(1) William Easterly shows how imprecise global economic measures--such as global poverty rates and purchasing power parity adjustments--can be. These very numbers have huge policy implications so we need to get them right. Until we do, though, Easterly cautions us about citing them.
(2) The monetary base does matter after all for macroeconomic activity. Most studies show that monetary aggregates, including the monetary base, have not had a robust short-term relationship with nominal spending, inflation, and the real economy since the early 1980s. In other words, what Friedman and Schwartz found in their classic study seems to have largely disappeared over the past 25 years or so. Several recent studies in prominent journals, however, say not so fast. These studies (e.g. here, here) show that if one looks at the monetary base held in the United States--the "domestic adjusted monetary base"--there is still a robust relationship. One of these studies even shows that Bennet McCallum's nominal income targeting rule could still be an effective policy option if the adjusted domestic monetary base were used.
(2) Bill Woolsey responds to this John Taylor interview on the Taylor Rule by taking a close look at its key components and notes that they imply the federal funds rate "for the entire period shows tremendous volatility. Perhaps the CBO estimate of potential output is off. Or, maybe the GDP deflator is the wrong measure of the price level." I would recommend taking a look at the Laubach and Williams output gap measure (Data here). It improves upon the CBO by allowing the growth rate of potential output to vary dramatically in the short run.
(2) The monetary base does matter after all for macroeconomic activity. Most studies show that monetary aggregates, including the monetary base, have not had a robust short-term relationship with nominal spending, inflation, and the real economy since the early 1980s. In other words, what Friedman and Schwartz found in their classic study seems to have largely disappeared over the past 25 years or so. Several recent studies in prominent journals, however, say not so fast. These studies (e.g. here, here) show that if one looks at the monetary base held in the United States--the "domestic adjusted monetary base"--there is still a robust relationship. One of these studies even shows that Bennet McCallum's nominal income targeting rule could still be an effective policy option if the adjusted domestic monetary base were used.
(2) Bill Woolsey responds to this John Taylor interview on the Taylor Rule by taking a close look at its key components and notes that they imply the federal funds rate "for the entire period shows tremendous volatility. Perhaps the CBO estimate of potential output is off. Or, maybe the GDP deflator is the wrong measure of the price level." I would recommend taking a look at the Laubach and Williams output gap measure (Data here). It improves upon the CBO by allowing the growth rate of potential output to vary dramatically in the short run.
David:
ReplyDeleteDo you know where the series can be found? I mean like the CBO series on the St. Louis Fed site?
Bill
Sorry about that Bill. The above link now takes you to John Williams excel file that has the data. Note this data file is a supplement to his article titled "Measuring the Natural Rate of Interest" and thus it also has a natural real interest rate measure and a potential output measure.
ReplyDeleteAs a backup here is the link: http://www.frbsf.org/economics/economists/jwilliams/Laubach_Williams_updated_estimates.xls
I suppose the obvious comment would be that in a RBC model, as firms increase investment due to an expected future positive TFP shock, bank lending rises, inside money increases, bank demand for reserves rises and an accommodating Fed must increase the base to prevent an unwanted rise in the target interest rate. Later as the positive TFP is confirmed, output rises. Thus we see monetary base rising before or contemporaneously with output. Our econometrician mistakenly finds that base Granger-causes output.
ReplyDeleteECB:
ReplyDeleteThere is no doubt that some of the change in the monetary base is the Fed responding to changes in the demand for reserves and currency. However, this does not mean there are never any exogenous changes to the monetary base. And I believe it is possible for an econometrician to find such monetary policy-driven shocks in a well specified VAR.
David:
ReplyDeleteThanks for the data series. I have looked at them a bit. I am puzzled about the difference between the one and two way estimates.
It is interesting as to how well the growth rates all track vs. the large persistent deviations in levels.
What a boom in the naughties.
ECB:
That expected productivity shocks in the context of interest rate targeting might result in changes in base money are pretty traditional. I thought the point was that a properly specified monetary base could be used to stabilize nominal expenditure.
Of course, that doesn't prove that nominal expenditure matters--that prices aren't perfectly and instantly flexible so that base money only impacts prices and leaves real output unchanged.
Frankly, I consider that position to be little more than a bad joke.
As for the notion that anyone would want to use changes in base money to manipulate real output (as oppose to avoid disruptions caused by sticky nominal prices or wages in the face of changes in nominal expenditure) is a bit outlandish to me.
I suppose this all just shows my odd notions as to what macroeconomics is supposed to be about.
Bill:
ReplyDeleteThe data come from the Laubach and Williams paper on the naturl interest rate. An ungated version can be found here (It got published in ReStat 2003).
What I find interesting about their output gap measure is that it shows a postive value in the 2000 during the time of housing boom which makes sense to me while the CBO shows a counterintuitive negative value. Now the Laubach & William's measure shows a smaller negative value than the CBO and that may be hard for some to accept.