A few weeks ago, in a full snit he declared that he didn't want me to speak to him or speak his name and he'd do the same for me.
"That was at Interfluidity, and it was over a month ago. Since then your comments have been completely devoid of substance and they have become increasingly personal over time. At this point I find your behavior more disturbing than any other single commenter I interact with.
I guess I haven't really kept up my side of the bargain-after all, he didn't ask me whether I agree to that. I don't have any personal problem with him but he's very aggressively attacking the kind of fiscal policy that would help out of work Americans and the larger economy. If he stops doing that then we can play silent treatment if that's his pleasure. Now, he's evidently given up on giving me the silent treatment.
Maybe as he's been declared personal non grata over at Cullen's now he decides to hang out here. Which is fine. I said I don't believe in banning people.
http://diaryofarepublicanhater.blogspot.com/2013/10/mark-sadowski-and-my-apparent-war-with.html
What he probably has finally gotten is that this place is the cutting edge of the post Keynesian anti Market Monetarist world. The fact that Sumner insults this blog doesn't reflect poorly on it but rather on Sumner. All the coolest kids and the best lights in economics hang out and read Diary of a Republican Hater.
Mark wants to set the record straight on Granger Causality and insist that GC does so prove that expanding the MB in 2008 had some huge positive effect on the economy. Ok, so let's look at what he has to say.
He quotes Peter P's comment:
"“Sadowski's stuff is of course nonsense. If you have a 100% jump in the monetary base in late 2008 then any test will show that it "Granger caused" anything that came afterwards. So you can say: "the monetary base Granger causes the iPad". He is either mathematically illiterate or thinks the Sumner readers are stupid (not a bad assumption). Of course, such an abrupt event is not a good moment to check causality of unique events that came afterwards.”
His rebuttal:
"A time series X is said to Granger-cause Y if it can be shown that lagged values of X collectively provide statistically significant information about future values of Y. There is simply no coherent way that values of X immediately preceding the range of observations could cause the lagged values of X in the range of observations to spuriously provide statistical information about future values of Y. "
I don't get what this means-is it that GC must be right that if there is a correlation it can't be noise? I'm not sure what the implications are but it seems to me Mark is as usual claiming that he has to be right, there's no way he can't be, though in fact you can show GC and not necessarily at all shown that there is any causality proper.
He then argues that Peter P's example of deflation in Sweden in the early 1990s following the expansion of the MB doesn't count because it wasn't real QE but just 'credit easing.' Well whatever you want to call it did the MB expand or not? This seems to be a classic Market Monetarist speciality: the No True Scotsman defense. You can never make any critical observations about monetary policy because nothing ever rises to the level of them allowing that it's actually MP we're discussing.
How about inflation in the U.S following QE? We've seen inflation contract in response to the latest QE.
In any case, I appreciate Sadowski dropping by-I never had any personal problem with him, that was all in his own mind. Maybe he's taking all of Sumner's traits on in a kind of weird case of empathy and identification where he even takes on Sumner's personality defects like a lack of sense of humor and extreme thin skinned-ness.
Peter P, if you're out there I'd be grateful if you could weigh in on Sadowski's answers here. I'm not an expert on econometrics and GC by any stretch-which doesn't mean I therefore should accept anything Sadowski says uncritically as he has a formal degree in this stuff-which seems to be what Sumner thinks I should do. GC is a interesting but complex subject. I do know though that whether something GCs something else or not doesn't mean you've conclusively proven that this thing causes the other.
Anyone else who has something to contribute to the GC debate you're welcome to jump in.
"That was at Interfluidity, and it was over a month ago. Since then your comments have been completely devoid of substance and they have become increasingly personal over time. At this point I find your behavior more disturbing than any other single commenter I interact with.
Frankly I wish you would stop talking to me and about me, and I shall try and do the same with respect to you."
I guess I haven't really kept up my side of the bargain-after all, he didn't ask me whether I agree to that. I don't have any personal problem with him but he's very aggressively attacking the kind of fiscal policy that would help out of work Americans and the larger economy. If he stops doing that then we can play silent treatment if that's his pleasure. Now, he's evidently given up on giving me the silent treatment.
