tag:blogger.com,1999:blog-5713178645208582139.post4561256998647784897..comments2024-03-22T02:37:15.030-05:00Comments on Macro Musings Blog: David Andolfatto Can Feel More Confident About NGDP TargetingDavid Beckworthhttp://www.blogger.com/profile/04577612979801459194noreply@blogger.comBlogger22125tag:blogger.com,1999:blog-5713178645208582139.post-87093051523559906402012-05-05T03:35:24.370-05:002012-05-05T03:35:24.370-05:00dwb,
I wanted to avoid raising the bankruptcy opt...dwb,<br /><br />I wanted to avoid raising the bankruptcy option, because I imagine that it is a relatively unusual end to a debt contract, but since you mention it, I think that bankruptcy is a much better way of dealing with unexpectedly hard times than engineering higher inflation. Right from the start of the financial crisis, I have said that, instead of bailouts, governments should have RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-89535820893048550772012-05-04T21:03:01.166-05:002012-05-04T21:03:01.166-05:00Typically, such contracts do not include clauses s...<i>Typically, such contracts do not include clauses saying "except if things are that bad", although of course both sides accept the possibility of default.</i><br /><br />of course they do. the nature of the investor/borrower contract is that the law provides a mechanism for abrogating debt contracts (forclosure/default/bankruptcy). The borrower has that right under law. If you are a dwbnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-61685625512485533572012-05-04T20:31:41.360-05:002012-05-04T20:31:41.360-05:00David,
Well, of course it is a subjective choice ...David,<br /><br />Well, of course it is a subjective choice how long you average the trend over, but to me going back to 1990 is far, far too long. If people like Scott Sumner now think that going back to the pre-2007 5% trend in the US is excessive, how can you justify going back two decades?<br /><br />I look at that graph and I see a level shift down followed by a resumption of growth at Declannoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-24218959589800924742012-05-04T17:26:44.899-05:002012-05-04T17:26:44.899-05:00dwb, the relationship to which I refer is the natu...dwb, the relationship to which I refer is the nature of the investor/borrower contract. That remains the same whether NGDP goes up 6% or down 6%, or house prices go up 35% (which they did and I do not recall borrowers offering to pay more interest at the time in the light of their unexpectedly good fortune) or down 35%. Typically, such contracts do not include clauses saying "except if RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-19637812124710129962012-05-04T16:56:59.317-05:002012-05-04T16:56:59.317-05:00I find your examples a little complicated Bill, bu...I find your examples a little complicated Bill, but here are some remarks.<br /><br />I agree with you that production shocks that do not affect the output of the borrower do not affect the relationship between the investor and borrower. In practice, however, I think that real variations in GDP affect the fortunes of many if not the vast majority of borrowers.<br /><br />Your characterisation ofRebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-56321729839101803182012-05-04T15:19:00.121-05:002012-05-04T15:19:00.121-05:00"What is wrong with that reasoning?"
Ex..."What is wrong with that reasoning?"<br /><br />Excessive aggregation.<br /><br />Smith can invest in a 50% share of Farmer Jones' profit from raising corn for $100 or he can lend $100 to Jones at 5% interest.<br /><br />He chooses to make the loan rather than buy the share. Farmer Jones makes $20 before interest and gets to keep $15. Jones gets $5. If he had chosen to be a Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-6429127544878036942012-05-04T14:36:12.587-05:002012-05-04T14:36:12.587-05:00^^ poor editing. "Suppose you are in one of t...^^ poor editing. "Suppose you are in one of the 25% of underwater homeowners.<br /><br />Unexpectedly, the relationship changes "<br /><br />--->Suppose the ngdp relationship unexpectedly changes and you become one of the 25% of homeowners under water.dwbnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-20309856399814554412012-05-04T14:32:02.542-05:002012-05-04T14:32:02.542-05:00You are right that the "safety" of a fix...<i>You are right that the "safety" of a fixed income contract is less when economic conditions are poor, but I would guess that nevertheless, the effect of credit losses on fixed income returns is small compared with the variability of equity returns.</i><br /><br />First, the ngdp relationship DID change, thats #1: ngdp is about ~6% below trend or full employment, and home prices are ~dwbnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-82097947455559055302012-05-04T12:48:36.320-05:002012-05-04T12:48:36.320-05:00dwb,
You are right that the "safety" of...dwb,<br /><br />You are right that the "safety" of a fixed income contract is less when economic conditions are poor, but I would guess that nevertheless, the effect of credit losses on fixed income returns is small compared with the variability of equity returns.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-18110619431564129172012-05-04T12:36:51.963-05:002012-05-04T12:36:51.963-05:00Thanks for replying to my comment Bill, but I am a...Thanks for replying to my comment Bill, but I am afraid that like last time we discussed this (on moneyillusion), I don't understand your argument. Hopefully you will see this response and we can get this important point - which occurred to David Andolfatto too - sorted out.<br /><br />To me, it is as simple as this: Assume that an investor has a choice of a fixed income or equity claim andRebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-75798258741842077082012-05-04T09:46:51.411-05:002012-05-04T09:46:51.411-05:00Declan,
