tag:blogger.com,1999:blog-49794770220085696172024-03-06T00:24:30.638-08:00Roger Farmer's Economic WindowA space for quotes, graphs, thoughts and blogsRoger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.comBlogger89125tag:blogger.com,1999:blog-4979477022008569617.post-91215922918530596772016-05-25T18:23:00.000-07:002016-05-25T18:23:15.117-07:00My Blog Has Moved<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiywVGkgyGs5Knlzoc6FajNNq9NNS0vF8sllYGSC4SXPFNIBIcJOHJNhifJgaV4elHxSKXc7QPoHB5gs6FAtSpQP2Q8OoeqfsVp05SLsGknG6oEmF5t8Jj76eGeTbOGcsnfXUxDJmJt4ww/s1600/Roger.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiywVGkgyGs5Knlzoc6FajNNq9NNS0vF8sllYGSC4SXPFNIBIcJOHJNhifJgaV4elHxSKXc7QPoHB5gs6FAtSpQP2Q8OoeqfsVp05SLsGknG6oEmF5t8Jj76eGeTbOGcsnfXUxDJmJt4ww/s320/Roger.jpg" width="212" /></a></div>
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">I have consolidated my blog and my website on squarespace. If all goes according to plan: you will be able to find new and existing blog posts <a href="http://rogerfarmer.com/">HERE</a> as well as a link to my updated shiny new website. Fingers crossed: this should be up and running in the next 72 hours if all goes according to plan. 😎</span>Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com0tag:blogger.com,1999:blog-4979477022008569617.post-83515507460162455562016-05-09T21:42:00.000-07:002016-05-09T22:27:14.029-07:00Would Robinson Crusoe Please Leave the Stage?<span style="font-size: large;">I have just completed a new working paper, ”Asset Prices in an Economy with Two Types of People”. You can find it as an NBER </span><br />
<span style="font-size: large;">working paper <a href="http://www.nber.org/papers/w22228">here</a>, as a CEPR discussion paper <a href="http://cepr.org/active/publications/discussion_papers/dp.php?dpno=11253">here</a>, or directly from my website <a href="http://www.rogerfarmer.com/NewWeb/PdfFiles/Two_People_Final.pdf">here</a>. The paper shows how asset price volatility may be driven by non-fundamental shocks.</span><br />
<span style="font-size: large;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjeOmIYGynd8xcjgzMIOd1L7kl3RjeeYlEp6dcWb4-xOlkDOvfXqQFdfAJD-VZCYKZx8xRSIZhC_t05ZwPhpZrhIZJOmmFDVtOpIilP_RZBm-KLkyj1hTF7Egy8pEchEi97JCPyQA2c-wQ/s1600/Picture1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjeOmIYGynd8xcjgzMIOd1L7kl3RjeeYlEp6dcWb4-xOlkDOvfXqQFdfAJD-VZCYKZx8xRSIZhC_t05ZwPhpZrhIZJOmmFDVtOpIilP_RZBm-KLkyj1hTF7Egy8pEchEi97JCPyQA2c-wQ/s320/Picture1.png" width="278" /></a></div>
<span style="font-size: large;">The paper constructs a formal mathematical model to capture the idea that free trade in capital markets does not lead to optimal outcomes.[1] We would all be better off if national governments were to regulate the capital markets through counter cyclical trades of debt for equity. </span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">In a second new working paper, "The Theory of Unconventional Monetary Policy" coauthored with Pawel Zabczyk of the Bank of England, we show how those regulations would work in a simple two-period general equilibrium model. As Ben Bernanke said in the aftermath of the Great Recession; "Quantitative Easing works in practice but not in theory". We show in this paper why it works in theory. </span><span style="font-size: large;">The paper is available from the NBER <a href="http://www.nber.org/papers/w22135">here</a>, CEPR <a href="http://cepr.org/active/publications/discussion_papers/dp.php?dpno=11253">here</a> and from my website <a href="http://www.rogerfarmer.com/NewWeb/PdfFiles/The%20Theory%20of%20Unconventional%20Monetary%20Policy.pdf">here</a>. </span><br />
<a name='more'></a><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">In my single-authored paper, I extend the two-period model to an infinite horizon a</span><span style="font-size: large;">nd I show that it captures two features of real world capital markets. Price-earnings ratios are excessively volatile and equity earns a substantial premium over three month treasuries. These two features are related and they both follow from the inability of the unborn to trade in the fin</span><span style="font-size: large;">ancial markets.</span><br />
<span style="font-size: large;"><br />Ever since Adam Smith, economists have sought to explain why market systems provide outcomes that improve our lives. If I have a good that you want and you have a good that I want, we should be allowed to exchange one good for the other. The power of that idea was demonstrated most recently by the growth of China as 1.5 billion Chinese were pulled from poverty by the move from social planning to a market economy.<br /><br />The benefit of free exchange is captured by economists in the theory of general equilibrium. That theory, developed by Walras and Pareto in the nineteenth century, was atemporal. The market takes place at a single point in time. In modern macroeconomics, exchange takes place in a sequence of markets and the trades we make are with people we may never have met. Each human being is connected with every other human being on the planet. From the urban centers of London, Paris, Tokyo and New York to remote areas like the Brazilian rain forest and the Australian outback; we are connected by free trade in markets. And through free trade in the capital markets, we are connected with people who are not yet born.<br /><br />The most important idea to emerge from Adam Smith is, in the immortal words of <a href="https://en.wikipedia.org/wiki/Gordon_Gekko">Gordon Gekko</a>, that ‘greed is good’. Selfish behavior by greedy people seeking to improve their own lives will, inevitably, improve the lives of everyone else on the planet. That idea is encapsulated in the first welfare theorem of economics which asserts that ‘every competitive equilibrium is Pareto optimal’. I assert that the first welfare theorem, when applied to the financial markets, is wrong.<br /><br />Macroeconomists often assume that all trades can be described ‘as if’ they were made by a representative family with superhuman perception of future prices. That assumption works well if our goal is to explain savings behavior. It works very badly when applied to financial data. There are two dimensions in which it fails that economists have labeled the <a href="http://www.econ.ucsb.edu/~sleroy/downloads/excess.pdf">excess volatility puzzle</a> and the <a href="https://en.wikipedia.org/wiki/Equity_premium_puzzle">equity premium puzzle</a>. My <a href="http://www.rogerfarmer.com/NewWeb/PdfFiles/Two_People_Final.pdf">new working paper</a> shows that both of these puzzles are explained by the fact that we are unable to participate in financial markets that open before we are born. <br /><br />The fact that we cannot insure over the state we are born into allows for non-fundamental shocks to influence asset prices simply because people believe that it will be so. I believe that a substantial component of the fluctuations we see in aggregate asset prices are caused by non-fundamental events. They are self-fulfilling prophecies and we would all be better off if these fluctuations were eliminated by treasury or central bank intervention. <br /><br />This paper, and my <a href="http://www.rogerfarmer.com/NewWeb/PdfFiles/The%20Theory%20of%20Unconventional%20Monetary%20Policy.pdf">joint paper with Pawel</a>, provide a foundation for the argument I make in my new book ‘<a href="https://global.oup.com/academic/product/prosperity-for-all-9780190621438?cc=us&lang=en&">Prosperity for All</a>’; namely that treasuries and/or central banks should intervene in the asset markets to smooth out inefficient fluctuations in PE ratios. </span><br />
<div>
<span style="font-size: large;">__________________________________________________<br /><br />[1] This paper is the latest in a series of working papers. Farmer and Zabcyck builds on <a href="http://www.nber.org/papers/w18421">Farmer (September 2012)</a> and my single-authored paper builds on </span><span style="font-size: large;">Farmer (<a href="http://www.rogerfarmer.com/NewWeb/Working%20Papers/business.pdf">2002a</a>, <a href="http://www.rogerfarmer.com/NewWeb/Working%20Papers/barcelona.pdf">2002b</a>), Farmer (<a href="http://www.nber.org/papers/w18421">September 2012</a>), <a href="http://www.nber.org/papers/w18647">Farmer, Venditti and Nourry (December 2012)</a>, and Farmer (<a href="http://www.nber.org/papers/w19958">2014</a>, <a href="http://www.nber.org/papers/w20831">2015</a>). The connections between these paper</span><span style="font-size: large;">s are explai</span><span style="font-size: large;">ned <a href="http://www.rogerfarmer.com/NewWeb/WebPages/working_papers.htm">here</a>.</span></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com3tag:blogger.com,1999:blog-4979477022008569617.post-28793325862252082832016-05-06T11:28:00.002-07:002016-05-06T11:39:05.023-07:00Prosperity for All: Coming Soon to a Bookstore Near You<span style="font-size: large;">This is my first post for a while: so, sorry if you missed me. I've been busy writing books and papers. I received the final galley proofs this week for my new book, <i>Prosperity for All: How to Prevent Financial Crises</i>. You can pre-order it <a href="https://global.oup.com/academic/product/prosperity-for-all-9780190621438?cc=us&lang=en&">from OUP</a> or <a href="http://www.amazon.com/Prosperity-All-Prevent-Financial-Crises/dp/0190621435">Amazon</a> and it will ship on September 1st.</span><br />
<div class="separator" style="clear: both; text-align: center;">
<span style="font-size: large;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhikK6PL7bWCTvExdbVm_hJ9UoSGxUj3Yc-5kKNgUh0Y__2G2DlknphfrdRe_8tA_cmw2mVeBXdKsH-s4XJoQceG2ErTkVZwSQ_xJTESDNCjlFpt5zQfB-OSh50VUbdk7NgoLKGTu-f-YY/s1600/prosperity.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhikK6PL7bWCTvExdbVm_hJ9UoSGxUj3Yc-5kKNgUh0Y__2G2DlknphfrdRe_8tA_cmw2mVeBXdKsH-s4XJoQceG2ErTkVZwSQ_xJTESDNCjlFpt5zQfB-OSh50VUbdk7NgoLKGTu-f-YY/s400/prosperity.jpg" width="259" /></a></span></div>
<span style="font-size: large;">
I also finished three new working papers that I will say more about in future posts.<br /><br />I've been consistent in my criticisms on this blog of attempts by Paul Krugman to revive the IS-LM framework. That's not because I'm opposed to IS-LM as it appeared in its earliest incarnations; the papers by <a href="http://www.hujingbei.net/upload/2007_11/07110714365941.pdf">John Hicks</a> and <a href="http://www.jstor.org/stable/1824136?seq=1#page_scan_tab_contents">Alvin Hansen</a>. It's because of the bastardization of the Keynesian agenda by what my friend and teacher David Laidler referred to as North American Keynesianism. In my view, articulated in <i>Prosperity for All</i>, macroeconomics went off the rails in 1955 when Samuelson introduced the neoclassical synthesis in the third edition of his textbook, <i>Economics: An Introductory Analysis</i>. (See <a href="http://hope.dukejournals.org/login?uri=%2Fcontent%2F27%2FSupplement%2F183.full.pdf%2Bhtml%3Faddtocart%3Dundefined">Pearce and Hoover</a> for a great discussion of the influence of Samuelson's text and my book <i><a href="http://www.amazon.com/How-Economy-Works-Confidence-Self-Fulfilling/dp/0195397916/ref=sr_1_1?s=books&ie=UTF8&qid=1462558710&sr=1-1&keywords=how+the+economy+works+roger+farmer">How the Economy Works</a></i>).</span><br />
<a name='more'></a><span style="font-size: large;"><br />The IS-LM model is an effective way of capturing some empirical regularities in a graphical apparatus. But it is not a complete theory of macroeconomics in the sense that we mean by that term today. When Hicks wrote the famous paper that became IS-LM, he had already written a pathbreaking book, <i><a href="https://global.oup.com/academic/product/value-and-capital-9780198282693?cc=us&lang=en&">Value and Capital</a></i>, that is, in many ways, a much much better book than Keynes’ <i>General Theory</i>. <i>Value and Capital</i> used a technique, temporary equilibrium theory, that presents a complete dynamic model of the macroeconomy. <br /><br />In <i>Value and Capital</i>, time proceeds in a series of “weeks”. Each week, people meet in a market. An auctioneer calls out prices and only stops when the demands and supplies of all commodities are equal. At that point trade takes place and people trot off home to the family farm to produce goods for the next week’s meeting. At each market meeting, the demands and supplies that people announce are functions of their beliefs about future prices. And those beliefs may or may not turn out to be correct.<br /><br />When Hicks read the first draft of the General Theory, he had a crisis of confidence and figured that everything he'd spent his life working on was wrong (see Michel De Vroey's <a href="http://econpapers.repec.org/paper/ctllouvir/2004014.htm">piece</a> on this point). He seized on Keynes’ idea that, at each market meeting, people trade with each other before the auctioneer has finished his job. The result is involuntary unemployment and he formalized that idea by developing what we later came to call the IS-LM model.<br /><br />The Keynesian economics of the General Theory is static. It purports to explain how employment, GDP and the interest rate are determined at one weekly meeting, taking the price level as fixed. Modern macroeconomics is dynamic. It purports to explain how employment, GDP, the interest rate and the price level are determined in a sequence of weekly meetings. To knit together the temporary one-week Keynesian equilibria, Samuelson, in the new-classical synthesis, used the <a href="http://people.virginia.edu/~lc7p/202/Phillips58.pdf">Phillips curve</a>, which he saw as a price adjustment mechanism in which the wage adjusts in response to an excess demand or supply of labor. This was the biggest mistake in the history of macroeconomic thought and we are still suffering the consequences as central banks work with false ideas and broken models.<br /><br />In <i>Prosperity for All</i> I articulate the evolution of an alternative research agenda. I argue that it is beliefs that are sticky: not prices. At each weekly meeting, the auctioneer finishes his job. The demands and supplies of all goods are equal and all markets clear; including the labor market. But the labor market is a search market, not an auction market, and there are many different ways in which it can clear (see my <a href="http://www.rogerfarmer.com/NewWeb/PdfFiles/fa-con-cra.pdf">EJ piece</a> on how this works). Labor market equilibrium is pinned down by beliefs about future prices and, for every belief, there is a different Pareto inefficient market-clearing unemployment rate. <br /><br />The differences of this theory from all of modern macro, both classical and New-Keynesian, are profound. In my view, high involuntary unemployment is an equilibrium phenomenon. A market economy can get stuck in a Pareto inefficient equilibrium with high unemployment forever. It is the job of government to design political institutions that provide the equilibrating mechanisms that are missing from laissez-faire market economies.<br /><br />You might think that the above paragraphs would make me an uber-Keynesian. Surely I should be riding in on my white horse unfurling the banner of fiscal intervention to save capitalism from itself. Not so fast. Although my work provides a foundation to the Keynesian theory of aggregate supply: I am skeptical of Keynes' views on aggregate demand. Much more on this in a future post.</span>Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com2tag:blogger.com,1999:blog-4979477022008569617.post-77226235131715246482016-03-26T11:53:00.000-07:002016-04-07T21:44:33.913-07:00Idiopathic Tardus Augmenti<span style="font-size: large;">There are religious nonconformists. There are climate change deniers. And there is now a new class of political agnostic: the secular stagnation skeptic. According to a piece in <a href="http://time.com/4269733/secular-stagnation-larry-summers/">Time magazine</a> this week, Barry Eichengreen finds the issue of secular stagnation so divisive amongst academic economists that he has coined a new term to help us sort ourselves into believers and non believers: the <table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left; margin-right: 1em; text-align: left;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHUVvlRAQ15ct5jG1bE7N-jFkLFmpN_ccy4Lmorw7ajDo1720aHN8jqjD1DvuV7a_GapHmFEPcB4ykZIK_5IUOT2DpfjRc5sXN0MQwLIsN4g-3-WgTXuTEstLI5uXJN3qU45_k_M9Jxjw/s1600/Picture1.png" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="268" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHUVvlRAQ15ct5jG1bE7N-jFkLFmpN_ccy4Lmorw7ajDo1720aHN8jqjD1DvuV7a_GapHmFEPcB4ykZIK_5IUOT2DpfjRc5sXN0MQwLIsN4g-3-WgTXuTEstLI5uXJN3qU45_k_M9Jxjw/s400/Picture1.png" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: small;">Steam Boat off Harbour's Mouth: J.M. Turner</span></td></tr>
</tbody></table>
</span><span style="font-size: large;"> secular stagnation <a href="http://equitablegrowth.org/state-of-the-union-rorschach-test/">Rorschach Test</a>. </span><span style="font-size: large;">I like that term. And as I look at the ink blot of incoherent theory and misinterpreted facts that is presented to us for interpretation I find myself peering at a late Turner painting. I am straining to see the ship in the blizzard. <br /><br />The Time piece is supposed to explain, to the layperson, what economists mean by secular stagnation. It serves only to spread the confusion that was laid by Larry Summer’s <a href="http://larrysummers.com/wp-content/uploads/2014/06/NABE-speech-Lawrence-H.-Summers1.pdf">original article</a> in which he resuscitated the term ‘secular stagnation’, originally coined by the American economist Alvin Hansen. </span><br />
