On Fed Control of the Money Supply
William F Hummel
Director of the Division of Monetary Affairs under the Board of
Governors of the Federal Reserve System, wrote to Warren Mosler
in 1994:
Dear Mr. Mosler,
Chairman Greenspan asked me to respond to your recent letter
regarding your treatise "Soft Currency Economics."
You made many interesting points in the treatise. I agree in
particular that the textbook money multiplier model is an
oversimplification of the money supply process. As you point
out, the lag even in the current system of "contemporaneous"
reserve requirements implies that monetary policy cannot achieve
perfect short-run control over money or reserves. Indeed, as you
stress, in the short run the causation runs more from money (see
note below) to reserves than vice versa. However, the Federal
Reserve can control the composition of reserves between
non-borrowed and borrowed reserves fairly closely in the short
run. By varying this mix the Federal Reserve can influence the
federal funds rate and the other money market rates in the short
run and thereby affect growth of the money supply over a longer
period.
---------
"Money" means the total of checkable deposits and cash.
Experience in the 1980s demonstrated that Fed's targeting of the
money supply resulted in unacceptable volatility in the Fed funds
rate, without actually succeeding in controlling the growth rate
within rather broad targets.
William F Hummel
Director of the Division of Monetary Affairs under the Board of
Governors of the Federal Reserve System, wrote to Warren Mosler
in 1994:
Dear Mr. Mosler,
Chairman Greenspan asked me to respond to your recent letter
regarding your treatise "Soft Currency Economics."
You made many interesting points in the treatise. I agree in
particular that the textbook money multiplier model is an
oversimplification of the money supply process. As you point
out, the lag even in the current system of "contemporaneous"
reserve requirements implies that monetary policy cannot achieve
perfect short-run control over money or reserves. Indeed, as you
stress, in the short run the causation runs more from money (see
note below) to reserves than vice versa. However, the Federal
Reserve can control the composition of reserves between
non-borrowed and borrowed reserves fairly closely in the short
run. By varying this mix the Federal Reserve can influence the
federal funds rate and the other money market rates in the short
run and thereby affect growth of the money supply over a longer
period.
End quote
---------
"Money" means the total of checkable deposits and cash.
Experience in the 1980s demonstrated that Fed's targeting of the
money supply resulted in unacceptable volatility in the Fed funds
rate, without actually succeeding in controlling the growth rate
within what were rather broad targets.
Mark Patrick Witte
short run control of the monetary aggregates (or FFR either), the Fed can
control the money the money supply over longer periods. Wow, this guy was a
real whistle-blower!
In article <hemk9uk3lotlv18ig...@4ax.com>,
But it did succeed in its real goal, which was bringing down
inflation. It (thankfully) abandoned (partial) reserve targeting
and chose to go back rate targeting, since it couldn't do both, since they
are co-determined.
Mason Clark
> Astonishing revelations! Textbooks simplify, there is not perfect
>short run control of the monetary aggregates (or FFR either), the Fed can
>control the money the money supply over longer periods. Wow, this guy was a
>real whistle-blower!
>
Warren Mosler is much more than a "whistle-blower."
Mark Witte would do better to look before blowing.
An essay "Soft Currency Economics" is at:
http://www.warrenmosler.com/docs/docs/soft0004.htm
on Mosler's site:
While you're browsing, take a look at the Mosler MT900r:
http://www.fast-autos.net/mosler/moslermt900r.html
I'm not in full agreement with all of Warren Mosler's ideas
about economics but he poses a good question in his
Soft Currency Economics. (and I'd like to have had his
*real* knowledge of economics)
Mason C
William F Hummel
Patrick Witte) wrote:
> Astonishing revelations! Textbooks simplify, there is not perfect
>short run control of the monetary aggregates (or FFR either), the Fed can
>control the money the money supply over longer periods. Wow, this guy was a
>real whistle-blower!
>
Mr. Witte apparently isn't even embarrassed by ignoring the key
statement made in the letter, namely "in the short run the
causation runs more from money to reserves than vice versa",
which was the point at issue. Instead Mr Witte attempts to argue
his case, as he often does, by the use of ridicule and diversion.
In this instance he selects comments of secondary importance in
the letter to focus the readers attention away from a position he
cannot defend.
First, the Fed did not target reserves per se during the period
in question. It targeted the money aggregate M1, using its
control of reserves as the tool. Second, the inflation was
killed at the expense of double digit unemployment, at best a
mixed success. And finally the term "co-determined" is simply
economist jargon that says prices and quantify are functionally
related without saying anything about which is the control
variable and which is the independent variable. Mr. Witte has
been using the term as a smoke screen in an attempt to hide the
point at issue.
WFH
Mark Patrick Witte
Mason Clark <mas...@ix.netcom.com> wrote:
>On 22 Mar 2002 03:39:30 GMT, mwi...@merle.acns.nwu.edu (Mark Patrick Witte) wrote:
>
>> Astonishing revelations! Textbooks simplify, there is not perfect
>>short run control of the monetary aggregates (or FFR either), the Fed can
>>control the money the money supply over longer periods. Wow, this guy was a
>>real whistle-blower!
>>
>Warren Mosler is much more than a "whistle-blower."
>Mark Witte would do better to look before blowing.
Warren did not write that letter.
Mark Patrick Witte
William F Hummel <wfhu...@attbi.com> wrote:
>On 22 Mar 2002 03:39:30 GMT, mwi...@merle.acns.nwu.edu (Mark
>Patrick Witte) wrote:
>
>> Astonishing revelations! Textbooks simplify, there is not perfect
>>short run control of the monetary aggregates (or FFR either), the Fed can
>>control the money the money supply over longer periods. Wow, this guy was a
>>real whistle-blower!
>>
>Mr. Witte apparently isn't even embarrassed by ignoring the key
>statement made in the letter, namely "in the short run the
>causation runs more from money to reserves than vice versa",
>which was the point at issue.
Ah, I would like to thank Mr. Hummel for letting me know which of
Donald Kohn's words he considered the key ones. Since I'm not him, and lack
mindreading ability, I would not have known. In fact, to me, it looked like
a the sort of polite letter I often wrote in my days working in Washington
to constituents who wrote in with empassioned but not entirely worked out
thoughts about government policy. (I know such people who have this as part
of their duties at the Fed as well.) Without Mr. Hummel's insight, I would
have thought the letter was doing the classic, "But of course what you say
is right (to some degree), *however* the more important issue is that..."
In this case, the "however" falls right after the line cited by Mr. Hummel:
>>>However, the Federal Reserve can control the composition of
>>>reserves between non-borrowed and borrowed reserves fairly
>>>closely in the short run.
From a technical standpoint, there are supply and demand shocks to
the monetary system. From the standpoint of the monetary authority, demand
shocks are much more apt to be unanticipated under the current system than
are supply shocks (obviously). As such, unanticipated demand shocks are apt
to be small and are handled by automatic and very short term adjustments of
borrowed reserves, while supply shocks (or changes since folks at the Fed
these days don't really like it when their actions are described as shocks)
come from changing non-borrowed reserves. A simple inspection of the ratio
of non-borrowed to borrowed reserves (absent Continental Illinois type
effects) makes the relative importance of these two reserve types clear for
their roles in monetary policy.
>Instead Mr Witte attempts to argue
>his case, as he often does, by the use of ridicule and diversion.
>In this instance he selects comments of secondary importance in
>the letter to focus the readers attention away from a position he
>cannot defend.
Oh dear, first I am accused of not providing specific references in
a post where I have clearly included all the important citations and more,
now I am accused of diversion away from points that I cannot defend,
although I have repeatedly done so. The original post was a polite letter
from a guy at the Fed trying to patiently explain what the important issue
really is. I feel his pain.
Mason Clark
First Mark typed:
> Astonishing revelations! Textbooks simplify, there is not perfect
>short run control of the monetary aggregates (or FFR either), the Fed can
>control the money the money supply over longer periods. Wow, this guy was a
>real whistle-blower!
>
then he typed:
> The original post was a polite letter
>from a guy at the Fed trying to patiently explain what the important issue
>really is. I feel his pain.
Which is it Mark?
(I suspect you were thinking Warren Mosler as the "whistle-blower."
The insider at the Fed is not likely to be called such.)
Mason C (why are "economists" defensive?)
William F Hummel
Patrick Witte) wrote:
>In article <qihm9ugbt6ra4g1eh...@4ax.com>,
>William F Hummel <wfhu...@attbi.com> wrote:
>>On 22 Mar 2002 03:39:30 GMT, mwi...@merle.acns.nwu.edu (Mark
>>Patrick Witte) wrote:
>>
>>> Astonishing revelations! Textbooks simplify, there is not perfect
>>>short run control of the monetary aggregates (or FFR either), the Fed can
>>>control the money the money supply over longer periods. Wow, this guy was a
>>>real whistle-blower!
>>>
>>Mr. Witte apparently isn't even embarrassed by ignoring the key
>>statement made in the letter, namely "in the short run the
>>causation runs more from money to reserves than vice versa",
>>which was the point at issue.
>
> Ah, I would like to thank Mr. Hummel for letting me know which of
>Donald Kohn's words he considered the key ones. Since I'm not him, and lack
>mindreading ability, I would not have known.
Your welcome. Some need more help than others.
>In fact, to me, it looked like
>a the sort of polite letter I often wrote in my days working in Washington
>to constituents who wrote in with empassioned but not entirely worked out
>thoughts about government policy. (I know such people who have this as part
>of their duties at the Fed as well.)
Don't flatter yourself. For all I know you may be a star in
academia, but I doubt that Greenspan has ever heard of you.
Donald Kohn has had a distinguished career at the Fed. And you
claim he would be assigned a flunky job of the type you did at
the Fed. Checking Google, I found the following release by the
Fed BOG on Donald Kohn:
Quote
Release Date: June 11, 2001
For immediate release
The Federal Reserve Board today announced the appointments of
Donald Kohn as Advisor to the Board for Monetary Policy in the
Office of Board Members, Vincent Reinhart as Director of the
Division of Monetary Affairs and Brian Madigan as a Deputy
Director of the Division of Monetary Affairs, all effective July
2, 2001.
Mr. Kohn will continue as secretary of the Federal Open Market
Committee (FOMC), with responsibility for briefing the Committee
and for its announcements, minutes and transcripts. He holds a
Ph.D. from the University of Michigan and served as financial
economist for the Federal Reserve Bank of Kansas City before
joining the Board's staff in 1975. Mr. Kohn has been the Director
of the Division of Monetary Affairs since 1987 but is
relinquishing management of the division and will focus on issues
related to monetary policy.
Unquote
>Without Mr. Hummel's insight, I would
>have thought the letter was doing the classic, "But of course what you say
>is right (to some degree), *however* the more important issue is that..."
>In this case, the "however" falls right after the line cited by Mr. Hummel:
>
>>>>However, the Federal Reserve can control the composition of
>>>>reserves between non-borrowed and borrowed reserves fairly
>>>>closely in the short run.
The key words are those related to the question you asked in
another post:
"Where is "the Fed" on record with such a statement?"
The statement was:
"On the other hand if you are referring to all transaction money,
most of which is in the form of bank deposits, then even the Fed
will tell you it cannot exogenously change that supply."
And the answer is in the words I pointed to in the letter. It
really shouldn't require so much back and forth to answer your
question and put the matter to rest.
>
> From a technical standpoint, there are supply and demand shocks to
>the monetary system. From the standpoint of the monetary authority, demand
>shocks are much more apt to be unanticipated under the current system than
>are supply shocks (obviously). As such, unanticipated demand shocks are apt
>to be small and are handled by automatic and very short term adjustments of
>borrowed reserves, while supply shocks (or changes since folks at the Fed
>these days don't really like it when their actions are described as shocks)
>come from changing non-borrowed reserves. A simple inspection of the ratio
>of non-borrowed to borrowed reserves (absent Continental Illinois type
>effects) makes the relative importance of these two reserve types clear for
>their roles in monetary policy.
Much of what Mr. Witte said in the above paragraph is correct.
Unfortunately he also demonstrated how misinformed an economist
can be about monetary affairs when that is not his field. The
ratio of non-borrowed to borrowed reserves says nothing about
their relative importance as Mr. Witte asserts. The Fed must
keep the banking system short of non-borrowed reserves in order
to force some banks to borrow at the discount window. That's
necessary for the Fed to maintain control of the overnight
lending rate. But it doesn't take much borrowing at the window
to make that work. The Fed does not want to force banks to
borrow any more than necessary at the window. It should be
remembered that, in contrast to most other central banks, the Fed
does not pay interest on the reserve deposits of banks, which
puts US banks at a competitive disadvantage vis-a-vis most
foreign banks. Paying interest to the Fed in order to meet
reserve requirements would just compound that disadvantage.
>
>>Instead Mr Witte attempts to argue
>>his case, as he often does, by the use of ridicule and diversion.
>>In this instance he selects comments of secondary importance in
>>the letter to focus the readers attention away from a position he
>>cannot defend.
>
> Oh dear, first I am accused of not providing specific references in
>a post where I have clearly included all the important citations and more,
But I didn't see any footnotes.
>now I am accused of diversion away from points that I cannot defend,
>although I have repeatedly done so.
If you could defend them, there would have been no point in the
diversion.
>The original post was a polite letter
>from a guy at the Fed trying to patiently explain what the important issue
>really is. I feel his pain.
Yeah, a "polite" letter written by some "guy" at the Fed named
Donald Kohn. Sheesh!
WFH
Mark Patrick Witte
Mason Clark <mas...@ix.netcom.com> wrote:
>On 22 Mar 2002 16:53:21 GMT, mwi...@merle.acns.nwu.edu (Mark Patrick Witte) wrote:
>
>First Mark typed:
>
>> Astonishing revelations! Textbooks simplify, there is not perfect
>>short run control of the monetary aggregates (or FFR either), the Fed can
>>control the money the money supply over longer periods. Wow, this guy was a
>>real whistle-blower!
I hoped that my over-the-top presentation would indicate to readers
a certain degree of sarcasm. I was refering to specific elements in the
extensive quote from Donald Kohn, an employee of the Federal Reserve, who
wrote a letter that basically confirms the conventional wisdom about
monetary theory.
>then he typed:
>
>> The original post was a polite letter
>>from a guy at the Fed trying to patiently explain what the important issue
>>really is. I feel his pain.
Again, from Donald Kohn, an employee of the Federal Reserve, who
wrote a letter that basically confirms the conventional wisdom about
monetary theory.
>Which is it Mark?
Both refer to the remarks of Donald Kohn, an employee of the Federal
Reserve, who wrote a letter that basically confirms the conventional wisdom
about monetary theory.
>(I suspect you were thinking Warren Mosler as the "whistle-blower."
>The insider at the Fed is not likely to be called such.)
I have met Warren Mosler, but here I was refering to the
words of Donald Kohn, and employee of the Federal Reserve, who wrote
a letter that basically confirms the conventional wisdom about monetary
theory.
Mark Patrick Witte
We have met, and work from my research group at one point led him to
change his testimony before Congress.
>Donald Kohn has had a distinguished career at the Fed. And you
>claim he would be assigned a flunky job of the type you did at
>the Fed.
Ah, the unwarrented assumptions people make when they do not read
closely. My work at the Federal Reserve did not involve writing such
letters, and those who did were senior economists, ironically. Further, I
never worked for the Board, and I doubt that anyone at the Fed views the
letter writing public as "constituents."
(I should also add that the letters I wrote when I was in DC
often went out over a signature other than my own, often that of a
senior staff person; not that the person who received the letter would
know this, nor would anyone else who latter happened to see, and perhaps
post such a letter to some newgroup. On the other hand, many senior staff
people also wrote such letters, so it's just hard to say. Either way,
the letters were like this one, and generally expressed sympathy with the
other person's point of view and then outlined the conventional wisdom.
An exception to this comes to mind when a friend of mine wrote a line in
a letter that got through the vetting process, but then proved quite
quotable by someone who read it in a very well televised event.)
>Checking Google, I found the following release by the
>Fed BOG on Donald Kohn:
>
>Quote
>
>Release Date: June 11, 2001
>
>For immediate release
>
>The Federal Reserve Board today announced the appointments of
>Donald Kohn as Advisor to the Board for Monetary Policy in the
>Office of Board Members, Vincent Reinhart as Director of the
>Division of Monetary Affairs and Brian Madigan as a Deputy
>Director of the Division of Monetary Affairs, all effective July
>2, 2001.
>
>Mr. Kohn will continue as secretary of the Federal Open Market
>Committee (FOMC), with responsibility for briefing the Committee
>and for its announcements, minutes and transcripts. He holds a
>Ph.D. from the University of Michigan and served as financial
>economist for the Federal Reserve Bank of Kansas City before
>joining the Board's staff in 1975. Mr. Kohn has been the Director
>of the Division of Monetary Affairs since 1987 but is
>relinquishing management of the division and will focus on issues
>related to monetary policy.
>
>Unquote
I'm sure that Dr. Kohn is a fine economist and a valuable player in
US monetary policy. Based upon the single piece of his writing that I have
ever read, I certainly have no reason to doubt his understanding of the
monetary system (if only I could say this of the Chairman). However, I am
confused, does Mr. Hummel feel that Kohn is a closet radical monetary
theorist? Or that he holds to some true, secret wisdom, that those inside
the Board know about but don't share with their academic colleagues (and in
fact have brain-washed out of them when they leave the BOG)? (I am not
saying that the Fed does not have this power, I am just asking if Mr. Hummel
believes they use it in this fashion. And yes, it does involve a small
device like the one from Men in Black.)
>>Without Mr. Hummel's insight, I would
>>have thought the letter was doing the classic, "But of course what you say
>>is right (to some degree), *however* the more important issue is that..."
>>In this case, the "however" falls right after the line cited by Mr. Hummel:
>>
>>>>>However, the Federal Reserve can control the composition of
>>>>>reserves between non-borrowed and borrowed reserves fairly
>>>>>closely in the short run.
>
>The key words are those related to the question you asked in
>another post:
>
>"Where is "the Fed" on record with such a statement?"
>
>The statement was:
>
>"On the other hand if you are referring to all transaction money,
>most of which is in the form of bank deposits, then even the Fed
>will tell you it cannot exogenously change that supply."
>
>And the answer is in the words I pointed to in the letter. It
>really shouldn't require so much back and forth to answer your
>question and put the matter to rest.
In the words of famed central banker Donald Kohn:
"However, the Federal Reserve can control the composition of
reserves between non-borrowed and borrowed reserves fairly
closely in the short run." (And by implication, in the long run as well.)
Ah yes, what do I know about monetary affairs? It's
not as though I've ever studied the subject, known a central
banker, worked as a consultant for a private financial firm,
or been on the payroll of the Federal Reserve System. However,
I feel it is horridly credentialist for someone to point this out.
I would gladly defer to someone who truely is an expert in
monetary affairs, perhaps an Alan Blinder, or a Larry Christiano,
or...maybe Donald Kohn, who points out that the Fed is able to
control bank reserves in the short run.
Anyway this is a simple economic question. It is not
clear what it means to "keep the system" short of reserves since
there is a scarcity value to reserves that creates the interest
rate on lending them, thus it's not clear why the Fed must worry
about "maintaining control of the overnight lending rate." (If
it went out of control...what would happen? What does it even
mean for a rate to be out of control? If they really want it
to be under control, the Fed could make it like the discount
rate, a take it or leave it rate for interbank borrowing or lending.)
I really don't want to be unfair to Mr. Hummel. I understand
that he has spent some years now reading and thinking a lot about
these issues and is a smart guy, but I have a hard time interpreting
some of his remarks. Maybe it's him, quite honestly, maybe it's me.
Mr. Hummel is right that under the Fed's current operating
procedure, it prefers to supply reserves trough open market operations,
and at least partially for the reason he explain. (However, the Fed's main
concern with the discount window is that banks would want to borrow too
much, give that the discount rate is almost always below the FFR.)
So, while what Mr. Hummel says is basically true, it is also
irrelevant to how the Fed pursues its monetary policy goals. I'm afraid
that here Mr. Hummel is confusing tactics with strategy. As such, the Fed
trys to affect the economy by managing the Fed Funds Rate, which implies
that it has to control the stock of reserves since this stock and the FFR
are co-determined.
>>>Instead Mr Witte attempts to argue
>>>his case, as he often does, by the use of ridicule and diversion.
>>>In this instance he selects comments of secondary importance in
>>>the letter to focus the readers attention away from a position he
>>>cannot defend.
>>
>> Oh dear, first I am accused of not providing specific references in
>>a post where I have clearly included all the important citations and more,
>
>But I didn't see any footnotes.
Ah! Damn UNIX editors, dropping all my ibids and op cits!
Well, one more time then.
[Larry Christiano about Japan
http://minneapolisfed.org/research/qr/qr1322.html
"Stochastic Trends and Economic Fluctuations" by Robert G. King,
Charles I. Plosser, James H. Stock, Mark W. Watson,
from the The American Economic Review, Vol. 81, No. 4. (Sep., 1991)
"Trends and Random Walks in Macroeconmic (sic) Time Series: Some
Evidence and Implications" by Nelson and Plosser, Journal of
Monetary Economics, 1982.
Solow's 1956 QJE paper or his 1957 RE Stat paper
Charles I. Jones, _Introduction to Economic Growth_."
(Norton Press, 2nd edition, 2002).
Stock and Watson, The Journal of Economic Perspectives, Vol. 2, No.
3. (Summer, 1988), pp. 147-174
Christiano and Eichenbaum, 1989 NBER Working Paper w3130
Thomas Kuhn, 1962, _The Structure of Scientific Revolutions_
_Central Banking in Theory and Practice_, Alan S. Blinder,
MIT Press, 1999
Cagan, Journal of Money Credit and Banking, 1969]
(Hmm, that might make a good reading list for the next time I teach money
and banking.)
>>now I am accused of diversion away from points that I cannot defend,
>>although I have repeatedly done so.
>
>If you could defend them, there would have been no point in the
>diversion.
Yeah, but when someone pushes me on this whole "co-determined"
thing, I clearly just run off and start new threads.
>>The original post was a polite letter
>>from a guy at the Fed trying to patiently explain what the important issue
>>really is. I feel his pain.
>
>Yeah, a "polite" letter written by some "guy" at the Fed named
>Donald Kohn. Sheesh!
I hope that Mr. Hummel is not implying that Donald Kohn is ever not
polite, or that...heaven forbid!, that he is not a guy. I mean, I know
someone in the world of economics who was named Donald but who is not
currently a guy, but I did not know there was becoming a trend, not that
there's anything wrong with it, no, no.
>WFH
William F Hummel
Patrick Witte) wrote:
(some stuff deleted)
>In article <ed9n9u852nlbf2mo0...@4ax.com>,
>William F Hummel <wfhu...@attbi.com> wrote:
>>On 22 Mar 2002 16:53:21 GMT, mwi...@merle.acns.nwu.edu (Mark
>>Patrick Witte) wrote:
>>
> I'm sure that Dr. Kohn is a fine economist and a valuable player in
>US monetary policy. Based upon the single piece of his writing that I have
>ever read, I certainly have no reason to doubt his understanding of the
>monetary system (if only I could say this of the Chairman). However, I am
>confused, does Mr. Hummel feel that Kohn is a closet radical monetary
>theorist? Or that he holds to some true, secret wisdom, that those inside
>the Board know about but don't share with their academic colleagues (and in
>fact have brain-washed out of them when they leave the BOG)? (I am not
>saying that the Fed does not have this power, I am just asking if Mr. Hummel
>believes they use it in this fashion. And yes, it does involve a small
>device like the one from Men in Black.)
Since I can't make any sense of this rambling discourse, I'd best
just pass the chance.
>
>>The key words are those related to the question you asked in
>>another post:
>>
>>"Where is "the Fed" on record with such a statement?"
>>
>>The statement was:
>>
>>"On the other hand if you are referring to all transaction money,
>>most of which is in the form of bank deposits, then even the Fed
>>will tell you it cannot exogenously change that supply."
>>
>>And the answer is in the words I pointed to in the letter. It
>>really shouldn't require so much back and forth to answer your
>>question and put the matter to rest.
>
> In the words of famed central banker Donald Kohn:
>
>"However, the Federal Reserve can control the composition of
>reserves between non-borrowed and borrowed reserves fairly
>closely in the short run." (And by implication, in the long run as well.)
>
Here Mr. Witte shows his confusion about the matter under
discussion. He has switched the focus from controlling the total
of reserves to controlling the composition of reserves. I
shouldn't have to remind him that these are two entirely
different types of challenges. The Fed can fairly easily control
the composition between borrowed and non-borrowed reserves, but
has it no control over the total of reserves for the reasons I've
outlined in some detail.
>>>
>>Much of what Mr. Witte said in the above paragraph is correct.
>>Unfortunately he also demonstrated how misinformed an economist
>>can be about monetary affairs when that is not his field. The
>>ratio of non-borrowed to borrowed reserves says nothing about
>>their relative importance as Mr. Witte asserts. The Fed must
>>keep the banking system short of non-borrowed reserves in order
>>to force some banks to borrow at the discount window. That's
>>necessary for the Fed to maintain control of the overnight
>>lending rate. But it doesn't take much borrowing at the window
>>to make that work. The Fed does not want to force banks to
>>borrow any more than necessary at the window. It should be
>>remembered that, in contrast to most other central banks, the Fed
>>does not pay interest on the reserve deposits of banks, which
>>puts US banks at a competitive disadvantage vis-a-vis most
>>foreign banks. Paying interest to the Fed in order to meet
>>reserve requirements would just compound that disadvantage.