I went back and estimated the trend throu...Declan,<br /><br />I went back and estimated the trend through 2007. The NGDP gap falls to 5.9%. If it is done through 2008 the gap is 3.2%. But going that far is problematic because NGDP starts growing above trend at those times. That is why I stopped at 2006.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-6655387895829441232012-05-04T09:36:41.149-05:002012-05-04T09:36:41.149-05:00Declan,
I used 1990-2006 as the basis for the pre...Declan,<br /><br />I used 1990-2006 as the basis for the pre-crisis trend in Australia. Look at this picture of the natural log of NGDP for Australia and you will see the 2009 dip has been corrected: http://research.stlouisfed.org/fred2/graph/?g=6X6David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-53362520584292820952012-05-04T09:33:21.980-05:002012-05-04T09:33:21.980-05:00Nick: interesting comparison to Okun's Law. I...<b>Nick</b>: interesting comparison to Okun's Law. It would be good for someone to do a more thorough analysis along these lines. <br /><br /><b>Bill</b>: Maybe that positive NGDP gap is reducing the cyclical component of unemployment. It is possible for NGDP to overshoot after all.<br /><br /><b>dwb,</b> that makes sense to me.<br /><br /><b>Rebel Economist</b> What Bill and dwb said.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-41407435832437161142012-05-04T09:10:09.343-05:002012-05-04T09:10:09.343-05:00@Rebel economist
fixed income debt is safer than ...@Rebel economist<br /><br /><i>fixed income debt is safer than equity, and vice versa for the borrower, and the relative returns are comensurate with the relative risk. The relationship did not change; it just so happened that when the dice fell recently, the investors have done better than the borrowers</i><br /><br />no, fixed income "safety" is a function of credit risk, and dwbnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-34071367387789920762012-05-04T08:16:58.291-05:002012-05-04T08:16:58.291-05:00Rebel Economist:
A gold standard and money growth...Rebel Economist:<br /><br />A gold standard and money growth rule have the same implications as nominal GDP level targeting for supply shocks for creditors and debtors.<br /><br />The impact of "flexible inflation targeting" is a bit difficult to describe. Flexibility is whatever the central bank wants. <br /><br />Introducing a price level target regime does shield creditors for &Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-36519020028268126492012-05-04T07:47:36.829-05:002012-05-04T07:47:36.829-05:00"The first problem is restoring the expected ..."The first problem is restoring the expected relationship between creditors and debtors that prevailed prior to the economic crisis."<br /><br />You are confusing relationships with outcomes, David. A cornerstone of finance is that, for the investor, fixed income debt is safer than equity, and vice versa for the borrower, and the relative returns are comensurate with the relative risk.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-42124070015102729482012-05-04T07:02:41.757-05:002012-05-04T07:02:41.757-05:00great post.
a different way but equivalent way t...great post.<br /><br />a different way but equivalent way to think about it here in the US is loan delinquencies, which are strongly positively correlated (90%) with unemployment (or equivalently the output gap) when homes prices have declined. As long as UE stays high, the delinquency-foreclosure - home price decline cycle will continue, putting pressure on the contruction industry.dwbnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-84494037952148290182012-05-04T00:14:26.428-05:002012-05-04T00:14:26.428-05:00How on earth do you get a +7.8% gap for Australia?...How on earth do you get a +7.8% gap for Australia? Our NGDP tanked in '09 and there hasn't been any catchup since.Declannoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-34302909305658699612012-05-03T21:58:10.922-05:002012-05-03T21:58:10.922-05:00Great post.
However, it looks like a positive NGD...Great post.<br /><br />However, it looks like a positive NGDP gap would reduce unemployment even further. How does that work?Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-59591656772776672802012-05-03T17:15:26.324-05:002012-05-03T17:15:26.324-05:00Good post David.
"The fitted line in this sc...Good post David.<br /><br />"The fitted line in this scatterplot indicates that a 1% decline in the NGDP gap will reduce the unemployment rate by 0.325%."<br /><br />That immediately reminded me of Okun's Law. About the same value for the parameter, and a better fit by the looks of it.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-12576996403166267752012-05-03T17:11:59.396-05:002012-05-03T17:11:59.396-05:00Great blogging--but crickey, is this a serious di...Great blogging--but crickey, is this a serious discussion?<br /><br />A central bank can print lots of money and it will not lead to growth and then inflation?<br /><br />Really, if QE will not lead to growth and inflation, then let's do about $5 trillion worth of QE buying of Treasury bonds, and wipe out one-half of our national debt. <br /><br />The Fed can keep it on their books for a Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-5567575616308312382012-05-03T16:28:25.754-05:002012-05-03T16:28:25.754-05:00what about if we factor in U6 unemployment figures...what about if we factor in U6 unemployment figures? the factoring out of workers who have either stopped looking for jobs and have effectively left the labor market and those who are underemployed given their credentials puts the total level of unemployment here in the US at just over 20%. is it worth mentioning? not sure... not necessarily meant as a criticism either because what you have Ecodudenoreply@blogger.com