<a name='more'></a><span style="font-size: large;"><br />The confusion that originates in Larry’s article is between economic theories of unemployment and economic theories of growth. On unemployment, economists can at least agree to disagree. <br /><br />For the thirty years leading up to the Great Recession, most economists built economic models where there is never any unemployment and the quantity of labor demanded is always equal to the quantity of labor supplied. Although there are still a few rosy tinted <a href="https://www.minneapolisfed.org/research/sr/sr494.pdf">true believers </a>who think that this makes sense; for the most part, the breed is dying out. It has been replaced by a new religion that genuflects to the altar of the sticky price. These ‘<a href="https://en.wikipedia.org/wiki/New_Keynesian_economics">New Keynesian</a>’ economists agree that, in the long-run, the quantity of labor demanded will equal the quantity of labor supplied. But, in the short-run, high unemployment persists because wages and prices are ‘sticky’. <br /><br />Larry is not in either of these camps. Nor am I. I have spoken at length with him about this. Larry sees high involuntary unemployment as an equilibrium situation. I have modeled that idea <a href="http://www.rogerfarmer.com/NewWeb/PdfFiles/fa-con-cra.pdf">in my own work</a> where I use the theory of labor market search to explain why <i>high involuntary unemployment</i> may persist. And Larry has <a href="http://www.nber.org/chapters/c4245.pdf">written papers</a> with Olivier Blanchard where <i>low involuntary employment </i>may persist as workers become discouraged and remain out of the labor force. The exact formulation of this idea is unimportant. Larry and I are on the same page. Market economies are not self-stabilizing and they do not quickly adjust to find the socially optimal employment rate in the absence of active stabilization policies. <br /><br />That brings me to the theory of economic growth. On this topic, despite more than twenty-five years of intense and active research, there is little or no consensus. The dominant way that macroeconomists model economic growth was developed by Robert Solow in the 1960s. Growth, in the <a href="https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model">Solow model</a>, is caused by an exogenous increase in an unexplained factor called technological progress. <br /><br />We produce goods by combining capital, land and labor using blueprints that represent the state of knowledge. If we had combined one acre of land with twenty-five machines and one hundred people in 2000 we might have produced (by way of an example) one hundred units of output. If we had combined one acre of land with twenty-five machines and one hundred people in 2001, we might have produced one hundred and three units of output. In this example, the economy grew by three percent between 2000 and 2001. But why did this happen? <br /><br />According to the Solow model, the economy did not produce three percent more output in 2001 because we used more land, more labor, or more machines (although these may also have increased). It produced three percent more output because entrepreneurs used better blueprints. And according to the economic theory that is fed into almost all macroeconomic forecasting models, the reason for the improvement in those blueprints has nothing to do with economic policy and it has nothing to do with population growth, with investment spending or with changes in the unemployment rate. It is a black box we call technological progress. <br /><br />There has, of course, been a great deal of work on theories of endogenous growth. <a href="http://www.jstor.org/stable/2138148?seq=1#page_scan_tab_contents">Paul Romer</a> and <a href="http://www.sciencedirect.com/science/article/pii/0304393288901687">Robert Lucas</a> have both produced seminal pieces on that topic that led to reams of economic research papers that try to understand Solow’s black box. To a macroeconomist who is interested in secular stagnation, these theories are a big disappointment.<br /><br />I do not know why growth is low. There are a number of promising candidate theories. My own favorite explanation is that the Fed has lost control of inflation and that firms are not creating new technologies, at a pace that is fast enough to generate high growth, because uncertainty has increased. But I do not have a good economic model that links that idea in a coherent way with economic data. When it comes to economic growth; I have very little to say about why growth is currently slow. I am not unusual in that regard. Beware of economists bearing confident assertions about the best way to increase productivity growth. This is simply an area that we know very little about.<br /><br />So what do I see in Turner’s painting? If secular stagnation means that unemployment can be permanently high if we don’t do something about it: I see secular stagnation. If secular stagnation means that we will be in trouble when the next recession hits because the Fed will not be able to lower interest rates further: I see secular stagnation. But if secular stagnation means that a massive bout of government investment in roads and infrastructure will cause firms to start producing better blueprints, I say; show me the theory and the evidence that leads you to believe that that is so.<br /><br />Ignorance is not a reason for embarrassment. When medical doctors do not understand the cause of a disease, they cloak their ignorance with Latin. An illness of unknown origin is ‘idiopathic’. Economists should adopt the same strategy. When growth is slow and we don't know why, the economy is not experiencing secular stagnation. We are afflicted with a bout of idiopathic <a href="http://www.indifferentlanguages.com/words/slow_growth/latin">tardus augmenti</a>. <br /><br /> <br /><br /> </span>Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com14tag:blogger.com,1999:blog-4979477022008569617.post-17018604577818836242016-03-14T14:29:00.000-07:002016-03-14T14:31:04.336-07:00Why the Fed Should Raise Rates and Purchase More Assets<span style="font-size: large;">Here is <a href="http://www.bloomberg.com/news/videos/2016-03-14/why-the-fed-should-raise-rates-and-purchase-more-assets">a link</a> to my Bloomberg TV segment today on "What'd You Miss" with Scarlett Fu, Alix Steel and Joe Weisenthal: In which I </span><br />
<div class="separator" style="clear: both; text-align: center;">
<span style="font-size: large;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKAMPhKafzO5j1Qv8cDAbhbE3D8rmS7l6oWZaQWxLS6XBCq4j-GWNwqtX4fcsJCQs9m3HhurBdyL0CJJu1nIWtRrz6SrxNzIW-aa6YXmtifqTNvW-wTlzkCMBmVytLuqgBg5XjqiM9NVo/s1600/Screenshot+2016-03-14+14.10.47.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKAMPhKafzO5j1Qv8cDAbhbE3D8rmS7l6oWZaQWxLS6XBCq4j-GWNwqtX4fcsJCQs9m3HhurBdyL0CJJu1nIWtRrz6SrxNzIW-aa6YXmtifqTNvW-wTlzkCMBmVytLuqgBg5XjqiM9NVo/s400/Screenshot+2016-03-14+14.10.47.png" width="400" /></a></span></div>
<span style="font-size: large;">argue that the Phillips Curve is like <a href="http://www.amazon.com/The-Hunt-Vulcan-Discovered-Relativity-ebook/dp/B00TCI48B8">the Planet Vulcan</a>. Although observed by eminent astronomers in the early twentieth century: it was never actually there. </span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">The Phillips curve seemed remarkably stable in a century of UK labor market data. But as soon as Phillips published his eponymous article, it vanished. </span><span style="font-size: large;">That didn't stop economists from seizing on the Phillips curve as a building block of macro theory to prop up the neoclassical synthesis; <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130306.pdf">Samuelson's attempt</a> to connect Keynesian economics with classical ideas.</span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">Why is this relevant? Because central bankers think that by lowering interest raters even further they will create inflation. This is a bad mistake. We need to raise rates now and support the value of risky assets by <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130411.pdf">trading an ETF in the stock market</a>.</span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">Much more to come in my forthcoming book "Prosperity for All", coming in September from Oxford University Press.</span>Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com6tag:blogger.com,1999:blog-4979477022008569617.post-48723311275971232462016-03-14T13:47:00.001-07:002016-03-14T13:52:14.581-07:00So you believe the stock market can directly affect the economy?<div class="separator" style="clear: both;">
</div>
<div style="text-align: left;">
<span style="font-size: large;">Here is <a href="http://www.latimes.com/business/la-fi-qa-stocks-recession-20160310-story.html">a link</a> to an LA Times interview by James Peltz that features my work on link between confidence, the stock market and unemployment. Here is an excerpt. </span></div>
<div style="text-align: left;">
<span style="color: #333333; font-family: "georgia" , serif; font-size: 18px; font-weight: 700;"><br /></span></div>
<b><span style="font-size: large;">So you believe the stock market can directly affect the economy?</span></b><br />
<div class="" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDhaNu2Ku3Okr_Xuh9AkMeLMQKFKxDbqPAaEDNIt5LY4h4HFcT78AA0oI8B9yG6rGV7O_elmwIpnCJXdamywCaLSsx3nzZZSVRkOjx0dE9bF_81jc68l1JWMMmm3Da2EbyOVyhneCKMVQ/s1600/Screenshot+2016-03-14+13.38.03.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="228" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDhaNu2Ku3Okr_Xuh9AkMeLMQKFKxDbqPAaEDNIt5LY4h4HFcT78AA0oI8B9yG6rGV7O_elmwIpnCJXdamywCaLSsx3nzZZSVRkOjx0dE9bF_81jc68l1JWMMmm3Da2EbyOVyhneCKMVQ/s400/Screenshot+2016-03-14+13.38.03.png" width="400" /></a></div>
<blockquote class="tr_bq">
<span style="font-size: large;">"Yes: When people lose confidence in the market and when the market stays down for three, six months at a time, people start paying attention.</span><span style="font-size: large;">"</span></blockquote>
<br /><b><span style="font-size: large;">Paying attention in what way?</span></b><br /><br /><blockquote class="tr_bq">
<span style="font-size: large;">"Imagine you're a 65-year-old couple and you have money invested in a 401(k). Now if your 401(k) drops for a week and then it comes back up again, you're probably not going to do very much. But if your 401(k) drops for three months or six months or a year, maybe you're not going to take that cruise you were going to take. Maybe you're not going to put money into your grandchild's college education.<br />Those decisions impact the economy. When people feel less wealthy they spend less. When they spend less, firms lay off workers and unemployment increases, and the fall in wealth becomes self-fulfilling. I believe when we feel rich we are rich."</span></blockquote>
<br /><div>
<b><span style="font-size: large;">Why is confidence so critical?</span></b><br /><br /><blockquote class="tr_bq">
<span style="font-size: large;">"If people are not out in the shops buying things, then firms are not going to be hiring people and one of the ways they respond is laying people off. And when people get laid off, profits fall along with demand and the drop in profits validates the original belief that their wealth was worth less. The stock market is a reflection of how wealthy we all think we are."</span></blockquote>
</div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com2tag:blogger.com,1999:blog-4979477022008569617.post-34254206606567845092016-02-25T21:16:00.002-08:002016-02-25T21:16:56.474-08:00Multiple Equilibria and Financial Crises<div class="separator" style="clear: both;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8sHSrkiVFBmFHCEMOfpQxS8QO52DJ9jN8tZhjXHhfUW-78-MybVdcxTVFGFZqN43HMOND5htncWU1AJ0B8Vg2Fe779C6I6YCKGn0JGiDud1ZryuDtryufy_v6SOpn4_AF2t4XPEYOK4Y/s1600/financial-crisis-544944_640.jpg" imageanchor="1" style="clear: left; display: inline !important; float: left; font-size: 24px; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="280" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8sHSrkiVFBmFHCEMOfpQxS8QO52DJ9jN8tZhjXHhfUW-78-MybVdcxTVFGFZqN43HMOND5htncWU1AJ0B8Vg2Fe779C6I6YCKGn0JGiDud1ZryuDtryufy_v6SOpn4_AF2t4XPEYOK4Y/s400/financial-crisis-544944_640.jpg" width="400" /></a><span style="font-size: large;">Jess Benhabib and I are running our second annual conference on multiple equilibria and financial crises at NYU over the weekend with the support of the C.V Starr Center.We have a great lineup with a guest dinner talk from Costas Azariadis with "reflections on multiple equilibria". <a href="http://www.cvstarrnyu.org/wp-content/uploads/2016/02/Program1_page1_2_2016Feb1-1.pdf">Here</a> is a link to the program.</span></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com0tag:blogger.com,1999:blog-4979477022008569617.post-49859549094479428322016-02-01T21:21:00.001-08:002016-02-01T21:21:54.773-08:00Does the Economy Ruin the Stock Market or Does the Stock Market Ruin the Economy?<div class="tr_bq">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIGC4o4xB6tGydiPXnH1vvpoJ5ixe2fE8Qgu1PlagBP8ngDnN1dMjgI1jaoO4Q-4D2QMsah8GVPpqTNQPYxL_njSu0wIFWqjdbc5ur12VFvMKl5xoxRxRRHMjCx2QKr9kl6MYD0tkxLy0/s1600/BN-MG093_NYDIGG_G_20160124124131.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIGC4o4xB6tGydiPXnH1vvpoJ5ixe2fE8Qgu1PlagBP8ngDnN1dMjgI1jaoO4Q-4D2QMsah8GVPpqTNQPYxL_njSu0wIFWqjdbc5ur12VFvMKl5xoxRxRRHMjCx2QKr9kl6MYD0tkxLy0/s1600/BN-MG093_NYDIGG_G_20160124124131.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIGC4o4xB6tGydiPXnH1vvpoJ5ixe2fE8Qgu1PlagBP8ngDnN1dMjgI1jaoO4Q-4D2QMsah8GVPpqTNQPYxL_njSu0wIFWqjdbc5ur12VFvMKl5xoxRxRRHMjCx2QKr9kl6MYD0tkxLy0/s1600/BN-MG093_NYDIGG_G_20160124124131.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIGC4o4xB6tGydiPXnH1vvpoJ5ixe2fE8Qgu1PlagBP8ngDnN1dMjgI1jaoO4Q-4D2QMsah8GVPpqTNQPYxL_njSu0wIFWqjdbc5ur12VFvMKl5xoxRxRRHMjCx2QKr9kl6MYD0tkxLy0/s400/BN-MG093_NYDIGG_G_20160124124131.jpg" width="400" /></a><span style="font-size: large;">John Carney of the Wall Street Journal has written a well researched thoughtful piece <a href="http://www.rogerfarmer.com/NewWeb/PdfFiles/stock_market_really.pdf">featuring my research</a> on the connection </span><span style="font-size: large;">between the stock market and the unemployment rate and he asks? </span></div>
<span style="font-size: large;"><br /></span>
<span style="font-size: large;"><a href="http://blogs.wsj.com/moneybeat/2016/02/01/does-the-economy-ruin-the-stock-market-or-does-the-stock-market-ruin-the-economy/">Does the Economy Ruin the Stock Market or Does the Stock Market Ruin the Economy?</a></span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">The ideas he talks about are discussed in much more detail in my new book Prosperity for All: How to Prevent Financial Crises coming this year from Oxford University Press.</span>Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com2tag:blogger.com,1999:blog-4979477022008569617.post-31571213425315303622016-01-22T08:35:00.004-08:002016-01-22T08:35:49.062-08:00Thought for the Day<blockquote class="tr_bq">
<span style="font-size: large;">Words are Powerful: especially if you put them in the right order. Roger Farmer</span></blockquote>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfh71HXWvjqhOmDmBLH535JTddEjjS6m-HAA2mcr2fq0afidffoRUK6e2YZPMu_u-mbbNWS2zUjd1i7UPzjahboPwE77wdHuxxlyDjel138eGhhdnMoTPzsm5U0O8djazQly50V7MCfIM/s1600/power.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfh71HXWvjqhOmDmBLH535JTddEjjS6m-HAA2mcr2fq0afidffoRUK6e2YZPMu_u-mbbNWS2zUjd1i7UPzjahboPwE77wdHuxxlyDjel138eGhhdnMoTPzsm5U0O8djazQly50V7MCfIM/s1600/power.png" /></a></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com0tag:blogger.com,1999:blog-4979477022008569617.post-49882559605178008472016-01-20T11:39:00.000-08:002016-01-20T11:39:59.609-08:00Graph For the Day: Is QE4 Far Away?<div class="separator" style="clear: both; text-align: left;">
<span style="font-size: large;">Here is an update of the graphs I used <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130411.pdf">here</a> to point to the link from QE to the stock market.</span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikAZXar1UMqhNfg2GwitaSCNTukV2H-eLzpcAg2-uLHtG-59yq8G7RgLzaXXSoJu0fHaej8EUQ7ydJxPvtDB5CNUaUe1vNIatH3rDYLlGWFRIyFbJ307AGRVfJ8VoUeF7QczpIyesBufg/s1600/updatedmarkets.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="550" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikAZXar1UMqhNfg2GwitaSCNTukV2H-eLzpcAg2-uLHtG-59yq8G7RgLzaXXSoJu0fHaej8EUQ7ydJxPvtDB5CNUaUe1vNIatH3rDYLlGWFRIyFbJ307AGRVfJ8VoUeF7QczpIyesBufg/s640/updatedmarkets.png" width="640" /></a></div>
<span style="font-size: large;">The market is down 10% since this time last year. If it stays down and falls further, look for a spike in US unemployment. I showed <a href="http://rogerfarmer.com/NewWeb/PdfFiles/EBC.pdf">here</a> that the stock market Granger causes the unemployment rate. Surely the Fed is aware of that by now. The question is: do they accept my <a href="http://www.amazon.com/gp/reader/0195397908/ref=sib_dp_pt#reader-link">causal explanation</a> that sees low confidence as a self-fulfilling prophecy.</span>Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com9tag:blogger.com,1999:blog-4979477022008569617.post-20033331251237300542016-01-20T08:54:00.000-08:002016-01-20T08:54:21.252-08:00To the Fed and the Treasury: Can we Please Play Cooperatively?<span style="font-size: large;">How should government respond to a situation of high unemployment and low growth? If you are a classical RBC kind of person: the answer is simple. Get out of the way. Let the market perform its magic. </span><br />
<div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZduVNlDOVlazRtw3Sw3-BL09yJOBWH7ZsgdHzpTeHMV7cqeOBqSPa7iGDOA6YomMVSF9aHYOUfz19PrYmUTbeOLduhAIYRUvRT519W0HS5whWTKxQo2hWml2-5xSMfa4_LkpKB_OInQ0/s1600/picfedtreas.png" imageanchor="1" style="clear: left; display: inline !important; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="136" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZduVNlDOVlazRtw3Sw3-BL09yJOBWH7ZsgdHzpTeHMV7cqeOBqSPa7iGDOA6YomMVSF9aHYOUfz19PrYmUTbeOLduhAIYRUvRT519W0HS5whWTKxQo2hWml2-5xSMfa4_LkpKB_OInQ0/s320/picfedtreas.png" width="320" /></a></div>
<div>