Maybe as he's been declared personal non grata over at Cullen's now he decides to hang out here. Which is fine. I said I don't believe in banning people.
http://diaryofarepublicanhater.blogspot.com/2013/10/mark-sadowski-and-my-apparent-war-with.html
What he probably has finally gotten is that this place is the cutting edge of the post Keynesian anti Market Monetarist world. The fact that Sumner insults this blog doesn't reflect poorly on it but rather on Sumner. All the coolest kids and the best lights in economics hang out and read Diary of a Republican Hater.
Mark wants to set the record straight on Granger Causality and insist that GC does so prove that expanding the MB in 2008 had some huge positive effect on the economy. Ok, so let's look at what he has to say.
He quotes Peter P's comment:
"“Sadowski's stuff is of course nonsense. If you have a 100% jump in the monetary base in late 2008 then any test will show that it "Granger caused" anything that came afterwards. So you can say: "the monetary base Granger causes the iPad". He is either mathematically illiterate or thinks the Sumner readers are stupid (not a bad assumption). Of course, such an abrupt event is not a good moment to check causality of unique events that came afterwards.”
His rebuttal:
"A time series X is said to Granger-cause Y if it can be shown that lagged values of X collectively provide statistically significant information about future values of Y. There is simply no coherent way that values of X immediately preceding the range of observations could cause the lagged values of X in the range of observations to spuriously provide statistical information about future values of Y. "
I don't get what this means-is it that GC must be right that if there is a correlation it can't be noise? I'm not sure what the implications are but it seems to me Mark is as usual claiming that he has to be right, there's no way he can't be, though in fact you can show GC and not necessarily at all shown that there is any causality proper.
He then argues that Peter P's example of deflation in Sweden in the early 1990s following the expansion of the MB doesn't count because it wasn't real QE but just 'credit easing.' Well whatever you want to call it did the MB expand or not? This seems to be a classic Market Monetarist speciality: the No True Scotsman defense. You can never make any critical observations about monetary policy because nothing ever rises to the level of them allowing that it's actually MP we're discussing.
How about inflation in the U.S following QE? We've seen inflation contract in response to the latest QE.
In any case, I appreciate Sadowski dropping by-I never had any personal problem with him, that was all in his own mind. Maybe he's taking all of Sumner's traits on in a kind of weird case of empathy and identification where he even takes on Sumner's personality defects like a lack of sense of humor and extreme thin skinned-ness.
Peter P, if you're out there I'd be grateful if you could weigh in on Sadowski's answers here. I'm not an expert on econometrics and GC by any stretch-which doesn't mean I therefore should accept anything Sadowski says uncritically as he has a formal degree in this stuff-which seems to be what Sumner thinks I should do. GC is a interesting but complex subject. I do know though that whether something GCs something else or not doesn't mean you've conclusively proven that this thing causes the other.
Anyone else who has something to contribute to the GC debate you're welcome to jump in.
"I don't get what this means-is it that GC must be right that if there is a correlation it can't be noise?"
ReplyDeletePeter P is essentially claiming terms that aren't in the observation range are causing lagged terms of X within the observation range to be spuriously correlated with present values of Y. How exactly can that occur? By magic?
Let me put it another way. If Peter P can show that this is true, then it's a completely novel drawback to Granger causality tests and such a discovery would probably be worthy of the R.A. Fisher Award (the equivalent of a Nobel Prize in statistics).
"He then argues that Peter P's example of deflation in Sweden in the early 1990s following the expansion of the MB doesn't count because it wasn't real QE but just 'credit easing.' Well whatever you want to call it did the MB expand or not?"
You're missing the point. The only time one is likely to find that the monetary base Granger causes anything is when the monetary base is the monetary policy instrument. Credit Easing is a policy designed to support the financial sector when it is distressed. It isn't designed to have any monetary policy impact beyond that.
More importantly, the policy rate was as high as 8.9% in 1995-96 meaning the monetary policy instrument was obviously the policy rate. Sweden wasn't at the zero lower bound in interest rates. The observation range for my US Granger causality tests starts in December 2008 precisely because that's when the average effective fed funds rate fell below 0.25%.
"How about inflation in the U.S following QE? We've seen inflation contract in response to the latest QE."
My results suggest inflation would have been even lower without QE. The important thing is the policy counterfactual.