>
> Ah yes, what do I know about monetary affairs? It's
>not as though I've ever studied the subject, known a central
>banker, worked as a consultant for a private financial firm,
>or been on the payroll of the Federal Reserve System.
None of which guarantees that you fully understand the system.
>However,
>I feel it is horridly credentialist for someone to point this out.
>I would gladly defer to someone who truely is an expert in
>monetary affairs, perhaps an Alan Blinder, or a Larry Christiano,
>
Don't feel bad. But credentials, even for very bright people,
are no guarantee of expertise. I don't know about Christiano,
but I am convinced that Blinder has his blind spots in regard to
monetary affairs. Surprisingly one doesn't necessarily develop a
deep understanding of the monetary system by working at the Fed.
>or...maybe Donald Kohn, who points out that the Fed is able to
>control bank reserves in the short run.
Not true at all. Kohn did not point out that the Fed is able to
control bank reserves in the short run. Here is what he said:
"Indeed, as you stress, in the short run the causation runs more
from money (see note below) to reserves than vice versa.
However, the Federal Reserve can control the composition of
reserves between non-borrowed and borrowed reserves fairly
closely in the short run. By varying this mix the Federal
Reserve can influence the federal funds rate and the other money
market rates in the short run and thereby affect growth of the
money supply over a longer period."
Note that he was talking about the composition of reserves, not
the total quantity of reserves, a distinction Mr. Witte failed to
grasp. Further, he used the qualifying term "fairly closely"
which Mr. Witte omitted. Two errors on one play will usually get
a guy replaced on the team. As noted above, the Fed can control
the composition. It cannot control the total.
>
> Anyway this is a simple economic question. It is not
>clear what it means to "keep the system" short of reserves
Again more reading confusion on Mr. Witte's part. The Fed does
not keep the system short of reserves. Quite the contrary. It
must supply whatever reserves banks need to meet their reserve
ratio requirement on checkable deposits.
The Fed does keep the system short of _unborrowed_ reserves for
the reason I mentioned earlier, namely to force some banks to the
discount window. This is a necessary part of controlling the
average interbank lending rate.
>since
>there is a scarcity value to reserves that creates the interest
>rate on lending them, thus it's not clear why the Fed must worry
>about "maintaining control of the overnight lending rate." (If
>it went out of control...what would happen? What does it even
>mean for a rate to be out of control?
The Fed funds rate was out of control during the early 1980s.
The resulting high volatility together with the high average Fed
funds rate was very difficult for the business community to deal
with. Neither the Fed nor the business community wants a repeat
of that.
>If they really want it
>to be under control, the Fed could make it like the discount
>rate, a take it or leave it rate for interbank borrowing or lending.)
You better believe they want the Fed funds rate under control.
And they use some sophisticated algorithms to assist in their OMO
to keep it there. It doesn't have to be smack on target, but it
is important to the whole financial world to have confidence that
the Fed will keep the overnight rate on the target that it has
announced. If it strays too far, it can suggest an unannounced
change in the funds rate. In 1992 the Fed pulled a surprise
increase of just .25% that stunned the bond market.
>
> I really don't want to be unfair to Mr. Hummel. I understand
>that he has spent some years now reading and thinking a lot about
>these issues and is a smart guy, but I have a hard time interpreting
>some of his remarks. Maybe it's him, quite honestly, maybe it's me.
>
> Mr. Hummel is right that under the Fed's current operating
>procedure, it prefers to supply reserves trough open market operations,
>and at least partially for the reason he explain. (However, the Fed's main
>concern with the discount window is that banks would want to borrow too
>much, give that the discount rate is almost always below the FFR.)
The Fed does not allow banks to borrow from the discount window
in order to lend at a profit. Further, the Fed has made it clear
to banks that borrowing from the discount window is not looked
upon favorably because it implies poor management. For this
reason, even though the discount rate is typically about 50 basis
point cheaper than the Fed funds target rate, banks themselves
are reluctant to borrow from the Fed unless the interbank lending
rate is simply too steep for them. This means there is a sloping
demand curve for Fed loans which the Fed has calibrated and can
use to control the composition of reserves (borrowed vs
unborrowed) which will hold the average interbank lending rate
close to target.
> So, while what Mr. Hummel says is basically true, it is also
>irrelevant to how the Fed pursues its monetary policy goals. I'm afraid
>that here Mr. Hummel is confusing tactics with strategy. As such, the Fed
>trys to affect the economy by managing the Fed Funds Rate, which implies
>that it has to control the stock of reserves since this stock and the FFR
>are co-determined.
There's that buzzword "co-determined" again, saying nothing but
sounding profound. Mr. Hummel is well aware of the distinction
between the art of controlling the Fed funds rate and the reason
for doing so at some particular rate. Surprisingly Mr. Witte
continues to misunderstand some of the key aspects of the
monetary system. The Fed has only one monetary policy tool, and
that is control of the Fed funds rate. Unless Mr. Witte can
overcome the notion that the Fed has to control (or can control)
the stock of banking system reserves it will be an albatross
around his neck. It will prevent him or anyone else interested
from an in depth understanding how and why the monetary system
works the way it does.
>
>>>The original post was a polite letter
>>>from a guy at the Fed trying to patiently explain what the important issue
>>>really is. I feel his pain.
>>
>>Yeah, a "polite" letter written by some "guy" at the Fed named
>>Donald Kohn. Sheesh!
>
> I hope that Mr. Hummel is not implying that Donald Kohn is ever not
>polite, or that...heaven forbid!, that he is not a guy. I mean, I know
>someone in the world of economics who was named Donald but who is not
>currently a guy, but I did not know there was becoming a trend, not that
>there's anything wrong with it, no, no.
I have little doubt that Donald Kohn understands the system in
depth and that he was pulling his punches in his response to
Mosler. Why? Because it avoids putting him on the spot. It
would upset the vast majority of economists, including many at
the Fed, who just can't swallow the notion that Fed cannot
control either the money supply or the reserves backing that
supply, except quite indirectly and with a long time lag.
WFH
Robert Vienneau
"I would be interested to see an example of an economic trend
based purely on theory that has been validated empirically."
Mark Witte replied in some vague way:
"Well, take a look at Solow's work..."
Later he clarified he meant:
"Solow's 1956 QJE paper or his 1957 RE Stat paper..."
The complete reference for the latter paper is:
R. M. Solow, "Technical Change and the Aggregate Production Function".
Review of Economics and Statistics. August 1957.
Now Solow has written:
"The factor-share device of my 1957 article is in no sense a TEST
of aggregate production functions or marginal productivity or of
anything else. It merely shows how one goes about interpreting
given time series if one starts by ASSUMING that they were
generated from a production function and that the competitive
marginal-product relations apply."
-- R. M. Solow, "Laws of Production and Laws of Algebra: The
Humbug Production Function: A Comment". V. 56, 1. Feb. 1974,
p. 121.
Somewhat confusingly, Solow (1957) contains correlation coefficients.
So it seems Solow (1957) does not empirically validate anything.
I don't know if the other references Mr. Witte gave address Franklin
Fisher's simulation results or contrast the empirical strength of
Solow's theory with competing theories (e.g., Kaldor's).
Does Solow (1957) provide an economic trend based purely on theory?
Well, Samuelson has described this work as like that of a "busman
on holiday who operates brilliantly and without inhibitions in the
rough-and-ready realm of empirical heuristics". (This is in a paper
trying to provide some theoretical rationalization for Solow's
results; Samuelson later dropped this paper's defense.) And Hahn
has written:
"...Suppose that in fact there is a number C (a measure of
capital) defined by
C = C(R, xbar )
[where R is the rate of interest and xbar is a vector of endowments;
notation simplified.] If now we treat as given C and xbar then we
shall have one equation too many, since the information is equivalent
to being told R...
Lastly, suppose that we are given C and nothing else. Then the
investment savings equation can be written as
Z(R, C) = 0
which now, since C is fixed, is one equation in one unknown. The
condition that the ...market [for endowments] also clears and the
definition
C = pbar( R ) . xbar
[where pbar( R ) is a vector of prices and . is the inner product]
then give us what the amount of [endowments]...would have to be in
order to have a consistent story...The problem is the sense to be
made of C being given from the outside.
...In general, there does not exist a function from the vector of
endowments to the scalar such that knowledge of the scalar (and of
preferences and of technology) is sufficient to allow one to
determine a neoclassical equilibrium. If you put it the other way
round, it is even more obvious. In general, the neoclassical
equilibrium can be found given the vector of endowments which may
have, say, 10^8 components. It would be surprising if there were
a single number which gives the same information as the 10^8
dimensional vector. In fact, sometimes and in very special cases,
this surprising property holds. But neoclassical economists have
shown these special cases to be without interest."
-- Frank Hahn
So Mr. Witte seems to be citing a description of an economic trend that
is not based purely on theory and that does not seem to have been
empirically validated. At least, that is how the pure-reviewed
literature, including more recent references (e.g., by Burmeister)
characterizes the work in his citation. I don't know why Mr. Witte
disagrees. Mayhaps he read William as asking for a heuristic,
empirically unvalidated and theoretically unlikely, useful in
interpretingand summarizing empirical data.
--
Try http://csf.colorado.edu/pkt/pktauthors/Vienneau.Robert/Bukharin.html
To solve Linear Programs: .../LPSolver.html
r c A game: .../Keynes.html
v s a Whether strength of body or of mind, or wisdom, or
i m p virtue, are found in proportion to the power or wealth
e a e of a man is a question fit perhaps to be discussed by
n e . slaves in the hearing of their masters, but highly
@ r c m unbecoming to reasonable and free men in search of
d o the truth. -- Rousseau
George
>The Fed can fairly easily control
the composition between borrowed and non-borrowed reserves, but
has it no control over the total of reserves for the reasons I've
outlined in some detail.>
Could one of you guys when you have nothing else to do, explain "borrowed
reserves"? Banks keep reserves so they do not not have a run they can't handle.
If banks borrow reserves isn't this kinda circumventing the purpose of
reserves. If a bank doesn't have enough reserves, that's bad. Just curious.
William F Hummel
Borrowed reserves are those funds obtained on loan from the Fed,
which of course must be repaid at some point. The Fed charges
interest (at the so-called discount rate) on those loans.
Non-borrowed reserves are those funds that flow to banks as
customers deposit the proceeds they receive from the Fed when it
purchases securities (mainly Treasury securities) from the
public. This comprises 90% to 95% of total reserves.
Banks borrow all the time and from many sources, not simply from
the Fed. Large banks borrow enormous amounts in the money market
to support their own lending. However only those funds obtained
from the Fed (borrowed or unborrowed) can increase the aggregate
reserves of the banking system. All other borrowing just shifts
ownership of reserves from one bank to another. So when banks in
the aggregate are faced with a shortage of reserves to meet their
reserve ratio requirements, one or more banks will have to borrow
from the Fed. And the Fed has no real choice but to grant the
loan.
For more detail, see http://wfhummel.cnchost.com/moneybasics.html
and http://wfhummel.cnchost.com/bankreserves.html
WFH
Grinch
>wfhummel wrote in part:
>
>>The Fed can fairly easily control
>the composition between borrowed and non-borrowed reserves, but
>has it no control over the total of reserves for the reasons I've
>outlined in some detail.>
>
>Could one of you guys when you have nothing else to do, explain "borrowed
>reserves"? Banks keep reserves so they do not not have a run they can't handle.
No, deposit insurance exists to prevent/handle bank runs.
Reserve requirements are a tool of monetary policy.
E.g., see http://www.ny.frb.org/pihome/fedpoint/fed45.html
>If banks borrow reserves isn't this kinda circumventing the purpose of
>reserves. If a bank doesn't have enough reserves, that's bad. Just curious.
Since that's not the purpose of the reserve requirement, it's not a
problem.
Remember, banks must keep required reserves on hand or on deposit at
the Fed -- so they aren't available to pay depositors in event of a
bank run. After all, they can't be on hand or on deposit at the Fed
and be being paid out at the same time.
Simplistic example: A bank takes $100 of deposits and after applying
the current 10% reserve requirement loans out $90, leaving it with $10
of reserves on hand. Now there is a "mini bank run" during which
depositors withdraw $5 -- only 5% of deposits but 50% of the reserves.
That leaves the bank with too little in reserves. But it can borrow
some to make up the shortfall (and avoid having to call in loans to do
so instead) until it attracts some more deposits or reduces its loans
outstanding as they mature without calling any in, as explained in the
various "Fed Points".
Grinch
<wfhu...@attbi.com> wrote:
>On 23 Mar 2002 19:28:33 GMT, gchan...@aol.com (George) wrote:
>
>>wfhummel wrote in part:
>>
>>>The Fed can fairly easily control
>>the composition between borrowed and non-borrowed reserves, but
>>has it no control over the total of reserves for the reasons I've
>>outlined in some detail.>
>>
>>Could one of you guys when you have nothing else to do, explain "borrowed
>>reserves"? Banks keep reserves so they do not not have a run they can't handle.
>>If banks borrow reserves isn't this kinda circumventing the purpose of
>>reserves. If a bank doesn't have enough reserves, that's bad. Just curious.
>
>Borrowed reserves are those funds obtained on loan from the Fed,
>which of course must be repaid at some point. The Fed charges
>interest (at the so-called discount rate) on those loans.
Borrowed reserves more typically are borrowed from other banks,
financial institutions, government agencies, securities dealers, etc.,
through the federal funds market, with fed funds rate being the price
of such borrowing.
Reserves borrowed in the fed funds market can be used to support
for-profit lending, while those borrowed from the discount window
can't be -- one very practical reason why banks prefer to borrow
reserves in the fed funds market, even though the discount window
usually charges a lower interest rate, so borrowing from the discount
window usually remains slight.
>Non-borrowed reserves are those funds that flow to banks as
>customers deposit the proceeds they receive from the Fed when it
>purchases securities (mainly Treasury securities) from the
>public. This comprises 90% to 95% of total reserves.
>
>Banks borrow all the time and from many sources, not simply from
>the Fed. Large banks borrow enormous amounts in the money market
>to support their own lending. However only those funds obtained
>from the Fed (borrowed or unborrowed) can increase the aggregate
>reserves of the banking system. All other borrowing just shifts
>ownership of reserves from one bank to another. So when banks in
>the aggregate are faced with a shortage of reserves to meet their
>reserve ratio requirements, one or more banks will have to borrow
>from the Fed. And the Fed has no real choice but to grant the
>loan.
It seems the Fed must have the real choice to say "no" to loan
requests at the discount window, and must usually be expected to.
Otherwise, being that the discount rate is usually lower than the fed
funds rate, banks that are short of reserves would be lined up to
borrow at the discount window instead of in the fed funds market.
Even if "aggregate" reserves were deemed too low, this would be
reflected in the fed funds rate being "too high" and the typical
response by the Fed would be to choose to increase aggregate reserves
through open market operations rather than make loans upon request at
the discount window.
The Fed generally sets rather restrictive conditions for loans made
through the discount window, which is why there are so few of them.
But it has on particular occasions, such as after 9/11 and for Y2k,
announced the easing of these conditions to make it easier for banks
to borrow at the window for limited periods of time -- something which
wouldn't make much sense if it had no real choice but to grant the
loan requests to begin with.
See
http://www.ny.frb.org/pihome/fedpoint/fed15.html and
http://www.ny.frb.org/pihome/fedpoint/fed18.html
William F Hummel
<oldn...@mindspring.com> wrote:
>On Sat, 23 Mar 2002 20:50:17 GMT, William F Hummel
><wfhu...@attbi.com> wrote:
>
>>On 23 Mar 2002 19:28:33 GMT, gchan...@aol.com (George) wrote:
>>
>>>wfhummel wrote in part:
>>>
>>>>The Fed can fairly easily control
>>>the composition between borrowed and non-borrowed reserves, but
>>>has it no control over the total of reserves for the reasons I've
>>>outlined in some detail.>
>>>
>>>Could one of you guys when you have nothing else to do, explain "borrowed
>>>reserves"? Banks keep reserves so they do not not have a run they can't handle.
>>>If banks borrow reserves isn't this kinda circumventing the purpose of
>>>reserves. If a bank doesn't have enough reserves, that's bad. Just curious.
>>
>>Borrowed reserves are those funds obtained on loan from the Fed,
>>which of course must be repaid at some point. The Fed charges
>>interest (at the so-called discount rate) on those loans.
>
>Borrowed reserves more typically are borrowed from other banks,
>financial institutions, government agencies, securities dealers, etc.,
>through the federal funds market, with fed funds rate being the price
>of such borrowing.
Not true. The term "borrowed reserves" refers specifically to
funds borrowed from the Fed, not from other financial
institutions. The reason for this distinction is that borrowing
from the Fed increases the aggregate reserves, while borrowing in
the Fed funds market does not. Borrowing in the Fed funds market
is merely a temporary transfer between banks of the ownership of
existing reserves on deposit at the Fed. They are part of the
non-borrowed component of reserves.
>
>Reserves borrowed in the fed funds market can be used to support
>for-profit lending, while those borrowed from the discount window
>can't be -- one very practical reason why banks prefer to borrow
>reserves in the fed funds market, even though the discount window
>usually charges a lower interest rate, so borrowing from the discount
>window usually remains slight.
The Fed does not allow banks to borrow from the discount window
in order to lend at a profit, but it normally relies on the bank
to honor that rule. The Fed has made it clear to banks that
borrowing from the discount window is not looked upon favorably
because it suggests poor management. It's referred to as the
"frown cost" of borrowing from the Fed. For that reason, even
though the discount rate is typically about 50 basis point
cheaper than the Fed funds target rate, banks are reluctant to
borrow from the Fed unless the interbank lending rate is simply
too steep for them. This means there is a sloping demand curve
for Fed loans which the Fed has calibrated and can use to control
the composition of reserves (borrowed vs unborrowed) which will
hold the average interbank lending rate close to target. It's a
strange system with none other like it, but it works.
>
>>Non-borrowed reserves are those funds that flow to banks as
>>customers deposit the proceeds they receive from the Fed when it
>>purchases securities (mainly Treasury securities) from the
>>public. This comprises 90% to 95% of total reserves.
>>
>>Banks borrow all the time and from many sources, not simply from
>>the Fed. Large banks borrow enormous amounts in the money market
>>to support their own lending. However only those funds obtained
>>from the Fed (borrowed or unborrowed) can increase the aggregate
>>reserves of the banking system. All other borrowing just shifts
>>ownership of reserves from one bank to another. So when banks in
>>the aggregate are faced with a shortage of reserves to meet their
>>reserve ratio requirements, one or more banks will have to borrow
>>from the Fed. And the Fed has no real choice but to grant the
>>loan.
>
>It seems the Fed must have the real choice to say "no" to loan
>requests at the discount window, and must usually be expected to.
>Otherwise, being that the discount rate is usually lower than the fed
>funds rate, banks that are short of reserves would be lined up to
>borrow at the discount window instead of in the fed funds market.
The Fed expects banks to exhaust other borrowing options before
coming to the discount window for a loan. A bank that comes too
often will be "frowned upon" and likely denied access to the
window. That could force the bank to sell securities or pay a
much higher rate in the money market to acquire the needed
reserves. That's the main reason why banks don't line up at the
window. However if they have no other source for meeting their
reserve requirements they will have to request a loan from the
Fed. The Fed will almost always grant the loan, but at a penalty
above the Fed funds rate.
>
>Even if "aggregate" reserves were deemed too low, this would be
>reflected in the fed funds rate being "too high" and the typical
>response by the Fed would be to choose to increase aggregate reserves
>through open market operations rather than make loans upon request at
>the discount window.
True. Except that banks in need of reserves usually do not come
to the window until near the end of the two weeks maintenance
period on which their average reserves are counted. That can
leave inadequate time for the funds market to redistribute
reserves. Under those conditions the Fed will normally grant the
loan, and possibly at a penalty rate.
>
>The Fed generally sets rather restrictive conditions for loans made
>through the discount window, which is why there are so few of them.
>But it has on particular occasions, such as after 9/11 and for Y2k,
>announced the easing of these conditions to make it easier for banks
>to borrow at the window for limited periods of time -- something which
>wouldn't make much sense if it had no real choice but to grant the
>loan requests to begin with.
Except for seasonal demand in some banks like those serving the
farming business, the Fed allows healthy banks to borrow only for
the purpose of covering a short term reserve deficiency that
could not be covered by borrowing elsewhere.
WFH
Grinch
<wfhu...@attbi.com> wrote:
I was addressing George's question, which was about, to the best of my
understanding, the situation where "a bank" borrows reserves.
To wit:
~~
"Banks keep reserves so they do not have a run they can't handle. If
banks borrow reserves isn't this kinda circumventing the purpose of
reserves? If a bank doesn't have enough reserves, that's bad. Just
curious."
~~
Note: "If a bank..." The perspective discussed is that of individual
banks.
Banks borrow reserves from each other. Most reserves that are
borrowed are borrowed in this manner. The fed funds rate is the
interest rate on these borrowed reserves, and it is commonly referred
to as such. Without even doing a google search I could cite several
examples of fed funds being referred to by the term "borrowed
reserves" just from my files. [1]
Now, from the perspective of the banking system as a whole, you are
of course correct. Fed funds in the aggregate represent no borrowed
reserves since what is borrowed is also lent after being first
deposited.
So when discussing the banking system in aggregate, the terminology
"borrowed reserves" refers as you say to discount window borrowing,
and other reserves are "non-borrowed" even if in fact they are
borrowed from the owner through the fed funds market.
But that was not what I was talking about, since, to the best of my
admittedly sometimes faulty understanding, George was asking about the
borrowed reserves of a bank, not of the banking system in aggregate.
So it seems the Fed can say "no"at the discount window, and expects
banks that can anticipate that response not to ask.
Well, there had to be some reason for banks that need to borrow
reserves not to go there to get the lower interest rate.
>>>Non-borrowed reserves are those funds that flow to banks as
>>>customers deposit the proceeds they receive from the Fed when it
>>>purchases securities (mainly Treasury securities) from the
>>>public. This comprises 90% to 95% of total reserves.
>>>
>>>Banks borrow all the time and from many sources, not simply from
>>>the Fed. Large banks borrow enormous amounts in the money market
>>>to support their own lending. However only those funds obtained
>>>from the Fed (borrowed or unborrowed) can increase the aggregate
>>>reserves of the banking system. All other borrowing just shifts
>>>ownership of reserves from one bank to another. So when banks in
>>>the aggregate are faced with a shortage of reserves to meet their
>>>reserve ratio requirements, one or more banks will have to borrow
>>>from the Fed. And the Fed has no real choice but to grant the
>>>loan.
>>
>>It seems the Fed must have the real choice to say "no" to loan
>>requests at the discount window, and must usually be expected to.
>>Otherwise, being that the discount rate is usually lower than the fed
>>funds rate, banks that are short of reserves would be lined up to
>>borrow at the discount window instead of in the fed funds market.
>
>The Fed expects banks to exhaust other borrowing options before
>coming to the discount window for a loan. A bank that comes too
>often will be "frowned upon" and likely denied access to the
>window.
It will hear "No." That would seem to be proof that the Fed does in
fact have a real choice but to grant the loan.
>That could force the bank to sell securities or pay a
>much higher rate in the money market to acquire the needed
>reserves. That's the main reason why banks don't line up at the
>window.
A whole lot of anticipated "Nos".
Yes, the Fed will readily grant loans at the discount window to any
bank that meets all the conditions that it sets for obtaining such a
loan, as discussed in Fed Point 18, linked to previously.
>WFH
[1] E.g.:
"The interest rate that is paid on these borrowed reserves is called
the federal funds rate."
http://www.clev.frb.org/research/com2001/1001.htm
That's a Fed publication.
and...
"The interest rate charged on the borrowed reserves is called the
federal funds rate.
"Today, the federal funds market is much larger than before.
Commercial banks, particularly large ones, borrow these funds for any
shortage of their required reserves...."
http://www.biz.uiowa.edu/iem/assignments/fedpolicyandIEM1.doc
So it depends on what one is talking about: The system in aggregate,
for which fed funds aren't borrowed at all; or the individual banks
that borrow them from other institutions to make up a shortage of
required reserves, for which they certainly are "borrowed reserves."
Mark Patrick Witte
With Robert Vienneau, things always seem to go poorly when he tries to
get involved with issues concerning support in the data for models. And
also, it's usually the case that what he edits out is far more revealing
than what he leaves in. Under these rules, this post is a two-for!
In article <rvien-B1302F....@news.dreamscape.com>,
Robert Vienneau <rv...@see.sig.com> wrote:
>William Hummel wrote:
>
> "I would be interested to see an example of an economic trend
> based purely on theory that has been validated empirically."
The discussion was one that began over issues in macroeconomics
that were not directly related to money/financial matters, with long run
growth models being suggested as an example of such. Hmm...what would
be an example of a model that might relate to such a thing an would
predict a trend, and one where there is some emprical validation? Gosh, who
has done research like that? Maybe...Solow!
>Mark Witte replied in some vague way:
>
> "Well, take a look at Solow's work..."
Ah, observe a classic Vienneau edit! So crisp, but what does it
leave out? What exactly did I say in reply to these words from Mr. Hummel?
W| "Well, take a look at Solow's work...or the paper I recommended
W| by Christiano." A nice place to read about empirical tests of Solow
W| is Charles I. Jones's book _Introduction to Economic Growth_.