<span style="font-size: large;">If you are a New Keynesian sticky price kind of person: the answer is also simple. Let the Fed do its magic by lowering the interest rate to stimulate aggregate demand. I have a different answer: replace long dated Treasury bonds in the hands of the public with cash or with short dated Treasury bills. </span></div>
<div>
<span style="font-size: large;"><br />Many Keynesian <a href="http://mainlymacro.blogspot.com/2015/11/public-investment-has-george-started.html">economists</a>, journalists and bloggers have argued that, when at the zero lower bound (ZLB) we must repair our infrastructure. Build roads. Build bridges. Build airports. They argue that, when the overnight rate is zero and the thirty year rate is lower than it has been for a century, public infrastructure should be paid for by borrowing at the long end of the yield curve. Float thirty year bonds. Better still: issue Consols that will never be retired.<br /><br />While I agree that public expenditure in a depression may be helpful: issuing long bonds is not the right way to do it. I agree with <a href="http://www.ft.com/intl/cms/s/0/8e3ec518-68cf-11e4-9eeb-00144feabdc0.html#axzz3xiJnFFfK">Adair Turner</a> that it is better to finance an expansion by printing money or borrowing in the Treasury bill market. Better still: as I argued in <a href="http://www.amazon.com/How-Economy-Works-Confidence-Self-Fulfilling/dp/0195397916/ref=sr_1_9?ie=UTF8&s=books&qid=1254946079&sr=8-9#reader_0195397916">How the Economy Works</a> and as Mark Blyth and Eric Lonergan have argued (<a href="http://www.vox.com/2014/9/9/6122517/helicopter-drop-money-print-fed-blyth-lonergan">here</a>) print money and give it to those who know how to spend it: that would be you and me. <br /><br />Borrowing at the long end of the yield curve is a bad idea because there are still active private participants in that market. There is not one interest rate: there are many. And although it is not possible to crowd out private expenditure at the short end of the yield curve; it is still possible to crowd out private expenditure at the long end. <br /><br />The maturity structure of debt in the hands of the public matters. As I argue <a href="http://rogerfarmer.com/NewWeb/PdfFiles/Manchester%20School.pdf">here</a>, it matters because our children and our grandchildren cannot participate in financial markets that open before they are born.<br /><br />Once one recognizes that the way that public expenditure is financed matters: it is a short step to recognizing that it is all that matters. If the Treasury increases the stock of thirty year bonds in the hands of the public, it will drive up long yields and crowd out private expenditure. If the Treasury reduces the stock of thirty year bonds held by the public, it will lower long yields and crowd in private expenditure. That leads to the <a href="http://blogs.ft.com/economistsforum/2012/05/central-banks-should-do-much-more/">argument for Qualitative Easing</a>. A policy that removes long bonds (or other long dated risky securities) from the hands of the public and replaces them with cash or with Treasury bills, will crowd in private expenditure and increase aggregate demand.<br /><br />Critics of QE have argued that QE3 was less effective than QE2 and QE1. That is true. But Fed intervention in the asset markets was <a href="http://rogerfarmerblog.blogspot.com/2014/08/thetreasury-and-fed-are-at-loggerheads.html">undone by the Treasury</a> that was simultaneously changing the yield composition of its debt to take advantage of low long-term interest rates. My message to the Fed and the Treasury is simple: can we please play cooperatively? Much more coming soon on this topic in a forthcoming book.</span></div>
</div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com1tag:blogger.com,1999:blog-4979477022008569617.post-19537917072163090452016-01-18T12:27:00.000-08:002016-01-18T12:46:23.061-08:00Please: Lets Agree to Speak the Same Language<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvX9LZFjk1fSIcgfjM52puxBHOI02rmg3FQfMw4f-NYNa40jKBmMD8M7wXMVc0gt6r3jES4VLss9Dg028DRB9-EZY7TgpP9D8PCvqLude9My-o1hkMr67VuZns7j76MNgcFN5loelDGrI/s1600/BABEL.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvX9LZFjk1fSIcgfjM52puxBHOI02rmg3FQfMw4f-NYNa40jKBmMD8M7wXMVc0gt6r3jES4VLss9Dg028DRB9-EZY7TgpP9D8PCvqLude9My-o1hkMr67VuZns7j76MNgcFN5loelDGrI/s1600/BABEL.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvX9LZFjk1fSIcgfjM52puxBHOI02rmg3FQfMw4f-NYNa40jKBmMD8M7wXMVc0gt6r3jES4VLss9Dg028DRB9-EZY7TgpP9D8PCvqLude9My-o1hkMr67VuZns7j76MNgcFN5loelDGrI/s1600/BABEL.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvX9LZFjk1fSIcgfjM52puxBHOI02rmg3FQfMw4f-NYNa40jKBmMD8M7wXMVc0gt6r3jES4VLss9Dg028DRB9-EZY7TgpP9D8PCvqLude9My-o1hkMr67VuZns7j76MNgcFN5loelDGrI/s1600/BABEL.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="280" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvX9LZFjk1fSIcgfjM52puxBHOI02rmg3FQfMw4f-NYNa40jKBmMD8M7wXMVc0gt6r3jES4VLss9Dg028DRB9-EZY7TgpP9D8PCvqLude9My-o1hkMr67VuZns7j76MNgcFN5loelDGrI/s400/BABEL.jpg" width="400" /></a></div>
<span style="font-size: large;">Olivier Blanchard finds the drop in the value of American stocks hard to explain in a framework where only fundamentals matter. He concludes that ‘<a href="http://blogs.piie.com/realtime/?p=5341">herding</a>’ is to blame.<br /><br />Can we please agree on terminology? <a href="http://press.princeton.edu/titles/8967.html">Animal spirits</a>, <a href="http://www.amazon.com/How-Economy-Works-Confidence-Self-Fulfilling/dp/0195397916/ref=sr_1_9?ie=UTF8&s=books&qid=1254946079&sr=8-9#reader_0195397916">confidence</a>, <a href="http://www.econ.ku.dk/mtvede/videreg%C3%A5ende%20dynamisk%20%C3%B8konomi/cass-shell-1983.pdf">sunspots</a>, <a href="https://books.google.com/books?id=fYmOO_jdGUYC&pg=PA289&lpg=PA289&dq=azariadis+self+fulfilling+prophecies&source=bl&ots=d2BWOBMXM-&sig=Xq-Uy-kyEtIp-L5olrTwSIWm6zU&hl=en&sa=X&ved=0ahUKEwjH48qZjbTKAhVR7GMKHYx4BzgQ6AEIVDAH#v=onepage&q=azariadis%20self%20fulfilling%20prophecies&f=false">self-fulfilling prophecies</a> and, <a href="http://economics.mit.edu/files/8394">sentiments</a> have all been used to mean shifts in markets caused by factors that are non-fundamental. Now Olivier adds herding as one more term. (To be fair, that term too has been used before in the <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.17.4883&rep=rep1&type=pdf">finance literature</a>). Why this smorgasbord of synonyms?</span><br />
<a name='more'></a><br />
<span style="font-size: large;"><br />Beatrice Cherrier and Aurélian Saïdi h</span><span style="font-size: large;">ave a <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2684756">nice survey </a>of the history of sunspots. The idea that non fundamental factors can have real effects, was developed at the University of Pennsylvania in the 1980s at about the same time that the Real Business Cycle model took off. According to the RBC school, recessions are times of technological regress caused by shocks to technology. According to the sunspot school, recessions are times when <a href="http://rogerfarmerblog.blogspot.com/2015/05/thought-for-day-animal-spirits-as-new.html">belief shifts</a> move the economy from one equilibrium to another. Initially, both paradigms flourished but the RBC agenda pulled ahead and stayed ahead for thirty years. That is now changing.</span><br />
<div>
<span style="font-size: large;"><br />Why this divergence in fortunes? According to Cherrier and Saïdi there were three major reasons why the RBC program pulled ahead. 1) there was no single strong individual to promote the sunspot agenda and the three initial leaders, Costas Azariadis, Dave Cass and Karl Shell could not even agree among themselves. Azariadis used the term self-fulfilling prophecies. Cass and Shell used sunspots. 2) The literature on sunspots was technically demanding and the protagonists made no attempt to explain it to a non technical audience. 3) Cass, Shell and Azariadis were not interested in empiricism and they did not make an effort to promote their agenda at central banks or at applied groups such as the National Bureau of Economic Research.<br /><br />My own work on self-fulfilling prophecies began at Penn in the early 80s and I have made the effort to promote this agenda at central banks and to promote these ideas in a series of <a href="http://www.amazon.com/Macroeconomics-Self-fulfilling-Prophecies-Roger-Farmer/dp/0262062038/ref=sr_1_4?ie=UTF8&s=books&qid=1275152780&sr=1-4">books</a> and coauthored papers. My research agenda has been devoted to <a href="http://www.amazon.com/How-Economy-Works-Confidence-Self-Fulfilling/dp/0195397916/ref=sr_1_9?ie=UTF8&s=books&qid=1254946079&sr=8-9">explaining</a> these ideas to a non technical audience and to providing a link with empirical work. My coauthors on this agenda include <a href="http://rogerfarmer.com/NewWeb/PdfFiles/self-fulfilling.pdf">Michael Woodford</a>, <a href="http://rogerfarmer.com/NewWeb/PdfFiles/indeterminacy%20and%20ir.pdf">Jess Benhabib</a> and <a href="http://rogerfarmer.com/NewWeb/PdfFiles/rbc%20and%20animal.pdf">Jang-Ting Guo</a>. Why weren’t we more aggressive in promoting the agenda? I can only speak for myself; but I realized early on that, if we accept the idea that business cycles are just autocorrelated disturbances around the <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130306.pdf">natural rate of unemployment</a>, that a sunspot shock is one more disturbance that takes its place alongside productivity shocks, tastes shocks, news shocks and monetary disturbances. <br /><br />In a survey paper published <a href="http://rogerfarmer.com/NewWeb/PdfFiles/EBC.pdf">here</a>, I distinguish between first and second generation models of endogenous business cycles. I use that term to mean models driven by non-fundamentals (yes, I too am guilty of adding one more synonym). In first generation models, sunspots are one more shock that temporarily shifts the economy away from the natural rate of unemployment. In second generation models, movements away from the natural rate are permanent. There is no self-correcting mechanism.</span><br />
<br />
<span style="font-size: large;">If you are a graduate student or a researcher who is working, or planning to work, in this area, I have a plea. </span><span style="font-size: large;">Can we at least agree to add no more words to refer to the </span><span style="font-size: large;">same idea? Please: Lets agree to speak the same language and, in so doing, give credit to those who laid the foundations for this agenda.</span></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com5tag:blogger.com,1999:blog-4979477022008569617.post-4265786667986863332015-12-29T19:14:00.000-08:002016-05-21T09:48:30.313-07:00Why a Bottle of Beaujolais is not the same as a Collateralized Debt Obligation (Updated May 2016)<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg737gI5upOSsl1aPwwnsqp-XIS1sN8Ji4BuhbfEO2qfOAucue6ocOoWJAN0a3fVTVUIzv6l3SpDt6YdVCUJwOKqquC5aAdmfhkMvPTp5zCFVQV2uEpVpYpKvOOfDfqpGWVQO2du3D7ypU/s1600/Unknown.jpg" /></a></div>
<span style="font-size: large;">I have updated this blogpost with a link to the new version of my paper. The new revised paper has the title of "<a href="http://www.rogerfarmer.com/NewWeb/PdfFiles/Two_People_Final.pdf">Pricing Assets in an Economy with Two Types of People</a>". </span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">-----------------------------------------</span><br />
<br />
<span style="font-size: large;"><a href="http://equitablegrowth.org/must-read-roger-farmer-global-sunspots-and-asset-prices-in-a-monetary-economy/">Brad DeLong</a> kindly tweeted a link to a <a href="http://www.rogerfarmer.com/NewWeb/PdfFiles/Two_People_Final.pdf">working paper</a> (updated to new version May 21st 2016) I wrote last year. <a href="https://twitter.com/mattyglesias/status/681964371313094656">Matt Yglesias</a> asks Brad to explain the paper. Let me take a stab at that.<br /><br />Every graduate student of economics learns, early in her career, that markets work well. The idea that ‘markets work well’ has a well defined meaning: allocating resources by buying and selling goods in free markets does at least as well as any other way of allocating them. Let me be more precise.<br /><br />A society, to an economist, is a bunch of people and a bunch of goods. A good is something that people want. For example, a ticket to see the latest Star Wars movie is a good. A bottle of Beaujolais is a good: and so is a banana. I could go on. But the basic idea here is that everyone in society has preferences over different bundles of goods. I personally would prefer a bottle of Beaujolais and a banana to a trip to the movies: but you may rank things differently.</span><br />
<a name='more'></a><span style="font-size: large;"><br />We need a way of thinking about abstract ways of allocating goods amongst all of the people in the society that is general enough to include the activity of buying and selling goods in markets as one possible allocation mechanism. Economists think about that idea by introducing an abstract individual that we call the social planner. The social planner is a non-existent benevolent dictator who knows the preferences of every person in society. <br /><br />Imagine that we dump all of the goods that exist in a big pile in the middle of a very large imaginary room. Now let the social planner allocate them to people. For example, she might give everyone equal amounts of every good. That might sound like a good idea, but some people might not drink wine. They would prefer an extra loaf of bread to a bottle of Beaujolais. That idea suggests that some ways of allocating goods are better than others. If the social planner finds a way of allocating goods among people that can’t be improved on, without making someone in society worse off, we say that that allocation is Pareto Optimal. <br /><br />There is not just one Pareto Optimal way of allocating goods. There are many. And some of them are very bad from a moral perspective. For example, if the social planner gives everything to one selfish person: that allocation is Pareto Optimal. Why? Because, in order to give food to starving children we need to take it away from the selfish person. And that, by assumption, makes him worse off. Pareto Optimality is a very weak concept.<br /><br />But although Pareto Optimality a very weak concept it is an interesting concept because, if an allocation of goods is not Pareto Optimal, it is very bad indeed. Everybody in society, from the very richest to the very poorest person, could agree upon an intervention that would change things for the better.<br /><br />Graduate students of economics learn, early in their careers, that markets allocations are Pareto Optimal. Markets may not produce outcomes that you or I judge to be morally acceptable. But they do not leave room for any obvious improvements that we could all agree upon. That idea, with a little reflection, seems to me to be obviously wrong. The ‘Global sunspots…’ paper provides one reason why.<br /><br />Ok. That's the background. To understand my ‘Global sunspots paper…’ I need to go a little further by elaborating on the idea of a ‘good’.<br /><br /><a href="http://digamo.free.fr/debreu59.pdf">Writing in 1959</a>, the Nobel laureate, Gerard Debreu, suggested that the theory of markets that I just explained, is much more general than it at first seems. Debreu asked us to think of a good in a new way. A loaf of bread is not just a loaf of bread. It is indexed by location, date and state of nature. A loaf of bread in Paris on March 9th 2016 in the rain, is a different good from a loaf of bread in London England on July 20th if the sun is shining. <br /><br />Financial economists took that idea and they ran with it. They argued that the financial markets provide people with ways of trading goods across space, time and states of nature. And because market allocations are Pareto Optimal, there is no possible intervention in the financial markets that can make us all better off. Government should get out of the way and let the magic of the market do what it does best.<br /><br />According to financial economists, the financial instruments that are traded on Wall Street are unequivocally good. Equities, bonds, and exotic derivatives like <a href="https://en.wikipedia.org/wiki/Collateralized_debt_obligation">collateralized debt obligations</a> (CDOs) all provide opportunities that connect people across time and space. To justify their confidence in the magic of the market, financial economists appeal to the mantra that they learn as graduate students: market allocations are Pareto Optimal. What could possibly be wrong with that?<br /><br />The problem is a simple and obvious one. In order for markets to work well: we must all be able to take part in them. One of the most important functions of the financial markets is the ability to make bets on the future. If I think that the S&P 500 will crash next month, but you don’t, we have an opportunity to trade. And if I face different outcomes if the market crashes, or if it booms, I will try to insure myself by selling the market short in boom states and paying for that trade by buying the market in the crash state. It is my ability to make those trades, which ensures that market movements are not capricious. If a crash occurs, it occurs for a reason. And that reason is connected with the fundamentals of the economy. That, at last, is the theory. That theory is wrong.<br /><br />That’s where sunspots come in. Writing in 1983, <a href="https://en.wikipedia.org/wiki/Sunspots_(economics)">David Cass and Karl Shell</a> picked up on a phrase that had been used much earlier by <a href="https://en.wikipedia.org/wiki/William_Stanley_Jevons">Stanley Jevons</a>. Jevons thought that sunspots influence the business cycle through their effect on the weather. Cass and Shell meant something very different. They used the term as a spoof to mean capricious movements in market prices, and in the goods that we all consume, that are unrelated to fundamentals.<br /><br />That leads me to the conclusion of my global sunspots paper. Because we cannot trade in financial markets that open before we are born, most of the movements in financial markets are Pareto inefficient. Financial markets go up. Financial markets go down. If you are lucky enough to enter the labor market in a boom; you will have a happy and prosperous future. If your first job occurs in the wake of a financial crisis: tough luck. <br /><br />A bottle of Beaujolais is not the same as a Collateralized Debt Obligation. Why? Because trades in CDOs affect the welfare of the unborn: and the unborn are not around to trade in the CDO market. Stay tuned. I have much more to say about this idea in my forthcoming book ‘Prosperity for All’, to be published by Oxford University Press in 2016.</span> Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com22tag:blogger.com,1999:blog-4979477022008569617.post-87001311031496758862015-12-20T10:45:00.000-08:002015-12-20T10:45:05.457-08:00Scott Sumner and Musical Chairs<div class="MsoNormal">
