Yichuan Wang on “reaching for yield”

Yichuan Wang has a very nice post on “reaching for yield”. Everyone talks about it but he’s the first I’ve seen who has actually thought through the implications.

Whenever I hear of a trendy new idea that’s not consistent with economic theory, I’m immediately skeptical. I used to associate these things with liberals, but now conservative economists are just as bad.

Here’s the punchline:

The greatest irony is that only after the Fed tightens do we realize that the Fed didn’t need to tighten at all. But now that it has, it doesn’t look like the financial impacts will be that large after all.

Special thanks to my daughter for helping me with the #%@$@&%¥â‚¬£%#@$& iPad.



17 Responses to “Yichuan Wang on “reaching for yield””

  1. Gravatar of 123 123
    9. July 2013 at 14:17

    Reaching for yield is consistent with the theory:

  2. Gravatar of Geoff Geoff
    9. July 2013 at 15:30


    “First, Fed policy has not been distorting financial markets.”


    Clueless as usual…

  3. Gravatar of TravisV TravisV
    9. July 2013 at 16:35

    Prof. Sumner,

    Have you seen this document released by Shinzo Abe’s cabinet?


  4. Gravatar of TravisV TravisV
    9. July 2013 at 16:39

    Prof. Sumner,

    And this?


    “From San Francisco Fed President John Williams: A Defense of Moderation in Monetary Policy.”

    Williams argues because of uncertainty that current policy might be optimal. Note: Williams is an influential Fed president and has been supportive of QE.

  5. Gravatar of Hafiz Hafiz
    9. July 2013 at 21:17

    If you haven’t read it, John Kay disses QE. http://www.ft.com/intl/cms/s/0/6b0d5268-e7ba-11e2-babb-00144feabdc0.html#axzz2Yc0Jsxlf

  6. Gravatar of ssumner ssumner
    10. July 2013 at 03:03

    123, Maybe I should have said “plausible model.”

    Travis, Yes, I saw the Abe statement. Regarding Williams, there is no such thing as “moderation” in monetary policy.

    Hafiz, Thanks, but that doesn’t really have anything new, does it? Or did I miss something?

  7. Gravatar of Milton Freeman Milton Freeman
    10. July 2013 at 06:34

    “Growth of gross domestic product (GDP) by around 3 percent in nominal terms and around 2 percent in real terms, with a higher growth rate to be set for the late 2010s”


    What happened to the 2% inflation target?

  8. Gravatar of Bogwood Bogwood
    10. July 2013 at 06:55

    NGDP focus is interesting in the sense that “for every complicated problem there is a simple solution” but there are concerns. Since there is recent interest in bets/prizes to ferret out real opinions I will put it in that form. I would contribute 10,000$ toward an X prize if the following could be proven:
    (assume a “compared to ,,,,)
    The policy leads to exponential decline in population
    Reduces the threat of global warming.
    Reverses species extinction.
    Does not depend on monopoly power.
    Is neutral on wage employment (sees the recent bubble returning to mean)
    Neutral to negative on central planning.
    Encourages real savings (resources actually not consumed)
    Transparently defines a store of value option.

    other concerns, but that is the core. Remember the fifth grade level explanation required is not the IQ but the amount of attention outsiders devote to the area. You have to empirically prove that Soddy, +/-Fisher, Daly, Hall are wrong in their ecological approach. “Not my job” is not a response, otherwise NGDP is a good ladder on a irrelevant wall.

    A little off topic but the constant concern about the Casino set me off. It would be nice if the markets actually dealt with capital instead of leveraged wagers. My judges might be considered fringe, but the definition of fringe would be the subject of another prize.

  9. Gravatar of paul Einzig paul Einzig
    10. July 2013 at 07:17

    Hi Scott,

    I have a 13 yr old daughter and I am constantly in awe of her effortless mastery of all things technological/social…..daughters are truly wonderful !

    I am away for the summer, but your blog is still the cornerstone of my daily reading, fascinating pieces of a never ending puzzle. Thanks so much for all the work you put into it.

  10. Gravatar of Saturos Saturos
    10. July 2013 at 09:10

    This doesn’t sound good: http://online.wsj.com/article/SB10001424127887324069104578527683704380960.html?mod=WSJ_hps_LEFTTopStories

    I like this graph from Yichuan’s Twitter account, it’s basically Scott’s view on 2008 in a single picture: https://twitter.com/yichuanw/status/354433924140781568

    Paul and Scott, it’s been demonstrated that 3-year olds are capable of mastering the iPad, it’s that intuitive…

  11. Gravatar of Steve Steve
    10. July 2013 at 09:50

    NGDP targeting and Macroprudential tools aren’t mutually exclusive, but if used at the same time the term ‘Macroprudential’ becomes a misnomer.

  12. Gravatar of Andrew Andrew
    10. July 2013 at 12:20

    Hi Scott,

    Not at all related and I’m sure you’ve probably seen it already, but it’s not just Bullard that is channeling Svennson; Bernanke is too.

    From today’s speech;

    The framework for implementing monetary policy has evolved further in recent years, reflecting both advances in economic thinking and a changing policy environment. Notably, following the ideas of Lars Svensson and others, the FOMC has moved toward a framework that ties policy settings more directly to the economic outlook, a so-called forecast-based approach.43 In particular, the FOMC has released more detailed statements following its meetings that have related the outlook for policy to prospective economic developments and has introduced regular summaries of the individual economic projections of FOMC participants (including for the target federal funds rate). The provision of additional information about policy plans has helped Fed policymakers deal with the constraint posed by the effective lower bound on short-term interest rates; in particular, by offering guidance about how policy will respond to economic developments, the Committee has been able to increase policy accommodation, even when the short-term interest rate is near zero and cannot be meaningfully reduced further.44 The Committee has also sought to influence interest rates further out on the yield curve, notably through its securities purchases. Other central banks in advanced economies, also confronted with the effective lower bound on short-term interest rates, have taken similar measures.

  13. Gravatar of Doug M Doug M
    10. July 2013 at 12:22

    I remember when I was 12 and I used to help my dad with all things technical and technological. And now, I need a 12 year old of my own to help me out.

  14. Gravatar of Doug M Doug M
    10. July 2013 at 12:28

    If the EMH holds,
    Should a change in growth expectations cause interest rates to spike and a spike in interest rates causes expectations for growth to falter, then the interest rate spike must be of a magnitude less than sufficient to cause growth to stall.

  15. Gravatar of 123 123
    10. July 2013 at 13:01

    Scott, only the models where demand for safety curve slopes down are plausible. Other models are implausible.

    The problem with “reaching for yield” is different. There are two views that I understand:
    1. financial stability should be achieved with other tools, not with monetary policy
    2. slight adjustments to monetary policy should be made to help with financial stability.

    However, there is the third view – making big changes to monetary policy. This is what the Fed has done. This is unreasonable, and to some extent self-defeating.

  16. Gravatar of ssumner ssumner
    11. July 2013 at 04:20

    Milton, In Japan the CPI runs about one percent ahead of the deflator.

    Saturos, I can’t access that, but the headline doesn’t sound promising.

    Even my daughter has trouble. She must tap many times to highlight a word. For me it takes 100 times. Fat fingers?

    Thanks Andrew.

    Doug, I agree.

    123, One cannot point to “demand curves sloping downward” when arguing for non optimal behavior.

  17. Gravatar of ssumner ssumner
    11. July 2013 at 04:23

    Thanks Paul, and great name.

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