Thus we see a classic example of Mr. Vienneau's approach to honest
debate on sci.econ.
I put Jones's book as a serious recommendation for (post DeLong)
empirical support for the Solow approach. I agree that Solow's papers
themselves are not themselves the place to go for empirical support of this
methodology, and so favor Jones's exceptionally readable book.
As such, the following comments are on par for relevancy with Mr.
Vienneau's usual inputs on empirical matters of theoretical models finding
support in observed features of the real world.
Mark Patrick Witte
else who posts on this thread and has left a number of questions I posed to
him unanswered. I'll try to answer his while recalling some of my previous
points, and be brief to the limits of my small ability on that score.
* Does Mr. Hummel think that Dr. Donald Kohn is a fellow traveler
who is keeping his maverick views on monetary policy a secret from his peers
there, as indicated in the letter Mr. Hummel has posted on this group? Or
perhaps was Dr. Kohn saying something that is quite tame and in accord with
standard monetary theory? When he says that the Fed "can control the
composition of reserves between non-borrowed and borrowed reserves
fairly closely in the short run", it seems to me that he is saying that the
Fed closely controls this ratio because it controls both borrowed (small)
and non-borrowed (large, and tightly controlled via OMOs) reserves. We
don't know exactly what remark Kohn was responding to from Mr. Mosler, so
we're left with an Occam's Razor matter here, and the simplest reading is
that Kohn is saying that the Fed controls the level of borrowed reserves
well in the short run. Perhaps when Mr. Hummel gets around to citing the
textbooks that he finds so in error, I suppose starting with anything by
Alan Blinder, he can also put up some pages from published Fed documents
that support his claim, rather than a possibly misread passage from a
letter that was in response to something unclear. Or perhaps Mr. Hummel
would like to clarify matters with a more in-depth letter of his own to
Dr. Kohn where he gets the Fed's official view on whether interest rates
and the monetary base are co-determined.
* Does Mr. Hummel agree that the Federal reserve has made a
conscious policy *choice* to manage the Fed Funds Rate and it could instead
*choose* to manage reserves? I suspect that everyone on sci.econ (with one
possible exception) agrees that this is a good policy, but it is a policy
choice, not a law of nature.
* Does Mr. Hummel agree that if A + B = 10, and if we choose A to
be 7, then B must be 3? That is, having chosen A, we are left with a
Hobson's choice for B? And if we were instead to choose B first, then we
would have also at that moment limited our choice for A to a single number?
That is, that A and B are co-determined in the specified relationship?
And now, I shall do my part:
>Please answer a simple question. Let's assume banks issue loans
>this month well in excess of the aggregate reserves required to
>back them. (It can happen.) Assume also the FFR target has been
>selected previously and is required to be accurately met by the
>NYFRB. Tell me how your static model of X and Y are consistent
>with this imbalance, or what happens to restore equilibrium.
As taught in Introductory Macroeconomics, since the Fed has
chosen to target the FFR, it will adjust the amount of reserves in
the system, either through expansionary OMOs, or through increased discount
lending. However, if the Fed where to instead target reserves, then
it would be the FFR that would bear the brunt of the adjustment, since these
variables are co-determined. However, in the real world, in either case,
the Fed would allow both variables to adjust to meet the demand shock for
reserves; that is, the FFR displays volitility around its target range and
the stock of private sector bank reserves has an elasticity that is
certainly not zero since the amount of bank reserves is less than 10% of the
available monetary base.
In article <8e2o9u0dni6q8s6hm...@4ax.com>,
Mason Clark
I would be interested to see an example of an economic trend
based purely on theory that has been validated empirically.
And especially if it will predict the value of GE stock.
Robert Vienneau
> Long time fans of sci.econ know to watch for certain things.
> With Robert Vienneau, things always seem to go poorly when he tries to
> get involved with issues concerning support in the data for models.
Ad hominem.
> And
> also, it's usually the case that what he edits out is far more revealing
> than what he leaves in. Under these rules, this post is a two-for!
Ad hominem.
> In article <rvien-B1302F....@news.dreamscape.com>,
> Robert Vienneau <rv...@see.sig.com> wrote:
> >William Hummel wrote:
> > "I would be interested to see an example of an economic trend
> > based purely on theory that has been validated empirically."
> The discussion was one that began over issues in macroeconomics
> that were not directly related to money/financial matters, with long run
> growth models being suggested as an example of such. Hmm...what would
> be an example of a model that might relate to such a thing an would
> predict a trend, and one where there is some emprical validation? Gosh,
> who has done research like that? Maybe...Solow!
I assume my readers have a memory.
> >Mark Witte replied in some vague way:
> > "Well, take a look at Solow's work..."
> Ah, observe a classic Vienneau edit! So crisp, but what does it
> leave out? What exactly did I say in reply to these words from Mr.
> Hummel?
> W| "Well, take a look at Solow's work...or the paper I recommended
> W| by Christiano." A nice place to read about empirical tests of Solow
> W| is Charles I. Jones's book _Introduction to Economic Growth_.
I've never been able to obtain:
Sylos Labini, Paolo. 1995. "Why the Interpretation of the Cobb-Douglas
Production Function Must be Radically Changed". Structural Change and
Economic Dynamics, 6: 485-504.
Sylos Labini, Paolo. 1988. "The Great Debates on the Laws of Return
and the Value of Capital: When will Economists Finally Accept Their
Own Logic?". BNL Quarterly Review, September.
"The reality is that estimations of aggregate production functions
tend to yield poor results. For example, a standard finding for the
Cobb-Douglas with a linear time trend is a negative elasticity of
capital. See Sylos Labini (1995)..."
"At the empirical level, and contrary to widespread belief,
production functions, when estimated econometrically, tend to yield,
in general, poor results, a point made recently by Sylos-Labini
(1995) discussing estimations with the Cobb-Douglas function."
-- Jesus Felipe and Franklin M. Fisher, "Aggregation in Production
Functions: What Applied Economists Should Know". September 19,
2001. (Available somewhere on the 'net.)
I think this paper asserts that Mr. Witte is "simply and plainly wrong".
> Thus we see a classic example of Mr. Vienneau's approach to honest
> debate on sci.econ.
Ad hominem.
> I put Jones's book as a serious recommendation for (post DeLong)
> empirical support for the Solow approach. I AGREE that Solow's papers
> themselves are not themselves the place to go for empirical support of
> this
> methodology, and so favor Jones's exceptionally readable book.
(emphasis added.) Failed attempts to find a theoretical justification
for Solow's models are to be found elsewhere than the two papers
Mr. Witte cites.
> As such, the following comments are on par for relevancy with Mr.
> Vienneau's usual inputs on empirical matters of theoretical models
> finding
> support in observed features of the real world.
Ad hominem.
In the post Mr. Witte is pretending to comment on, I wrote:
"I don't know if the other references Mr. Witte gave address Franklin
Fisher's simulation results or contrast the empirical strength of
Solow's theory with competing theories (e.g., Kaldor's)."
So obviously, I acknowledged that Mr. Witte gave other references.
The ad hominems constituting almost the entirety of Mr. Witte's
comments seem to be based on a strawperson.
Does Mr. Witte address the point that Solow's model is more of
an heuristic, than "an economic trend based purely on theory"?
Does he explain why he disagrees with Samuelson's characterization
of this work as like that of a "busman on holiday who operates
brilliantly and without inhibitions in the rough-and-ready realm of
empirical heuristics"? No.
Does he clarify whether the literature he recommends addresses the
difficulties that past researchers, such as Franklin Fisher, have
found with some work that could be read as an attempt to validate
Solow's model? No.
Does he clarify whether the literature he recommends compares and
contrasts the ability of Solow's model to explain the data with
the ability of other approaches to explain the data? No.
I guess all the ad hominems Mr. Witte produces are to distract
from the fact he has nothing substantial to say, other than to
agree with my point that those particular classic Solow papers
do not contain empirical validation.
Given the silliness in Mr. Witte's post, it is extremely odd that
he should feel justified in making any comments about others'
"approach to honest debate on sci.econ".
--
William F Hummel
Patrick Witte) wrote:
> Mr. Hummel seems to have borrowed the aggressive editor from someone
>else who posts on this thread and has left a number of questions I posed to
>him unanswered. I'll try to answer his while recalling some of my previous
>points, and be brief to the limits of my small ability on that score.
>
> * Does Mr. Hummel think that Dr. Donald Kohn is a fellow traveler
etc. etc.
Mr. Witte does love to ramble on. I've already stated my views
on the letter from Kohn and have no intention of belaboring the
issue. Answering a series of mostly rhetorical questions adds
nothing to this discussion.
>
> * Does Mr. Hummel agree that the Federal reserve has made a
>conscious policy *choice* to manage the Fed Funds Rate and it could instead
>*choose* to manage reserves? I suspect that everyone on sci.econ (with one
>possible exception) agrees that this is a good policy, but it is a policy
>choice, not a law of nature.
If Mr. Witte understood some of my earlier remarks about the
Fed's actions in the early 1980s, he would not have asked this
question. At least I would hope that's true.
>
> * Does Mr. Hummel agree that if A + B = 10, and if we choose A to
>be 7, then B must be 3? That is, having chosen A, we are left with a
>Hobson's choice for B? And if we were instead to choose B first, then we
>would have also at that moment limited our choice for A to a single number?
>That is, that A and B are co-determined in the specified relationship?
Of course, but this trivial example bears no relation to the
question of whether the Fed can simultaneously control the Fed
funds rate and the total amount of reserves as Mr. Witte has
claimed, based on his reading of introductory macro textbooks.
In fact it should be apparent that the two monetary variables are
not dimensionally additive. I'll have more to say about how the
Fed manages to control the overnight funds rate at another time.
>
> And now, I shall do my part:
>
>>Please answer a simple question. Let's assume banks issue loans
>>this month well in excess of the aggregate reserves required to
>>back them. (It can happen.) Assume also the FFR target has been
>>selected previously and is required to be accurately met by the
>>NYFRB. Tell me how your static model of X and Y are consistent
>>with this imbalance, or what happens to restore equilibrium.
>
> As taught in Introductory Macroeconomics, since the Fed has
>chosen to target the FFR, it will adjust the amount of reserves in
>the system, either through expansionary OMOs, or through increased discount
>lending. However, if the Fed where to instead target reserves, then
>it would be the FFR that would bear the brunt of the adjustment, since these
>variables are co-determined. However, in the real world, in either case,
>the Fed would allow both variables to adjust to meet the demand shock for
>reserves; that is, the FFR displays volitility around its target range and
>the stock of private sector bank reserves has an elasticity that is
>certainly not zero since the amount of bank reserves is less than 10% of the
>available monetary base.
Mr. Witte says that according to his reading of introductory
macroeconomics, the Fed controls either the FFR or reserves and
lets the other one adjust. [I would note here that is an example
of a control variable and a dependent variable.] Then he
modifies this by saying in the real world both variables adjust
together to meet the demand shock for reserves, although he
doesn't acknowledge that one is the target variable and the other
is a "don't care" variable. Apparently what is most important to
him is that this must be seen as "co-determination".
Now it is true that the Fed uses its control of reserves to steer
the Fed funds rate to its target value, a procedure I have
described in some detail on sci.econ. But if that is the whole
point, it is hardly worth the time and effort to say it. That's
a case of not seeing the forest for the trees. Or to put it more
directly, one cannot acquire a real understanding of how our
monetary system works without seeing the bigger relationships.
WFH
susupply
"Robert Vienneau" <rv...@see.sig.com>
The Conscience of sci.econ,
wrote in message news:rvien-993721....@news.dreamscape.com...
> Mark Patrick Witte is being silly:
BECAUSE:
> > Long time fans of sci.econ know to watch for certain things.
> > With Robert Vienneau, things always seem to go poorly when he tries to
> > get involved with issues concerning support in the data for models.
>
> Ad hominem.
Which may break the J.M. Ivler record for; Self-Unawareness in the 60 Meter
Dash.
Of course, Vienneau is incorrect that the above from Prof. Witte is an "ad
hominem". Nor is he correct in the following:
> > And
> > also, it's usually the case that what he edits out is far more revealing
> > than what he leaves in. Under these rules, this post is a two-for!
>
> Ad hominem.
Accurate descriptions of a poster's practices, when apposite, are not ad
hominems. The truth can legitimately be used, even if it stings.
[snip]
> I assume my readers have a memory.
Well, that doesn't explain Hummel's inability to remember from one paragraph
to the next what he's saying. In fact, most of your fans operate in a
similar manner.
But, I'm sure Prof. Witte remembers other times when you've said similar to
the following:
> I've never been able to obtain:
>
> Sylos Labini, Paolo. 1995. "Why the Interpretation of the Cobb-Douglas
> Production Function Must be Radically Changed". Structural Change and
> Economic Dynamics, 6: 485-504.
Which makes MPW's:
> > Thus we see a classic example of Mr. Vienneau's approach to honest
> > debate on sci.econ.
>
> Ad hominem.
Not the immediately above charge, but an accurate description of Mr.
Vienneau's approach.
But speaking of economists who DO rely almost exclusively on ad hominem, how
about those Two Daffy Aussies, Robert is so fond of?
Who said:
> "WHY THE PUBLIC NEEDS TO KNOW THAT ECONOMICS IS INTELLECTUALLY UNSOUND."
and:
> "Virtually every aspect of conventional economic theory is intellectually
> unsound; virtually every economic policy recommendation is just as likely
to
> do general harm as it is to lead to the general good. Far from holding the
> intellectual high ground, economics rests on foundations of quicksand. If
> economics were truly a science, then the dominant school of thought in
> economics would long ago have disappeared from view."
Then there was his sidekick, John Legge, just today chirping in with:
> Dr Kates is in the interesting position of being on two horses at once.
> When his members are the targets of some of the more bloody-minded
industry
> regulators and competition czars I am sure that Dr Kates will fully
support
> the debunking of such lords of their private dunheaps. When he is called
> upon to support deregulation of the labour market he would like to believe
> that, in spite of the odd lacunae, the neoclassical arguments for
> deregulation are logically sound.
>
> If economics can be brought back to earth and treated as a tool kit with
> which to analyse specific problems and propose appropriate solutions it
will
> be less in need of debunking. The world suffers enough from rigid
> ideologies and their practitioners, and would continue to do so if
economics
> was debunked out of existence. At the moment mainstream economics is part
> of the global problem, not a contributor to its solution,
I'm sure Robert just hasn't gotten around the Hayek-L yet, and his rebuke
will shortly be posted.
Patrick
Mark Patrick Witte
William Hummel wrote:
H| "I would be interested to see an example of an economic
H| trend based purely on theory that has been validated
H| empirically"
Following up on earlier remarks in this exchange, I replied with:
W| "Well, take a look at Solow's work...or the paper I
W| recommended by Christiano." A nice place to read about
W| empirical tests of Solow is Charles I. Jones's book
W| _Introduction to Economic Growth_.
Robert Vienneau then entered the fray by editing my
response down to just the first seven words and then
claiming that I had not answered Mr. Hummel since
Solow's original papers we essentially work of theory
and contained little in the way of empirical support.
The key to my response was the citation of the book by
Charles Jones that summarizes a number of empirical
results that are supportive of Solow's model.
When this deceit of Mr. Vienneau's was laid bare, he
tries to hide is dishonesty by citing other papers on the
topic. There are two typically sad and strange Vienneau
aspects to this move.
1) Occasionally Robert Vienneau adopts the pretense
that he has read Thomas Kuhn's most famous book and to have
understood at least some parts important parts of what Kuhn
was trying to communicate. This is yet another striking
disproof of at least the latter part of such contentions.
In any research endeavor, there will be counter evidence
and neither Jones nor I nor anyone serious about this topic
would consider the matter settled. My citation of Jones
and his recent work should not be considered as closing the
book on the questions but was just what I said it was,
empirical support for Solow's theoretical growth work.
2) Mr. Vienneau's continuing citation of things he has
never read in support of his case, based solely upon the
title. Is the paper any good? Does it truly matter for
the question at hand? Who would know? Certainly not Mr.
Vienneau who has never read it. Do any of the papers he
cites, if he has read them or not, present alternative
empirical implementations that do a better job of
explaining the observed world than does the Solow approach?
If not, if they are just whining about alternative assumption
sets that have no superior support from data from the real world,
then consider this aspect of the thread ended.
In article <rvien-993721....@news.dreamscape.com>,
Mark Patrick Witte
>Patrick Witte) wrote:
>
>> Mr. Hummel seems to have borrowed the aggressive editor from someone
>>else who posts on this thread and has left a number of questions I posed to
>>him unanswered. I'll try to answer his while recalling some of my previous
>>points, and be brief to the limits of my small ability on that score.
>>
>> * Does Mr. Hummel think that Dr. Donald Kohn is a fellow traveler
>etc. etc.
>
>Mr. Witte does love to ramble on. I've already stated my views
>on the letter from Kohn and have no intention of belaboring the
>issue. Answering a series of mostly rhetorical questions adds
>nothing to this discussion.
Cut to the chase: Do you think that Dr. Donald Kohn has a view of
how monetary policy works that is at odds with that of economists such as
Alan Blinder and Rich Mishkin? If so, is your who castle built upon the
sand of part of a letter from Kohn to Mosler?
>> * Does Mr. Hummel agree that the Federal reserve has made a
>>conscious policy *choice* to manage the Fed Funds Rate and it could instead
>>*choose* to manage reserves? I suspect that everyone on sci.econ (with one
>>possible exception) agrees that this is a good policy, but it is a policy
>>choice, not a law of nature.
>
>If Mr. Witte understood some of my earlier remarks about the
>Fed's actions in the early 1980s, he would not have asked this
>question. At least I would hope that's true.
I would hope that you would answer the question. Is the Feds
targeting the FFR a policy *choice* it has chosen? Could it (perhaps
imprudently) make a different policy *choice*?
>> * Does Mr. Hummel agree that if A + B = 10, and if we choose A to
>>be 7, then B must be 3? That is, having chosen A, we are left with a
>>Hobson's choice for B? And if we were instead to choose B first, then we
>>would have also at that moment limited our choice for A to a single number?
>>That is, that A and B are co-determined in the specified relationship?
>
>Of course, but this trivial example bears no relation to the
>question of whether the Fed can simultaneously control the Fed
>funds rate and the total amount of reserves as Mr. Witte has
>claimed, based on his reading of introductory macro textbooks.
>In fact it should be apparent that the two monetary variables are
>not dimensionally additive. I'll have more to say about how the
>Fed manages to control the overnight funds rate at another time.
It should be apparent that this is not an example of a monetary
model, but rather the simplest example of a co-determined relationship
available. And it begs the question Mr. Hummel raises, can the Fed
simultaneously and and independently control both rates and reserves?
Can it? (Hint: No, because these are co-determined.)
>> And now, I shall do my part:
>>
>>>Please answer a simple question. Let's assume banks issue loans
>>>this month well in excess of the aggregate reserves required to
>>>back them. (It can happen.) Assume also the FFR target has been
>>>selected previously and is required to be accurately met by the
>>>NYFRB. Tell me how your static model of X and Y are consistent
>>>with this imbalance, or what happens to restore equilibrium.
>>
>> As taught in Introductory Macroeconomics, since the Fed has
>>chosen to target the FFR, it will adjust the amount of reserves in
>>the system, either through expansionary OMOs, or through increased discount
>>lending. However, if the Fed where to instead target reserves, then
>>it would be the FFR that would bear the brunt of the adjustment, since these
>>variables are co-determined. However, in the real world, in either case,
>>the Fed would allow both variables to adjust to meet the demand shock for
>>reserves; that is, the FFR displays volitility around its target range and
>>the stock of private sector bank reserves has an elasticity that is
>>certainly not zero since the amount of bank reserves is less than 10% of the
>>available monetary base.
>
>Mr. Witte says that according to his reading of introductory
>macroeconomics, the Fed controls either the FFR or reserves and
>lets the other one adjust. [I would note here that is an example
>of a control variable and a dependent variable.] Then he
>modifies this by saying in the real world both variables adjust
Jeez, it it really so hard? Right now, the Fed would choose to
allow both variables to move to handle the shock, but in a co-determined
manner. The rates and the stock of reserves are not independent.
>together to meet the demand shock for reserves, although he
>doesn't acknowledge that one is the target variable and the other
>is a "don't care" variable. Apparently what is most important to
>him is that this must be seen as "co-determination".
No, the most important thing here is that they actually *are*
co-determined.
>Now it is true that the Fed uses its control of reserves to steer
>the Fed funds rate to its target value, a procedure I have
>described in some detail on sci.econ. But if that is the whole
>point, it is hardly worth the time and effort to say it. That's
>a case of not seeing the forest for the trees.
Indeed! The forest versus trees saying has been in my mind from the
beginning of this.
>Or to put it more
>directly, one cannot acquire a real understanding of how our
>monetary system works without seeing the bigger relationships.
Indeed! One cannot understand monetary policy, unless one realizes
the "bigger relationship" that the FFR and monetary base are co-determined,
as explained by myself, Blinder, and a host of others. The choice the
Fed correctly makes to target the FFR and adjust reserves accordingly is the
result of this relationship, and the choice in the past by the Fed and in
other nations to chose a policy of targeting reserves would leave the
adjustment to fall more heavily upon interest rates is a similar result of
this co-determination relationship.
So, is it agreed, that the FFR and monetary base are co-determined,
that if the Fed choses one, it then has no choice about the other?
Mr. Hummel suggests that "it is hardly worth the time and effort to
say it", but as I will explain in my next post, his earlier remarks make it
clear, this over-long debate was necessary.
>
>WFH
Robert Vienneau
> William Hummel wrote:
>
> H| "I would be interested to see an example of an economic
> H| trend based purely on theory that has been validated
> H| empirically"
>
> Following up on earlier remarks in this exchange, I replied with:
>
> W| "Well, take a look at Solow's work...or the paper I
> W| recommended by Christiano." A nice place to read about
> W| empirical tests of Solow is Charles I. Jones's book
> W| _Introduction to Economic Growth_.
>
> Robert Vienneau then entered the fray by editing my
> response down to just the first seven words and then
> claiming that I had not answered Mr. Hummel since
> Solow's original papers we essentially work of theory
> and contained little in the way of empirical support.
Saying that I claimed Solow's original papers were "essentially
work of theory" is, of course, to make an untrue statement. Solow's
original papers interpret empirical data, but contain little in the
way of theory, as I have explained repeatedly. Does Witte explain why
he disagrees with Samuelson's characterization of this work as like
that of a "busman on holiday who operates brilliantly and without
inhibitions in the rough-and-ready realm of empirical heuristics"? Does
Witte explain why he disagrees with Solow:
"I have never thought of the macroeconomic production function
as a rigorous justifiable concept. In my mind, it is either an
illuminating parable, or else a mere device for handling data, to
be used so long as it gives good empirical results, and to be
abandoned as soon as it doesn t, or as soon as something better
comes along."
-- Robert Solow, as quoted by Felipe and Fisher
<http://growthconf.ec.unipi.it/papers/Felipe.pdf>
(Section 10 of this paper is a summary of the main conclusions and
lessons. I like the metaphor that Witte and his ilk cannot bring
mermaids into existence merely by insisting on studying them.)
Witte, of course, does not answer these questions. Nor will
he address Felipe and Fisher:
"Aggregate production functions do not have a sound theoretical
foundation. For practical purposes this means that while generating
GDP, for example, as the sum of the components of aggregate demand
(or through the production or income sides of the economy) is
correct, generating and thinking of GDP as GDP=F(K,L), where K and
L are aggregates of capital and labor, respectively, is incorrect.
And thinking of aggregate investment as a well-defined addition to
capital in production is a mistake. The paper evaluates the standard
reasons given by economists for continuing to use aggregate production
functions in theoretical and applied work, and concludes that none of
them provides a valid argument."
-- Felipe and Fisher, 2001.
So I don't why Witte cites a heuristic for decomposing the
rate of growth as a "trend based purely on theory". I can see that
he seems to think that he can make a point by continuing to
misrepresent the opinion of others.
> The key to my response was the citation of the book by
> Charles Jones that summarizes a number of empirical
> results that are supportive of Solow's model.
I had written:
I don't know if the other references Mr. Witte gave address Franklin
Fisher's simulation results or contrast the empirical strength of
Solow's theory with competing theories (e.g., Kaldor's).
I still don't. I do know that Mr. Witte, for reasons that only can
be clear to himself, thinks raising these question about the
references he cites (other than Solow's) deceitful:
> When this deceit of Mr. Vienneau's was laid bare, he
> tries to hide is dishonesty by citing other papers on the
> topic.
And on and on and still on with boring and ignorant ad hominem.
I still don't know if Witte can cite any work that shows Solow's
approach to growth theory is empirically better than the
alternatives. Or, even, if the work Witte cites is just a matter
of estimating accounting identities. (That's rather the point of
Fisher's simulations and work by, e.g., McCombie, extending
Fisher's results.)
William F Hummel
Patrick Witte) wrote:
>In article <jh0s9u0sdfv4qlmfs...@4ax.com>,
>William F Hummel <wfhu...@attbi.com> wrote:
>>On 24 Mar 2002 05:26:56 GMT, mwi...@merle.acns.nwu.edu (Mark
>>Patrick Witte) wrote:
>>
>>> Mr. Hummel seems to have borrowed the aggressive editor from someone
>>>else who posts on this thread and has left a number of questions I posed to
>>>him unanswered. I'll try to answer his while recalling some of my previous
>>>points, and be brief to the limits of my small ability on that score.