<span style="font-size: large;">Since 2009, Scott Sumner has been a big proponent of nominal GDP targeting. He sees nominal wages as slow to adjust and he has sketched a simple model, <a href="http://www.themoneyillusion.com/?p=20433">the musical chairs model</a>, to explain why his policy should be adopted.</span></div>
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjn1sPkdJ27LO1eksEZdizZgbbEf_Hvv2lPPimAJ6JklPfEUSJlfPC4_FUUwWRYRVfEfpDXVJcgNb3iC1EQ4ySq4nYfOPn4iqF7A3m4cmpKdM_uc9ybZsf-m1q_u1HRtPZP1qsQQAr20SY/s1600/musical+chairs.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="376" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjn1sPkdJ27LO1eksEZdizZgbbEf_Hvv2lPPimAJ6JklPfEUSJlfPC4_FUUwWRYRVfEfpDXVJcgNb3iC1EQ4ySq4nYfOPn4iqF7A3m4cmpKdM_uc9ybZsf-m1q_u1HRtPZP1qsQQAr20SY/s400/musical+chairs.jpg" width="400" /></a><span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: large;">I am a new convert to these arguments. That is my loss. I had assumed, incorrectly, that
Scott was proposing that central banks should simply adjust the coefficients on
their interest rate policies, so called Taylor Rules, to raise the nominal
interest rate when nominal GDP growth is above target and to lower it when nominal
GDP growth is below target.I will refer to that variant of NGDP targeting, as
growth rate targeting. An alternative, NGDP level targeting, would make these interest
rate adjustments in response to deviations of nominal GDP from a target growth
path. For an elaboration of that view, see, for example, <a href="http://www.dallasfed.org/assets/documents/research/staff/staff1202.pdf">the article by Evan Koenig</a>, Vice President of the Dallas Fed.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<a name='more'></a><br />
<div class="MsoNormal">
<span style="font-size: large;">Viewed in this light; NGDP targeting, of either variety, <span style="mso-spacerun: yes;"> </span>is not a particularly new idea. Nor does it
represent a departure from the body of New Keynesian economics that grew up in
the decades since 1983, when Ed Prescott sought to banish money from macroeconomic
models. Scott is saying much much more than that.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">The <span style="mso-spacerun: yes;"> </span>novel aspect of
Scott’s proposal, and one that I endorse wholeheartedly, is the means that he
advocates to achieve his goal. Scott proposes that central banks and/or
national treasuries should set up markets for nominal GDP futures. Robert
Shiller has made a similar suggestion. He proposes that national treasuries
finance their borrowing by issuing securities that pay off a dividend that is
proportional to nominal GDP. <a href="http://www.forbes.com/sites/nathanvardi/2012/07/10/robert-shillers-favorite-financial-innovation-an-ipo-for-the-usa/">He calls these ‘Trills’</a>; where a Trill is a claim
to one trillionth of GDP in perpetuity.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;"><a href="http://rogerfarmer.com/NewWeb/PdfFiles/stock_market_really.pdf">In my own work</a>, I have drawn attention to the remarkable
stable connection between the real value of the stock market, and the
unemployment rate. I interpret that connection through the lens of a causal
theory in which expectations drive asset values, and asset values drive
aggregate demand. I have suggested that central banks trade an exchange traded
fund to stabilize real economic activity. Hold that thought as the word ‘real’
represents a significant point where Scott and I differ.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Trading Trills, trading GDP futures and trading an ETF, are
all methods of targeting nominal wealth. I do not want to quibble over the
exact method: and I readily concede that Trills or GDP futures have advantages
over ETFs. <a href="http://rogerfarmer.com/NewWeb/PdfFiles/fa-con-cra.pdf">The important insight here</a>, is that wealth, or permanent income,
drives aggregate demand and that expectations cause inefficient fluctuations in
aggregate demand that can be stabilized through relatively straightforward
interventions.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">In the simplest macroeconomic models, GDP <a href="http://www.amazon.com/Expectations-Employment-Prices-Roger-Farmer/dp/0195397908/ref=sr_1_1?ie=UTF8&s=books&qid=1255040846&sr=1-1">measured in wage units</a>, is proportional to employment:<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="margin-left: .5in;">
<span style="font-size: large;">PY/W = bL<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .5in;">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">where P is ‘the’ price level, Y is real output, W is the
money wage, L is employment and b is the inverse of labor’s share of income.
Scott points out that money wages move slowly and that, as a<span style="mso-spacerun: yes;"> </span>consequence, stabilizing PY will stabilize
employment, and eventually, wages and prices. Scott </span><span style="font-size: large;">bases his ideas on Samuelson’s neoclassi</span><span style="font-size: large;">cal synthesis (see <a href="https://ideas.repec.org/a/hop/hopeec/v27y1995i5p183-216.html">Pearce and Hoover)</a>. According to this idea, t</span><span style="font-size: large;">he economy is Keynesian in the short run, when prices and wages are sticky, and classical in the long-run. </span><span style="font-size: large;"> </span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: large;">In Scott’s world, the economy homes in on the natural rate of unemployment just
as surely as a heat-seeking missile converges to its target. Scott’s intellectual heritage is firmly monetarist. If Milton Friedman were
alive today, one might imagine that Scott would find a supporter for his ideas.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">My own heritage is different. I have sought to wed
<a href="http://www.pieria.co.uk/articles/introducing_post-keynesian_economics">post-Keynesian insights</a> with new-classical ideas by resuscitating the idea that
the economy is not self-stabilizing. There are <a href="http://rogerfarmer.com/NewWeb/PdfFiles/EJ_Financial%20Crises.pdf">many equilibrium unemployment rates</a> and any one of them may be an equilibrium. </span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: large;">I wholeheartedly endorse
Scott’s proposal for open market trades in GDP futures. And, like Robert
Shiller, I would like to see the creation of a market for Trills. Unlike Scott,
I do not endorse the proposal to stabilize either the level or the growth rate
of nominal GDP. Trades in GDP futures should aim to stabilize the unemployment
rate. And here is my biggest difference from Scott: trades in GDP futures
should be seen as a complement to inflation targeting: not as a substitute. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">As I explained in my 2013 book, <a href="http://www.amazon.com/How-Economy-Works-Confidence-Self-Fulfilling/dp/0195397916/ref=sr_1_9?ie=UTF8&s=books&qid=1254946079&sr=8-9">How the Economy Works</a>, the economy is not a rocking horse, always returning to the
same rest point, a metaphor that originates with Wicksell. It is a boat on the
ocean with a broken rudder that requires active political interventions to
steer it to a safe harbor. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<!--[if gte mso 9]><xml>
<o:OfficeDocumentSettings>
<o:AllowPNG/>
<o:PixelsPerInch>96</o:PixelsPerInch>
</o:OfficeDocumentSettings>
</xml><![endif]-->
<!--[if gte mso 9]><xml>
<w:WordDocument>
<w:View>Normal</w:View>
<w:Zoom>0</w:Zoom>
<w:TrackMoves/>
<w:TrackFormatting/>
<w:PunctuationKerning/>
<w:ValidateAgainstSchemas/>
<w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid>
<w:IgnoreMixedContent>false</w:IgnoreMixedContent>
<w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText>
<w:DoNotPromoteQF/>
<w:LidThemeOther>EN-US</w:LidThemeOther>
<w:LidThemeAsian>JA</w:LidThemeAsian>
<w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript>
<w:Compatibility>
<w:BreakWrappedTables/>
<w:SnapToGridInCell/>
<w:WrapTextWithPunct/>
<w:UseAsianBreakRules/>
<w:DontGrowAutofit/>
<w:SplitPgBreakAndParaMark/>
<w:EnableOpenTypeKerning/>
<w:DontFlipMirrorIndents/>
<w:OverrideTableStyleHps/>
</w:Compatibility>
<m:mathPr>
<m:mathFont m:val="Cambria Math"/>
<m:brkBin m:val="before"/>
<m:brkBinSub m:val="--"/>
<m:smallFrac m:val="off"/>
<m:dispDef/>
<m:lMargin m:val="0"/>
<m:rMargin m:val="0"/>
<m:defJc m:val="centerGroup"/>
<m:wrapIndent m:val="1440"/>
<m:intLim m:val="subSup"/>
<m:naryLim m:val="undOvr"/>
</m:mathPr></w:WordDocument>
</xml><![endif]--><!--[if gte mso 9]><xml>
<w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="276">
<w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/>
<w:LsdException Locked="false" Priority="39" Name="toc 1"/>
<w:LsdException Locked="false" Priority="39" Name="toc 2"/>
<w:LsdException Locked="false" Priority="39" Name="toc 3"/>
<w:LsdException Locked="false" Priority="39" Name="toc 4"/>
<w:LsdException Locked="false" Priority="39" Name="toc 5"/>
<w:LsdException Locked="false" Priority="39" Name="toc 6"/>
<w:LsdException Locked="false" Priority="39" Name="toc 7"/>
<w:LsdException Locked="false" Priority="39" Name="toc 8"/>
<w:LsdException Locked="false" Priority="39" Name="toc 9"/>
<w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/>
<w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/>
<w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/>
<w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/>
<w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/>
</w:LatentStyles>
</xml><![endif]-->
<!--[if gte mso 10]>
<style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-parent:"";
mso-padding-alt:0in 5.4pt 0in 5.4pt;
mso-para-margin:0in;
mso-para-margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Calibri;
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;}
</style>
<![endif]-->
<!--StartFragment-->
<!--EndFragment--><br />
<div class="MsoNormal">
<span style="font-size: large;">Policy interventions have two dimensions: not one. Central
banks should continue to set the overnight interest rate in an effort to target
the inflation rate. They should adopt a second instrument, the purchase and
sale of GDP futures, to target real economic activity. For more on this idea, stay tuned. I have forthcoming book in 2016 with <o:p></o:p>Oxford Univesity Press with the working title: Prosperity for All. It will be available in mid 2016.</span></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com10tag:blogger.com,1999:blog-4979477022008569617.post-23109724563764914002015-10-24T13:26:00.000-07:002015-10-24T16:47:50.020-07:00Demand Creates its Own Supply<span style="font-size: large;">I have been teaching basic Keynesian economics this week to my <a href="https://moodle2.sscnet.ucla.edu/course/view/15F-ECON102-1?section=0">undergraduate class</a> and I have just completed a new book manuscript with the working title of <i>Prosperity for All</i>, that will be coming soon to a book </span><br />
<div class="separator" style="clear: both; text-align: center;">
<span style="font-size: large;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSnTw5K53gOA7a571U8CuUT3e-3knFLvs8PrcYsUfSCFUulA2r_fzEb7woA-u_WORsTTwgIdspxy1y9dcIVea0yy0grt70wqv5N72gYBz1occ3d974X5M9fVa8GmHK5It7Z2u8CGJDWnk/s1600/animal.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSnTw5K53gOA7a571U8CuUT3e-3knFLvs8PrcYsUfSCFUulA2r_fzEb7woA-u_WORsTTwgIdspxy1y9dcIVea0yy0grt70wqv5N72gYBz1occ3d974X5M9fVa8GmHK5It7Z2u8CGJDWnk/s400/animal.jpg" width="400" /></a></span></div>
<span style="font-size: large;">store near you. I am thus highly attuned to the debate over the connection between savings and investment. That debate resurfaced <a href="https://twitter.com/jomicheII/status/657914314091794432">with a vengeance this morning</a> on Twitter when Noah Smith and Jo Michell, among others, engaged in a sometimes testy exchange on the role of the State in promoting investment. Since that debate is at the core of Keynesian economics, and since my class is prepping for Monday’s midterm, this seems like a great opportunity to enlighten readers of all varieties on what Jo and Noah were on about. </span><br />
<a name='more'></a><span style="font-size: large;"><br />Keynesian economics begins with a basic definition. To sharpen the discussion, I will abstract from the role of government and I will abstract from foreign trade. In an economy with no government, and no foreign trade, we may define all of the goods produced in the economy to be of two types; a consumption good or an investment good. Since all of the income earned by the factors of production is earned from producing either consumption goods or investment goods, it is IDENTICALLY TRUE that:<br /><br />1) YN = CN + IN<br /><br />Here, YN is the dollar value of all of the incomes earned by workers, capitalists and landowners in the process of producing consumption goods worth CN dollars and investment goods worth IN dollars. The letter N stands for “nominal”.<br /><br /> In recent discourse, economists have sometimes resorted to the fiction of the one good representative consumer model in which we assume that the economy produces a single good from capital and labor. That IS NOT what I am assuming here. YN IS NOT a single good. It is the dollar value of all final goods produced in a given year.<br /><br />To move from nominal values, to real values, we need to deflate equation (1) by a nominal index. The Keynes of the General Theory made a very sensible suggestion that has been ignored for the past eighty years and that I resuscitated in my book, <a href="http://www.amazon.com/Expectations-Employment-Prices-Roger-Farmer/dp/0195397908/ref=sr_1_1?ie=UTF8&s=books&qid=1255040846&sr=1-1">Expectations Employment and Prices</a>. He suggested dividing both sides of identity (1) by a measure of the money wage. That is a great way to normalize measurements over time because the money wage grows for two reasons. It grows when there is inflation in the dollar. And it grows when there is real economic progress. Dividing equation (1) by the money wage leads to the following identity where Y, C and I represent GDP, consumption and investment measured in wage units.<br /><br />2) Y = C + I<br /><br />Equation (2) is, at this point, still an identity. Now comes the economics. Keynes introduced two simple pieces: A theory of aggregate supply. And a theory of aggregate demand. <br /><br />The Keynesian theory of aggregate supply asserts that firms will increase or decrease the number of workers they employ in order to produce as many goods as are demanded. The French Economist <a href="http://www.econlib.org/library/Enc/bios/Say.html">John Baptiste Say</a>, famously asserted that: Supply creates its own demand. Keynes turned this proposition on its head. In Keynesian economics: Demand creates its own supply.<br /><br />Keynes argued that the economy is typically producing at less than full employment. And as long as there is any involuntary unemployment: everything that is demanded will be supplied. That central proposition can be represented by a graph in which expenditure appears on the vertical axis, and income appears on the horizontal axis. A line at 45 degrees to the origin, for which income equals expenditure, IS the Keynesian aggregate supply curve.<br /><br />Keynes did not explain why firms would respond to deficient demand by reducing employment, as opposed to cutting wages. He thought that workers would resist reductions in their wages, but he did not believe that sticky wages were central to his argument. Although Keynes never provided a fully articulated theory that would reconcile his ideas with microeconomics: <a href="http://rogerfarmer.com/NewWeb/PdfFiles/fa-con-cra.pdf">I have provided</a> such a theory. In my <a href="http://rogerfarmer.com/NewWeb/PdfFiles/adas.pdf">published research</a>, I explain why the forty five degree line is an aggregate supply curve. My work is grounded in the microeconomics theory of search. But I digress. More on aggregate supply in a future post.<br /><br />Recall that my purpose here, is to explain the debate between Noah and Jo on the equality of savings and investment. In order to move forward with that purpose, let us accept, for now, the Keynesian theory of aggregate supply and move to the Keynesian theory of aggregate demand.<br /><br />Keynes asked, what determines expenditure on consumption and investment goods? He claimed that aggregate expenditure on consumption goods, by a community of people, will increase when the income of the community increases. But it will increase less than proportionally. He called the constant of proportionality, the marginal propensity to consume. We may represent that idea by equation (3):<br /><br />3) C = a + bY<br /><br />Here, ‘a’ is a constant that I will call autonomous consumption expenditure and ‘b’ is the marginal propensity to consume. <br /><br />Finally, we need a theory of investment. Investment, in the basic version of Keynesian theory, is a highly unstable variable that is driven by the <a href="http://rogerfarmer.com/NewWeb/PdfFiles/fa-con-cra.pdf">animal spirits</a> of investors. Each year, investors make plans and they enact those plans by placing orders for new machines and factories. I will represent the planned expenditures of investors with the symbol IP. Let me also use the symbol X to represent total expenditure and XP to represent planned expenditure. That leads to the following equations, </span><br />
