tag:blogger.com,1999:blog-8702840202604739302.post7096806344186908859..comments2024-03-28T03:38:53.734-07:00Comments on MacroMania: Lifting Off...Sooner or LaterDavid Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-8702840202604739302.post-47048729070300641882015-03-09T01:06:14.404-07:002015-03-09T01:06:14.404-07:00OT but not way OT: Why do people say "the Fed...OT but not way OT: Why do people say "the Fed just swapped reserves for bonds" when describing QE?<br /><br />The Fed bought $4 trillion in bonds; bank reserves rose by $2.5 trillion. Okay...only $1.5 trillion diff...<br /><br />Also, the Fed buys bonds from the 22 primary dealers. The PDs buy from clients or in the market. The sellers of bonds to the PDs get $4 trillion in cash. Does not that cash mean something?<br /><br />The reserves are created, of course, when the FedNY credits the commercial bank accounts of the PD when it buys bonds. Not from bond sellers' accounts. <br /><br />Side question: Since QE, another $500 billion in cash has been put into circulation, bringing total to $1.34 trillion. Okay, some of that is suit ace money.<br /><br />But all of it? And how often does a paper bills circulate? Not M2 velocity---a paper bill. <br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-36217792642794728732015-03-06T15:34:46.585-08:002015-03-06T15:34:46.585-08:00Thanks, David. That was educational, and I see you...Thanks, David. That was educational, and I see your point. I have noticed quite a variety of definitions and assumptions about the meaning of the "natural" anything, really.Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-64944652260399284742015-03-06T15:09:29.082-08:002015-03-06T15:09:29.082-08:00Ah, the "natural" rate. Richard Rogerson...Ah, the "natural" rate. Richard Rogerson once wrote a nice article on this that you might find useful. I blogged about it here: <br /><br />http://andolfatto.blogspot.com/2010/10/theory-ahead-of-language-in-economics.htmlDavid Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-16741808176436486812015-03-06T13:08:53.920-08:002015-03-06T13:08:53.920-08:00Yes, I can see where that story makes sense.
On a...Yes, I can see where that story makes sense.<br /><br />On another, but related, topic. I've been seeing lots of estimates of the natural rate of interest lately. These all require some measurement of the output gap, to my knowledge. But what if the real barriers to employment have increased, and so potential output is lower than it might appear from a modeling exercise? Would that not result in an incorrect estimate of the natural rate?Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-88053758307009916162015-03-06T08:45:42.514-08:002015-03-06T08:45:42.514-08:00I think of it this way. Suppose I want to park a l...I think of it this way. Suppose I want to park a large amount of cash overnight in a bank account. The bank charges me 50bp (so negative nominal interest rate). Alternatively, I could purchase a safe bond (or repo). How much will the seller of that safe bond ask? He will sell it at a premium (negative nominal interest rate). And I will accept because the alternative is a minus 50bp bank account. Yes?David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-77451504511214195232015-03-06T07:06:31.092-08:002015-03-06T07:06:31.092-08:00Thanks David. I can see Mr. Soltas' point vis-...Thanks David. I can see Mr. Soltas' point vis-a-vis checking accounts, but I don't think that can hold water for bond yields. People need to use checking accounts, after all - I don't know of a single legitimate business that doesn't use direct deposit, and electronic payment for goods & services is near-universal. But bonds - that's a discretionary investment. Seems like a different story to me.Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-85576922855347295152015-03-05T19:36:52.581-08:002015-03-05T19:36:52.581-08:00"This" referring to disagreement? Could ..."This" referring to disagreement? Could you please elaborate? I'm not seeing the connection.<br /><br />But for what it's worth, I don't think commitment is a reasonable assumption to make. Back in 2008, for example, Bernanke made very clear that QE was just temporary. But now it seems that the Fed's large balance sheet will be with us for the foreseeable future. Not that this really matters. What matters is that the FOMC as a group (with overlapping generations of members) all appear to appreciate the need to keep inflation low and stable. It may not be a first-best policy, but it has served reasonably well, especially when compared to past policy mistakes and the crazy monetary policy regimes in other countries. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-66933525089804046322015-03-05T19:28:26.899-08:002015-03-05T19:28:26.899-08:00Thanks, Prof J.
Yes, I am aware of models that pe...Thanks, Prof J. <br />Yes, I am aware of models that permit negative nominal interest rates, though I can't recall specific papers. I saw Randy Wright present such a paper last year at the Chicago Fed money and payments conference. But it is not rocket science. All one has to do is dispense with the assumption that it is costless to store money. <br /><br />Evan Soltas has a nice discussion here: http://esoltas.blogspot.com/2015/03/whats-actual-lower-bound.htmlDavid Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-3847031493507164342015-03-05T16:56:28.092-08:002015-03-05T16:56:28.092-08:00Isn't this also an implicit argument against d...Isn't this also an implicit argument against discretion? David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-14604939833863110942015-03-05T16:56:01.682-08:002015-03-05T16:56:01.682-08:00Hi David,
Thanks for this, it helps fix ideas a b...Hi David,<br /><br />Thanks for this, it helps fix ideas a bit. I have a question though. As you and most others do, I find the negative yields (and ECB negative interest on excess reserves) in the Euro area perplexing. In finance, we long have modeled interest rates with models that expressly will not result in negative yields at any point, so my usual tools aren't much help to understand the current situation. <br /><br />So question: Are you aware of any models that either (a) result in negative yields as an outcome or (b) tell us what negative yields mean? <br /><br />Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.com