>>>
>>> * Does Mr. Hummel think that Dr. Donald Kohn is a fellow traveler
>>etc. etc.
>>
>>Mr. Witte does love to ramble on. I've already stated my views
>>on the letter from Kohn and have no intention of belaboring the
>>issue. Answering a series of mostly rhetorical questions adds
>>nothing to this discussion.
>
> Cut to the chase: Do you think that Dr. Donald Kohn has a view of
>how monetary policy works that is at odds with that of economists such as
>Alan Blinder and Rich Mishkin?
Ambiguous question. How monetary policy works on the economy or
how monetary policy is implemented? If either case, the answer
is yes. I have never encountered any two people, economists or
otherwise, who fully agree on how the monetary system works.
Also I would guess Kohn knows far more about it than Blinder.
Kohn has been a specialist in the field for his whole career.
Sure, Blinder spent a year or so on the BOG, but it takes more
time than that to become an expert.
>If so, is your who castle built upon the
>sand of part of a letter from Kohn to Mosler?
Presumptuous question. No
>
>>> * Does Mr. Hummel agree that the Federal reserve has made a
>>>conscious policy *choice* to manage the Fed Funds Rate and it could instead
>>>*choose* to manage reserves? I suspect that everyone on sci.econ (with one
>>>possible exception) agrees that this is a good policy, but it is a policy
>>>choice, not a law of nature.
>>
>>If Mr. Witte understood some of my earlier remarks about the
>>Fed's actions in the early 1980s, he would not have asked this
>>question. At least I would hope that's true.
>
> I would hope that you would answer the question. Is the Feds
>targeting the FFR a policy *choice* it has chosen?
Of course. Fed monetary management methods have gone through
many variations over the years as the financial scene in the US
have evolved, particularly with the end of caps on interest
rates. An excellent review of this can be found in Marcia
Stigum's "Money Market", 3rd Edition. For at least the last 12
years, the Fed has tightly pegged the FFR, and it has explicitly
announced its target FFR since 1995. In the Fed's history you
won't find a longer period where the implementation has been
virtually unchanged.
>Could it (perhaps
>imprudently) make a different policy *choice*?
Yes, if by policy choice you mean its implementation. But the
current system of pegging the FFR works well, and in my opinion
it is a better choice than any of the systems the Fed has
previously tried.
>
>>> * Does Mr. Hummel agree that if A + B = 10, and if we choose A to
>>>be 7, then B must be 3? That is, having chosen A, we are left with a
>>>Hobson's choice for B? And if we were instead to choose B first, then we
>>>would have also at that moment limited our choice for A to a single number?
>>>That is, that A and B are co-determined in the specified relationship?
>>
>>Of course, but this trivial example bears no relation to the
>>question of whether the Fed can simultaneously control the Fed
>>funds rate and the total amount of reserves as Mr. Witte has
>>claimed, based on his reading of introductory macro textbooks.
>>In fact it should be apparent that the two monetary variables are
>>not dimensionally additive. I'll have more to say about how the
>>Fed manages to control the overnight funds rate at another time.
>
> It should be apparent that this is not an example of a monetary
>model, but rather the simplest example of a co-determined relationship
>available. And it begs the question Mr. Hummel raises, can the Fed
>simultaneously and and independently control both rates and reserves?
>Can it? (Hint: No, because these are co-determined.)
Then you agree that the quantity of reserves is a residual of the
pegging of the FFR?
Never said they were. When y = f(x), then x and y are obviously
not independent. Yet when x is taken as the independent variable
then y is the dependent variable. Call them co-determined if you
are determined to do so.
>
>>together to meet the demand shock for reserves, although he
>>doesn't acknowledge that one is the target variable and the other
>>is a "don't care" variable. Apparently what is most important to
>>him is that this must be seen as "co-determination".
>
> No, the most important thing here is that they actually *are*
>co-determined.
Ah yes, it's really very important to recognize that they are
co-determined. That really helps to see the big picture, right?
>
>>Now it is true that the Fed uses its control of reserves to steer
>>the Fed funds rate to its target value, a procedure I have
>>described in some detail on sci.econ. But if that is the whole
>>point, it is hardly worth the time and effort to say it. That's
>>a case of not seeing the forest for the trees.
>
> Indeed! The forest versus trees saying has been in my mind from the
>beginning of this.
Maybe you need to take aspirin.
>
>>Or to put it more
>>directly, one cannot acquire a real understanding of how our
>>monetary system works without seeing the bigger relationships.
>
> Indeed! One cannot understand monetary policy, unless one realizes
>the "bigger relationship" that the FFR and monetary base are co-determined,
>as explained by myself, Blinder, and a host of others.
Including the authors of introductory macro textbooks?
>The choice the
>Fed correctly makes to target the FFR and adjust reserves accordingly is the
>result of this relationship, and the choice in the past by the Fed and in
>other nations to chose a policy of targeting reserves would leave the
>adjustment to fall more heavily upon interest rates is a similar result of
>this co-determination relationship.
So the policy decision to target the FFR is the result of the
"co-determination" relationship? Hardly. It's because the FFR
is important in the macroeconomic sense, while reserves are at
least one order of magnitude down on that scale. Very few firms,
even banks, know (or care) what the total quantity of reserves
are, but they sure respond to changes in the FFR.
I can't understand why you insist on making so much of the fact
that the FFR and reserves are functionally related. You can't
change one without affecting the other, but so what? The
important point is that the Fed currently treats the FFR as the
target variable and the reserves as a "don't care" variable.
That is, the Fed doesn't really care what quantity of reserves it
must provide to peg the FFR at a chosen target. In that sense
reserves are the residual variable.
>
> So, is it agreed, that the FFR and monetary base are co-determined,
>that if the Fed choses one, it then has no choice about the other?
Absolutely not. The monetary base includes cash held by the
public, most of which is overseas according to the Fed. The
monetary base is an order of magnitude larger than the reserves ,
but it is the latter that banks respond to in bidding on fed
funds. Furthermore the FFR is a function of several variables,
not just aggregate reserves.
>
> Mr. Hummel suggests that "it is hardly worth the time and effort to
>say it", but as I will explain in my next post, his earlier remarks make it
>clear, this over-long debate was necessary.
>
Necessary for whom? Anyhow, don't forget to cite a lot of
references, and be sure to add footnotes. It won't sell if it
doesn't look authoritative.
WFH
Mark Patrick Witte
In his last post he wrote:
H| Now it is true that the Fed uses its control of
H| reserves to steer the Fed funds rate to its target
H| value, a procedure I have described in some detail on
H| sci.econ. But if that is the whole point, it is hardly
H| worth the time and effort to say it. That's a case of
H| not seeing the forest for the trees. Or to put it more
H| directly, one cannot acquire a real understanding of how
H| our monetary system works without seeing the bigger
H| relationships.
This begs two types of questions:
1) Why might it be "worth the time and effort to say it?"
Why? Because William Hummel has been using this point
for years as a proof of where much of the field of economics
gets something that he feels is important fundamentally wrong.
2) Who is "seeing the bigger relationships?"
Is it economists such as Friedman, Blinder, Christiano, Mishkin,
and the like? Or is it William Hummel? Are interest rates and
monetary reserves co-determined as Tinbergen explained in 1952
or does the Fed lack any control over reserves because it *must*
manage the interest rate?
How does what Mr. Hummel says above differ from
anything that I've said in these threads, or differ from the
piece by Alan Blinder that Mr. Hummel holds up as a signal
of basic misunderstanding by an well known economist?
http://groups.google.com/groups?q=Blinder+instrument+group:sci.econ+author:Hummel&hl=en&selm=cbdn9uorb06vmqmj3jq47iimojckrch4vt%404ax.com&rnum=1
(Blinder is "incorrect in some respects", but what can we expect? He was
only at the Fed for a couple of years, so how much could he really have
learned about monetary policy? What? People are chosen for Fed jobs based
upon their previous related accomplishments? Oh, then never mind.)
How does Mr. Hummel's statement differ from what is taught in those
terrible economics textbooks that he so derides (but never references)?
"When the demand curve for money shifts outward, the Fed
must tolerate a rise in interest rates, a rise in the money stock,
or both. It simply cannot control *both* the supply of money
*and* the interest rate. If it tries to keep M steady, then r will rise
sharply. Conversely, if it tries to stabilize r, then M will shoot up."
(Emphasis from the original, p. 286 of _Macroeconomics:
Principles and Policy_, Baumol and Blinder, 1999.)
Why does all this matter? It matters because Mr. Hummel's
misunderstanding of the operating choices of monetary authorities has
led him to believe and repeatedly state that central banks cannot
increase the supply of reserves in the system. It has led him to badly
mis-read Phillip Cagan. It has led him to disparage macroeconomists
in general because they don't share his misperception and so in his
eyes must lack a basic clue as to how the real world works.
It's a slightly subtle point, but one that has led Mr. Hummel into
some serious misunderstanding. It's a good thing that the Fed targets the
FFR, but it doesn't have to do so, and even targeting the FFR can lead to
problems if it's done at the wrong level, thus causing too much growth of
the monetary aggregates and resulting rising inflation.
In article <ptet9u0j31clicsa5...@4ax.com>,
William F Hummel <wfhu...@attbi.com> wrote:
>On 25 Mar 2002 02:54:39 GMT, mwi...@merle.acns.nwu.edu (Mark
>Patrick Witte) wrote:
>>
>> Cut to the chase: Do you think that Dr. Donald Kohn has a view of
>>how monetary policy works that is at odds with that of economists such as
>>Alan Blinder and Rick Mishkin?
>
>Ambiguous question. How monetary policy works on the economy or
>how monetary policy is implemented? If either case, the answer
>is yes. I have never encountered any two people, economists or
>otherwise, who fully agree on how the monetary system works.
Dodge attempt unsuccessful. Blinder and Mishkin may differ slightly in
their views on monetary policy; would you say that Kohn differs to a much
larger extent from these two guys than they differ from each other? And do
you base your answer from that single paragraph from a letter that was
responding to points unclear?
>Also I would guess Kohn knows far more about it than Blinder.
>Kohn has been a specialist in the field for his whole career.
>Sure, Blinder spent a year or so on the BOG, but it takes more
>time than that to become an expert.
Indeed, imagine Blinder's surprise when he hatched out of his egg
and found himself the Fed Vice-Chairman. Maybe it would have been better if
they had chosen someone who had spent his life studying and researching
monetary and macroeconomic issues and finding original insights into the
function of policy.
>>>> * Does Mr. Hummel agree that the Federal reserve has made a
>>>>conscious policy *choice* to manage the Fed Funds Rate and it could instead
>>>>*choose* to manage reserves? I suspect that everyone on sci.econ (with one
>>>>possible exception) agrees that this is a good policy, but it is a policy
>>>>choice, not a law of nature.
>>>
>>>If Mr. Witte understood some of my earlier remarks about the
>>>Fed's actions in the early 1980s, he would not have asked this
>>>question. At least I would hope that's true.
>>
>> I would hope that you would answer the question. Is the Feds
>>targeting the FFR a policy *choice* it has chosen?
>
>Of course. Fed monetary management methods have gone through
Yes! Yes! Yes!
>Stigum's "Money Market", 3rd Edition. For at least the last 12
Ah, a woman with great NU econ ties.
>>Could it (perhaps
>>imprudently) make a different policy *choice*?
>
>Yes, if by policy choice you mean its implementation. But the
By policy choice, I mean one of targeting reserves or some
aggregate, rather than the choice of targeting the interest
rate. I would hope that might become obvious after a hundred
repetitions or so.
>> It should be apparent that this is not an example of a monetary
>>model, but rather the simplest example of a co-determined relationship
>>available. And it begs the question Mr. Hummel raises, can the Fed
>>simultaneously and and independently control both rates and reserves?
>>Can it? (Hint: No, because these are co-determined.)
>
>Then you agree that the quantity of reserves is a residual of the
>pegging of the FFR?
As with the quote from Baumol and Blinder above, the two variables are
co-determined so that whichever one is chosen as the target relegates the
the other to do residual adjustment. Do a websearch on Google groups,
you'll find I've been saying just this for years.
Well, what exactly were you saying all these years?
(Oct 5 1998)
H| In the big picture, there is no question that the money supply
H| is endogenous and the Fed funds rate is exogenous.
(Dec 11, 2000)
H| The Fed cannot target the monetary base. The demand for
H| currency by the public must be met by the Fed.
(September 8, 2001)
H| There were and still are plenty of economists who have swallowed
H| his [Friedman's] views on the neutrality of money vis-a-vis the
H| real economy and the causal relation between money and inflation.
(March 19, 2002)
H| And for one who worked a spell at the Federal Reserve,
H| Mr. Witte seems unaware of the endogeneity of the base money
H| supply. His view on the cause of inflation is also surprising.
(March 19, 2002)
H| Not only is a causal relation impossible to show empirically,
H| but in this case it ignores the fact that the money supply is
H| endogenous.
(March 19, 2002)
H| Thus it makes little sense to assert that money growth is the
H| _cause_ of inflation, or even of hyperinflation.
(March 20, 2002)
H| The amount of fresh bank
H| lending responds (among other things) to the Fed funds
H| rate as expressed in bank lending rates.
H| I see nothing co-determined in that.
(March 20, 2002)
H| Yes, I meant Cagan. So you still conclude that
H| hyperinflations are CAUSED by printing too much money?
(March 21, 2002)
H| The notion that price and quantity of banking system
H| reserves are both controlled (co-determined?) by the
H| Fed is absurd.
(March 21, 2002)
H| Large banks often create more deposits through lending
H| than they have reserves for, and seek the reserves after
H| the fact. If this causes a shortage of aggregate reserves
H| in the banking system, the Fed must increase the supply
H| of reserves, typically through short term purchase
H| agreements with dealers, collateralized by Treasury
H| securities. The FOMC selects a target Fed funds rate,
H| and the NYFRB open market desk acts through its
H| OMO to hold Fed funds rate on target.
(March 21, 2002)
H| The Fed can only control the Fed funds rate.
(March 24, 2002)
(W| So, is it agreed, that the FFR and monetary base are co-determined,
that if the Fed choses one, it then has no choice about the other?)
H| Absolutely not.
With many of these quotes, broader context helps, but clearly
there is the suggestion that the dependence must run from quantities
to rates. However the Fed can chose to target either and so the
dependence is a choice, not a result of theory.
>>>together to meet the demand shock for reserves, although he
>>>doesn't acknowledge that one is the target variable and the other
>>>is a "don't care" variable. Apparently what is most important to
>>>him is that this must be seen as "co-determination".
>>
>> No, the most important thing here is that they actually *are*
>>co-determined.
>
>Ah yes, it's really very important to recognize that they are
>co-determined. That really helps to see the big picture, right?
Evidently. If one recognizes this, then the writings of Friedman,
Blinder, and Cagan make a lot of sense.
>> Indeed! One cannot understand monetary policy, unless one realizes
>>the "bigger relationship" that the FFR and monetary base are co-determined,
>>as explained by myself, Blinder, and a host of others.
>
>Including the authors of introductory macro textbooks?
Or all the non-intermediate books I listed before. Speaking of
lists of textbooks, where is yours of all the ones with terrible
inaccuracies in them?
>>The choice the
>>Fed correctly makes to target the FFR and adjust reserves accordingly is the
>>result of this relationship, and the choice in the past by the Fed and in
>>other nations to chose a policy of targeting reserves would leave the
>>adjustment to fall more heavily upon interest rates is a similar result of
>>this co-determination relationship.
>
>So the policy decision to target the FFR is the result of the
>"co-determination" relationship? Hardly.
Right, that is hardly what I said. Following Tinbergen, the decision of
monetary authories to target interest rates and support this target by
adjusting reserves is because of this co-determined relationship. It
recalls a really funny line about Jimmy Carter from William Greider's book.
(That is, _Secrets of the Temple_, Simon and Schuster, 1989).
>I can't understand why you insist on making so much of the fact
>that the FFR and reserves are functionally related. You can't
>change one without affecting the other, but so what? The
>important point is that the Fed currently treats the FFR as the
>target variable and the reserves as a "don't care" variable.
>That is, the Fed doesn't really care what quantity of reserves it
>must provide to peg the FFR at a chosen target. In that sense
>reserves are the residual variable.
This is exactly the point that I, Blinder, and a host of intro and
intermediate texts have been making for years. The point is that monetary
aggregates can be or not be endogenous depending upon the choice of the
monetary authority about what to target and what to adjust in compensation
to hit that target. Thus, when Friedman or Cagan write about exogenous
growth of the money supply, they are just examining a system where the
interest rate is not being set by the central bank. As such, they are not
wrong in the way that you have said Friedman is wrong.
>> So, is it agreed, that the FFR and monetary base are co-determined,
>>that if the Fed choses one, it then has no choice about the other?
>
>Absolutely not. The monetary base includes cash held by the
>public, most of which is overseas according to the Fed. The
>monetary base is an order of magnitude larger than the reserves ,
>but it is the latter that banks respond to in bidding on fed
>funds. Furthermore the FFR is a function of several variables,
>not just aggregate reserves.
Absolutely not? What choice does the Fed have about growth of the MB
given its FFR target?
>> Mr. Hummel suggests that "it is hardly worth the time and effort to
>>say it", but as I will explain in my next post, his earlier remarks make it
>>clear, this over-long debate was necessary.
>>
>Necessary for whom? Anyhow, don't forget to cite a lot of
>references, and be sure to add footnotes. It won't sell if it
>doesn't look authoritative.
Citing references in support of claims? What a concept!
Clearly it won't sell either way. I'm giving this away and have clearly
had no success selling books by authors like Kuhn and Blinder, even to
people who claim that they are interested in the topics.
Mark Patrick Witte
Robert Vienneau recalls for me the saying, "There is no shaming
the shameless."
It's clear what he's trying to do, and it's ugly. If he feels
that models with assumptions that don't annoy his itchy bowel
syndrome have better empirical support than do Solow's, then
he is free to trot out that real world evidence. If he wants to
whine about modeling rigor and assumptions, he can take that
to the editors of JPE, QJE, JEP, AER, and Brookings who have
published all those papers in recent years by folks including
Jones, Barro, Sala-I-Martin, Romer, et al.
Concerning Vienneau's spineless behavior, let's be clear here.
William Hummel asked:
H| "I would be interested to see an example of an economic trend
H| based purely on theory that has been validated empirically"
In another context, I had recommended the work of Robert
Solow. To Mr. Hummel's reasonable further request from above,
I replied:
W| "Well, take a look at Solow's work...or the paper I
W| recommended by Christiano." A nice place to read about
W| empirical tests of Solow is Charles I. Jones's book
W|_Introduction to Economic Growth_.
Robert Vienneau edited my words to read:
W| "Well, take a look at Solow's work..."
and then Vienneau responded to them as though they were
my original statement.
Actually, it is even more dishonest than this. In response
to Mr. Hummel's misplaced request that I provide more
references, I offered the following extension:
W| Rather than have Mr. Hummel spend his time reading Solow's
W| 1956 QJE paper or his 1957 RE Stat paper, I directly
W| recommend: "A nice place to read about empirical tests of
W| Solow is Charles I. Jones's book _Introduction to Economic
W| Growth_." (Norton Press, 2nd edition, 2002).
In his same post, Mr. Vienneau edited this down to read
W| "Solow's 1956 QJE paper or his 1957 RE Stat paper..."
Mr. Vienneau then goes on to quote Solow as saying that
his 1957 paper "is in no sense a TEST of aggregate production
functions or marginal productivity or of anything else", as though I had
implied that it was. Mr. Vienneau follows this up with,
V| "Somewhat confusingly, Solow (1957) contains correlation
V| coefficients. So it seems Solow (1957) does not empirically
V| validate anything."
Mr. Vienneau has previously put on display his lack of
understanding of anything relating to empirical testing so what we
see here is consistent. There is nothing confusing about Solow's
1957 paper; in it Solow is applying the theory from his 1956 paper
to revolutionize the field of growth accounting. In his 1957 paper,
Solow works out his measure of total factor productivity as a
residual from effects of the embodied factors, creating what came
to be known as the "Solow residual." As such, this is an extension
of Solow's theory work, and not a direct test of his model, hence
my recommendation of work by Jones. It was dishonest of Mr.
Vienneau to imply that I was suggesting those Solow papers as direct
empirical verification of Solow's own work.
No reasonable person could read the Solow papers without
recognizing that they make up the theoretical framework that the
empirical tests worked out in Jones (and many other places) use. If
there are papers that Vienneau thinks work with better theories and
do a better job of explaining the real world data, he is free to bring
them out. In the end, that's what it's about, explaining the world
that we see. If Vienneau had some models that he liked that did a
good job of this, we would have seen them years ago. He doesn't,
so he whines about assumptions and mis-edits quotes.
William F Hummel
Patrick Witte) wrote:
> Well, what exactly were you saying all these years?
I owe Mr. Witte a thank you for taking the time and effort to
research what I have been saying all these years.
>
>(Oct 5 1998)
>H| In the big picture, there is no question that the money supply
>H| is endogenous and the Fed funds rate is exogenous.
Correct
>
>(Dec 11, 2000)
>H| The Fed cannot target the monetary base. The demand for
>H| currency by the public must be met by the Fed.
Correct
>
>(September 8, 2001)
>H| There were and still are plenty of economists who have swallowed
>H| his [Friedman's] views on the neutrality of money vis-a-vis the
>H| real economy and the causal relation between money and inflation.
Correct
>
>(March 19, 2002)
>H| And for one who worked a spell at the Federal Reserve,
>H| Mr. Witte seems unaware of the endogeneity of the base money
>H| supply. His view on the cause of inflation is also surprising.
Indeed
>
>(March 19, 2002)
>H| Not only is a causal relation impossible to show empirically,
>H| but in this case it ignores the fact that the money supply is
>H| endogenous.
Correct
>
>(March 19, 2002)
>H| Thus it makes little sense to assert that money growth is the
>H| _cause_ of inflation, or even of hyperinflation.
>
Yes, as Cagan has shown. Money growth is a symptom of a deeper
problem.
>(March 20, 2002)
>H| The amount of fresh bank
>H| lending responds (among other things) to the Fed funds
>H| rate as expressed in bank lending rates.
>H| I see nothing co-determined in that.
Correct.
>
>(March 20, 2002)
>H| Yes, I meant Cagan. So you still conclude that
>H| hyperinflations are CAUSED by printing too much money?
As above.
>
>(March 21, 2002)
>H| The notion that price and quantity of banking system
>H| reserves are both controlled (co-determined?) by the
>H| Fed is absurd.
Possibly quoted out of context. Obviously I mean the two cannot
simultaneously and independently be controlled by the Fed.
>
>(March 21, 2002)
>H| Large banks often create more deposits through lending
>H| than they have reserves for, and seek the reserves after
>H| the fact. If this causes a shortage of aggregate reserves
>H| in the banking system, the Fed must increase the supply
>H| of reserves, typically through short term purchase
>H| agreements with dealers, collateralized by Treasury
>H| securities. The FOMC selects a target Fed funds rate,
>H| and the NYFRB open market desk acts through its
>H| OMO to hold Fed funds rate on target.
Simple fact. Surprised to see it quoted here.
>
>(March 21, 2002)
>H| The Fed can only control the Fed funds rate.
If not out of context, this is incorrect.
>
>(March 24, 2002)
>(W| So, is it agreed, that the FFR and monetary base are co-determined,
>that if the Fed choses one, it then has no choice about the other?)
>H| Absolutely not.
Correct
>
> With many of these quotes, broader context helps, but clearly
>there is the suggestion that the dependence must run from quantities
>to rates.
True, but you did a fair job of avoiding out-of-context quotes.
>However the Fed can chose to target either and so the
>dependence is a choice, not a result of theory.
Great Scott! Do you mean this has been the bee in your bonnet
all the time? Where did I say the Fed cannot choose to target
reserves? I have pointed to the Volcker period when the Fed did
just that. My point, to reiterate, is that such an approach does
not provide a satisfactory result as the record clearly
indicates. That's why it is no longer done, and may never again
be done unless things really go wrong.
>
>>> No, the most important thing here is that they actually *are*
>>>co-determined.
>>
>>Ah yes, it's really very important to recognize that they are
>>co-determined. That really helps to see the big picture, right?
>
> Evidently. If one recognizes this, then the writings of Friedman,
>Blinder, and Cagan make a lot of sense.
As I have said many times, co-determination is a just fancy word
for functionally related. I have never claimed the FFR and
reserves were not functionally related, but you seem oblivious to
that fact.
>
>>> Indeed! One cannot understand monetary policy, unless one realizes
>>>the "bigger relationship" that the FFR and monetary base are co-determined,
>>>as explained by myself, Blinder, and a host of others.
>>
>>Including the authors of introductory macro textbooks?
>
> Or all the non-intermediate books I listed before. Speaking of
>lists of textbooks, where is yours of all the ones with terrible
>inaccuracies in them?
Mr. Witte does like to refer to textbooks in support of his
views.
>
>>>The choice the
>>>Fed correctly makes to target the FFR and adjust reserves accordingly is the
>>>result of this relationship, and the choice in the past by the Fed and in
>>>other nations to chose a policy of targeting reserves would leave the
>>>adjustment to fall more heavily upon interest rates is a similar result of
>>>this co-determination relationship.
>>
>>So the policy decision to target the FFR is the result of the
>>"co-determination" relationship? Hardly.
>
> Right, that is hardly what I said.
Then read it again. I think that is exactly what you said.