<span style="font-size: large;"><br />4) X = C + I<br /><br />5) XP = C + IP<br /><br />and, using the theory of consumption from (3)<br /><br />6) X = (a+I) + bY<br /><br />7) XP = (a+IP) + bY<br /><br />Equations (6) and (7) distinguish expenditure, X, from planned expenditure, XP. It is identically true that <br /><br />8) X = Y<br /><br />But it is only true, in equilibrium, that <br /><br />9) XP = Y<br /><br />The difference between I and IP is that goods that are produced, but not sold, are DEFINED to be investment goods. If Toyota builds 100,000 cars, but only 20,000 are sold, the 80,000 unsold cars are defined to be investment expenditure. But they are not defined to be part of planned investment expenditure. An economy in which unplanned inventories increase by the real value of 80,000 cars is not in equilibrium. To restore equilibrium, Keynes argued that Toyota will fire workers, those workers will spend less, and income will fall to the point where saving equals planned investment.<br /><br />What about the equality of savings and investment? By definition, every dollar not spent, is saved.<br /><br />10) S = Y – C <br /><br />Here, S represents savings. A little further algebra establishes that, when Y = XP, it is simultaneously true that<br /><br />11) S = IP<br /><br />Here, finally, is the answer to the exchange between Jo and Noah. It is always true, in equilibrium, that savings is equal to investment. In Keynesian theory, it is income and employment that adjust to make this so. In Keynesian economics: Demand creates its own supply.</span> Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com18tag:blogger.com,1999:blog-4979477022008569617.post-57290666324724188772015-10-22T13:30:00.000-07:002015-10-22T13:30:44.300-07:00A Bridge Too Far?<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7eQB5VDDKm1JiRtw4nROOkKqasMpon3HAR1oSbYavqmM1RF4I8U8hyZBTWoZfZ387XoQbmmom3rea38dpwLPzSTN3Vadxu1kxm5-ngAIpcK3bqPNR91RCogtgGh8CRv-TF_IHQ1Z1HgA/s1600/Storseisundet+Bridge+Norway+Drunk+Birdge+to+nowhere+1.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7eQB5VDDKm1JiRtw4nROOkKqasMpon3HAR1oSbYavqmM1RF4I8U8hyZBTWoZfZ387XoQbmmom3rea38dpwLPzSTN3Vadxu1kxm5-ngAIpcK3bqPNR91RCogtgGh8CRv-TF_IHQ1Z1HgA/s1600/Storseisundet+Bridge+Norway+Drunk+Birdge+to+nowhere+1.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7eQB5VDDKm1JiRtw4nROOkKqasMpon3HAR1oSbYavqmM1RF4I8U8hyZBTWoZfZ387XoQbmmom3rea38dpwLPzSTN3Vadxu1kxm5-ngAIpcK3bqPNR91RCogtgGh8CRv-TF_IHQ1Z1HgA/s1600/Storseisundet+Bridge+Norway+Drunk+Birdge+to+nowhere+1.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="217" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7eQB5VDDKm1JiRtw4nROOkKqasMpon3HAR1oSbYavqmM1RF4I8U8hyZBTWoZfZ387XoQbmmom3rea38dpwLPzSTN3Vadxu1kxm5-ngAIpcK3bqPNR91RCogtgGh8CRv-TF_IHQ1Z1HgA/s400/Storseisundet+Bridge+Norway+Drunk+Birdge+to+nowhere+1.jpg" width="400" /></a></div>
<span style="font-size: large;">There is much current angst on the difficult problem of how to escape a liquidity trap. <a href="http://krugman.blogs.nytimes.com/2015/10/20/rethinking-japan/?_r=1&mtrref=undefined&assetType=opinion">Paul Krugman</a> points out that in Japan, the ratio of debt to GDP is growing, leaving little room for a further tame fiscal expansion. He favors something more aggressive. <br /><br /><a href="https://longandvariable.wordpress.com/2015/10/21/krugman-on-japan/">Tony Yates</a> argues instead for a helicopter drop. Print money and give it to Japanese citizens. The benefit of that approach is that it does not leave the government with an increase in interest bearing debt. </span><span style="font-size: large;"><a href="http://mainlymacro.blogspot.com/2015/10/central-bankers-and-their-irrational.html">Simon Wren Lewis</a> looks more closely at the technical aspects of this idea.</span><span style="font-size: large;"><br /><a name='more'></a><br />What are the differences between aggressive fiscal expansion financed by debt creation; and printing money and giving it to citizens? There are two.<br /><br />First, an aggressive fiscal expansion, as envisaged by Keynesians, would be spent on infrastructure. A money financed transfer would be spent by citizens. <br /><br />Second, an aggressive fiscal expansion, as envisaged by Keynesians, would be financed by issuing long term bonds. A money financed transfer would be financed by printing money.<br /><br />While infrastructure expenditure is sorely needed, at least in the U.S., I see no reason to give up on sound cost benefit analysis to decide which projects are worth pursuing and which are not. That’s why I favor giving checks to citizens over building a bridge to nowhere.<br /><br />Once we decide how the fiscal expansion is to be distributed, we face the second question: how should it be financed? Print money? Or issue long term debt. Standard Economic models tells us that it doesn’t matter. At the zero lower bound, money and three month T-bills are perfect substitutes. And financing expenditure by three month T-bills has the same effect as financing it by thirty-year bonds because the composition of the government’s liabilities is supposed to be irrelevant. That of course, is nonsense. The <a href="http://rogerfarmer.com/NewWeb/PdfFiles/Manchester%20School.pdf">composition of government liabilities matters</a>. And it matters a lot.<br /><br />Why does the composition of debt matter? Because the asset markets are incomplete. Our children and our grandchildren cannot participate in asset markets that open before they are born. And none of us can sell our human capital or buy the human capital of others. Once you realize that the composition of the governments portfolio matters, it is a short step to recognize that it is all that matters. <br /><br />Why be wary of building bridges that are financed with 30 year bonds? Because the yield on these bonds is low; but it is not yet zero. A big increase in public sector borrowing, at the long end of the yield curve, will drive up rates and crowd out some private investment. A big increase in public sector borrowing at the short end of the yield curve will not crowd out private sector investment because rates at the short end of the yield curve are currently zero.<br /><br />That observation suggests a third alternative to building bridges or to a helicopter drop. Buy back long term government debt and refinance it by printing money. That strategy would, one hopes, lower yields at the long end of the yield curve and stimulate private companies to invest in new capital projects.<br /><br />I prefer private sector investment over government sector investment. But there are also good arguments for more public infrastructure projects. Build a bridge if it is needed; but make sure that it goes somewhere first. More importantly; finance the project by printing money: not by issuing thirty year bonds.</span>
<!--[if gte mso 9]><xml>
<o:OfficeDocumentSettings>
<o:AllowPNG/>
<o:PixelsPerInch>96</o:PixelsPerInch>
</o:OfficeDocumentSettings>
</xml><![endif]-->
<!--[if gte mso 9]><xml>
<w:WordDocument>
<w:View>Normal</w:View>
<w:Zoom>0</w:Zoom>
<w:TrackMoves/>
<w:TrackFormatting/>
<w:PunctuationKerning/>
<w:ValidateAgainstSchemas/>
<w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid>
<w:IgnoreMixedContent>false</w:IgnoreMixedContent>
<w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText>
<w:DoNotPromoteQF/>
<w:LidThemeOther>EN-US</w:LidThemeOther>
<w:LidThemeAsian>X-NONE</w:LidThemeAsian>
<w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript>
<w:Compatibility>
<w:BreakWrappedTables/>
<w:SnapToGridInCell/>
<w:WrapTextWithPunct/>
<w:UseAsianBreakRules/>
<w:DontGrowAutofit/>
<w:SplitPgBreakAndParaMark/>
<w:EnableOpenTypeKerning/>
<w:DontFlipMirrorIndents/>
<w:OverrideTableStyleHps/>
</w:Compatibility>
<m:mathPr>
<m:mathFont m:val="Cambria Math"/>
<m:brkBin m:val="before"/>
<m:brkBinSub m:val="--"/>
<m:smallFrac m:val="off"/>
<m:dispDef/>
<m:lMargin m:val="0"/>
<m:rMargin m:val="0"/>
<m:defJc m:val="centerGroup"/>
<m:wrapIndent m:val="1440"/>
<m:intLim m:val="subSup"/>
<m:naryLim m:val="undOvr"/>
</m:mathPr></w:WordDocument>
</xml><![endif]--><!--[if gte mso 9]><xml>
<w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="false"
DefSemiHidden="false" DefQFormat="false" DefPriority="99"
LatentStyleCount="380">
<w:LsdException Locked="false" Priority="0" QFormat="true" Name="Normal"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 1"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="heading 2"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="heading 3"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="heading 4"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="heading 5"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="heading 6"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="heading 7"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="heading 8"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="heading 9"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 9"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 1"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 2"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 3"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 4"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 5"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 6"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 7"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 8"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 9"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="footnote text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="header"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="footer"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index heading"/>
<w:LsdException Locked="false" Priority="35" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="caption"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="table of figures"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="envelope address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="envelope return"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="footnote reference"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation reference"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="line number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="page number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="endnote reference"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="endnote text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="table of authorities"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="macro"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="toa heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 5"/>
<w:LsdException Locked="false" Priority="10" QFormat="true" Name="Title"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Closing"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Signature"/>
<w:LsdException Locked="false" Priority="1" SemiHidden="true"
UnhideWhenUsed="true" Name="Default Paragraph Font"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Message Header"/>
<w:LsdException Locked="false" Priority="11" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Salutation"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Date"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 9"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="46" Name="List Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="List Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="List Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 6"/>
</w:LatentStyles>
</xml><![endif]-->
<!--[if gte mso 10]>
<style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-parent:"";
mso-padding-alt:0in 5.4pt 0in 5.4pt;
mso-para-margin:0in;
mso-para-margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Calibri;
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;}
</style>
<![endif]-->
<!--StartFragment-->
<!--EndFragment--><br />
<div class="MsoNormal">
<br /></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com11tag:blogger.com,1999:blog-4979477022008569617.post-23519469790218523542015-10-11T16:19:00.000-07:002015-10-11T16:24:37.939-07:00Give me a One Armed Economist<div>
<span style="font-size: large;">I'm glad to see that Olivier Blanchard and Yanis Varoufakis have <a href="http://positivemoney.org/2015/10/yanis-varoufakis-olivier-blanchard-in-favour-of-pqe/">come out in favor </a>of my plan </span><span style="font-size: large;">for People's QE.</span><br />
<br />
<span style="font-size: large;">The following passage is from <i><a href="http://www.amazon.com/How-Economy-Works-Confidence-Self-Fulfilling/dp/0195397916/ref=sr_1_9?ie=UTF8&s=books&qid=1254946079&sr=8-9">How the Economy Works</a>,</i> (HTEW) page 151.</span><br />
<span style="font-size: large;"><i><br /></i></span>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjR0AzGsy5ZYRd8VNBa40-prJRvfvQWtPc3UC38Cl0dxMvfYGBXCcnGVuF_yosIGtrmfSq1q1Q6iSnUmQ5Vg6twAB8dE-_PEdqys5JGG3ujIRefLPAa1SVpSFlCBolsdR3vI198QXa00eY/s1600/Screenshot+2015-10-11+15.38.49.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="227" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjR0AzGsy5ZYRd8VNBa40-prJRvfvQWtPc3UC38Cl0dxMvfYGBXCcnGVuF_yosIGtrmfSq1q1Q6iSnUmQ5Vg6twAB8dE-_PEdqys5JGG3ujIRefLPAa1SVpSFlCBolsdR3vI198QXa00eY/s400/Screenshot+2015-10-11+15.38.49.png" width="400" /></a><br />
<blockquote class="tr_bq">
<span style="font-size: large;">Economists are famous for hedging their bets. A typical response to the question of how to run fiscal policy might be: “On the one hand we should raise taxes but on the other we should balance the budget”. President Harry Truman who instituted the Council of Economic Advisors famously quipped; “give me a one-armed economist.”</span></blockquote>
<span style="font-size: large;">Here's what I said about fiscal stimulus in HTEW. </span></div>
<blockquote class="tr_bq">
<span style="font-size: large;">A large fiscal stimulus may or may not be an important component of a recovery plan. My own view is that there is a better alternative to fiscal policy that I explain in [How the Economy Works, Chaper 11]. <b>But if a fiscal policy is used it should take the form of a transfer payment to every domestic resident; not an increase in government expenditure.</b></span></blockquote>
<span style="font-size: large;">Well ok, I didn't call it peoples QE. "<a href="http://www.telegraph.co.uk/finance/economics/11862318/What-are-we-to-think-of-Jeremy-Corbyns-peoples-QE.html">Peoples QE</a>", was coined by a speech writer for Jeremy Corbyn, the new leader of the Labour Party in the UK and its one of the less crazy parts of the Corbyn platform. Why do I believe that? Because I also believe something that may seem contradictory. Its time to get interest rates into positive territory. SOON. Quoting again from an impeccable source (<a href="http://www.amazon.com/How-Economy-Works-Confidence-Self-Fulfilling/dp/0195397916/ref=sr_1_9?ie=UTF8&s=books&qid=1254946079&sr=8-9">HTEW</a> page 152).</span><br />
<blockquote class="tr_bq">
<span style="font-size: large;">Here are my views on monetary policy. Short term interest rates should be increased as soon as feasible, because a positive interest rate is needed if a national central bank is effectively to control inflation. In future, central banks should use the interest rate for this purpose and not to prevent </span><span style="font-size: large;">recessions.</span></blockquote>
<span style="font-size: large;">Why do I favor a fiscal transfer, rather than currently popular bandwagon of infrastructure expenditure? Two reasons.</span><br />
<br />
<ul>
<li><span style="font-size: large;">Because the work of <a href="http://www.nber.org/papers/w13264.pdf">Christina and David Romer</a> suggests that tax multipliers (and by implication, transfer multipliers) are big. </span></li>
</ul>
<ul>
<li><span style="font-size: large;">Because I trust markets to decide how to allocate a fiscal stimulus more than I trust the government.</span></li>
</ul>
<br />
<span style="font-size: large;">So: Raising interest rates is necessary to eventually raise inflation. I'm with the "<a href="https://research.stlouisfed.org/wp/2015/2015-002.pdf">neo-Fisherians</a>" here. But an interest rate hike must be offset by some other expansionary policy to prevent the normalization of rates from creating a new recession. Here's what I said about that in HTEW.</span><br />
<blockquote class="tr_bq">
<span style="font-size: large;">But if a central bank raises the domestic interest rate without independently managing confidence, the result will be a drop in the value of the national stock market and a further deterioration in the real economy. To prevent this from happening, central banks need a second instrument.</span></blockquote>
<span style="font-size: large;">So: Janet, Mark, Mario: yes: raise rates. Please. But give us QE too.</span><br />
<blockquote class="tr_bq">
</blockquote>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com14tag:blogger.com,1999:blog-4979477022008569617.post-75432063790129835522015-09-23T11:24:00.001-07:002015-09-23T11:36:27.079-07:00Beliefs are Fundamental: Whatever your Religion<span style="font-size: large;">A couple of weeks ago, I had the pleasure of attending a very interesting conference at the Federal Reserve Bank of Saint Louis. The topic </span><br />
<div class="separator" style="clear: both; text-align: center;">
