Cullen Roche on QE; Joshua Wojinlower Uses Granger Causality to Show the Money Supply is Endogenous

     That Joshua has blogged again is very welcome news. He had taken a long hiatus but clearly he's been using his time off well-he's got a very important paper coming out on the money supply. He had recently resurfaced here at Diary of a Republican Hater and had an interesting discussion with Mark Sadowski. 

     http://diaryofarepublicanhater.blogspot.com/2013/11/mark-sadowski-and-joshua-wojnilower-on.html

    http://diaryofarepublicanhater.blogspot.com/2013/11/mark-sadowski-and-joshua-wojnilower-on.html

    I must admit I'm still a little puzzled what Sadowski thinks GC is-I'm not saying he's wrong more like I don't get his argument. Of course, Sumner claims I'm an economic simpleton so maybe this is no surprise. Nevertheless you need to be able to explain yourself even to simpletons that's what separates the men from the boys at least if your hope is to move public opinion-which is clearly what motivates Mark.No matter how I've tried to phrase the question he seems to just imply that there is no difference between GC and actual causality-in fact he made a jibe about 'metaphysical causality' which suggests that he is arguing that there is no difference. 

    I was very excited to see this morning that Joshua has this new work out now using GC. He does caution that is not a finished work. I phrased this title in perhaps stronger terms than he would prefer but here it is.

    "Let me start off by sincerely apologizing for my abrupt and now lengthy absence from the blogosphere. Although I have been absent from blogging, my interest in the endogenous money hypothesis and Modern Monetary Theory (MMT) continues to grow."

    "This semester I have been taking a directed readings course on those topics with another GMU PhD student, Paul Mueller. As part of the course, we are co-writing two papers that will hopefully be published in an academic journal. Our first paper, “Empirical Evidence for the Endogeneity of the Money Supply in the United States from 1971-2008,” is now sufficiently complete to make publicly available."

     "The unique aspects of our paper are the incorporation of Divisia monetary aggregates and a focus on broader measures of the money supply (i.e. M3 and M4). While the paper remains in draft status (so please do not cite this version), we would greatly appreciate comments and suggestions for improving the paper before a final draft is submitted for publication. The paper can be downloaded at SSRN (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2355178). Here is the abstract:"

     “This paper demonstrates that contrary to orthodox monetary theory, fluctuations in total commercial bank loans affect the quantity of various money aggregates, including the monetary base, but not vice versa. The Granger causality tests that we run on lagged quarterly data strongly suggest that changes in the money supply depend on private demand for commercial loans, not “exogenous” changes in the monetary base. Our findings strongly contradict the notion of a fixed “money multiplier.” The theory behind endogenous money is that banks issue new loans (credit) on demand and look for reserves later. The Federal Reserve must ultimately accommodate increases in demand for reserves from the banking sector to maintain an interest rate target and, more importantly, financial stability. These findings suggest that most economists need to revise their theories about monetary policy and credit expansion.”

     http://bubblesandbusts.blogspot.com/2013/11/empirical-evidence-for-endogeneity-of.html

     It seems that his conversations with Mark had an effect on his views:

     "Note: In the past couple days it has come to my attention that using Granger-causality tests on the first differences of variables may lead to invalid results. Apparently a separate technique, created by Toda and Yamamato, generates more valid results using extra lags of the variables in levels as exogenous variables in the regression. The preliminary results using this method don’t materially alter the paper’s conclusion. Since each technique has been used in recently published articles, we would appreciate insight from other economists on which method (or both) to include our final version."

      Of course, the part of this paper Mark will agree with least is the conclusion...

      Also, 'in other news' I see that Cullen Roche links to an interesting Bloomberg article about QE-that it's not really an increase in the money supply. This is a view that he has been espousing for awhile but it's interesting to see it make a mainstream media article:

      "Outstanding piece here in Bloomberg on QE by Peter Coy.  Peter recites a common refrain from Pragmatic Capitalism about QE – it’s an asset swap.  I’ll get right to the good stuff in the article:

“Quantitative easing isn’t “printing money.” If it were, the supply of money would have soared and the U.S. would have either much more economic growth or much more inflation—or probably some of each. Instead, the Fed’s purchases have merely managed to give the banking system a huge increase in unneeded reserves.

The way to increase the amount of money—and get the Bureau of Engraving and Printing to rev up its presses—is for banks to make more loans. Borrowers will put most of the money on deposit, but they will take some of it out to spend. That will increase the amount of money being passed around between buyers and sellers—i.e., in circulation. That process is largely beyond the Fed’s control.”

     "If you go through my brief primer on QE you might find that there’s a bit of a problem in this description.  Technically, QE, which is done mostly with non-banks, does indeed increase the outstanding supply of deposits.  But that’s just an extra step in the accounting and doesn’t really change the story all that much.  More importantly, QE creates reserves/deposits and could technically be described as “money printing”, but also involves the “unprinting” of a T-bond or MBS thereby leaving the private sector with the same quantity of financial assets, but an altered composition.  Calling this overall process “money printing” is highly misleading.  The term “asset swap” is much more appropriate."

     "Anyhow, it’s nice to see this in a mainstream media article.  Really well done by Bloomberg and Peter Coy.:

     Read more at http://pragcap.com/bloomberg-quantitative-easing-isnt-printing-money#YPLvbkvW5lt6xtve.99