>Following Tinbergen, the decision of
>monetary authories to target interest rates and support this target by
>adjusting reserves is because of this co-determined relationship. It
>recalls a really funny line about Jimmy Carter from William Greider's book.
>(That is, _Secrets of the Temple_, Simon and Schuster, 1989).
>
>>I can't understand why you insist on making so much of the fact
>>that the FFR and reserves are functionally related. You can't
>>change one without affecting the other, but so what? The
>>important point is that the Fed currently treats the FFR as the
>>target variable and the reserves as a "don't care" variable.
>>That is, the Fed doesn't really care what quantity of reserves it
>>must provide to peg the FFR at a chosen target. In that sense
>>reserves are the residual variable.
>
> This is exactly the point that I, Blinder, and a host of intro and
>intermediate texts have been making for years.
If that is so, then what have you been carping about all this
time?
I note that there has been a subtle change in your reference from
introductory text books to intermediate text books. Have you had
a change of views about the quality of introductory text books?
>The point is that monetary
>aggregates can be or not be endogenous depending upon the choice of the
>monetary authority about what to target and what to adjust in compensation
>to hit that target.
In theory the monetary authority can control the monetary
aggregates, but it has never succeeded in doing so when it tried.
And it made a mess of things in the process. My interest in
theoretical possibilities diminishes sharply when they have
little or no use in practice. This is why I said it was very
misleading for Blinder to have said the Fed can control ANY
monetary aggregate. Of course as an academic he must cover all
the bases, or he would be criticized by his brethren.
>Thus, when Friedman or Cagan write about exogenous
>growth of the money supply, they are just examining a system where the
>interest rate is not being set by the central bank. As such, they are not
>wrong in the way that you have said Friedman is wrong.
What specifically did I say about Friedman that you think is
wrong?
>
>>> So, is it agreed, that the FFR and monetary base are co-determined,
>>>that if the Fed choses one, it then has no choice about the other?
>>
>>Absolutely not. The monetary base includes cash held by the
>>public, most of which is overseas according to the Fed. The
>>monetary base is an order of magnitude larger than the reserves ,
>>but it is the latter that banks respond to in bidding on fed
>>funds. Furthermore the FFR is a function of several variables,
>>not just aggregate reserves.
>
> Absolutely not? What choice does the Fed have about growth of the MB
>given its FFR target?
The MB can increase without affecting reserves when for example a
government agency makes direct cash purchases.
>
>>> Mr. Hummel suggests that "it is hardly worth the time and effort to
>>>say it", but as I will explain in my next post, his earlier remarks make it
>>>clear, this over-long debate was necessary.
>>>
>>Necessary for whom? Anyhow, don't forget to cite a lot of
>>references, and be sure to add footnotes. It won't sell if it
>>doesn't look authoritative.
>
> Citing references in support of claims? What a concept!
Ah yes, argue by appeal to "authority." That saves having to
develop one's own thoughts - hopefully.
>
> Clearly it won't sell either way. I'm giving this away and have clearly
>had no success selling books by authors like Kuhn and Blinder, even to
>people who claim that they are interested in the topics.
Perhaps you have been trying to hard.
WFH
Mark Patrick Witte
Perhaps the motto of sci.econ should be, "Delete what you can't respond
to, but always respond." I've perhaps misallocated a great deal of time in
correspondence with Mr. Hummel under the apprehension that he was a bright
fellow of a scholarly bent who was serious about learning about how the
world works. Intelligent people can disagree but still learn from each
other and I had hopes. I perhaps need to re-evaluate.
The key exchange in the my last post was this:
H| I can't understand why you insist on making so much of the
H| fact that the FFR and reserves are functionally related. You can't
H| change one without affecting the other, but so what? The
H| important point is that the Fed currently treats the FFR as the
H| target variable and the reserves as a "don't care" variable.
H| That is, the Fed doesn't really care what quantity of reserves it
H| must provide to peg the FFR at a chosen target. In that sense
H| reserves are the residual variable.
W| This is exactly the point that I, Blinder, and a host of intro and
W| intermediate texts have been making for years. The point is that
W| monetary aggregates can be or not be endogenous depending upon the
W| choice of the monetary authority about what to target and what to adjust
W| in compensation to hit that target. Thus, when Friedman or Cagan write
W| about exogenous growth of the money supply, they are just examining a
W| system where the interest rate is not being set by the central bank. As
W| such, they are not wrong in the way that you have said Friedman is
W| wrong.
H| In theory the monetary authority can control the monetary
H| aggregates, but it has never succeeded in doing so when it tried.
H| And it made a mess of things in the process. My interest in
H| theoretical possibilities diminishes sharply when they have
H| little or no use in practice. This is why I said it was very
H| misleading for Blinder to have said the Fed can control ANY
H| monetary aggregate. Of course as an academic he must cover all
H| the bases, or he would be criticized by his brethren.
Here we have a classic "forest for the trees" misperception. It is
true that the financial system likes to have a stable discount rate,
but what is the really essential issue in monetary policy? Really?
It is to supply a sufficient money supply for the economy to grow
without inflation. Why does the Fed target the Fed Funds Rate, or
all things? Because that rate seems to give the quickest indication
of whether there is too much or too little reserves in the system.
Certainly the Fed values a stable financial system, but the financial
system is able to withstand shocks greater than even large
fluctuations in the interbank loan rate. The Fed manages the FFR
because it desires to head off recessions and inflations. To think
otherwise is to imagine that a physician who checks a pulse at the
wrist does so because he thinks the wrist is somehow vital to human
health. As Mr. Hummel has rightly pointed out, it is hard for a
monetary authority to know how much reserves to put into the system,
so the Fed has taken to watching the FFR as a guide. It is the
canary in the coalmine of monetary policy.
For some years, Mr. Hummel has held some strong views about the
failings of what he refers to as "mainstream" economics. Some of this
was based upon a general outsider's naiveti about how research is done,
but part of it was based upon what he saw as serious misunderstandings
of how monetary issues are approached. This has led him to make
condemning remarks about economists like Milton Friedman and Alan
Blinder who suggest that money growth can be exogenous and can lead
to rising inflation, and about the field of economics in general. (I
strongly
recommend that Mr. Hummel re-read Phillip Cagan's work before citing
him in support. Cagan treats money growth as exogenous and as the root
cause of the hyperinflations in the economies he studies.)
This has lead him to statements such as the following:
H| There were and still are plenty of economists who
H| have swallowed his [Friedman's] views on the neutrality of
H| money vis-a-vis the real economy and the causal relation
H| between money and inflation.
(On Friedman's statement about the causal relationship between money
growth and inflation.)
H| Assuming Mr. Witte believes this himself, I have to conclude
H that his devotion to mainstream economics is clouding his own vision.
When it comes to the field of economics in general, Mr. Hummel has said
things like:
H| One who finds monetary theory uninteresting and not worth
H| bothering with should not be dealing with macroeconomics.
H| Macro models that ignore the financial institutions of an economy
H| are pretty much worthless.
He has suggested there is a "tendency in mainstream macroeconomics to
treat monetary issues as having little relevance", as showing that serious
economists lack exposure to "the institutional side - the real world."
When I asked him where he comes by such a notion, he says:
H| Read any college macro text.
This brought us to a strange juncture. When Mr. Hummel asks for an
example of something, he complains if he feels he isn't given sufficient
references to find the work, which if true would be fair. However, having
given him such references, he now dismisses them as "arguing by appeal to
'authority.'" However, in the cases in these threads, references have been
given to back up explained claims, or unfortunately have not been given in
support of claims that needed them. In response to the above quote, I did a
quick survey of a number of leading introductory, intermediate, and
advanced undergraduate textbooks at my disposal, and found no real
evidence to support Mr. Hummel's statement. When I pressed him for
specifics on this point, he began what seemed to me to be some odd process
of making issue about whether I was referring to introductory or
intermediate books. He has never produced an example of a textbook that
fails his notion of what would be reasonable.
In what I hope again will be the penultimate post in this overlong
series, I'll ask again if Mr. Hummel has any objection to this issue
is treated in a standard introductory text. Is there anything wrong
with this?
"When the demand curve for money shifts outward, the Fed
must tolerate a rise in interest rates, a rise in the money stock,
or both. It simply cannot control *both* the supply of money
*and* the interest rate. If it tries to keep M steady, then r will rise
sharply. Conversely, if it tries to stabilize r, then M will shoot up."
(Emphasis from the original, p. 286 of _Macroeconomics:
Principles and Policy_, Baumol and Blinder, 1999.)
In article <jmmu9uornn77flvs3...@4ax.com>,
William F Hummel <wfhu...@attbi.com> wrote:
William F Hummel
Patrick Witte) wrote:
> Mr. Hummel seems to wonder, what is all the fuss about?
>In his last post he wrote:
>
>H| Now it is true that the Fed uses its control of
>H| reserves to steer the Fed funds rate to its target
>H| value, a procedure I have described in some detail on
>H| sci.econ. But if that is the whole point, it is hardly
>H| worth the time and effort to say it. That's a case of
>H| not seeing the forest for the trees. Or to put it more
>H| directly, one cannot acquire a real understanding of how
>H| our monetary system works without seeing the bigger
>H| relationships.
>
> This begs two types of questions:
>
> 1) Why might it be "worth the time and effort to say it?"
>
> Why? Because William Hummel has been using this point
>for years as a proof of where much of the field of economics
>gets something that he feels is important fundamentally wrong.
Mr. Witte has begun firing his shot gun in hopes of finally
hitting the target. His reference to "this point" needs
clarification. I wouldn't guess what it specifically refers to.
>
> 2) Who is "seeing the bigger relationships?"
>Is it economists such as Friedman, Blinder, Christiano, Mishkin,
>and the like? Or is it William Hummel? Are interest rates and
>monetary reserves co-determined as Tinbergen explained in 1952
>or does the Fed lack any control over reserves because it *must*
>manage the interest rate?
Mr. Witte is competing here for the credentialism prize. Argue
the case by citing well-known academics, presumed to have
superior knowledge to any layman. Ignore the fact that they
seldom fully agree among themselves. Then end by repeating once
again the same tired misinterpretation of my position, a practice
Mr. Witte has developed to a high art.
>
> How does what Mr. Hummel says above differ from
>anything that I've said in these threads, or differ from the
>piece by Alan Blinder that Mr. Hummel holds up as a signal
>of basic misunderstanding by an well known economist?
>http://groups.google.com/groups?q=Blinder+instrument+group:sci.econ+author:Hummel&hl=en&selm=cbdn9uorb06vmqmj3jq47iimojckrch4vt%404ax.com&rnum=1
Another reference to credentials. Argue by citing the views of a
well-known economist. It would be nice if Mr. Witte would
develop his own views and present the rationale in his own words.
>
>(Blinder is "incorrect in some respects", but what can we expect? He was
>only at the Fed for a couple of years, so how much could he really have
>learned about monetary policy? What? People are chosen for Fed jobs based
>upon their previous related accomplishments? Oh, then never mind.)
Still more credentialism. Blinder is smart, but not infallible.
The notion that people are chosen for Fed jobs based on prior
related accomplishments is not a universal rule. There have been
several incompetents and political hacks among them. I'm not
saying Blinder is one of those, but I don't hold in awe his views
on at least some monetary issues.
>
> How does Mr. Hummel's statement differ from what is taught in those
>terrible economics textbooks that he so derides (but never references)?
> "When the demand curve for money shifts outward, the Fed
>must tolerate a rise in interest rates, a rise in the money stock,
>or both. It simply cannot control *both* the supply of money
>*and* the interest rate. If it tries to keep M steady, then r will rise
>sharply. Conversely, if it tries to stabilize r, then M will shoot up."
>(Emphasis from the original, p. 286 of _Macroeconomics:
>Principles and Policy_, Baumol and Blinder, 1999.)
Mr. Witte has finally presented something substantial to discuss,
even though only by quoting one of his fellow economists. I
don't have Blinder's text, so there may be context missing. But
let's take the quote as a stand-alone statement. What's wrong
here is that neither the money supply nor the interest rate are
defined in measurable terms. Is M one of the monetary
aggregates? If so, which? Or is M really money in the sense of
the monetary base? Is r the overnight interest rate controlled
by the Fed or some nebulous market rate in the private sector.
This is a good example of what is wrong or misleading in
introductory texts. The words often seem plausible until we look
at them carefully.
If M refers to a monetary aggregate, then the statement should
better read the demand for "credit" rather than "money" because
it is really the banks the create most of the monetary
aggregates. Now the demand for credit is a function of a large
number of economic variables, only one of which is the price of
credit. Furthermore the price of short term credit is pretty
much controlled by the Fed. It is not a free variable as implied
in the Blinder's text.
The truth is that Blinder's "law" is simply not supported by the
evidence under almost any definition of the terms. An important
missing link is the role of the FOMC, a body of 12 people
(usually dominated by the chairman) that decide what the short
term rates will be for reasons that normally have little relation
to size of the money supply. Indeed the Fed has declared that it
no longer is officially targeting any monetary aggregate,
although everyone knows that has been true since the mid-1980s.
So you can mark this quoted passage down as an example of what is
wrong in mainstream macro texts.
>
> Why does all this matter? It matters because Mr. Hummel's
>misunderstanding of the operating choices of monetary authorities has
>led him to believe and repeatedly state that central banks cannot
>increase the supply of reserves in the system.
Mr. Witte continues to make this claim, but he should be
embarrassed to do. It is patently false.
>It has led him to badly mis-read Phillip Cagan.
Wrong. It is Mr. Witte who misread Cagan.
>It has led him to disparage macroeconomists
>in general because they don't share his misperception and so in his
>eyes must lack a basic clue as to how the real world works.
Silly comments like this are hardly worth a response. I would be
glad to provide a list of macroeconomists whose work I value, but
Mr. Witte probably wouldn't recognize most of the names.
>
> It's a slightly subtle point, but one that has led Mr. Hummel into
>some serious misunderstanding.
I suspect Mr. Witte's understanding of our monetary system is
good deal better for having read some of my posts. However I
would never expect him to say so.
>It's a good thing that the Fed targets the
>FFR, but it doesn't have to do so, and even targeting the FFR can lead to
>problems if it's done at the wrong level, thus causing too much growth of
>the monetary aggregates and resulting rising inflation.
This is the first valid point Mr. Witte has made in this post.
>
>In article <ptet9u0j31clicsa5...@4ax.com>,
>William F Hummel <wfhu...@attbi.com> wrote:
>>On 25 Mar 2002 02:54:39 GMT, mwi...@merle.acns.nwu.edu (Mark
>>Patrick Witte) wrote:
>>>
>>> Cut to the chase: Do you think that Dr. Donald Kohn has a view of
>>>how monetary policy works that is at odds with that of economists such as
>>>Alan Blinder and Rick Mishkin?
>>
>>Ambiguous question. How monetary policy works on the economy or
>>how monetary policy is implemented? If either case, the answer
>>is yes. I have never encountered any two people, economists or
>>otherwise, who fully agree on how the monetary system works.
>
> Dodge attempt unsuccessful. Blinder and Mishkin may differ slightly in
>their views on monetary policy; would you say that Kohn differs to a much
>larger extent from these two guys than they differ from each other? And do
>you base your answer from that single paragraph from a letter that was
>responding to points unclear?
I've already made my position clear on Kohn's letter.
>
>>Also I would guess Kohn knows far more about it than Blinder.
>>Kohn has been a specialist in the field for his whole career.
>>Sure, Blinder spent a year or so on the BOG, but it takes more
>>time than that to become an expert.
>
> Indeed, imagine Blinder's surprise when he hatched out of his egg
>and found himself the Fed Vice-Chairman. Maybe it would have been better if
>they had chosen someone who had spent his life studying and researching
>monetary and macroeconomic issues and finding original insights into the
>function of policy.
Ah yes, that Fed Vice-Chairman hatched and died not long
thereafter. Was it a natural death or was it murder?
WFH
William F Hummel
Well, let's clean up some of Mr. Witte's misconceptions. First,
the discount rate is not a free variable. It is set by the Fed
and can be kept fixed as long as the Fed chooses to. Second,
under the monetary policy regime of targeting the FFR, the
reserves in the system are precisely what are needed by the
banking system to support its lending, no more and no less.
Reserves must be added by the Fed when the banking system
increases its net lending. Otherwise the Fed could not keep the
FFR on target. The notion that there is a right amount of
reserves for the needs of the economy as Mr. Witte implies is a
striking example of his misunderstanding of how the monetary
system works.
>Certainly the Fed values a stable financial system, but the financial
>system is able to withstand shocks greater than even large
>fluctuations in the interbank loan rate. The Fed manages the FFR
>because it desires to head off recessions and inflations. To think
>otherwise is to imagine that a physician who checks a pulse at the
>wrist does so because he thinks the wrist is somehow vital to human
>health. As Mr. Hummel has rightly pointed out, it is hard for a
>monetary authority to know how much reserves to put into the system,
>so the Fed has taken to watching the FFR as a guide. It is the
>canary in the coal mine of monetary policy.
This compounds Mr. Witte's error noted above. If pegging the FFR
is the Fed's modus operandi, then only valid reason for the Fed
to adjust the reserves in the banking system is to control the
FFR, the benchmark for all short term interest rates. In any
case, firms do not care a whit about the amount of reserves in
the banking system. They do care very much about the cost of
borrowing. Just as Donald Kohn noted, "the causation runs more
from money [credit] to reserves than vice versa". In other
words, reserves will track the (credit) money supply and are
simply a residual in the monetary system.
>
> For some years, Mr. Hummel has held some strong views about the
>failings of what he refers to as "mainstream" economics. Some of this
>was based upon a general outsider's naiveti about how research is done,
>but part of it was based upon what he saw as serious misunderstandings
>of how monetary issues are approached. This has led him to make
>condemning remarks about economists like Milton Friedman and Alan
>Blinder who suggest that money growth can be exogenous and can lead
>to rising inflation, and about the field of economics in general. (I
>strongly
>recommend that Mr. Hummel re-read Phillip Cagan's work before citing
>him in support. Cagan treats money growth as exogenous and as the root
>cause of the hyperinflations in the economies he studies.)
>
> This has lead him to statements such as the following:
>
>H| There were and still are plenty of economists who
>H| have swallowed his [Friedman's] views on the neutrality of
>H| money vis-a-vis the real economy and the causal relation
>H| between money and inflation.
>
Would Mr. Witte actually deny the truth of this? There are even
some on sci.econ who have said as much.
>(On Friedman's statement about the causal relationship between money
>growth and inflation.)
>H| Assuming Mr. Witte believes this himself, I have to conclude
>H that his devotion to mainstream economics is clouding his own vision.
Perhaps I am not sugar-coating it sufficiently for Mr. Witte's
taste.
>
> When it comes to the field of economics in general, Mr. Hummel has said
>things like:
>
>H| One who finds monetary theory uninteresting and not worth
>H| bothering with should not be dealing with macroeconomics.
>H| Macro models that ignore the financial institutions of an economy
>H| are pretty much worthless.
With so much misunderstanding about the monetary system and the
vital role of its institutions in the economy at large, it's hard
to imagine how macroeconomists without a strong background in
that area can properly deal with such issues as employment,
inflation, and growth.
>
> He has suggested there is a "tendency in mainstream macroeconomics to
>treat monetary issues as having little relevance", as showing that serious
>economists lack exposure to "the institutional side - the real world."
>When I asked him where he comes by such a notion, he says:
>
>H| Read any college macro text.
Mr. Witte forgets how many times he has referred to the
authoritative content of introductory or intermediate text books.
>
> This brought us to a strange juncture. When Mr. Hummel asks for an
>example of something, he complains if he feels he isn't given sufficient
>references to find the work, which if true would be fair. However, having
>given him such references, he now dismisses them as "arguing by appeal to
>'authority.'"
I thought the jocular nature of my cal for references would not
have escaped Mr. Witte. Wasn't there also something about adding
footnotes?
The second point relates to Mr. Witte's tendency to cite
references more in the mode of credentialism than debate.
>However, in the cases in these threads, references have been
>given to back up explained claims, or unfortunately have not been given in
>support of claims that needed them. In response to the above quote, I did a
>quick survey of a number of leading introductory, intermediate, and
>advanced undergraduate textbooks at my disposal, and found no real
>evidence to support Mr. Hummel's statement. When I pressed him for
>specifics on this point, he began what seemed to me to be some odd process
>of making issue about whether I was referring to introductory or
>intermediate books. He has never produced an example of a textbook that
>fails his notion of what would be reasonable.
Just so happens I have. See my comments about the passage from
the Baumol and Blinder text in another post.
>
> In what I hope again will be the penultimate post in this overlong
>series, I'll ask again if Mr. Hummel has any objection to this issue
>is treated in a standard introductory text. Is there anything wrong
>with this?
>
> "When the demand curve for money shifts outward, the Fed
>must tolerate a rise in interest rates, a rise in the money stock,
>or both. It simply cannot control *both* the supply of money
>*and* the interest rate. If it tries to keep M steady, then r will rise
>sharply. Conversely, if it tries to stabilize r, then M will shoot up."
>(Emphasis from the original, p. 286 of _Macroeconomics:
>Principles and Policy_, Baumol and Blinder, 1999.)
Fortunate that Mr. Witte should point to this very quote. I
commented at some length in another post today on the objections
I have to it.
WFH
George
> The term "borrowed reserves" refers specifically to
>funds borrowed from the Fed, not from other financial
>institutions.
>
Great discussion . No wonder there are so many " happy skeptics" and
conspiracy buffs following banking - it is so complicated! I still feel that
borrowing reserves is bad. If a bank doesn't have enough reserves that's bad.
Mark Patrick Witte
D'oh! Indeed I miss-typed, and it should be Fed Funds Rate.
>>but what is the really essential issue in monetary policy? Really?
>>It is to supply a sufficient money supply for the economy to grow
>>without inflation. Why does the Fed target the Fed Funds Rate, or
>>all things? Because that rate seems to give the quickest indication
>>of whether there is too much or too little reserves in the system.
>
>Well, let's clean up some of Mr. Witte's misconceptions. First,
>the discount rate is not a free variable. It is set by the Fed
>Second,
>under the monetary policy regime of targeting the FFR, the
>reserves in the system are precisely what are needed by the
>banking system to support its lending, no more and no less.
>Reserves must be added by the Fed when the banking system
>increases its net lending. Otherwise the Fed could not keep the
>FFR on target. The notion that there is a right amount of
>reserves for the needs of the economy as Mr. Witte implies is a
>striking example of his misunderstanding of how the monetary
>system works.
Rather it is a striking example of the way economics thinks about
marginal analysis. Phrases like "the reserves in the system are
precisely what are needed by the banking system to support its lending"
have no meaning without noting the conditional nature of lending and the
policy choice about the level of the targeted interest rate. It is this
short of thing that makes it unclear if Mr. Hummel understands the
implications of the relationship between choices of interest rates and
levels of reserves, which are...co-determined.
>>Certainly the Fed values a stable financial system, but the financial
>>system is able to withstand shocks greater than even large
>>fluctuations in the interbank loan rate. The Fed manages the FFR
>>because it desires to head off recessions and inflations. To think
>>otherwise is to imagine that a physician who checks a pulse at the
>>wrist does so because he thinks the wrist is somehow vital to human
>>health. As Mr. Hummel has rightly pointed out, it is hard for a
>>monetary authority to know how much reserves to put into the system,
>>so the Fed has taken to watching the FFR as a guide. It is the
>>canary in the coal mine of monetary policy.
>
>This compounds Mr. Witte's error noted above. If pegging the FFR
>is the Fed's modus operandi, then only valid reason for the Fed
>to adjust the reserves in the banking system is to control the
>FFR, the benchmark for all short term interest rates.
And why would the Fed want to change the FFR? To set the stock of
money (and interest rates) correctly to avoid recession or inflation.
>In any case, firms do not care a whit about the amount of reserves in
>the banking system. They do care very much about the cost of
>borrowing.
Yes, but the cost of borrowing is co-determined with the amount of
reserves in the system.
>Just as Donald Kohn noted, "the causation runs more
>from money [credit] to reserves than vice versa". In other
>words, reserves will track the (credit) money supply and are
>simply a residual in the monetary system.
"...However, the Federal Reserve can control the composition
of reserves between non-borrowed and borrowed reserves fairly
closely in the short run. By varying this mix the Federal
Reserve can influence the federal funds rate and the other
money market rates in the short run and thereby affect
growth of the money supply over a longer period."
So, the point is controlling the money supply over a longer
period...to avoid recessions and inflations. Indeed, Mr. Hummel says he has
always known that the Fed and either choose the FFR or a given level of
reserves and that one not targeted must adjust to accomodate the choice of
the first. However, the point of all of this is not that the Fed cares a
whit for either the FFR or the quantity of any aggregate but rather for
avoiding various bad macroeconomic outcomes. Hence, when economists like
Friedman and Blinder write about controling the stock of money, what they
are saying is not about day to day deviations any more than they would care
if the FFR misses its target by a few basis points. Instead, they are quite
reasonably talking about getting the co-determined interest rate/stock
variable(s) right to achieve the desired macroeconomic performance. This is
the forest.
>> For some years, Mr. Hummel has held some strong views about the
>>failings of what he refers to as "mainstream" economics. Some of this
>>was based upon a general outsider's naivete about how research is done,
>>but part of it was based upon what he saw as serious misunderstandings
>>of how monetary issues are approached. This has led him to make
>>condemning remarks about economists like Milton Friedman and Alan
>>Blinder who suggest that money growth can be exogenous and can lead
>>to rising inflation, and about the field of economics in general. (I
>>strongly
>>recommend that Mr. Hummel re-read Phillip Cagan's work before citing
>>him in support. Cagan treats money growth as exogenous and as the root
>>cause of the hyperinflations in the economies he studies.)