<span style="font-size: large;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs6ax-in0kpbypbK3lKjykVUIVqkWXjEu-6TqFg_xNO9HRYju-BWltByXAdANwBLzPq6ai6cGSamJN3NRQzYrzCug9eovGs88Y_66tbWk6GlPCSPxTdO2pB4UY7Y5JV9EHDQuL0if9ank/s1600/creed.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="72" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs6ax-in0kpbypbK3lKjykVUIVqkWXjEu-6TqFg_xNO9HRYju-BWltByXAdANwBLzPq6ai6cGSamJN3NRQzYrzCug9eovGs88Y_66tbWk6GlPCSPxTdO2pB4UY7Y5JV9EHDQuL0if9ank/s400/creed.jpg" width="400" /></a></span></div>
<span style="font-size: large;">
of the conference was the relationship between income inequality and monetary policy, but the papers, more broadly, were all trying to cope with the intellectual problem of rebuilding monetary economics to incorporate the lessons of the Great Recession.<br /><br />I discussed a fascinating paper, presented by Jim Bullard, joint with Costas Azariadis, Aarti Singh and Jacek Suda (ABSS). ABSS Built a 241 period overlapping generations model in which the people who inhabit the model are permitted to trade one period nominal bonds: but nothing else. They focused on one particular equilibrium of their model and they showed that, conditional on this equilibrium, a central bank can help the economy to function efficiently. Here is a link to the <a href="https://research.stlouisfed.org/wp/2015/2015-010.pdf">paper</a> and here is a link to <a href="http://rogerfarmer.com/NewWeb/PdfFiles/ABSS%20Discussion.pdf">my discussion</a>.</span><br />
<div>
<span style="font-size: large;"><br /></span>
<br />
<div>
<a name='more'></a><br />
<div>
<span style="font-size: large;">In this blog post I am going to give a synopsis of some general points that I made in my discussion, with a slight change of notation to make it blog friendly. </span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">Gather round and I will tell you a story. It is a story of how classical economists from the dark side bamboozled the Keynesian children of the light into accepting their dark version of the truth. <br /><br />I don’t see how to discuss this issue without a little notation. So bear with me, and you will be rewarded. I promise.<br /><br />For the past thirty years, most monetary models were built around a three equation New Keynesian monetary model. </span><br />
<blockquote class="tr_bq">
<span style="font-size: large;">Eqn 1. R – (PF-P) – (YF-Y) = Rstar + Dshock</span></blockquote>
<blockquote class="tr_bq">
<span style="font-size: large;">Eqn 2. R = beta1*(PF-P) + beta2*(Y-Ybar)</span> </blockquote>
<blockquote class="tr_bq">
<span style="font-size: large;">Eqn 3. H(PF-P,Y-Ybar) = Sshock</span></blockquote>
<span style="font-size: large;">Here, P is this year’s price index, PF is next year’s price index (the F is for future) Y is GDP this year, YF is GDP next year and R is the money interest rate. Rstar is Wicksell's natural rate of interest and Ybar is potential GDP. </span><br />
<div>
<span style="font-size: large;"><br /></span></div>
<div>
<span style="font-size: large;">Dshock and Sshock are random variables that represent demand and supply shocks. All variables are written as natural logarithms so PF-P is the inflation rate and YF-Y is the growth rate of real GDP. The star means multiplication and beta1 and beta 2 are numbers that describe policy.</span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">Equation 1 (sometimes called the Fisher equation) is derived, in New Keynesian models, from the choices made by a representative person with superhuman powers of perception who chooses to optimally allocate resources between the present and the future. It says, in words, that the price of future goods, relative to current goods, is proportional to the ratio of consumption this year to next.</span></div>
<div>
<span style="font-size: large;"><br />Equation 2 reflects central bank policy and it is sometimes called a Taylor Rule after John Taylor who showed that an equation like this does a pretty good job of describing how the Fed actually behaved in the period preceding the Great Recession. <br /><br />Equation 3 specifies how the real and the monetary economy interact, and, in the New-Keynesian model, it takes the form,</span></div>
<div>
<blockquote class="tr_bq">
<span style="font-size: large;">Eqn 3A. P-PL = PF-P + k(Y-Ybar) + Sshock</span></blockquote>
<span style="font-size: large;">where k is a number and PL is last year’s price index. This is called the New Keynesian Phillips curve and it plays the same role in New Keynesian economics that the <a href="http://www.usccb.org/beliefs-and-teachings/what-we-believe/">Nicene creed</a> plays in Christianity.<br /><br />Almost all of the papers at the conference last week accepted equation 2 and most of them accepted some version of equation 3. </span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;"><span style="color: #cc0000;">The focus of pretty much every paper at the St. Louis Fed conference was on how to replace Equation 1.</span> That is an interesting development, which reflects the fact that monetary economists have woken up to the fact that there is a problem with the representative agent assumption. <br /><br />That is a start. And it is a good start. But, as I argued, in my discussion of ABSS, the problem with monetary economics is deeper than replacing the representative agent assumption: although that is certainly a big part of the problem. The problem is with the rational expectations assumption.<br /><br />The New Keynesian monetary model is a child of the rational expectations revolution. In the dark days, before Robert Lucas wrote his game changing paper, <a href="http://old.econ.ucdavis.edu/faculty/kdsalyer/LECTURES/Ecn235a/expectations%20and%20the%20neutrality%20of%20money%202.pdf">Expectations and the Neutrality of Money</a>, economists had a more nuanced approach to super-human powers of perception. Here is the monetary model we worked with back then.</span><br />
<blockquote class="tr_bq">
<span style="font-size: large;">Eqn 1B. R – (EPF-P) – (YF-Y) = Rstar + Dshock</span></blockquote>
<blockquote class="tr_bq">
<span style="font-size: large;">Eqn 2B. R = F(EPF-P,Y-Ybar)</span></blockquote>
<blockquote class="tr_bq">
<span style="font-size: large;">Eqn 3B. H(P-PL,Y-Ybar) = Sshock</span></blockquote>
<span style="font-size: large;">This looks superficially like the New Keynesian model. But the differences are deep. First, I have replaced PF, the realization of the future price, with EPF, our current belief about what PF will be. (I could have done the same with YF, but changing PF to EPF is sufficient to make my point.) Second, back in the dark days, we worked with a version of the Phillips curve that was purely backward looking. More on that point in a future blog. <br /><br />Let me deal first, with expectations. By replacing PF with EPF I have added a new variable. The belief about what the future price will be is NOT the same as what it actually is. And because beliefs are not always correct, we need another equation. That equation, pre Lucas, was called adaptive expectations and it took the form</span><br />
<blockquote class="tr_bq">
<span style="font-size: large;">Eqn 4B. EPF-P = F1(X)</span></blockquote>
<span style="font-size: large;">where X is stuff we observe this year.<br /><br />In words, expected inflation between this year and next year is some function of things we can observe this year. For example, <a href="http://press.princeton.edu/titles/978.html">Friedman</a> used the following form for the function F1( )</span><br />
<blockquote class="tr_bq">
<span style="font-size: large;">Eqn 5B. EPF-P = lambda*(P-PL) + (1-lambda)*(EPFL-PL)</span></blockquote>
<span style="font-size: large;">which says that our belief of inflation is a weighted average, with weight lambda, of last period’s belief of this year's inflation rate and the inflation rate that actually happened. People don’t have superhuman powers of perception. They do, pretty much, what econometricians do.<br /><br />So how were we bamboozled into accepting rational expectations? Bob Lucas argued that, just as econometricians add random shocks to their models, so should theorists. And if the theorists’ model has shocks: the people who inhabit the model should recognize that fact. According to Bob, EPF is not the same as PF because PF is a random variable. <br /><br />If people inhabit a stationary environment, they will learn that every time they see X, P is equal to P(X). The rule that they use to forecast PF is irrelevant. In equilibrium, people will learn to forecast in a way that is unbiased. In equilibrium, PF will not equal EPF every time. But these two variables will be equal on average.<br /><br />This was a brilliant and beautiful argument. But Bob slipped in an unwarranted assumption. He assumed that for given fundamentals, there is a unique rational expectations equilibrium. That assumption is false in every monetary general equilibrium model that anyone has ever written down. And it was false in the model that Bob used to make his point as <a href="http://rogerfarmer.com/NewWeb/PdfFiles/self-fulfilling.pdf">Mike Woodford and I </a>pointed out at the time and as I have tried to hammer home in pretty much everything I’ve ever written since then.<br /><br />So how does this relate to the papers at the St Louis Fed conference? And how should it shape the way we move forward?<br /><br />Let me be clear. Rational expectations is a great assumption. In the words of Abraham Lincoln: you can’t fool all of the people all of the time. But, even in a stationary environment where the world is not changing in unpredictable ways, RATIONAL EXPECTATIONS IS NOT ENOUGH TO DETERMINE BELIEFS. The forecast rule, equation 4B, is a separate independent equation that represents beliefs. </span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">The moral of my story is this: Beliefs are fundamental: whatever your religion.<br /> </span></div>
</div>
</div>
</div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com0tag:blogger.com,1999:blog-4979477022008569617.post-4292546049015229962015-09-17T12:37:00.000-07:002015-09-17T12:37:11.584-07:00Washington: We have a problem<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5s7Fho10rkfki_HpTbM5lBcGUOCEHfPbuZLPF_S3DeVrnnBtRCJ-cIPnCHFf_tkDyWG9myLp0ALEaIlLfVsk3wrimVJmbghGo5VY4VfbYpHJJaY7OSVojZcksWYfoJaD0G-cDWSJ-IbY/s1600/images.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="272" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5s7Fho10rkfki_HpTbM5lBcGUOCEHfPbuZLPF_S3DeVrnnBtRCJ-cIPnCHFf_tkDyWG9myLp0ALEaIlLfVsk3wrimVJmbghGo5VY4VfbYpHJJaY7OSVojZcksWYfoJaD0G-cDWSJ-IbY/s320/images.jpg" width="320" /></a></div>
<span style="font-size: large;">John Cochrane makes the case in the <a href="http://www.wsj.com/articles/the-fed-neednt-rush-to-normalize-1442441737?mod=rss_opinion_main">WSJ</a> that everything is back to normal. Hunky Dory, rosy tinted, don’t panic, keep-calm-and-carry-on normal. He points out that inflation is under control. We have not entered a deflationary death-spiral and unemployment is back in reasonable territory.<br /><br />Here is what John learned from the Great Recession.</span><blockquote class="tr_bq">
<span style="font-size: large;">The [QE] experiment was huge, and the lessons are clear. The economy is stable, not subject to Keynesian “spirals” requiring constant Fed intervention. And when reserves pay the same rate as bonds, banks do not care which one they hold. So even massive bond purchases do not cause inflation. Quantitative easing is like trading a $20 bill for $10 and $5 bills. How would that make anyone spend more money?</span></blockquote>
<span style="font-size: large;"><a name='more'></a>John sees the world through the lens of a model where QE can’t matter. Doubling down on this view…</span><blockquote class="tr_bq">
<span style="font-size: large;">As then Fed Chairman Ben Bernanke said in January 2014: “The problem with QE is that it works in practice, but it doesn’t work in theory.” That’s a big problem. <b>If we have no theory why something works, then maybe it doesn’t really work.</b></span></blockquote>
<span style="font-size: large;">My emphasis.<br /><br />I'm not sure we’re living on the same planet. In fact, I know we’re not living on the same planet. John is on planet Chicago. I'm on planet UCLA. <br /><br />On my planet, QE has some pretty big effects. By increasing the size of the monetary base, the Fed averted an even bigger deflation than the one that occurred.</span><div>
<span style="font-size: large;"><br /></span></div>
<div>
<span style="font-size: large;">Here’s the evidence for that. Figure 1 shows how the Federal Reserve Board responded to the financial crisis. The solid line, measured in percent per year on the right-hand axis, measures the expected rate of inflation. The boundary of the shaded region, measured on the left-hand axis in millions of dollars, is the size of the Federal Reserve’s balance sheet.</span></div>
<div>
<span style="font-size: large;"><br /></span></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvgALVU771cvGr0qAr-NAXbZiDd4RNIHWCunVmCAD_s0j6lzNmahRpEQwrGy3d5P5VYIWwNBs8NhaIFQ2yICWiHDje2Wf5YyRm98L7RdBmmFn5hn5S4QrGuRiVdnGeG6Imc6PEV8GeM20/s1600/F1.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="500" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvgALVU771cvGr0qAr-NAXbZiDd4RNIHWCunVmCAD_s0j6lzNmahRpEQwrGy3d5P5VYIWwNBs8NhaIFQ2yICWiHDje2Wf5YyRm98L7RdBmmFn5hn5S4QrGuRiVdnGeG6Imc6PEV8GeM20/s640/F1.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: large;">Figure 1</span></td></tr>
</tbody></table>
<div>
<span style="font-size: large;">From January of 2007, through September of 2008, expected inflation fluctuated between two percent and three and a half percent. When Lehman Brothers declared bankruptcy in September 2008, expected inflation fell by nearly eight hundred basis points in the space of two months and by October of 2008 it reached a low of negative four and half percent. <br /><br />Immediately following the Federal Reserve purchase of one point three trillion dollars of new securities, expected inflation went back up into positive territory. <br /><br />The Fed’s actions did not completely prevent deflation, and the CPI inflation rate fell to negative two percent in July of 2009. But the Fed’s actions did turn around inflationary expectations and it is likely that QE prevented a much larger deflation that would have had catastrophic effects on unemployment, had it been allowed to occur. <br /><br />What about the composition of the balance sheet? By intervening in the MBS market, the Fed turned around a stock market crash and held the unemployment rate at 10%. Pretty bad, but not the 25% of 1933. </span></div>
<div>
<span style="font-size: large;"><br /></span><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjmy5hN_i55o0b4k58IRjB9xH9PZkkl5-SxwGbtnG_QMF5PnUrfT7Kpmw2ia941wZsiMdjdPRoeYh_5o-CTcUa-f8CNPyWgstNP6eGJJEbk86VRu2z28ABEx4k3b3LoqYFnIGgEcoM94to/s1600/F2.png" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="420" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjmy5hN_i55o0b4k58IRjB9xH9PZkkl5-SxwGbtnG_QMF5PnUrfT7Kpmw2ia941wZsiMdjdPRoeYh_5o-CTcUa-f8CNPyWgstNP6eGJJEbk86VRu2z28ABEx4k3b3LoqYFnIGgEcoM94to/s640/F2.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: large;">Figure 2</span></td></tr>
</tbody></table>
<span style="font-size: large;"></span><span style="font-size: large;">Figure 2 contains the same information on asset purchases as Figure 1 but instead of plotting expected inflation on this chart, the solid line is the value of the stock market. I want to use this chart to make a point about the effects on markets of the type of assets that central banks buy. <br /><br />Figure 2 shows that the turn around in the stock market that occurred at the beginning of 2009 coincides closely with the Fed’s intervention in the MBS market. Further, when asset buying was suspended temporarily, in the second quarter of 2010, the stock market resumed its downward spiral, picking up again only when the Federal Reserve announced at the Jackson Hole conference in the autumn of the same year, that large-scale asset purchases would resume. <br /><br />Here’s <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130411.pdf">a link</a> that explains how QE works. And here is <a href="http://rogerfarmer.com/NewWeb/PdfFiles/stock_market_really.pdf">a link</a> that presents the evidence for a causal connection from the stock market to the real economy. John is aware of my argument that financial instability is Pareto inefficient. He either disagrees or chooses to ignore it. I'm not sure which. <br /><br />So, is there a case for raising interest rates and getting ‘back to normal’. John thinks not</span><blockquote class="tr_bq">
<span style="font-size: large;">For interest rates, the Fed has set itself a nearly impossible task. Fed officials need to know what the correct, or “natural,” real rate of interest is. Is there a “savings glut” or another recession on its way, driving the correct real interest rate down? Or are tight markets for skilled workers and large corporate profits a sign of high “natural” rates? Setting the right price of tomatoes is hard enough, let alone divining the right real interest rate for an entire economy.</span></blockquote>
<span style="font-size: large;">John is wrong to think that we do not have a problem when rates are at zero. And he is wrong for two reasons.<br /><br />First. Even if we accept that the Fed has no business trying to influence the real economy it does have a responsibility to control inflation. And the lever that controls inflation is the money interest rate. That lever did a pretty effective job for thirty-five years. Right now, it’s set at full speed ahead with no room to maneuver.<br /><br />Second. The Fed does influence the real economy; not just in the short run: But in the long run. Financial markets do not allocate capital efficiently and the Fed has an important role as lender of last resort. We left markets to themselves in the nineteenth century and that didn’t turn out too well. Lets not forget that lesson.</span></div>
<div>
<span style="font-size: large;"><br /></span></div>
<div>
