actions would not push inflation in the direction I think it will go?
I think the world could use more consumption. Economies are stagnant and in recession. How can we get more consumption if not by using something like MMT or some other form of government spending?
Consumption is low due to demographics (lots of old people), income inequality, Chinese autocrats, technology automating more jobs, and some other things that you can think of. Something fairly big should be done to help people at the bottom feel less desperate.
22. December 2020 at 14:28
Identities are balance sheets. Snapshots that must be true at all times.
MMT uses the identities to set the scene, to highlight what it is that is interesting and then explains the flow mechanisms and shows the changes between the balance sheets over time.
You can hardly highlight a flow from Treasury to the private sector if you are using an I=S abstraction where such a flow does not show up. First you have to draw a line across that box and redraw the boundaries – in MMT’s case south of the central bank so we can focus on the interaction between the commercial banks and a consolidated government sector.
Then you can show how the monetary flow from the government sector to the commercial sector does not in any way reduce the fiscal capacity of the commercial sector. In fact it adds to it.
And you can show that when you do that you get up to two bids for the subsequent bond swap – one from the deposit holder in their own right, and one from the bank with the matching reserves.
Both of those findings destroy central pillars of mainstream arguments.
22. December 2020 at 14:29
The fundamental argument of MMT is very simple. If government spends in its own currency it does not reduce the fiscal capacity of the private sector to spend.
In other words the belief in fiscal crowding out is false because money is endogenous, not exogenous.
23. December 2020 at 13:49
You said:
You can hardly highlight a flow from Treasury to the private sector if you are using an I=S abstraction where such a flow does not show up.
I have two complaints. It’s silly to call that concept “net saving” as it’s completely unrelated to what 99% of economists call saving. Not just a little different, but completely unrelated to saving as defined by economists.
Second, it’s an uninteresting identity that tells us nothing about causation.