>>
>> This has lead him to statements such as the following:
>>
>>H| There were and still are plenty of economists who
>>H| have swallowed his [Friedman's] views on the neutrality of
>>H| money vis-a-vis the real economy and the causal relation
>>H| between money and inflation.
>>
>Would Mr. Witte actually deny the truth of this? There are even
>some on sci.econ who have said as much.
Friedman broadly makes the claim that excessive money growth (as he
carefully defines it) leads to inflation, and that money is neutral in the
long run but not the short run. Mr. Hummel should be careful that he does
not misunderstand what Friedman means by neutrality however. Mr. Hummel has
raised the valid point that losses in output caused by, for example,
monetary shocks, may not be made up in the long run. This is an interesting
research area that certainly contains some strong support for Mr. Hummel's
position. However, this does not relate to the concept of monetary
neutrality, but rather concerns the issue of "super-neutrality" where money
has no effect in either its level or its changing growth rates. Friedman's
point about neutrality is one of comparative levels: Would we be any better
off today if the money stock were 5% greater? Friedman would say no.
>>(On Friedman's statement about the causal relationship between money
>>growth and inflation.)
>>H| Assuming Mr. Witte believes this himself, I have to conclude
>>H that his devotion to mainstream economics is clouding his own vision.
>
>Perhaps I am not sugar-coating it sufficiently for Mr. Witte's
>taste.
Sugar coat this: excessive money growth causes rising inflation.
>> When it comes to the field of economics in general, Mr. Hummel has said
>>things like:
>>
>>H| One who finds monetary theory uninteresting and not worth
>>H| bothering with should not be dealing with macroeconomics.
>>H| Macro models that ignore the financial institutions of an economy
>>H| are pretty much worthless.
>
>With so much misunderstanding about the monetary system and the
>vital role of its institutions in the economy at large, it's hard
>to imagine how macroeconomists without a strong background in
>that area can properly deal with such issues as employment,
>inflation, and growth.
Inflation yes, growth and employment are not so hard to imagine.
>> He has suggested there is a "tendency in mainstream macroeconomics to
>>treat monetary issues as having little relevance", as showing that serious
>>economists lack exposure to "the institutional side - the real world."
>>When I asked him where he comes by such a notion, he says:
>>
>>H| Read any college macro text.
>
>Mr. Witte forgets how many times he has referred to the
>authoritative content of introductory or intermediate text books.
No, I refer to textbooks for their central role as a place for someone
with a weak background in some topic to find a careful explanation of the
material of interest. This is the role and comparative advantage of
textbooks for passing along information to people who are truly interested
in some subject, particularly relative to typed out newsgroup discussion.
However, note that it was Mr. Hummel who brought textbooks into this
discussion as support for his claims about the inadequacy of "mainstream
macroecomics", but he has never been able to produce a list of such
offending texts. As such, he used textbooks as a call to authority,
that is he offered no support for his position except to point to some
books, yet he is unable to say exactly what books he means. It's really
sad, given Mr. Hummel's other complaints about citations.
Robert Vienneau
> Robert Vienneau recalls for me the saying, "There is no shaming
> the shameless."
Ad hominem.
> It's clear what he's trying to do, and it's ugly. If he feels
> that models with assumptions that don't annoy his itchy bowel
> syndrome have better empirical support than do Solow's, then
> he is free to trot out that real world evidence.
Ad hominem.
Notice that Mr. Witte does not and will not address the lack of
theoretical foundation for, say, Solovian growth theory. For
example, he does not explain why he disagrees with Felipe and
Fisher. He changes the subject. But even then, his position
seems weak.
Notice that Mr. Witte does not claim to have found any literature
at all that shows Solow's approach is empirically superior to
alternatives. I, on the other hand, have occasionally cited
evidence that certain other approaches are empirically
superior to canonical neoclassical models in direct statistical
tests.
> If he wants to
> whine about modeling rigor and assumptions, he can take that
> to the editors of JPE, QJE, JEP, AER, and Brookings who have
> published all those papers in recent years by folks including
> Jones, Barro, Sala-I-Martin, Romer, et al.
Ad hominem, strawpersons, and argument from authority.
By the way, I notice that Mr. Witte has never told us about the
AEA's reception of the Schelling committee report.
One might conclude from arguments that Mr. Witte ignores:
"The revival of growth theory during the last two decades no doubt
has produced important discussions, and seemingly interesting
empirical results. However, the authors do not realize that they
are using a tool whose invalidity was demonstrated decades ago. The
consequence is that these empirical results are unjustifiable and
even misleading. For example, an important aspect emphasized by the
new models is the idea of increasing returns at the aggregate level.
However, the aggregate production functions derived theoretically
have constant returns to scale (recall that the aggregation conditions
strongly depend on the existence of constant returns to scale at the
micro level, and that with non-constant returns aggregates do not
exist in general).
We also have to make a reference to the important fact that the new
endogenous growth models have introduced as a factor of production
a very problematic concept, namely that of the physical quantity of
human capital. What are the logical foundations, or conditions under
which this can be represented?"
-- Felipe and Fisher
<http://growthconf.ec.unipi.it/papers/Felipe.pdf>
> Concerning Vienneau's spineless behavior, let's be clear here.
Ad hominem.
> William Hummel asked:
> H| "I would be interested to see an example of an economic trend
> H| based purely on theory that has been validated empirically"
> In another context, I had recommended the work of Robert
> Solow. To Mr. Hummel's reasonable further request from above,
> I replied:
> W| "Well, take a look at Solow's work...or the paper I
> W| recommended by Christiano." A nice place to read about
> W| empirical tests of Solow is Charles I. Jones's book
> W|_Introduction to Economic Growth_.
> Robert Vienneau edited my words to read:
> W| "Well, take a look at Solow's work..."
> and then Vienneau responded to them as though they were
> my original statement.
The claim seems to be that I tried to convey to the reader
the view that Mr. Witte had not mentioned any other references.
This is extremely odd. For one thing, our readers might remember
what they had read two days ago. For another thing, I wrote:
"I don't know if the other references Mr. Witte gave address Franklin
Fisher's simulation results or contrast the empirical strength of
Solow's theory with competing theories (e.g., Kaldor's)."
Perhaps the reason Mr. Witte turns the discussion to personalities
and responds with nothing substantial is because the answer
to these implied questions is "No". Or perhaps the problem is
simply that Mr. Witte has not grown up yet.
> [ More of the same boring nonsense. ]
> Mr. Vienneau then goes on to quote Solow as saying that
> his 1957 paper "is in no sense a TEST of aggregate production
> functions or marginal productivity or of anything else", as though I had
> implied that it was.
Strawperson.
Mr. Witte can draw any inferences he wants. In pointing out that the
first of his references does not empirically validate any trend
based purely on theory and wondering if his further references
do the same, I am not making any such implication.
> Mr. Vienneau follows this up with,
> V| "Somewhat confusingly, Solow (1957) contains correlation
> V| coefficients. So it seems Solow (1957) does not empirically
> V| validate anything."
> Mr. Vienneau has previously put on display his lack of
> understanding of anything relating to empirical testing so what we
> see here is consistent.
Ad hominem.
> There is nothing confusing about Solow's
> 1957 paper; in it Solow is applying the theory from his 1956 paper
> to revolutionize the field of growth accounting. In his 1957 paper,
> Solow works out his measure of total factor productivity as a
> residual from effects of the embodied factors, creating what came
> to be known as the "Solow residual." As such, this is an extension
> of Solow's theory work,
That's odd. Mr. Witte had written:
> > >Solow's original papers we essentially work of theory...
I responded with:
> >Saying that I claimed Solow's original papers were "essentially
> >work of theory" is, of course, to make an untrue statement. Solow's
> >original papers interpret empirical data, but contain little in the
> >way of theory, as I have explained repeatedly.
So above we see Mr. Witte agreeing with me somewhat - "applying the
theory" ('cept there isn't much theory there) - about the 1957
paper, but refusing to say so.
Attempts to provide theoretical foundation for Solow's work followed
these papers. As Samuelson, Burmeister, Fisher, and maybe even
Solow acknowledge, these attempts failed.
But I certainly want to point out that it is possible to write
papers with statistical tests and correlation coefficients - e.g.,
as in Solow - and not empirically test anything. We have more
agreement from Mr. Witte followed by an ad hominem illustrating
that he is too cowardly to say so or apologize for his silly
comments:
> and not a direct test of his model, hence
> my recommendation of work by Jones. It was dishonest of Mr.
> Vienneau to imply that I was suggesting those Solow papers as direct
> empirical verification of Solow's own work.
This "dishonesty" must be on display when I wrote:
"I don't know if the other references Mr. Witte gave address Franklin
Fisher's simulation results or contrast the empirical strength of
Solow's theory with competing theories (e.g., Kaldor's)."
Despite Mr. Witte's comments above, I still don't know if the other
references Mr. Witte gives address Franklin Fisher's simulation
results.
> No reasonable person could read the Solow papers without
> recognizing that they make up the theoretical framework that the
> empirical tests worked out in Jones (and many other places) use.
As Fisher knows, these empirical tests in many places are not
necessarily tests of the theory.
> If
> there are papers that Vienneau thinks work with better theories and
> do a better job of explaining the real world data, he is free to bring
> them out.
When Mr. Witte is referred to arguments about the lack of
theoretical foundation for the Solovian model, he changes the
subject.
> In the end, that's what it's about, explaining the world
> that we see.
That's odd. Mr. Witte recommends a paper that gives advise to the
U.S. congress on protectionism against Japanese imports based on
a study of mermaids. I don't see how life on this planet can be
explained like so.
> If Vienneau had some models that he liked that did a
> good job of this, we would have seen them years ago.
Felipe and Fisher are clear in their last paragraph that work I
have often cited provides an explaination of the world that we
see, an alternative to the failed paradigm Mr. Witte espouses.
(See also their 28th footnote.)
For some reason that cannot be clear to us, Mr. Witte is afraid
to acknowledge the existence of such work. So he must state
untruths about what I write instead:
> He doesn't,
> so he whines about assumptions and mis-edits quotes.
It seems the following would be simple questions to answer:
Does Mr. Witte give references that address Fisher's simulation
results and work extending Fisher's results?
Does Mr. Witte give references that contrast the empirical strength
of Solow's theory with competing theories (e.g., Kaldor's)?
William F Hummel
Patrick Witte) wrote:
>In article <b15v9uc2d2cbjvh35...@4ax.com>,
>William F Hummel <wfhu...@attbi.com> wrote:
>
>>Well, let's clean up some of Mr. Witte's misconceptions. First,
>>the discount rate is not a free variable. It is set by the Fed
>
>>Second,
>>under the monetary policy regime of targeting the FFR, the
>>reserves in the system are precisely what are needed by the
>>banking system to support its lending, no more and no less.
>>Reserves must be added by the Fed when the banking system
>>increases its net lending. Otherwise the Fed could not keep the
>>FFR on target. The notion that there is a right amount of
>>reserves for the needs of the economy as Mr. Witte implies is a
>>striking example of his misunderstanding of how the monetary
>>system works.
>
> Rather it is a striking example of the way economics thinks about
>marginal analysis. Phrases like "the reserves in the system are
>precisely what are needed by the banking system to support its lending"
>have no meaning without noting the conditional nature of lending and the
>policy choice about the level of the targeted interest rate. It is this
>short of thing that makes it unclear if Mr. Hummel understands the
>implications of the relationship between choices of interest rates and
>levels of reserves, which are...co-determined.
Mr. Witte can rest assured that I understand the relationships
involved here. I have reiterated them so many times in this
forum, it's surprising he raise the question, unless of course he
misunderstands them himself. In any case it should not be
necessary to write a treatise in support every statement one
makes.
>
>>This compounds Mr. Witte's error noted above. If pegging the FFR
>>is the Fed's modus operandi, then only valid reason for the Fed
>>to adjust the reserves in the banking system is to control the
>>FFR, the benchmark for all short term interest rates.
>
> And why would the Fed want to change the FFR? To set the stock of
>money (and interest rates) correctly to avoid recession or inflation.
A non-sequitur since the subject was about pegging the FFR, not
changing it. Nevertheless, I would hope Mr. Witte doesn't really
mean to imply it's possible for the Fed, by changing the FFR, to
"set the stock of money." The best it can hope to do is
influence the demand for credit over the longer run for the
purpose he correctly noted.
>
>>In any case, firms do not care a whit about the amount of reserves in
>>the banking system. They do care very much about the cost of
>>borrowing.
>
> Yes, but the cost of borrowing is co-determined with the amount of
>reserves in the system.
Mr. Witte loves that word "co-determined". It must have a
special meaning to him, or perhaps it just resonates well.
>
>>Just as Donald Kohn noted, "the causation runs more
>>from money [credit] to reserves than vice versa". In other
>>words, reserves will track the (credit) money supply and are
>>simply a residual in the monetary system.
>
> "...However, the Federal Reserve can control the composition
>of reserves between non-borrowed and borrowed reserves fairly
>closely in the short run. By varying this mix the Federal
>Reserve can influence the federal funds rate and the other
>money market rates in the short run and thereby affect
>growth of the money supply over a longer period."
>
> So, the point is controlling the money supply over a longer
>period...to avoid recessions and inflations.
Yes, the Fed is constantly working to avoid recessions and
inflations. But no, the Fed has no target for the money supply,
and without a target it's meaningless to talk about control. In
fact the Fed is on record as declaring that the relation between
any of the monetary aggregates and its primary policy objectives
is unpredictable, and has abandoned targeting the monetary
aggregates. The notion that the Fed controls the money supply is
one of the hoary errors of mainstream economics. It pervades the
textbooks, sometimes implicitly so the student is not even aware
of the assumption. It is one of the misconceptions I have been
trying to exorcise, an uphill battle in a forum where most have
been indoctrinated with mainstream training.
>Indeed, Mr. Hummel says he has
>always known that the Fed and either choose the FFR or a given level of
>reserves and that one not targeted must adjust to accomodate the choice of
>the first. However, the point of all of this is not that the Fed cares a
>whit for either the FFR or the quantity of any aggregate but rather for
>avoiding various bad macroeconomic outcomes.
The Fed talks about primary targets, and intermediate targets.
Obviously the primary targets are macroeconomic outcomes, but
that does mean the Fed cares not one whit about what it has to do
in the attempt to achieve those outcomes. Mr. Witte is playing
word games here.
>Hence, when economists like
>Friedman and Blinder write about controling the stock of money, what they
>are saying is not about day to day deviations any more than they would care
>if the FFR misses its target by a few basis points. Instead, they are quite
>reasonably talking about getting the co-determined interest rate/stock
>variable(s) right to achieve the desired macroeconomic performance. This is
>the forest.
Keep walking. You may yet find the way out.
>
> Friedman broadly makes the claim that excessive money growth (as he
>carefully defines it) leads to inflation, and that money is neutral in the
>long run but not the short run. Mr. Hummel should be careful that he does
>not misunderstand what Friedman means by neutrality however. Mr. Hummel has
>raised the valid point that losses in output caused by, for example,
>monetary shocks, may not be made up in the long run. This is an interesting
>research area that certainly contains some strong support for Mr. Hummel's
>position. However, this does not relate to the concept of monetary
>neutrality, but rather concerns the issue of "super-neutrality" where money
>has no effect in either its level or its changing growth rates. Friedman's
>point about neutrality is one of comparative levels: Would we be any better
>off today if the money stock were 5% greater? Friedman would say no.
Milton Friedman once declared "nothing is so unimportant as the
quantity of money expressed in terms of the nominal monetary
unit. . . The situation is very different with respect to the
real quantity of money."
Would you care to explain this in the context of the neutrality
of money?
>
>>Mr. Witte forgets how many times he has referred to the
>>authoritative content of introductory or intermediate text books.
>
> No, I refer to textbooks for their central role as a place for someone
>with a weak background in some topic to find a careful explanation of the
>material of interest. This is the role and comparative advantage of
>textbooks for passing along information to people who are truly interested
>in some subject, particularly relative to typed out newsgroup discussion.
Perhaps the central role of the introductory textbooks is the
main source of the problem in macroeconomics teaching today.
>
> However, note that it was Mr. Hummel who brought textbooks into this
>discussion as support for his claims about the inadequacy of "mainstream
>macroecomics", but he has never been able to produce a list of such
>offending texts. As such, he used textbooks as a call to authority,
>that is he offered no support for his position except to point to some
>books, yet he is unable to say exactly what books he means. It's really
>sad, given Mr. Hummel's other complaints about citations.
Wrong. You are ignoring the example I gave about the Blinder
textbook.
WFH
Mark Patrick Witte
aggregation assumptions (yawn), insults, mermaids?, insults,...any empirical
support for approaches that Vienneau finds acceptable? Nope.
(That he would bring up the Schelling report is particularly amusing with
its call for more empirical work to be published. The critique of the
report is that there are a lot of competing journals that are always
competiting to attact readers by looking to publish papers that make
unusual claims and then back them up with sound theory and good
empirical work.)
In article <rvien-DAAF52....@news.dreamscape.com>,
Mark Patrick Witte
William F Hummel <wfhu...@attbi.com> wrote:
>On 25 Mar 2002 22:30:52 GMT, mwi...@merle.acns.nwu.edu (Mark
>Patrick Witte) wrote:
>
>> So, the point is controlling the money supply over a longer
>>period...to avoid recessions and inflations.
>
>Yes, the Fed is constantly working to avoid recessions and
>inflations. But no, the Fed has no target for the money supply,
>and without a target it's meaningless to talk about control. In
>fact the Fed is on record as declaring that the relation between
>any of the monetary aggregates and its primary policy objectives
>is unpredictable, and has abandoned targeting the monetary
>aggregates.
Indeed, because it is targeting the co-determined interest rate
variable. It should be noted that the relationship between the FFR and
other measures of economic activity is not stable either, hence its
frequent alteration.
>The notion that the Fed controls the money supply is
>one of the hoary errors of mainstream economics. It pervades the
>textbooks, sometimes implicitly so the student is not even aware
>of the assumption. It is one of the misconceptions I have been
>trying to exorcise, an uphill battle in a forum where most have
>been indoctrinated with mainstream training.
Classic. Remember that.
>Milton Friedman once declared "nothing is so unimportant as the
>quantity of money expressed in terms of the nominal monetary
>unit. . . The situation is very different with respect to the
>real quantity of money."
>
>Would you care to explain this in the context of the neutrality
>of money?
If the Fed had run a policy whereby the nominal money supply were
twice as high today as it is, prices would be twice as high, but the real
economy would be essentially unchanged. However, a change in the real
supply of money can bring on things like the Great Depression. Is
Friedman's intent so opaque here?
>>>Mr. Witte forgets how many times he has referred to the
>>>authoritative content of introductory or intermediate text books.
>>
>> No, I refer to textbooks for their central role as a place for someone
>>with a weak background in some topic to find a careful explanation of the
>>material of interest. This is the role and comparative advantage of
>>textbooks for passing along information to people who are truly interested
>>in some subject, particularly relative to typed out newsgroup discussion.
>
>Perhaps the central role of the introductory textbooks is the
>main source of the problem in macroeconomics teaching today.
Examples of those problems? What do texts get wrong that you get right?
Please tell me, I have a meeting with a rep from South-Western texts this
week. Please cite titles and problems.
>> However, note that it was Mr. Hummel who brought textbooks into this
>>discussion as support for his claims about the inadequacy of "mainstream
>>macroecomics", but he has never been able to produce a list of such
>>offending texts. As such, he used textbooks as a call to authority,
>>that is he offered no support for his position except to point to some
>>books, yet he is unable to say exactly what books he means. It's really
>>sad, given Mr. Hummel's other complaints about citations.
>
>Wrong. You are ignoring the example I gave about the Blinder
>textbook.
You gave an example from a Blinder textbook? No, I gave an example
from a Blinder textbook, one that you mis-interpreted as badly as you
seem to misinterpret Cagan. Please supply a some elements from your list of
"any college macro text that contains serious errors. And please give a
citation for what Cagan article you are talking about so that I can discuss
it as I will shortly do with your Blinder misunderstading.
Mark Patrick Witte
William F Hummel <wfhu...@attbi.com> wrote:
>On 25 Mar 2002 08:14:58 GMT, mwi...@merle.acns.nwu.edu (Mark
>Patrick Witte) wrote:
>> Why does all this matter? It matters because Mr. Hummel's
>>misunderstanding of the operating choices of monetary authorities has
>>led him to believe and repeatedly state that central banks cannot
>>increase the supply of reserves in the system.
>
>Mr. Witte continues to make this claim, but he should be
>embarrassed to do. It is patently false.
>
>>It has led him to badly mis-read Phillip Cagan.
>
>Wrong. It is Mr. Witte who misread Cagan.
While I know it is credentialist of me to post or ask for citations,
I really would like to know what part of this classic old work on monetary
theory I am mis-reading. Earlier post a specific reference and quote from
a Cagan article that relates to real effects of exogenous increases in the
money supply, but if Mr. Hummel has in mind another piece of research by Mr.
Cagan, I hope that he will be good enough to give the reference and his
interpretation of the paper.
Mark Patrick Witte
Hummel that contain the word "mainstream" generates an
interesting collection of complaints. Again and again we are told
that mainstream economics (though never defined) is full of
falsehoods as are its textbooks (though none are cited) yet
economists continue to teach these errors either because they are
brainwashed, unwilling to fight the power, or because it is the path
of least resistance. Please see the list at the bottom for a collection
of some of Hummel's greatest hits. Here is today's latest
contribution:
>The notion that the Fed controls the money supply is
>one of the hoary errors of mainstream economics. It pervades the
>textbooks, sometimes implicitly so the student is not even aware
>of the assumption. It is one of the misconceptions I have been
>trying to exorcise, an uphill battle in a forum where most have
>been indoctrinated with mainstream training.
What are the falsehoods being taught? As far as I can tell, the
great errors that "mainstream economics" propagates are:
1) Money is in the long run neutral.
2) The monetary authority controls the money supply.
It is not clear that Mr. Hummel understands what is generally
meant by the long run neutrality of money. It is simply that a
higher nominal level of money balances will only change nominal
factors, not real allocations. As for the second issue, well, that has
been at the heart of this debate.
A quick overview. The Fed has "goals" (low inflation, low
unemployment, nice growth, etc.). It also has "tools" (OMOs,
discount policy, reserve requirements, etc.). However, changing
the level of one of its tools has now contemporaneous effect on the
levels of its goals due to long policy lags. As a result, the Fed uses
two classes of "proximate targets" (short term quantities like
reserves, monetary base, etc. or various short term interest rates)
that respond quickly to the tools, and "intermediate targets"
(Longer run monetary aggregates or interest rates) to monitor its
progress toward its goals. Because for both sets of targets,
quantities and interest rates are co-determined, a choice to target
one is also a choice to adjust the other one to attempt to hit the
targeted variable. That is, either quantities or interest rates can be
chose to be the target, and the one not chosen must respond to the
needs to pursue the target.
Over the years, many targets have been used. These have
included various reserve and monetary aggregates as well as
various interest rates. Currently the target is the Fed Funds Rate,
for reasons that Alan Blinder describes in some detail in his 1999
central banking book. This co-determination problem was very
nicely worked out in a paper by a Fed guy, William Poole (QJE,
May 1970), in response to what was known as the "Instrument
Problem" debate in the major journals during the 1960s.
Going back to before even Ricardo, there have been discussions
of controlling the money supply, but in modern work (like since
the 1960s) this is generally done in the context of the above
framework where the co-determination issue is clear. So, what
does "mainstream economics get wrong? That's not so clear am
Mr. Hummel provides no examples. Here is an example I found of
how this issue is presented in one intro text.
"When the demand curve for money shifts outward, the Fed
must tolerate a rise in interest rates, a rise in the money stock,
or both. It simply cannot control *both* the supply of money
*and* the interest rate. If it tries to keep M steady, then r will rise
sharply. Conversely, if it tries to stabilize r, then M will shoot up."
(Emphasis from the original, p. 286 of _Macroeconomics:
Principles and Policy_, Baumol and Blinder, 1999.)
What objections does Mr. Hummel have to this?
H| What's wrong here is that neither the money supply nor the
H| interest rate are defined in measurable terms. Is M one of the
H| monetary aggregates? If so, which? Or is M really money in
H| the sense of the monetary base? Is r the overnight interest rate
H| controlled by the Fed or some nebulous market rate in the
H| private sector.
Since the Fed has at times targeted various monetary and reserve
aggregates as well as various interest rates, the above objection by
Mr. Hummel is meaningless. The textbook is laying out a
statement of general theory that is consistent with the Federal
Reserve's views on policy. Not surprisingly, the Fed's current
choice of operating procedure. Hummel continues:
H| This is a good example of what is wrong or misleading in
H| introductory texts. The words often seem plausible until we
H| look at them carefully.
H| If M refers to a monetary aggregate, then the statement
H| should better read the demand for "credit" rather than
H| "money" because it is really the banks the create most of
H| the monetary aggregates. Now the demand for credit is a
H| function of a large number of economic variables, only
H| one of which is the price of credit. Furthermore the price
H| of short term credit is pretty much controlled by the Fed.