<span style="font-size: large;">So what should we do? Raise rates. And raise them soon. But raising rates is not a get out of jail free card. A higher nominal rate will drive the economy back into recession by triggering a fall in the stock market. </span></div>
<div>
<span style="font-size: large;"><br /></span></div>
<div>
<span style="font-size: large;">Financial wealth goes up. Financial wealth goes down. And with it - so goes the real economy. Movements in financial wealth do not reflect future booms or busts. They cause them. The lesson from Figure 2, is that the Fed can, and should, stabilize asset markets by actively trading the risk composition of its portfolio. So - yes: raise rates. But; at the same time, absorb the risk that the private sector is unwilling to bear by trading equities.</span></div>
<div>
<span style="font-size: large;"><br /></span></div>
<div>
<span style="font-size: large;">Perhaps that sounds too radical? Intervening in the asset markets in any capacity was a radical proposal when the Fed was created in 1913. If you think the last crisis was bad: Wait and see what the next one will bring.</span></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com8tag:blogger.com,1999:blog-4979477022008569617.post-20156808546328131062015-08-29T21:29:00.001-07:002015-08-29T21:37:01.764-07:00Not too simple: Just wrong<span style="font-size: large;">Simon Wren-Lewis has a <a href="http://mainlymacro.blogspot.com/2015/08/reform-and-revolution-in-macroeconomics.html">nice post</a> discussing Paul Romer’s <a href="http://paulromer.net/solows-choice/">critique </a>of macro.</span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">In Simon's words:</span><br />
<div>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgokz18Yz7P3mq4pU9KRZVjs2BwoKbO2QssTuGW0_59K3ObSTNR_YSjmUR4RY2exGBxaPeOryW7-oCGp3SmcvENlQGqdmi6EiWEUWp8aS8mHCJ6kcawRDMSnxm1UmzLYzkSd0kzg8h60Wk/s1600/wrong.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="210" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgokz18Yz7P3mq4pU9KRZVjs2BwoKbO2QssTuGW0_59K3ObSTNR_YSjmUR4RY2exGBxaPeOryW7-oCGp3SmcvENlQGqdmi6EiWEUWp8aS8mHCJ6kcawRDMSnxm1UmzLYzkSd0kzg8h60Wk/s400/wrong.jpg" width="400" /></a><br />
<blockquote class="tr_bq">
<span style="font-size: large;">"It is hard to get academic macroeconomists trained since the 1980s to address [large scale Keynesian models] , because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems."<br /> </span><span style="font-size: large;"><br /></span><span style="font-size: large;"><b><span style="color: blue;">"But DSGE models as a guide for policy are also fatally flawed because they are too simple. The unique property that DSGE models have is internal consistency."</span></b></span></blockquote>
<blockquote class="tr_bq">
<span style="font-size: large;">"Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy."</span></blockquote>
</div>
<div>
<span style="font-size: large;">Nope! Not too simple. Just wrong!</span><br />
<span style="font-size: large;"><br />I disagree with Simon. NK models are not too simple. They are <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130306.pdf">simply wrong</a>. There are no ‘frictions’. There is no <a href="http://blogs.ft.com/economistsforum/2010/01/the-stimulus-plan-unemployment-and-economic-theory-why-i-dont-believe-in-fairies/?">Calvo Fairy</a>. There are simply <a href="http://rogerfarmer.com/NewWeb/PdfFiles/Farmer_Phelps_Volume_Revision.pdf">persistent nominal beliefs</a>.<br /><br />Period.</span></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com4tag:blogger.com,1999:blog-4979477022008569617.post-56024558995879384032015-08-24T10:27:00.002-07:002015-08-29T21:37:19.399-07:00The Next Great Depression<div class="MsoNormal">
<span style="font-size: large;">The <a href="http://money.cnn.com/2015/08/24/investing/stocks-markets-selloff-china-crash-dow/">financial markets are in turmoil</a>. We are dangerously
close to the next financial crisis. <span style="mso-spacerun: yes;"> </span>The
FTSE in the UK is down by 13% from its April peak. The Dow in the United States
is off by 10% </span></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-size: large;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_yLHGgANyjC-UqRlOM9ctSAKWuw8hgjrNVs9GUTCCp8kafhMKCBp9Ch1wsCMymP3I2_efZW0wZFk0xvF3tQEBjx9ANcHl98smD90wMGr9ZowysTuTsXitg7IotpxMcISYd5H5NV61GDY/s1600/gd45.gif" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_yLHGgANyjC-UqRlOM9ctSAKWuw8hgjrNVs9GUTCCp8kafhMKCBp9Ch1wsCMymP3I2_efZW0wZFk0xvF3tQEBjx9ANcHl98smD90wMGr9ZowysTuTsXitg7IotpxMcISYd5H5NV61GDY/s320/gd45.gif" width="246" /></a></span></div>
<span style="font-size: large;">and the Hong Kong Hang Seng index, the market that <span style="mso-spacerun: yes;"> </span>is closest to the epicenter of the crisis, is
down by a whopping 21%. </span><br />
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: large;">Why worry? Surely this is just a market correction. Traders
in the financial markets are, after all, simply making the trades that are in
all of our best interests. I don't think so!<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Are the financial markets efficient? In one sense yes. In
another sense no.</span></div>
<div class="MsoNormal">
<o:p><span style="font-size: large;"></span></o:p></div>
<a name='more'></a><br />
<div class="MsoNormal">
<span style="font-size: large;">The financial markets are informationally efficient. It is
difficult or impossible to make money trading in the markets unless you have
inside information. There is no free lunch. That's what Gene Fama meant when he
defined the term “<a href="https://en.wikipedia.org/wiki/Efficient-market_hypothesis">efficient markets hypothesis</a>”. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">The financial markets are not Pareto efficient. They do not
allocate capital across time in a socially optimal way. They are not Pareto
efficient because almost all of the people who are affected by the trades we
make today are not yet born. That is what explains Bob Shiller’s finding that <a href="https://personal.vanguard.com/pdf/s338.pdf">long-run returns are predictable</a>.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Real interest rates, and their close cousin, price earnings
ratios, are incredibly persistent. They are persistent because the mistakes
that our parents and our grandparents made in the past are carried into the
present through the generational wealth distribution. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">For the past hundred <span style="mso-spacerun: yes;"> </span>years, we have managed the economy with a
single tool; monetary policy. <span style="mso-spacerun: yes;"> </span>Central
banks raised the interest rate when inflation was high or when unemployment was
low. They lowered the interest rate when inflation was low or when unemployment
was high. For the past thirty-five years, there was no conflict between those
objectives. Times have changed.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">The stock market crash is screaming out for the Fed to lower
interest rates. That option is closed as the interest rate has reached its
lower bound. Some economists are <a href="http://azizonomics.com/2015/08/24/correction-or-crisis/">calling for a huge fiscal stimulus</a>.
That is not the answer. Although <a href="http://blogs.ft.com/economistsforum/2010/01/the-stimulus-plan-unemployment-and-economic-theory-why-i-dont-believe-in-fairies/">I have stated publicly that I don't believe in fairies</a>: Unlike Paul, I DO believe in the <a href="http://www.nytimes.com/2010/07/02/opinion/02krugman.html">confidence fairy</a>. Pessimistic beliefs
about the value of private wealth are as destructive to the economy as a
hurricane.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">For monetary policy to work effectively as a lever to
control inflation, the interest rate must be positive. We must raise the
interest rate. And we must do it now.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">If we raise interest rates now, the stock market will fall
further. The U.S. market correction will turn into a full scale rout.
Unemployment will soar. Unless.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Unless we use the deep pockets of the Treasury to <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130411.pdf">step in on behalf of unborn generations</a> and prevent that from happening.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">For the economy to function at a high level of activity, the
value of paper assets must be high. When we feel wealthy we spend. When we
spend, firms create jobs. When firms create jobs, earnings and dividends
increase and the high value of paper assets is validated.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">What can we do? What should we do?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: large;">First: Give the Fed the power to buy a value weighted Exchange Traded Fund that contains every publicly traded stock. </span> <span style="font-size: large;">Commit to support the ETF by buying stocks. Pay for the shares by</span> <span style="font-size: large;">borrowing, or by trading Social Security Trust Fund.</span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: large;">Second: Raise the money interest rate to bring us back to normality and restore normal functioning of <o:p></o:p>monetary policy.</span></div>
<div class="MsoNormal">
<o:p><span style="font-size: large;"><br /></span></o:p></div>
<div class="MsoNormal">
<o:p><span style="font-size: large;">When? Now! </span></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">If we do not act, and act soon, we are headed for another
Great Depression.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<!--[if gte mso 9]><xml>
<o:OfficeDocumentSettings>
<o:AllowPNG/>
<o:PixelsPerInch>96</o:PixelsPerInch>
</o:OfficeDocumentSettings>
</xml><![endif]-->
<!--[if gte mso 9]><xml>
<w:WordDocument>
<w:View>Normal</w:View>
<w:Zoom>0</w:Zoom>
<w:TrackMoves/>
<w:TrackFormatting/>
<w:PunctuationKerning/>
<w:ValidateAgainstSchemas/>
<w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid>
<w:IgnoreMixedContent>false</w:IgnoreMixedContent>
<w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText>
<w:DoNotPromoteQF/>
<w:LidThemeOther>EN-US</w:LidThemeOther>
<w:LidThemeAsian>JA</w:LidThemeAsian>
<w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript>
<w:Compatibility>
<w:BreakWrappedTables/>
<w:SnapToGridInCell/>
<w:WrapTextWithPunct/>
<w:UseAsianBreakRules/>
<w:DontGrowAutofit/>
<w:SplitPgBreakAndParaMark/>
<w:EnableOpenTypeKerning/>
<w:DontFlipMirrorIndents/>
<w:OverrideTableStyleHps/>
</w:Compatibility>
<m:mathPr>
<m:mathFont m:val="Cambria Math"/>
<m:brkBin m:val="before"/>
<m:brkBinSub m:val="--"/>
<m:smallFrac m:val="off"/>
<m:dispDef/>
<m:lMargin m:val="0"/>
<m:rMargin m:val="0"/>
<m:defJc m:val="centerGroup"/>
<m:wrapIndent m:val="1440"/>
<m:intLim m:val="subSup"/>
<m:naryLim m:val="undOvr"/>
</m:mathPr></w:WordDocument>
</xml><![endif]--><!--[if gte mso 9]><xml>
<w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="276">
<w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/>
<w:LsdException Locked="false" Priority="39" Name="toc 1"/>
<w:LsdException Locked="false" Priority="39" Name="toc 2"/>
<w:LsdException Locked="false" Priority="39" Name="toc 3"/>
<w:LsdException Locked="false" Priority="39" Name="toc 4"/>
<w:LsdException Locked="false" Priority="39" Name="toc 5"/>
<w:LsdException Locked="false" Priority="39" Name="toc 6"/>
<w:LsdException Locked="false" Priority="39" Name="toc 7"/>
<w:LsdException Locked="false" Priority="39" Name="toc 8"/>
<w:LsdException Locked="false" Priority="39" Name="toc 9"/>
<w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/>
<w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/>
<w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/>
<w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/>
<w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/>
</w:LatentStyles>
</xml><![endif]-->
<!--[if gte mso 10]>
<style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-parent:"";
mso-padding-alt:0in 5.4pt 0in 5.4pt;
mso-para-margin:0in;
mso-para-margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Calibri;
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;}
</style>
<![endif]-->
<!--StartFragment-->
<!--EndFragment--><br />
<div class="MsoNormal">
<br /></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com41tag:blogger.com,1999:blog-4979477022008569617.post-9366546981466688942015-08-23T09:53:00.001-07:002015-08-23T10:09:19.100-07:00Animal Spirits and the Two Natural Rates<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVntqXea7GNGaSxO2XY4rMy3HOwR04LBHonjKVHefE29yH16kXd8Q3Cx1ZDJhuzAFJvw6ocoimXpfd8ihRkiuqf8HwGMSPdVe7rrhqrbpCnbpx7J67X_UbAEICYCp3PxOY8bZFGJeJGzs/s1600/pessimism-or-optimism-small.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVntqXea7GNGaSxO2XY4rMy3HOwR04LBHonjKVHefE29yH16kXd8Q3Cx1ZDJhuzAFJvw6ocoimXpfd8ihRkiuqf8HwGMSPdVe7rrhqrbpCnbpx7J67X_UbAEICYCp3PxOY8bZFGJeJGzs/s1600/pessimism-or-optimism-small.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVntqXea7GNGaSxO2XY4rMy3HOwR04LBHonjKVHefE29yH16kXd8Q3Cx1ZDJhuzAFJvw6ocoimXpfd8ihRkiuqf8HwGMSPdVe7rrhqrbpCnbpx7J67X_UbAEICYCp3PxOY8bZFGJeJGzs/s1600/pessimism-or-optimism-small.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVntqXea7GNGaSxO2XY4rMy3HOwR04LBHonjKVHefE29yH16kXd8Q3Cx1ZDJhuzAFJvw6ocoimXpfd8ihRkiuqf8HwGMSPdVe7rrhqrbpCnbpx7J67X_UbAEICYCp3PxOY8bZFGJeJGzs/s1600/pessimism-or-optimism-small.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVntqXea7GNGaSxO2XY4rMy3HOwR04LBHonjKVHefE29yH16kXd8Q3Cx1ZDJhuzAFJvw6ocoimXpfd8ihRkiuqf8HwGMSPdVe7rrhqrbpCnbpx7J67X_UbAEICYCp3PxOY8bZFGJeJGzs/s1600/pessimism-or-optimism-small.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVntqXea7GNGaSxO2XY4rMy3HOwR04LBHonjKVHefE29yH16kXd8Q3Cx1ZDJhuzAFJvw6ocoimXpfd8ihRkiuqf8HwGMSPdVe7rrhqrbpCnbpx7J67X_UbAEICYCp3PxOY8bZFGJeJGzs/s1600/pessimism-or-optimism-small.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVntqXea7GNGaSxO2XY4rMy3HOwR04LBHonjKVHefE29yH16kXd8Q3Cx1ZDJhuzAFJvw6ocoimXpfd8ihRkiuqf8HwGMSPdVe7rrhqrbpCnbpx7J67X_UbAEICYCp3PxOY8bZFGJeJGzs/s1600/pessimism-or-optimism-small.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVntqXea7GNGaSxO2XY4rMy3HOwR04LBHonjKVHefE29yH16kXd8Q3Cx1ZDJhuzAFJvw6ocoimXpfd8ihRkiuqf8HwGMSPdVe7rrhqrbpCnbpx7J67X_UbAEICYCp3PxOY8bZFGJeJGzs/s320/pessimism-or-optimism-small.jpg" width="320" /></a></div>
<span style="font-size: large;"></span><br />
<div>
<span style="font-size: large;"><span style="font-size: large;">In my <a href="http://rogerfarmerblog.blogspot.com/2015/08/a-tale-of-two-natural-rates.html">last post</a> I pointed out that it is not enough for monetary policy to guide the economy back to the natural rate of interest. Central banks and national treasuries must use <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130411.pdf">financial policy</a> to guide us back to the <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130306.pdf">natural rate of unemployment</a>.</span></span></div>
<span style="font-size: large;">
<div>
<span style="font-size: large;"><br /></span></div>
Imagine two economies in parallel universes. I will call them economy A and economy B. Both economies are populated by identical copies of the same people. They have the same endowments of land labor and capital. And each economy has access to identical technologies for producing goods. In economic jargon: they have the same fundamentals.<br /><br />But although these economies have identical fundamentals, the people in economy A are naturally optimistic. They believe that shares in their stock market are worth PA. And PA is a large number. The people in economy B are pessimists. They believe that their stock market is worth PB. And PB is a small number. Importantly, PB < PA.<br /><a name='more'></a><br />In economy A, as a consequence of the optimism of the population, households have a high demand for goods and services. To meet that demand, firms require a high labor force. The unemployment rate in economy A is 2%. <br /><br />In economy B, as a consequence of the pessimism of the population, households have a low demand for goods and service. To meet that demand, firms require a low labor force. The unemployment rate in economy B is 10%.<br /><br />In each economy, the households and firms believe, correctly, that the value of a share is equal to the discounted present value of a claim to the dividends that will be paid by the firm. And in each economy people discount the future at rate 1/R*, where R* is Wicksell’s ‘natural rate of interest’. <br /><br />Dividends, in each economy, are a fraction of GDP. Because employment is higher in economy A than economy B, GDP is also higher. And so are dividends. The valuations placed on the stock market in both economies are rational. PA is equal to the present value of the dividends paid in economy A, discounted at rate 1/R*. PB is equal to the present value of the dividends paid in economy B, also discounted at rate 1/R*. Optimism or pessimism is a self-fulfilling prophecy.<br /><br />How can this be? Surely the unemployment rate is determined by fundamentals. Not so. I explain in my <a href="http://rogerfarmer.com/NewWeb/PdfFiles/fa-con-cra.pdf">published academic work</a>, how there can be many unemployment rates, all of which are consistent with the conditions I described in this example. In a labor market where people must search for jobs, there are not enough price signals, to lead market participants to the optimal unemployment rate.</span>Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com4tag:blogger.com,1999:blog-4979477022008569617.post-11243681161556031772015-08-22T11:09:00.001-07:002015-08-23T09:59:17.841-07:00A Tale of Two Natural Rates<div class="MsoNormal">
<span style="font-size: large;"><a href="https://www.minneapolisfed.org/news-and-events/presidents-speeches/public-debt-and-the-long-run-neutral-real-interest-rate" target="_blank">Narayana Kocherlakota</a> makes the case for more public debt.
