Monday, July 11, 2011

Australia Talk

Here are some slides* for a talk that I'll be giving tomorrow morning at these meetings at ANU in Canberra, Australia. I'll actually be impersonating Brad DeLong, which is an interesting story in itself.

*Someone suggested that, since my Fed affiliations are on the slides, I should add the usual disclaimer, so here it is. As should be obvious, these are my views, and not those of the Federal Reserve System.

9 comments:

  1. Thanks for sharing your presentation with your readers. I'm just reading it and I'd like to make comments while reading it.

    #3. I've known Caballero since he took my undergraduate courses in the early 1980s and even to call his reaction "mild rabble-rousing" is too much. He's always been part of your group of scientists. Now he's calling for caution to draw policies from what the group has been discussing. I'd say that Bob Lucas has always been far more cautious than Ricardo.

    #4. Please make clear who "we" are in your question (it sound as the good guys). You point to several economists and their work (btw, Hurwicz was my mentor at U. of M. in the late 1960s, and John Kareken my monetary economics prof) but it's not clear why you don't mention others and why you mention only a few.

    #5. You start by talking about FINANCIAL factors but so far you have referred only to money and monetary economics. As I said in comments to one your posts a few days ago, as long as we fail to distinguish clearly the several functions that modern financial systems perform, we will not be able to understand how those systems behave and perform. In 50 years as professor and adviser I learnt the hard way how important it's to separate the payments function from all other functions that modern financial institutions perform. It's not enough to focus on central banks as financial intermediaries because the separation of the issue of currency (remember that what you have written about fiat money applies only to currency) from market transactions funded by deposits is essential to what central banks do. Forget about the concept of monetary base and other monetary aggregates.

    #7. Please make clear that some your accounting items (Reserves, each Asset category) include a variety of things that are not perfect substitutes and sometimes even close substitutes. Unfortunately I have no evidence to support my view but having worked in several financial and fiscal crises, I'm sure that "Reserves" may include commercial bank liabilities that are related to the bailout and have nothing to do with required and excess reserves (sorry I'm Argentine and I don't trust politicians and bureaucrats).

    cont.

    ReplyDelete
  2. Stephen,

    A couple of questions after looking over your slide presentation.

    (1) Does your model lend itself to doing impulse response functions and other innovation accounting? For example, can you trace out the dynamic effect of real interest rates, consumption, investment, etc. given an a negative shock to the demand for liquidity?

    (2) On problem I see with the standard DSGE models is that money enters into them either through money in the utility function or cash in advance constraint. Both of these modeling seems to get away from the very point of money reducing transactions costs and being the medium of exchange. Ironically, money is found to be redundant in these models but that is only so because money's ability to reduce transactions costs is simply assumed away.

    (3) On slide 22 you mention the advantage of central banks is that they have a monopoly in the issue of currency and some monopoly in the payment system. What about their ability to shape expectations? Isn't that one of their biggest advantages.

    ReplyDelete
  3. "On problem I see with the standard DSGE models is that money enters into them either through money in the utility function or cash in advance constraint. Both of these modeling seems to get away from the very point of money reducing transactions costs and being the medium of exchange."

    Money in the utility function is isomorphic to a model in which physical (or temporal) transactions costs are reduced by holdings of real money balances. Cash-in-advance is just an extreme version of this setup, in which the transaction cost is infinite without cash. You're not understanding the literature.

    ReplyDelete
  4. "I'll actually be impersonating Brad DeLong, which is an interesting story in itself."

    You're going to act like a bloviating jackass?

    ReplyDelete
  5. "I'll actually be impersonating Brad DeLong, which is an interesting story in itself."

    You'll need to gain a lot of weight and lose a lot of intellect to pull that off.

    ReplyDelete
  6. Anonymous:

    I know some papers have attempted to show that MIU and CIA models are technically equivalent to having transactions costs, but my point is more economic than mathematics. These types of models abstract from the important characteristics that make money important. As Williamson's own buddies in the New Monetarist camp like to say, using MIU and CIA models are "reduced form" monetary models. From the first paragraph of Lagos and Wright (2005):

    "Existing monetary models in macroeconomics are reduced-form models. By this we mean they make assumptions, such as putting money in the utility function or imposing cash-in-advance constraints, that are meant to stand in for some role of money that is not made explicit–say, that it helps overcome spatial, temporal, or informational frictions."

    In other words, money is assumed to be important because we put it in the model. However, when the results of the model without money turn out to be roughly equivalent to those with money, the conclusion the profession seems to draw is that money is unimportant rather than realizing the modeling assumption isn't useful.

    ReplyDelete
  7. E. Barandiaran,

    1. Yes, Caballero is a serious economist. The quote is from this paper:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1683617

    Basically, Caballero wants us to think outside the box, but I read his paper and thought that he was describing things that people actually already do. And I don't think that work is on the "periphery," as he says.

    2. On citations: I can't include everyone.

    3. Monetary economics and financial economics are not distinct. It's all the same thing.

    David,

    1. I did not put aggregate shocks into the model, but it's no problem to do that.

    2. Woodford has always given short shrift to monetary factors. He wants to focus only on the sticky price friction, and ignore everything else, though he has written things in the last couple of years where he makes some small changes to include "financial factors."

    3. In principle any large economic actor can shape expectations. That's not inherent to central banking.

    ReplyDelete
  8. I hope your readers read Caballero's paper to understand how wrong you are in your characterization of his work.

    To say that monetary economics and financial economics are the same thing was a useful simplification until the early 1970s. Since then financial economics has slowly expanding to deal with the several functions of financial intermediation. I'm not arguing that corn economics and wheat economics are the same but that the payments function is quite different from the other functions of financial intermediaries and that the issue of fiat money (=currency) is not even a function of financial intermediaries but a government function as history has shown even in times of commodity monies.

    I failed to post the second part of my earlier comment. I tried a few times but it was not posted.

    ReplyDelete
  9. What's wrong with my characterization of Caballero's paper? He basically says there are some things that people are not doing, and they should go do them. I'm saying we are already doing those things.

    "the payments function is quite different from the other functions of financial intermediaries..."

    I don't agree. You can't separate these things. Part of the role of financial intermediaries is to transform assets and make them more liquid. Being "more liquid" means that the assets are more useful in various types of exchange, whether that be retail exchange, or exchange among large financial institutions.

    ReplyDelete