H| It is not a free variable as implied
The above paragraph is problematic. It displays a confusion
about what an exogenous change in demand for money is, raises a
immaterial issue about transactions balances, it suggests that banks
create credit when it is bank/customer interactions that do hence
the nature of the shock in this example, and it does what Mr.
Hummel likes to do, which is assume that the Fed must
always and forever be controlling the interest rate. Again, this is
the Fed's current operating policy choice, but it has not always
been the choice, and need not always be the choice. Mr. Hummel often seems
confused on this point. Hummel continues:
H| The truth is that Blinder's "law" is simply not supported by
H| the evidence under almost any definition of the terms. An
H| important missing link is the role of the FOMC, a body of 12
H| people (usually dominated by the chairman) that decide what
H| the short term rates will be for reasons that normally have little
H| relation to size of the money supply. Indeed the Fed has
H| declared that it no longer is officially targeting any monetary
H| aggregate, although everyone knows that has been true since the H|
mid-1980s.
Huh? (Yes, the book discusses the FOMC.) Blinder says:
(The Fed) "simply cannot control *both* the supply of money
*and* the interest rate." Is Mr. Hummel suggesting that a vote of
the FOMC and its dominating chairman could reverse this?
Anyway, if Mr. Hummel really has some examples of major
textbooks that get important issues wrong, I hope he will
eventually post those examples. I hope that if he doesn't have any
such examples, that he won't merely return to this one and try
manufacture controversy about this excerpt.
One further area of discussion is warranted from Mr. Hummel's
post. Consider the following exchange:
W| Why does all this matter? It matters because Mr. Hummel's
W| misunderstanding of the operating choices of monetary
W| authorities has led him to believe and repeatedly state that
W| central banks cannot increase the supply of reserves in the
W| system.
H| Mr. Witte continues to make this claim, but he should be
H| embarrassed to do. It is patently false.
This is a very strong statement, and one he has often made.
Why does Mr. Hummel believe this is so? Is it based upon the
work of Basel Moore? Or Phillip Cagan? Or some logical or
empirical support? Will Mr. Hummel simply come back and say
that the Fed can't do this because to do so would cause the FFR to
fall? I look forward to seeing the monetary reasoning of the man
who made the following blanket pronouncements.
______________
(August 23, 1999)
No doubt many macro principles can stand up to empirical
tests. But some fundamental axioms of macro cannot, in my
opinion. One of them is the axiom of the 'reals', that money is
neutral as it affects the economy in the "long run", not meaning
forever but for long enough to really matter.
(May 13, 1999)
Anderson unwittingly describes what is wrong with much of
mainstream economics: teach what is generally believed, whether
it is true or not. Each generation of academic economists
perpetuates some of the false concepts of previous generations,
often because it is the path of least resistance. Undergraduates are
taught much that is known to be outdated, oversimplified, and in
some cases misleading to false.
(Jan 17, 2002)
Mainstream monetary theory is in a crisis because it doesn't
work. It falsely tells us the money supply is controlled by the
Fed. It falsely tells us the "interest rate" is a dependent
variable, and builds an elaborate theory around that. It makes
much of a "money multiplier" that is merely an after the fact
observation of the multiple. It has been misleading successive
generations of economists who are so brainwashed by their
predecessors that they can't bear to abandon the house of cards
they spent so much effort to build.
(March 24, 2000)
>>And show me one mainstream macro principles text that
>>presents a coherent story on how our monetary system works.
>>WFH
>Show me one that doesn't.
Anyone of the mainstream texts.
(Feb 9, 2002)
Also like most mainstream economists you assume that the
money supply is a control variable. You imply that the Fed can
increase the money supply at will, and if it does then the
interest rate falls. In truth the interest rate is the control
variable, not the money supply. You have inverted cause and
effect.
(Jan 22, 2002)
You ask "so what?" My answer is that very few economists today
believe that the money supply is a function of demand within the
private sector (endogenous) rather than controlled by the central
bank (exogenous). And so we see elaborate theories in
mainstream economics built on a false premise of how a fiat
money system works. That in turn results in bad policies, not a
"so what?"
(Nov 11, 2000)
This is what's so disconcerting about much of undergraduate
economics. The mainstream econ textbooks are full of
oversimplifications and a fair share of disproven concepts. The
sad fact is that most graduate instructors know it, but they have
to earn a living.
(Sept. 15, 1999)
Mainstream texts offer a
different, and I claim invalid, theory of money, usually based on
monetarist principles. Most mention the endogenous theory of
money in passing, but don't really develop it.
(April 11, 1997)
And I am sure there are many misleading models in the what is
considered mainstream economics that have been accepted
uncritically far too long.
_____________
In article <ifvu9u0atichsuek4...@4ax.com>,
susupply
"Mark Patrick Witte" <mwi...@merle.acns.nwu.edu> wrote in message
news:a7pc5g$l4n$1...@news.acns.nwu.edu...
> Doing a quick Google search on sci.econ posts by William
> Hummel that contain the word "mainstream" generates an
> interesting collection of complaints. ....
[Hummel had written:]
> >The notion that the Fed controls the money supply is
> >one of the hoary errors of mainstream economics.
You can also get an interesting collection of concessions from Hummel, such
as this:
<<----------------------------------------
From: William F. Hummel (wfhu...@concentric.net)
Subject: Re: What controls the money supply? was: Inflation? Dead or Alive?
Newsgroups: sci.econ
Date: 1998/05/24
On Sun, 24 May 1998 08:08:13 GMT, oldn...@mindspring.com
(Grinch) wrote:
>>>William F. Hummel writes:
>>The Fed can only steer the money supply in a desired
>>direction and with a substantial time lag unless it is willing to
>>leave interest rates totally uncontrolled.
>
>William, it reads to me like you just said the Fed indeed *can* steer
>the money supply in a desired direction with a time lag -- and with
>less of a time lag if it is willing to let rates move sharply.
>
>If so, I agree and that's enough control to satisfy me. With that
>capability, the Fed can prevent long-term inflationary or deflationary
>expectations from setting in, which really is all that matters.
[Hummel responds:]
I guess we differ on the meaning of "control"
--------------------------------------------->>
And years later, we still do, it seems.
I wonder if William has ever been able to reconcile his claim back then:
>Paul Volcker is no dummy. He was fully aware of the fact that
>the Fed could not control the money supply directly through its
>control of bank reserves. He was using the monetarist
>prescription as a screen for his real objective which was to
>break the inflationary spiral that was building up with no end in
>sight. Political forces for following monetarism during the late
>1970s and early 1980s made it virtually impossible to avoid that
>path for a while.
with what Volcker himself said in his book (courtesy of Grinch):
"Part of the difficulty, I had come to believe, lay in the Fed's
operating techniques. . .
"In our focus on interest rates lay a psychological trap, and the
implications became worse as the inflationary momentum grew. With the
best staff in the world and all the computing power we could give
them, there could never be any certainty about just the right level of
the federal funds rate to keep the money supply on the right path and
to regulate economic activity. . .
[snip]
"In September 1979, the markets seemed to be confident of only one
thing: Bet on inflation. Even if the cost of borrowing to do so was
rising, that cost lagged inflation, and there always seemed to be
enough money to finance whatever you wanted to buy.
"That situation forced me to think hard about how we could be
more effective. I knew that for years some in the Federal Reserve had
wanted to put more emphasis on directly controlling some measure of
the money supply . . .
"That was philosophically in line with the monetarist school
of thought that Milton Friedman had done so much to popularize. I was
skeptical of the extreme claims of that school about the virtues of
constant money growth . . . but shorn of some of those extreme claims,
the approaches that had been debated within the Fed seemed worth
looking at again . . .
"In my own mind, I had about concluded that we could achieve
several things by a change in our approach. Among the most important
would be to discipline ourselves. Once the Federal Reserve put more
emphasis on the money supply, not just by publicly announcing the
target but by actually changing its operating techniques to increase
the chances of actually hitting it, we would find it difficult to back
off even if our decisions led to painfully high interest rates.
"More focus on the money supply also would be a way of telling
the public that we meant business. People don't need an advanced
course in economics to understand that inflation has something to do
with too much money"
What Volcker is saying in the above (perhaps after reading too many
mainstream textbooks, heh heh) is that the Fed was able to (in Hummel's
words) "break the inflationary spiral" by targeting some measure of the
money supply. Which they hadn't been able to do by targeting the FFR.
Patrick
William F Hummel
allusion to academic credentials or the lack thereof. That's
quite an improvement over most of his prior posts in which
argument by "authority" plays an important part. On the other
hand, I doubt that researching and quoting a list of "blanket
pronouncements" of his opponent was very smart. It brings
together in one place a body of mutually related statements, and
tends to focus the reader's attention on his opponent's views
rather than his own. It was a nice gesture for which I must
thank him. However I'm not sure why he referred to them as
"blanket pronouncements." Perhaps it was just a subtle warning
to the reader that the statements are the views of one person and
not to be taken seriously. Or perhaps he was suggesting that the
statements can indeed be fully understood in the absence of the
context in which they were made. Or perhaps it is just his
gentle way of down-putting. In any case it says more about Mr.
Witte than it does his opponent.
> Doing a quick Google search on sci.econ posts by William
>Hummel that contain the word "mainstream" generates an
>interesting collection of complaints. Again and again we are told
>that mainstream economics (though never defined) is full of
>falsehoods as are its textbooks (though none are cited) yet
>economists continue to teach these errors either because they are
>brainwashed, unwilling to fight the power, or because it is the path
>of least resistance. Please see the list at the bottom for a collection
>of some of Hummel's greatest hits. Here is today's latest
>contribution:
>
>>The notion that the Fed controls the money supply is
>>one of the hoary errors of mainstream economics. It pervades the
>>textbooks, sometimes implicitly so the student is not even aware
>>of the assumption. It is one of the misconceptions I have been
>>trying to exorcise, an uphill battle in a forum where most have
>>been indoctrinated with mainstream training.
>
> What are the falsehoods being taught? As far as I can tell, the
>great errors that "mainstream economics" propagates are:
> 1) Money is in the long run neutral.
> 2) The monetary authority controls the money supply.
These are certainly two of the most prominent, and have far
reaching effects on the thought processes of many economists.
>
> It is not clear that Mr. Hummel understands what is generally
>meant by the long run neutrality of money. It is simply that a
>higher nominal level of money balances will only change nominal
>factors, not real allocations. As for the second issue, well, that has
>been at the heart of this debate.
Mr. Witte declares what is "generally meant" by the long run
neutrality of money as though definitions were the important
issue. That may be true in a college classroom, but it is out of
place here. Definitions are necessary for communicating ideas,
but they are not the end in themselves. What I mean by the
neutrality may need definition for Mr. Witte's benefit. I am
talking about the fact that shocks in the credit money system can
have long term effects on the real economy. The classic example
is the Great Depression. Further, that there is no such thing as
shocks that will eventually have zero effect on the real economy.
I have explained why in several earlier posts in this debate and
won't belabor it here. Mr. Witte seems to want to focus on my
presumed lack of understanding definitions rather than substance.
Some would call that a sign of pedantry.
>
> A quick overview. (snipped)
> Going back to before even Ricardo, there have been discussions
>of controlling the money supply, but in modern work (like since
>the 1960s) this is generally done in the context of the above
>framework where the co-determination issue is clear. So, what
>does "mainstream economics get wrong? That's not so clear am
>Mr. Hummel provides no examples. Here is an example I found of
>how this issue is presented in one intro text.
Strange how Mr. Witte contradicts himself. In the above
paragraph he says Mr. Hummel provides no examples of how
mainstream economics gets it wrong. And immediately following,
he quotes Mr. Hummel's example of what is wrong with mainstream
economics.
Read carefully. I said the Fed cannot control the (credit) money
supply in any satisfactory sense, and for Blinder to imply that
it can is very misleading. Further, I said the Fed cannot
control bank reserves and the overnight rate simultaneously and
independently.
>
> Anyway, if Mr. Hummel really has some examples of major
>textbooks that get important issues wrong, I hope he will
>eventually post those examples. I hope that if he doesn't have any
>such examples, that he won't merely return to this one and try
>manufacture controversy about this excerpt.
>
> One further area of discussion is warranted from Mr. Hummel's
>post. Consider the following exchange:
>
>W| Why does all this matter? It matters because Mr. Hummel's
>W| misunderstanding of the operating choices of monetary
>W| authorities has led him to believe and repeatedly state that
>W| central banks cannot increase the supply of reserves in the
>W| system.
>
>H| Mr. Witte continues to make this claim, but he should be
>H| embarrassed to do. It is patently false.
>
> This is a very strong statement, and one he has often made.
>Why does Mr. Hummel believe this is so? Is it based upon the
>work of Basel Moore? Or Phillip Cagan? Or some logical or
>empirical support? Will Mr. Hummel simply come back and say
>that the Fed can't do this because to do so would cause the FFR to
>fall? I look forward to seeing the monetary reasoning of the man
>who made the following blanket pronouncements.
>
[Blanket pronouncement deleted to save disc space.]
Mr. Witte says "Mr. Hummel's misunderstanding of the operating
choices of monetary authorities has led him to believe and
repeatedly state that central banks cannot increase the supply of
reserves in the system."
I find it a bit sad that Mr. Witte continues to play this type
tune. It's badly distorted, as I suspect he well knows. My
understanding of monetary economics has developed over several
years during which I sought (and continue doing so) to understand
monetary systems in general and the US system in particular. It
gradually became clear to me that the conventional wisdom is
wrong or misleading in several respects. I've tried to present
some of these insights on sci.econ and find that, as expected,
they are too hard or strange for many to swallow. They are in
fact a threat to some of the basic axioms on which macroeconomics
is built. It's not surprising that those who have worked hard to
gain degrees in economics are loath to accept what would shake
the foundations of their learning. So we see a great deal of
heated opposition to them rather than an open-minded look that
should be the hallmark of a scientific training.
WFH
Mark Patrick Witte
susupply <susu...@mindspring.com> wrote:
Actually, I think Hummel, Grinch, Volcker, and I all have the same view
on what was going on in this case, with the only difference being that
Hummel is uncomfortable with the time lags that may be involved in such
control (recalling his rejection of that portion of the letter by Donald
Kohn).
The Fed was in big trouble in that era, inflation was high, outside
critics like Milton Friedman were calling for its abolition (in favor of a
simple x% rule, and members of Congress were listening. As such, the Fed
had little political support for a campaign of high real interest rates to
defeat inflation. So...Volcker essentially said, "Hey, maybe my critics are
right, I'll try doing what they say and target quantities (and target them
at a low level that will cause high real rates since rates and quantities
are co-determined). Heh, heh, heh!"
Without the threat of Congress messing with how the Fed was overseen,
Volcker could have done the same thing by targeting rates, but instead he
let the bad publicity from the harsh effects of the tight money/high rates
policy fall on folks like Friedman. It was a brilliant political move
(although the Fed still took considerable political heat for causing a deep
recession).
Mark Patrick Witte
I strive for clarity, but evidently miss. Heeding Ben Franklin but
not W.C. Fields, I shall try again.
Mr. Hummel has a documented record of railing against what he
calls "mainstream economics", particularly how it is presented in
textbooks that are full of grievous errors.
Does he have a case? I see basic two problems with it.
1) Mr. Hummel complains about (a) the concept of long run
monetary neutrality, about (b) claims about the monetary authority
controlling the money supply, and about (c) the claim that
monetary authorities can expand the nominal supply of money and
thus create inflation. However, he has never made a convincing
case against any of these points. (a) He has made it clear that what
he has in mind as long run neutrality of money is not what
economists such as Milton Friedman mean when they use the term.
(b) Mr. Hummel's complaints about controlling the money supply
would apply just as well to papers written in another era that
described the monetary authority as controlling interest rates (as
many papers by what he calls "mainstream economists" do); but in
both cases, the co-determination of interest rates and quantity
variables is generally explained or referenced so there would be no
confusion for the reader. This is particularly true with the
textbooks I examined, as supported by the quote I supplied from
one by Baumol and Blinder. (c) Where to start with denial of the
money-inflation link?
2) As for the second problem, dealing with Mr. Hummel's
complaint about textbooks, although he has often been asked to
support his claim concerning such texts, Mr. Hummel has never
introduced even a single example of such a book (the texts
referenced in this thread have been from me, as has been the single
quotation from any college text).
As such, Mr. Hummel's complaints against what he calls
"mainstream economics" seems like a lot of hat, but no cattle.
There are certainly a lot of exciting, vigorous disagreements within
monetary economics, but those don't include stuff like this:
(From _Macroeconomics: Principles and Policy_, p. 286,
Baumol and Blinder, p. 286 of 1999. Emphasis from the original)
"When the demand curve for money shifts outward, the Fed
must tolerate a rise in interest rates, a rise in the money stock,
or both. It simply cannot control *both* the supply of money
*and* the interest rate. If it tries to keep M steady, then r will rise
sharply. Conversely, if it tries to stabilize r, then M will shoot up."
(Emphasis from the original, p. 286 of _Macroeconomics:
Principles and Policy_, Baumol and Blinder, 1999.)
H| Read carefully. I said the Fed cannot control the (credit)
H| money supply in any satisfactory sense, and for Blinder to
H| imply that it can is very misleading.
Ah, this sentence seems to hang on the word "satisfactory." I'm
not certain what the metric is for whether the Fed is currently
satisfactory in keeping the Fed Funds Rate on target. Is the Fed's
inability to control monetary aggregates as one of Poole's
intermediate targets related to Mr. Hummel's concern that doing so
would lead to lead to "uncontrolled" fluctuations of interest rates?
Anyway, Blinder is careful to use the word "tries" in discussing the
Fed's pursuits of its targets so Mr. Hummel is simply quibbling
here.
H| Further, I said the Fed cannot control bank reserves and the
H| overnight rate simultaneously and independently.
As does every undergraduate macro text that I know of,
including in the quote above.
So, who will Mr. Hummel rage against now, if not "mainstream"
economists and their texts?
In article <60f1auoomnjn79n5g...@4ax.com>,
William F Hummel <wfhu...@attbi.com> wrote:
William F Hummel
Patrick Witte) wrote:
>
> I strive for clarity, but evidently miss. Heeding Ben Franklin but
>not W.C. Fields, I shall try again.
>
> Mr. Hummel has a documented record of railing against what he
>calls "mainstream economics", particularly how it is presented in
>textbooks that are full of grievous errors.
I think I've made my views clear enough, but of course that's for
others to decide. Having seen nothing new in Mr. Witte's latest
remarks, I'll sign off on this debate.
WFH
susupply
> In article <a7q4dd$npg$1...@slb6.atl.mindspring.net>,
> susupply <susu...@mindspring.com> wrote:
>
> Actually, I think Hummel, Grinch, Volcker, and I all have the same view
> on what was going on in this case, with the only difference being that
> Hummel is uncomfortable with the time lags that may be involved in such
> control (recalling his rejection of that portion of the letter by Donald
> Kohn).
Well, that was my point. After a considerable amount of cyberspace was
gobbled up, the only real disagreement came down to the meaning of the word,
"control". But now, Hummel seems to have forgotten the earlier discussion
and is back to riding with Sancho Panza:
> My
> understanding of monetary economics has developed over several
> years during which I sought (and continue doing so) to understand
> monetary systems in general and the US system in particular. It
> gradually became clear to me that the conventional wisdom is
> wrong or misleading in several respects. I've tried to present
> some of these insights on sci.econ and find that, as expected,
> they are too hard or strange for many to swallow. They are in
> fact a threat to some of the basic axioms on which macroeconomics
> is built. It's not surprising that those who have worked hard to
> gain degrees in economics are loath to accept what would shake
> the foundations of their learning. So we see a great deal of
> heated opposition to them rather than an open-minded look that
> should be the hallmark of a scientific training.
BTW, wasn't it Jimmy Carter who took the political fallout?
Mark Patrick Witte
susupply <susu...@mindspring.com> wrote:
>
>"Mark Patrick Witte" <mwi...@merle.acns.nwu.edu> wrote in message
>news:a7qcdr$f29$1...@news.acns.nwu.edu...
>> In article <a7q4dd$npg$1...@slb6.atl.mindspring.net>,
>> susupply <susu...@mindspring.com> wrote:
>>
>> Actually, I think Hummel, Grinch, Volcker, and I all have the same view
>Well, that was my point. After a considerable amount of cyberspace was
>gobbled up, the only real disagreement came down to the meaning of the word,
>"control". But now, Hummel seems to have forgotten the earlier discussion
>and is back to riding with Sancho Panza:
Ah yes, I see!
>BTW, wasn't it Jimmy Carter who took the political fallout?
No, Volcker didn't try this until the beginning of Reagan's term,
and this led to the big recession then.
Mark Patrick Witte
Oh, wait! I did find something new. Concerning the debate
about money causing inflation, today I took a look at Phillip
Cagan's 1956 paper, "The Monetary Dynamics of Hyperinflation."
Cagan was considering whether inflation could rise spontaneously
due to shifts in money demand, as was suggested by some
researchers. He found no evidence of it.
Cagan writes that the countries in his study "never reached
the critical level in the seven hyperinflations, for none
had self-generating price increases. Instead of running
away on their own, price increases remained closely
linked to past and current changes in the quantity of money
and could have been stopped at any time, as they finally were, by
tapering off the issue of new money." (p. 88) "If in fact price
increases were not self-generating, what accounted for their
tremendous size? The above explanation of their behavior in terms
of large increases in the quantity of money only raises the further
question, 'Why did this quantity increase so much?' Clearly,
issuing money on a large scale serves as a major source of funds
for government expenditures." (p. 88-89) What of theories of
demand side generated inflations? "This study points to the
opposite sequence and indicates that an extreme rise in prices
depends almost entirely on changes in the quantity of money."
H| I find it a bit sad that Mr. Witte continues to play this type
H| tune. It's badly distorted, as I suspect he well knows.
H| It gradually became clear to me that the
H| conventional wisdom is wrong or misleading in several
H| respects. I've tried to present some of these insights on sci.econ
H| and find that, as expected, they are too hard or strange for many
H| to swallow. They are in fact a threat to some of the basic
H| axioms on which macroeconomics is built. It's not surprising
H| that those who have worked hard to gain degrees in economics
H| are loath to accept what would shake the foundations of their
H| learning. So we see a great deal of heated opposition to them
H| rather than an open-minded look that should be the hallmark of
H| a scientific training.
I am not sad to see this thread end, but considering the above
text, I would like to make a couple comments. I am sorry if Mr.
Hummel feels that I have distorted his position. This was never
my intent, but it was it was to clarify, moreover a part of testing
the soundness of ideas is by looking at them from other angles. I
recommend yet again that Mr. Hummel read Thomas Kuhn's _The
Structure of Scientific Revolutions_ if he would like to really
understand what is the hallmark of scientific training and method.
Why do smart, informed people disagree about the same facts?
Fear not, Kuhn cannot by any stretch of the imagination be
considered an economist. I claim that there is no "mainstream"
where economists agree on even important monetary issues (i.e.
reversion versus unit roots, or rules versus discretion), but that
the issues Mr. Hummel raises are really long settled ones for anyone
in the field. I certainly have learned things from Mr. Hummel's
posts, but not these.
The reason I don't buy what Mr. Hummel is promoting in these
recent threads is not because the ideas "are too hard or strange"
nor even that accepting them would devalue my degree since this
does not relate to my work in any meaningful way. Rather it
is that the ideas are simply wrong. I wish they were right,
and so poorly understood, so that I could take them and
publish them, get a big raise, tenure, and also improve the
performance of our monetary system. But I can't because I've
given them some thought, and I don't think they are right. I've
certainly put a lot of time into a number of research topics that I
thought were very promising, but turned out to be dead-ends, and I
fear that is what we have here as well. I've certainly read a
number of papers by very good economists that had real problems
and ended up never going anywhere. It happens, but the point is to
junk what doesn't work, and spend our time on what does.
Mason Clark
on sci.econ (except the socialist pkt'rs) understands
that inflation is caused by an increase in the money supply.
Mason C ain't life simple?
susupply
> Oh, wait! I did find something new. Concerning the debate
> about money causing inflation, today I took a look at Phillip
> Cagan's 1956 paper, "The Monetary Dynamics of Hyperinflation."
Darn! The Keen seminar is over.
[snip]
> I am not sad to see this thread end, but considering the above
> text, I would like to make a couple comments. I am sorry if Mr.
> Hummel feels that I have distorted his position. This was never
> my intent, but it was it was to clarify, moreover a part of testing
> the soundness of ideas is by looking at them from other angles.
And here's another angle from the recently deceased friend of Krugman and
Stein:
http://cowles.econ.yale.edu/P/cd/d11b/d1187.pdf
<<--------------------------------------
The Mystery: Why and How Does Monetary Policy Rule the Economy?
The interest rate on overnight loans of federal funds is, as explained
above, the Fed's instrument of
policy. It is a market rate, which the Fed controls by buying or selling
Treasury bills (in usual practice
with agreements to repurchase them) at its intervention rate, nowadays
publicly announced. At
scheduled meetings eight times a year - and occasionally at other times -
the Federal Reserve
System's "Federal Open Market Committee" (FOMC) reconsiders and sometimes
changes the inter-vention
rate, generally by 25 or 50 basis points, rarely by more.
The tail wages the dog. By gently touching a tiny tail, Alan Greenspan wags
the mammoth dog,
the great American economy. Isn't that remarkable? The federal funds rate is
the shortest of all
interest rates, remote from the rates on assets and debts by which
businesses and households finance
real investment and consumption expenditures counted in GDP. Why does
monetary policy work?