<a href="http://www.nytimes.com/2015/08/21/opinion/paul-krugman-debt-is-good-for-the-economy.html?ref=opinion&_r=0" target="_blank">Paul Krugman</a> and <a href="http://newmonetarism.blogspot.com/2015/08/krugman-comes-around.html" target="_blank">Steve Williamson</a> agree. (I have to keep rereading that
sentence before I believe it). What is this argument all about and how does it
relate to the soul of Keynesian economics?<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-size: large;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzQv_P3SHtO-QaQjLsQw8M30YJrnDZOQvCwQZg_THNIZ-14wF7nZFcdkmkAbPw06H974mZLbP_yMB1IrBo-TJ26964yTFlK_8NS-QjsFNXt6_megVAGVphMoPE0tc5IIM6So7sf-MskSM/s1600/irate.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="166" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzQv_P3SHtO-QaQjLsQw8M30YJrnDZOQvCwQZg_THNIZ-14wF7nZFcdkmkAbPw06H974mZLbP_yMB1IrBo-TJ26964yTFlK_8NS-QjsFNXt6_megVAGVphMoPE0tc5IIM6So7sf-MskSM/s200/irate.jpg" width="200" /></a></span></div>
<br />
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEil4t_QppAwjgCTM7Zt3V8noUHbDXg2UGHP7OtShSLDTX8LwlIz1sg7_7-PEHH6Sr4Sjg_ALf03DoR-LrcKiqoNWYph9DFkjsNt2ZzPCmtJX8atWnckJMnBT6PU_YzkVjuU2jusyq-qiVg/s1600/urate.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="129" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEil4t_QppAwjgCTM7Zt3V8noUHbDXg2UGHP7OtShSLDTX8LwlIz1sg7_7-PEHH6Sr4Sjg_ALf03DoR-LrcKiqoNWYph9DFkjsNt2ZzPCmtJX8atWnckJMnBT6PU_YzkVjuU2jusyq-qiVg/s200/urate.jpg" width="200" /></a><span style="font-size: large;">Let's start with a key premise in the Kocherlakota speech.
There is a theoretical concept called the ‘neutral real interest rate’ and one
of the jobs of a central bank is to get us back to that rate of interest as
quickly as possible. The ‘neutral rate’ is what Wicksell called the ‘<a href="https://research.stlouisfed.org/publications/mt/20050301/cover.pdf" target="_blank">natural rate of interest</a>’ and I'm going to stick with Wicksell’s terminology here.<o:p></o:p></span></div>
<div class="MsoNormal">
<br />
<a name='more'></a><br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Wicksell’s natural rate of interest inspired Milton Friedman
to coin the term ‘<a href="https://www.aeaweb.org/aer/top20/58.1.1-17.pdf" target="_blank">natural rate of unemployment</a>’. In classical economics and in
the brand of New Keynesian economics that inspires central bankers, there is a one-to-one correspondence
between these concepts. If we could only ensure that we were at the natural
rate of interest, it would simultaneously be true that we were at the natural
rate of unemployment. That is, to use a technical term, <a href="http://www.conagrafoods.com/our-food/brands/poppycock-gourmet-popcorn" target="_blank">poppycock</a>. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Let's consider two possible definitions of ‘the’ gross real
interest rate.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Definition 1: R1<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">R1 is <span style="mso-spacerun: yes;"> </span>the number of
apples you could buy one year from <span style="mso-spacerun: yes;"> </span>today
if you sell one apple today, invest the proceeds in one year treasury bonds,
and convert the interest and principal, one year from now, back into apples.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Definition 2: R2<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">R2 <span style="mso-spacerun: yes;"> </span>is the number of
apples you could buy, one year from today, if you sell one apple today, invest
the proceeds in the stock market, and reinvest the quarterly dividends. One
year from now, you sell your shares and convert the proceeds back into apples.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">These two real interest rate concepts will always be
different because the stock market return is far riskier. But economic theory
says that they should be connected by the equation,<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">R2 = R1 + RP<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">where RP is a positive number that represents the extra
return you require to compensate you for risk. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">So far so good. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Now let's look at the connection between R2 and the stock
market price. Imagine that we repeat the experiment of selling an apple many
times and that we compute the average return. That's a bit of an artificial
experiment because technically, I am thinking of the return earned in a billon
parallel universes, all with the same initial conditions. That's a technicality
that lets me abstract from uncertainty. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">How would R2 be related to the price dividend ratio? <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Here’s the answer.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">R2 = 1 + D/P = 1 + (1/pd)<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">where<span style="mso-spacerun: yes;"> </span>pd is the price
dividend ratio, P is the price of the stock and D is the dividend averaged over
all of these parallel universes.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">Now let's get back to original question. Let R2* represent
the natural rate of interest earned in the stock market. Let U be the
unemployment rate, <span style="mso-spacerun: yes;"> </span>let U* be the natural
rate of unemployment and let pd* be the price dividend ratio when we are at the
natural interest rate.<o:p></o:p></span></div>
<div class="MsoNormal">
<o:p><span style="font-size: large;"><br /></span></o:p></div>
<div class="MsoNormal">
<o:p><span style="font-size: large;"><span style="font-family: Arial, Helvetica, sans-serif;"><u>QUESTION</u></span> </span></o:p></div>
<div class="MsoNormal">
<span style="font-size: large;">Here is my question to Narayana, Paul,<span style="mso-spacerun: yes;"> </span>Steve and anyone out there who wants to throw in their two cents. </span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: large;">If:<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">R2 = R*<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">is it necessarily true that <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">U = U*?<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">My answer is a resounding no. And that is what distinguishes
<a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130306.pdf" target="_blank">my work</a> from new Keynesian economics. The reason is that for every U there will
be a P(U) and a D(U) where D(U) is the dividends you would earn on the stock
market, and P(U) is the price you would pay for a share<span style="mso-spacerun: yes;"> </span>if the unemployment rate was U. In my world,
there are multiple equilibrium unemployment rates. That is, after all, the
essence of Keynesian economics. And that premise implies that there are
multiple values of U such that<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">pd* = P(U)/D(U)<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: large;">The answer to this question matters. And it matters a lot. During the <a href="http://www.federalreservehistory.org/Events/DetailView/65" target="_blank">Great Moderation</a>, unemployment and inflation came down together. There was no apparent conflict between the goal of 2% inflation and full employment. That <a href="http://mainlymacro.blogspot.com/2015/02/the-divine-coincidence-in-parallel.html" target="_blank">divine coincidence</a> </span><span style="font-size: large;">cannot be expected to continue. We need two tools for two targets. As I have argued <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130411.pdf" target="_blank">here</a>; we must use financial policy to target the unemployment rate and monetary policy to target inflation. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">So my question to <a href="http://rogerfarmerblog.blogspot.com/2014/02/a-quiz-for-wannabe-keynesians.html" target="_blank">wannabe Keynesians</a> is: Are you a <a href="http://rogerfarmerblog.blogspot.com/2014/01/i-am-neo-paleo-keynesian-there-has-been.html" target="_blank">Neo-paleo Keynesian</a>? Or are you
a watered-down-Samuelsonian-MIT-Hicks-Hansen-1950s-IS-LM kind of guy?<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<!--[if gte mso 9]><xml>
<o:OfficeDocumentSettings>
<o:AllowPNG/>
<o:PixelsPerInch>96</o:PixelsPerInch>
</o:OfficeDocumentSettings>
</xml><![endif]-->
<!--[if gte mso 9]><xml>
<w:WordDocument>
<w:View>Normal</w:View>
<w:Zoom>0</w:Zoom>
<w:TrackMoves/>
<w:TrackFormatting/>
<w:PunctuationKerning/>
<w:ValidateAgainstSchemas/>
<w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid>
<w:IgnoreMixedContent>false</w:IgnoreMixedContent>
<w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText>
<w:DoNotPromoteQF/>
<w:LidThemeOther>EN-US</w:LidThemeOther>
<w:LidThemeAsian>JA</w:LidThemeAsian>
<w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript>
<w:Compatibility>
<w:BreakWrappedTables/>
<w:SnapToGridInCell/>
<w:WrapTextWithPunct/>
<w:UseAsianBreakRules/>
<w:DontGrowAutofit/>
<w:SplitPgBreakAndParaMark/>
<w:EnableOpenTypeKerning/>
<w:DontFlipMirrorIndents/>
<w:OverrideTableStyleHps/>
</w:Compatibility>
<m:mathPr>
<m:mathFont m:val="Cambria Math"/>
<m:brkBin m:val="before"/>
<m:brkBinSub m:val="--"/>
<m:smallFrac m:val="off"/>
<m:dispDef/>
<m:lMargin m:val="0"/>
<m:rMargin m:val="0"/>
<m:defJc m:val="centerGroup"/>
<m:wrapIndent m:val="1440"/>
<m:intLim m:val="subSup"/>
<m:naryLim m:val="undOvr"/>
</m:mathPr></w:WordDocument>
</xml><![endif]--><!--[if gte mso 9]><xml>
<w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="276">
<w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/>
<w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/>
<w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/>
<w:LsdException Locked="false" Priority="39" Name="toc 1"/>
<w:LsdException Locked="false" Priority="39" Name="toc 2"/>
<w:LsdException Locked="false" Priority="39" Name="toc 3"/>
<w:LsdException Locked="false" Priority="39" Name="toc 4"/>
<w:LsdException Locked="false" Priority="39" Name="toc 5"/>
<w:LsdException Locked="false" Priority="39" Name="toc 6"/>
<w:LsdException Locked="false" Priority="39" Name="toc 7"/>
<w:LsdException Locked="false" Priority="39" Name="toc 8"/>
<w:LsdException Locked="false" Priority="39" Name="toc 9"/>
<w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/>
<w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/>
<w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/>
<w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/>
<w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/>
</w:LatentStyles>
</xml><![endif]-->
<!--[if gte mso 10]>
<style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-parent:"";
mso-padding-alt:0in 5.4pt 0in 5.4pt;
mso-para-margin:0in;
mso-para-margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Calibri;
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;}
</style>
<![endif]-->
<!--StartFragment-->
<!--EndFragment--><br />
<div class="MsoNormal">
<br /></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com3tag:blogger.com,1999:blog-4979477022008569617.post-36453213888657187132015-08-14T16:49:00.000-07:002015-08-14T16:50:10.149-07:00Somebody at the PBC blinked<span style="font-size: large;">In a <a href="http://rogerfarmerblog.blogspot.com/2015/07/fasten-your-seat-belts-ride-is-about-to.html" target="_blank">recent post</a> I made this comment about China’s decision to intervene in its own stock market.</span><br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjp-_b8pXMZmfB7fzMMvFhWUY_WULA2wzukwR2kNPjjeWNTr1NiNojQfhIQHklUH8-rgH41ikABVwd5bPK2cFkr5cxTfo-PDcvj-Qk2Z6AXgeKmUH2V-fNUxBuh8qqcodkaTz9SYH1UicM/s1600/pbc.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="font-size: large;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjp-_b8pXMZmfB7fzMMvFhWUY_WULA2wzukwR2kNPjjeWNTr1NiNojQfhIQHklUH8-rgH41ikABVwd5bPK2cFkr5cxTfo-PDcvj-Qk2Z6AXgeKmUH2V-fNUxBuh8qqcodkaTz9SYH1UicM/s1600/pbc.jpg" /></span></a><br />
<blockquote class="tr_bq">
<span style="font-size: large;"><i>China is holding more than $1.2 trillion dollars of U.S. government debt. If the Bank were to tap those funds to stabilize the Chinese stock market it could not simultaneously maintain an exchange rate peg. If China goes that route, look out for upheaval in the foreign exchange markets.</i></span></blockquote>
<br />
<span style="font-size: large;">Chinese policy makers are now learning that lesson. The Peoples Bank of China (PBC) has allowed the <a href="http://money.cnn.com/2015/08/11/investing/yuan-china-rmb-currency/index.html" target="_blank">Renminbi to tumble</a> by more than 3% in the last few days. The ride may not yet be over.</span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">What’s happening and why? It's my guess that there are investors on the margin who are pulling money out of the Chinese market and moving it into the world capital markets. Those investors are betting against the valuation that the PBC is putting on domestic assets. The outflow of funds puts downward pressure on the RMB and if the PBC were to maintain its previous parity they would be obliged to sell their holdings of dollar denominated assets to support the currency.</span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">The PBC blinked! But that's a good thing. They’ve chosen a domestic target over an exchange rate target and to make that work, the world needs to keep buying Chinese goods.</span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">I have advocated a policy of Treasury and Central Bank intervention to stabilize domestic asset markets. What we are seeing in the Chinese case is that this policy is inconsistent with a fixed exchange rate.</span><br />
<br />
<br />Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com0tag:blogger.com,1999:blog-4979477022008569617.post-59786477561263383362015-07-27T15:47:00.001-07:002015-07-27T15:59:40.565-07:00Playing Chess with the Devil<span style="font-size: large;">I love this quote (with my amendments for economists) from the <a href="http://www.nytimes.com/2015/07/26/magazine/the-singular-mind-of-terry-tao.html?_r=0" target="_blank">NY Times article</a> about Terrence Tao. </span><br />
<blockquote class="tr_bq">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_7rrE_t96DPxfzBpK5vjpSz1ek0S7wUV1umINmhyhf8z3RBLRLEu12iTe3nqCTLl4CCTzbuZerXD7ks_TAE5d0QjrMMuRCkTLtVW11Adx89MQGDYN5u00usllJlKhPT_6WufhuADsiFA/s1600/Screenshot+2015-07-27+15.41.23.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="308" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_7rrE_t96DPxfzBpK5vjpSz1ek0S7wUV1umINmhyhf8z3RBLRLEu12iTe3nqCTLl4CCTzbuZerXD7ks_TAE5d0QjrMMuRCkTLtVW11Adx89MQGDYN5u00usllJlKhPT_6WufhuADsiFA/s400/Screenshot+2015-07-27+15.41.23.png" width="400" /></a><span style="font-size: large;">The true work of the <strike>mathematician</strike> economist is not experienced until the later parts of graduate school, when the student is challenged to create knowledge in the form of a novel <strike>proof</strike> piece of research. It is common to fill page after page with an attempt, the seasons turning, only to arrive precisely where you began, empty-handed — or to realize that a subtle flaw of logic doomed the whole enterprise from its outset. The steady state of <strike>mathematical</strike> economic research is to be completely stuck.</span></blockquote>
<blockquote class="tr_bq">
<span style="font-size: large;">It is a process that Charles Fefferman of Princeton, himself a onetime math prodigy turned Fields medalist, likens to ‘‘<span style="color: orange;">playing chess with the devil</span>.’’ The rules of the devil’s game are special, though: The devil is vastly superior at chess, but, Fefferman explained, you may take back as many moves as you like, and the devil may not. You play a first game, and, of course, ‘‘he crushes you.’’ So you take back moves and try something different, and he crushes you again, ‘‘in much the same way.’’ If you are sufficiently wily, you will eventually discover a move that forces the devil to shift strategy; you still lose, but — aha! — you have your first clue.</span></blockquote>
<span style="font-size: large;">That's pretty much how I feel about research. Another analogy is that research is like solving a Rubik's Cube: You're about to put the last piece in place and you find you have to go back 25 moves and start over.</span><br />
<div>
<br /></div>
Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.com5