How? It's a mystery, fully understood by neither central bankers nor
economists.
----------------------------------------->>
susupply
No, it was the fall of 1979, when he announced the switch in policy . I
remember this well, as I had some real estate I needed to sell in the summer
of 1980, and managed to pull if off in the window when interest rates came
down sharply (and briefly). What is interesting about this period is the
votality of the policy, and the market responses to the credit controls that
accompanied the monetary policies.
After the election there was no real reason not to swallow the consequences
(i.e. the recession), especially since Reagan supported his goal of
suppressing the inflation.
Mark Patrick Witte
>
>What Volcker is saying in the above (perhaps after reading too many
>mainstream textbooks, heh heh) is that the Fed was able to (in Hummel's
>words) "break the inflationary spiral" by targeting some measure of the
>money supply. Which they hadn't been able to do by targeting the FFR.
Did Reagan support Volcker in the fight against inflation? Reagan supported
Volcker just as firmly as he supported free trade, that is Reagan talked a
good game but his actions where largely harmful to the cause. Reagan's
appointments to the FOMC were not those that Volcker favored but were almost
uniformly Volcker opponents, favoring much lower rates (particularly Preston
Martin as the Vice-Chair).
Who bore the political fallout for Volcker's inflation fight, Carter or
Reagan? Certainly Carter has cause to be unhappy with Volcker, but Carter's
monetary problems were much more due to Arthur Burns and Carter's own man,
G. William Miller. Volcker didn't get serious about crushing inflation
until after Reagan had come into office, as can be seen as the spread
between the monthly prime rate and the cumulative 12-month log growth of the
CPI, hence the real interest rate. These high rates caused the deepest
recession since the 1930s, for which Reagan was widely blamed, and cost the
Republican's during the 1982 election.
1977.01 6.25 5.066585745 1.183414255
1977.02 6.25 5.904492584 0.345507416
1977.03 6.25 6.230388334 0.019611666
1977.04 6.25 6.720874969 -0.470874969
1977.05 6.41 6.520319381 -0.110319381
1977.06 6.75 6.48691543 0.26308457
1977.07 6.75 6.453852114 0.296147886
1977.08 6.83 6.421124246 0.408875754
1977.09 7.13 6.225727524 0.904272476
1977.1 7.52 6.194448596 1.325551404
1977.11 7.75 6.496872119 1.253127881
1977.12 7.75 6.464553596 1.285446404
1978.01 7.93 6.59217208 1.33782792
1978.02 8 6.052542039 1.947457961
1978.03 8 6.180828737 1.819171263
1978.04 8 6.297479916 1.702520084
1978.05 8.27 6.899287149 1.370712851
1978.06 8.63 7.174390486 1.455609514
1978.07 9 7.446035367 1.553964633
1978.08 9.01 7.562657533 1.447342467
1978.09 9.41 8.142210472 1.267789528
1978.1 9.94 8.552217344 1.387782656
1978.11 10.94 8.499321283 2.440678717
1978.12 11.55 8.607460877 2.942539123
1979.01 11.75 8.847229763 2.902770237
1979.02 11.75 9.386613623 2.363386377
1979.03 11.75 9.76017878 1.98982122
1979.04 11.75 9.971078312 1.778921688
1979.05 11.75 10.16326455 1.586735446
1979.06 11.65 10.5052776 1.1447224
1979.07 11.54 10.84092985 0.699070149
1979.08 11.91 11.18643577 0.723564231
1979.09 12.9 11.22539942 1.674600582
1979.1 14.39 11.3967187 2.993281302
1979.11 15.55 11.86057424 3.689425759
1979.12 15.3 12.44698419 2.853015805
1980.01 15.25 12.98750814 2.262491858
1980.02 15.63 13.24469898 2.385301016
1980.03 18.31 13.62102048 4.688979517
1980.04 19.77 13.61836796 6.151632043
1980.05 16.57 13.47561325 3.094386748
1980.06 12.63 13.33582474 -0.705824744
1980.07 11.48 12.35502394 -0.875023938
1980.08 11.12 12.12445486 -1.004454863
1980.09 12.23 12.01696716 0.213032837
1980.1 13.79 11.89643707 1.89356293
1980.11 16.06 11.89519429 4.164805714
1980.12 20.35 11.64817993 8.70182007
1981.01 20.16 11.14955042 9.010449577
1981.02 19.43 10.7888962 8.641103799
1981.03 18.05 10.08560035 7.964399646
1981.04 17.15 9.654551041 7.495448959
1981.05 19.61 9.34167672 10.26832328
1981.06 20.03 9.255155737 10.77484426
1981.07 20.39 10.23292918 10.15707082
1981.08 20.5 10.27127827 10.22872173
1981.09 20.08 10.40485708 9.675142919
1981.1 18.45 9.777574358 8.672425642
1981.11 16.84 9.147957286 7.692042714
1981.12 15.75 8.537037078 7.212962922
1982.01 15.75 7.933674224 7.816325776
1982.02 16.56 7.337718571 9.222281429
1982.03 16.5 6.658214258 9.841785742
1982.04 16.5 6.411755712 10.08824429
1982.05 16.5 6.683521282 9.816478718
1982.06 16.5 6.93611278 9.56388722
1982.07 16.26 6.351340572 9.908659428
1982.08 14.39 5.794142849 8.595857151
1982.09 13.5 4.822737477 8.677262523
1982.1 12.52 4.909602134 7.610397866
1982.11 11.85 4.380262266 7.469737734
1982.12 11.5 3.754351246 7.745648754
1983.01 11.16 3.640547639 7.519452361
1983.02 10.98 3.425347848 7.554652152
1983.03 10.5 3.527336638 6.972663362
1983.04 10.5 3.922071315 6.577928685
1983.05 10.5 3.38320324 7.11679676
1983.06 10.5 2.444113516 8.055886484
1983.07 10.5 2.331580531 8.168419469
1983.08 10.89 2.426812727 8.463187273
1983.09 11 2.726064821 8.273935179
1983.1 11 2.715098907 8.284901093
1983.11 11 3.114264736 7.885735264
1983.12 11 3.717153211 7.282846789
1984.01 11 4.200617563 6.799382437
1984.02 11 4.587045407 6.412954593
1984.03 11.21 4.777027627 6.432972373
1984.04 11.93 4.453977137 7.476022863
1984.05 12.39 4.243359841 8.146640159
1984.06 12.6 4.235000157 8.364999843
1984.07 13 4.21837923 8.78162077
1984.08 13 4.205998913 8.794001087
1984.09 12.97 4.193691062 8.776308938
1984.1 12.58 4.177392225 8.402607775
1984.11 11.77 4.070329311 7.699670689
1984.12 11.06 3.963786176 7.096213824
1985.01 10.61 3.465216771 7.144783229
1985.02 10.5 3.542735261 6.957264739
1985.03 10.5 3.720028369 6.779971631
1985.04 10.5 3.519145834 6.980854166
1985.05 10.31 3.512463593 6.797536407
1985.06 9.78 3.598873233 6.181126767
1985.07 9.5 3.399760854 6.100239146
1985.08 9.5 3.297519682 6.202480318
1985.09 9.5 3.195760677 6.304239323
1985.1 9.5 3.18378951 6.31621049
1985.11 9.5 3.453446309 6.046553691
1985.12 9.5 3.721359634 5.778640366
1986.01 9.5 3.896596853 5.603403147
1986.02 9.5 3.148408193 6.351591807
1986.03 9.1 2.130696631 6.969303369
1986.04 8.83 1.576295967 7.253704033
1986.05 8.5 1.665163359 6.834836641
1986.06 8.5 1.752004242 6.747995758
1986.07 8.16 1.657496509 6.502503491
1986.08 7.9 1.563250225 6.336749775
1986.09 7.5 1.742364115 5.757635885
1986.1 7.5 1.554672374 5.945327626
1986.11 7.5 1.276225161 6.223774839
1986.12 7.5 1.180222506 6.319777494
1987.01 7.5 1.355646608 6.144353392
1987.02 7.5 1.896219344 5.603780656
1987.03 7.5 2.801810025 4.698189975
1987.04 7.75 3.613762692 4.136237308
1987.05 8.14 3.603993648 4.536006352
1987.06 8.25 3.679194693 4.570805307
1987.07 8.25 3.851797244 4.398202756
1987.08 8.25 4.198919629 4.051080371
1987.09 8.7 4.183965834 4.516034166
1987.1 9.07 4.263523164 4.806476836
1987.11 8.78 4.429422023 4.350577977
1987.12 8.75 4.240918193 4.509081807
1988.01 8.75 4.046286361 4.703713639
1988.02 8.51 3.86012837 4.64987163
1988.03 8.5 3.760827992 4.739172008
1988.04 8.5 3.91524561 4.58475439
1988.05 8.84 3.905051487 4.934948513
1988.06 9 3.888178754 5.111821246
1988.07 9.29 4.047043888 5.242956112
1988.08 9.84 4.029692231 5.810307769
1988.09 10 4.099634724 5.900365276
1988.1 10 4.172593367 5.827406633
1988.11 10.05 4.158426891 5.891573109
1988.12 10.5 4.317217187 6.182782813
1989.01 10.5 4.385188253 6.114811747
1989.02 10.93 4.542412511 6.387587489
1989.03 11.5 4.776777373 6.723222627
1989.04 11.5 4.911515605 6.588484395
1989.05 11.5 5.142094581 6.357905419
1989.06 11.07 5.040306774 6.029693226
1989.07 10.98 4.939275533 6.040724467
1989.08 10.5 4.518222279 5.981777721
1989.09 10.5 4.339608456 6.160391544
1989.1 10.5 4.485056617 6.014943383
1989.11 10.5 4.549931807 5.950068193
1989.12 10.5 4.535190125 5.964809875
1990.01 10.11 5.067429096 5.042570904
1990.02 10 5.129329439 4.870670561
1990.03 10 5.104776507 4.895223493
1990.04 10 4.603987675 5.396012325
1990.05 10 4.272801845 5.727198155
1990.06 10 4.567723147 5.432276853
1990.07 10 4.706751086 5.293248914
1990.08 10 5.546130299 4.453869701
1990.09 10 5.987018949 4.012981051
1990.1 10 6.184350528 3.815649472
1990.11 10 6.011054306 3.988945694
1990.12 10 6.067119518 3.932880482
1991.01 9.52 5.493371882 4.026628118
1991.02 9.05 5.176193456 3.873806544
1991.03 9 4.708538667 4.291461333
1991.04 9 4.697833502 4.302166498
1991.05 8.5 4.912207765 3.587792235
1991.06 8.5 4.588996206 3.911003794
1991.07 8.5 4.275116695 4.224883305
1991.08 8.5 3.728992825 4.771007175
1991.09 8.2 3.33982804 4.86017196
1991.1 8 2.808758181 5.191241819
1991.11 7.58 3.020487447 4.559512553
1991.12 7.21 2.93706868 4.27293132
1992.01 6.5 2.637515525 3.862484475
1992.02 6.5 2.779988828 3.720011172
1992.03 6.5 3.140090045 3.359909955
1992.04 6.5 3.133225336 3.366774664
1992.05 6.5 2.978789076 3.521210924
1992.06 6.5 2.970156761 3.529843239
1992.07 6.02 3.108309506 2.911690494
1992.08 6 3.028349659 2.971650341
1992.09 6 2.948793303 3.051206697
1992.1 6 3.22724314 2.77275686
1992.11 6 3.072767652 2.927232348
1992.12 6 2.923559376 3.076440624
1993.01 6 3.201981123 2.798018877
1993.02 6 3.195159981 2.804840019
1993.03 6 2.97472359 3.02527641
1993.04 6 3.107594696 2.892405304
1993.05 6 3.170395859 2.829604141
1993.06 6 2.953801244 3.046198756
1993.07 6 2.807201878 3.192798122
1993.08 6 2.801303623 3.198696377
1993.09 6 2.726488356 3.273511644
1993.1 6 2.715098907 3.284901093
1993.11 6 2.707558661 3.292441339
1993.12 6 2.772180293 3.227819707
1994.01 6 2.421425812 3.578574188
1994.02 6 2.484599859 3.515400141
1994.03 6.06 2.617229277 3.442770723
1994.04 6.45 2.336876101 4.113123899
1994.05 6.99 2.262695093 4.727304907
1994.06 7.25 2.464190394 4.785809606
1994.07 7.25 2.663182318 4.586817682
1994.08 7.51 2.859282599 4.650717401
1994.09 7.75 2.922396212 4.827603788
1994.1 7.75 2.576413694 5.173586306
1994.11 8.15 2.569444937 5.580555063
1994.12 8.5 2.564243061 5.935756939
1995.01 8.5 2.830377616 5.669622384
1995.02 9 2.822768062 6.177231938
1995.03 9 2.749083614 6.250916386
1995.04 9 3.077165867 5.922834133
1995.05 9 3.071002349 5.928997651
1995.06 9 2.997227354 6.002772646
1995.07 8.8 2.790878812 6.009121188
1995.08 8.75 2.583780699 6.166219301
1995.09 8.75 2.513359812 6.236640188
1995.1 8.75 2.707329433 6.042670567
1995.11 8.75 2.570157946 6.179842054
1995.12 8.65 2.500130221 6.149869779
1996.01 8.5 2.752467339 5.747532661
1996.02 8.25 2.680775115 5.569224885
1996.03 8.25 2.804226787 5.445773213
1996.04 8.25 2.793296256 5.456703744
1996.05 8.25 2.787862885 5.462137115
1996.06 8.25 2.782450611 5.467549389
1996.07 8.25 2.84256865 5.40743135
1996.08 8.25 2.773476706 5.476523294
1996.09 8.25 2.960319131 5.289680869
1996.1 8.25 3.015948831 5.234051169
1996.11 8.25 3.201297699 5.048702301
1996.12 8.25 3.32298945 4.92701055
1997.01 8.25 2.992900878 5.257099122
1997.02 8.25 2.98719383 5.26280617
1997.03 8.3 2.727730171 5.572269829
1997.04 8.5 2.405179232 6.094820768
1997.05 8.5 2.213179173 6.286820827
1997.06 8.5 2.208988527 6.291011473
1997.07 8.5 2.142489008 6.357510992
1997.08 8.5 2.264247675 6.235752325
1997.09 8.5 2.19513361 6.30486639
1997.1 8.5 2.064508733 6.435491267
1997.11 8.5 1.872713905 6.627286095
1997.12 8.5 1.682806928 6.817193072
1998.01 8.5 1.617956888 6.882043112
1998.02 8.5 1.429928001 7.070071999
1998.03 8.5 1.36733019 7.13266981
1998.04 8.5 1.428152184 7.071847816
1998.05 8.5 1.674457727 6.825542273
1998.06 8.5 1.609941893 6.890058107
1998.07 8.5 1.669281419 6.830718581
1998.08 8.5 1.603982568 6.896017432
1998.09 8.49 1.416716026 7.073283974
1998.1 8.12 1.475134309 6.644865691
1998.11 7.89 1.473323151 6.416676849
1998.12 7.75 1.654956558 6.095043442
1999.01 7.75 1.713628224 6.036371776
1999.02 7.75 1.652930195 6.097069805
1999.03 7.75 1.774289433 5.975710567
1999.04 7.75 2.255505552 5.494494448
1999.05 7.75 2.069459124 5.680540876
1999.06 7.75 1.946533479 5.803466521
1999.07 8 2.123222011 5.876777989
1999.08 8.06 2.239125318 5.820874682
1999.09 8.25 2.536367849 5.713632151
1999.1 8.25 2.530255466 5.719744534
1999.11 8.37 2.586610371 5.783389629
1999.12 8.5 2.639625361 5.860374639
2000.01 8.5 2.693967166 5.806032834
2000.02 8.73 3.167279987 5.562720013
2000.03 8.83 3.632432694 5.197567306
2000.04 9 3.027835931 5.972164069
2000.05 9.24 3.084467535 6.155532465
2000.06 9.5 3.666880364 5.833119636
2000.07 9.5 3.538104892 5.961895108
2000.08 9.5 3.296354955 6.203645045
2000.09 9.5 3.45771334 6.04228666
2000.1 9.5 3.392138095 6.107861905
2000.11 9.5 3.386196261 6.113803739
2000.12 9.5 3.319081959 6.180918041
2001.01 9.05 3.653639206 5.396360794
2001.02 8.5 3.468555799 5.031444201
2001.03 8.32 2.9388459 5.3811541
2001.04 7.8 3.222373167 4.577626833
2001.05 7.24 3.557460617 3.682539383
2001.06 6.98 3.200273109 3.779726891
2001.07 6.75 2.686643443 4.063356557
2001.08 6.67 2.685108472 3.984891528
2001.09 6.28 2.559138807 3.720861193
2001.1 5.53 2.10534092 3.42465908
2001.11 5.1 1.87665445 3.22334555
2001.12 4.84 1.534556967 3.305443033
2002.01 4.75 1.132514936 3.617485064
2002.02 4.75 1.129955525 3.620044475
James McCown
> On 22 Mar 2002 03:39:30 GMT, mwi...@merle.acns.nwu.edu (Mark
> Patrick Witte) wrote:
> >WFH said:
> >>Experience in the 1980s demonstrated that Fed's targeting of the
> >>money supply resulted in unacceptable volatility in the Fed funds
> >>rate, without actually succeeding in controlling the growth rate
> >>within what were rather broad targets.
> >
> > But it did succeed in its real goal, which was bringing down
> >inflation. It (thankfully) abandoned (partial) reserve targeting
> >and chose to go back rate targeting, since it couldn't do both, since they
> >are co-determined.
>
> First, the Fed did not target reserves per se during the period
> in question. It targeted the money aggregate M1, using its
> control of reserves as the tool. Second, the inflation was
> killed at the expense of double digit unemployment, at best a
> mixed success. And finally the term "co-determined" is simply
> economist jargon that says prices and quantify are functionally
> related without saying anything about which is the control
> variable and which is the independent variable. Mr. Witte has
> been using the term as a smoke screen in an attempt to hide the
> point at issue.
>
> WFH
Mr. Hummel, the smoke screen was the myth that the Fed was targeting
the money supply at all.
The de facto target was the Fed Funds rate. The Fed announced its
"money supply" targets so they wouldn't be blamed for the high
interest rates.
James McCown
> I hope that Mr. Hummel is not implying that Donald Kohn is ever not
> polite, or that...heaven forbid!, that he is not a guy. I mean, I know
> someone in the world of economics who was named Donald but who is not
> currently a guy, but I did not know there was becoming a trend, not that
> there's anything wrong with it, no, no.
ROTFLMAO!
Deirdre gave a seminar at Ohio State a few years ago. It had to be the
funniest sight I have seen in a long time.
Here was this person who looked like a man in drag. Broad shoulders,
masculine athletic legs, wearing a bright red dress. S(he) was
speaking with a pronounced stutter.
The seminar she gave was totally incoherent and incomprehensible. And
her appearance added considerably to the effect.
William F Hummel
wrote:
The violent swings in the Fed funds rate during that period are
inconsistent with targeting the Fed funds rate per se. But it
really wasn't necessary to target the FFR to achieve the effect
that Volcker was after, namely to drive real interest rates up to
unprecedented levels -- the objective being to break the back of
the inflationary spiral with a serious recession. Since the
monetarists were riding high at the time, Volcker cleverly used
the monetarist prescription as cover, and was able to keep the
wolves at bay long enough to succeed in his objective. That
seems to be the general view in retrospect. I do believe the Fed
actually made a serious attempt to control M1 for a while. The
resulting volatility in the FFR was the inevitable result, and
somewhat of an embarrassment to Volcker. But it also pretty well
put and end to the notion that targeting a money monetary
aggregate is a workable monetary policy.
WFH
Mark Patrick Witte
McCloskey may have given a bad seminar at OSU, and she always has
spoken with a stutter, but she's still quite sharp. She often comes to
seminars at Northwestern and comes up with killer comments and questions.
She most often comes to the econ history seminars, which tend to be small
and where coffee and cookies are always served. McCloskey usually comes
with a large handbag that contains...her little dog, which she lets out to
roam around the room during the seminar. One time the presenter, who knew
about this habit, was ready for this and had brough a little tray of dog
snacks. It was a very good paper, but that's the way to win over a room!
economists
who have heard of her, don't see her and economists who
have never met her before, don't immediately
Christopher Auld
>ROTFLMAO!
You disgrace yourself.
--
Chris Auld
Department of Economics
University of Calgary
au...@ucalgary.ca
susupply
> Did Reagan support Volcker in the fight against inflation? Reagan
supported
> Volcker just as firmly as he supported free trade, that is Reagan talked a
> good game but his actions where largely harmful to the cause. Reagan's
> appointments to the FOMC were not those that Volcker favored but were
almost
> uniformly Volcker opponents, favoring much lower rates (particularly
Preston
> Martin as the Vice-Chair).
Well, Volcker himself (in "Changing Fortunes") says he did. Volcker tells
about the first meeting he had with Reagan (shortly after his inauguration,
and at Reagan's initiative), that he was "delighted" with what Reagan said
while the press was present. He later compares Reagan quite favorably to
his predecessors, for his "visceral aversion to inflation", and his,
"instinct that...it wasn't a good idea to tamper with the independence of
the Federal Reserve...."
Of course, there is an air of disingenuousness in much of the chapter on
Volcker's time at the Fed, but both Weidenbaum and Friedman in their books
corroborate Volcker, re Reagan's support.
As for Reagan's pandering to Detroit, let's just say he had a better grasp
of Public Choice Economics than Roy.
> Who bore the political fallout for Volcker's inflation fight, Carter or
> Reagan? Certainly Carter has cause to be unhappy with Volcker, but
Carter's
> monetary problems were much more due to Arthur Burns and Carter's own man,
> G. William Miller. Volcker didn't get serious about crushing inflation
> until after Reagan had come into office, as can be seen as the spread
> between the monthly prime rate and the cumulative 12-month log growth of
the
> CPI, hence the real interest rate. These high rates caused the deepest
> recession since the 1930s, for which Reagan was widely blamed, and cost
the
> Republican's during the 1982 election.
But that bolsters Volcker's claim that Reagan supported him. He specificall
y notes the problem of the recession and the resulting 11% unemployment
coming just before the 82 election, and seems quite grateful for Reagan's
response:
"President Reagan must have received lots of advice to take on the Fed
himself, but he never really did despite plenty of invitations at press
conferences or otherwise."
And the Republicans campaigned on the slogan: "Stay the course".
Grinch
Witte) wrote:
>In article <f70ca421.02032...@posting.google.com>,
>James McCown <flec...@yahoo.com> wrote:
>>
>>Deirdre gave a seminar at Ohio State a few years ago. It had to be the
>>funniest sight I have seen in a long time.....
>>
>>Here was this person who looked like a man in drag.....
>
> McCloskey may have given a bad seminar at OSU, and she always has
>spoken with a stutter, but she's still quite sharp. She often comes to
>seminars at Northwestern and comes up with killer comments and questions...
Last year McCloskey was one of the speakers in Washington Square in
Greenwich Village, just a few blocks from here, before a big protest
crowd/convention of anti-business, anti-capitalism,
anti-establishment, anti-globalism,
anti-have-to-get-a-job-and-pay-back-my-college-loan types.
Deirdre gave a big pro-capitalism speech saying, among other things,
that only in capitalist countries does one find successful Deirdre
McCloskeys (there are none in Cuba, etc.)
The local press reported that that the crowd was at first befuddled
("capitalist bad .... trans-sexual good") but that she spoke their
language, won most of them over and left to cheers.
Ada Ma
Do you guys have more news about Deirdre?
I used her (then his) book co-written with Floud on British economic history
as a 1st year undergraduate in Edinburgh University and has been in deep
admiration of her (his) rhetoric skills and knowledge on Brit Econ Hist ever
since. The news of him becoming her came as quite a shock to me although I
have never even met her.
She's written about him, as a 5 year old kid, prayed to God asking God to
turn him into a girl and stop his stuttering forever. And his dream only
comes true after so many decades and after jumping over so many barriers
made me feel very sorry for him.
It's great to hear news about her and lots of thanks for telling us these
little stories. I greatly appreciate them.
Cheers,
Ada Ma
/brian
university: one lecture in a financial history class, speaking on her
paper on what did not cause the industrial revolution, (much to her
surprise, it wasn't a prepared talk); and, a second lecture on the
lack of oomph in economics and other sciences and statistical
significance. I missed her lectures on religion and another one at
the dedication ceremony for a new college within the university.
There's not much news I can add on that front: she had her little dog
with her at both lectures and she seemed well.
One of my professors recently revealed that he is working with her on
an intro level economics book, which I look forward to very much.
here's her website: http://tigger.uic.edu/~deirdre2/
/brian
On Sat, 27 Apr 2002 13:18:28 +0100, Ada Ma <ada_m...@hotmail.com>
wrote:
Mason Clark
re: Deirdre McCloskey
>here's her website: http://tigger.uic.edu/~deirdre2/
Thanks for posting the link. I've just finished reading
the article I found there: "The Rhetoric of Economics."
I read here a "mainstream" economist with an open mind,
although "economists appear to believe that economics
is too important to be left to the open-minded," ... "economics
is badly written"..."badly taught"..."misunderstood"..."pointlessly
limit(ed)...to 'objective' facts"...and "debates in economics are
long-lasting and ill-tempered."
I suspect there's gold at this site.
(I'm trolling for McCloskey -- go look at her website.)
Mason C