Hi Mark,
DeleteA couple questions for you regarding Granger-causality since I'm currently working on a paper that focuses on the period from 1971 to 2008.
1) In response to Peter P, you ask how "terms that aren't in the observation range are causing lagged terms of X within the observation range to be spuriously correlated with present values of Y." Let me propose two seemingly plausible answer.
First, imagine that W causes changes in variables X and Y, however the response of variable X typically occurs with a shorter lag than Y. Wouldn't X exhibit unidirectional Granger-causality of Y, even though unidirectional Granger-causality would also exist from W to X and W to Y?
Second, imagine that expectations of W causes changes in X but only the occurrence of W causes changes in Y. The outcome described above could once again follow.
2) You mention that "The only time one is likely to find that the monetary base Granger causes anything is when the monetary base is the monetary policy instrument." Does this imply that changes in the monetary base prior to 2008 were not expected to affect NGDP? If so, how does one reconcile this view with old Monetarist or Keynesian models that treated the money supply as an exogenous determinant of NGDP?
Thanks in advance for your insight.
1) Yes, but W *is* X. Maybe I should have been more explicit and said "terms *of X* that aren't in the observation range" but that's clear from the context of this conversation, right? (That is, W and X are both the monetary base.).
DeleteIn any case if W causes Y then what you're really proposing is that X causes Y, but we already know that.
2) I haven't shown that the monetary base Granger causes NGDP after December 2008. I'm using monthly data and NGDP is in quarterly frequency only. There aren't enough quarters since December 2008 such that Granger causality tests would be feasible.
For what it's worth I've done Granger causality tests on the monetary base and NGDP from 1947 to present and find that there is bidirectional Granger causality between the monetary base and NGDP, and in fact bidirectional Granger causality between M1, M2 and MZM and NGDP.
Suppose the central bank is targeting the inflation rate using the unsecured overnight interbank lending rate. We probably would find that commercial bank loans and leases Granger cause broad money (or the money multiplier, as has been found in some studies) and loans and leases Granger cause the monetary base. But if the unsecured overnight interbank lending rate is fixed, and the central bank is increasing the monetary base at ad hoc rates as in QE, then we may find that the monetary base Granger causes other quantities, no?
"If so, how does one reconcile this view with old Monetarist or Keynesian models that treated the money supply as an exogenous determinant of NGDP?"
I don't know. Why would anybody want to do that?
Mark,
DeleteThanks for the replies.
1) Perhaps the context was less than clear on my part as well. I was considering W = commercial bank loans and leases, X = monetary base, and Y = M3 or M4, all in regards to the pre-IOR/QE monetary regime.
2) Your prior results are definitely worth something. For a current project I'm trying to add to the literature by using the Divisia monetary aggregates and expanding consideration to broader levels of the money supply (M3 and M4) as well as money multipliers.
Forgive me for being a little surprised by your third paragraph (starting with "suppose..."), but I suspect you would find general agreement on those points from MMTers, Post-Keynesians, etc.
Two quick follow up questions, if you'll indulge me. From a market monetarist perspective...
3) Can a central bank target NGDP using the unsecured overnight interbank lending rate?
4) In a presentation today at the Cato Institute (and recently at the Mercatus Center), Sumner discussed letting the market determine interest rates and adjusting the monetary base to target NGDP. Above you mention a fixed interbank lending rate, which obviously corresponds to the present reality. Does the selection of a fixed or floating short-term rate alter the effectiveness of monetary policy in targeting NGDP?
1) The drawback of Granger causality tests that you alluded to is well known, but is not relevant to Peter P's claims. Your context is an excellent example, as all of those things are almost certainly true around the time of the regime change.
Delete2) "Your prior results are definitely worth something."
Hmm, interesting. I have seen references to bidirectional causality between broad money and NGDP in the empirical endogenous money literature and had assumed that it had already been demonstrated.
David Beckworth has been doing a lot of work with Divisia aggregates.
"Forgive me for being a little surprised by your third paragraph..."
Nick Rowe in particular has done a lot of blogging on endogenous money.
"...I suspect you would find general agreement on those points from MMTers, Post-Keynesians, etc."
Up to a point. How many of them would accept the idea that the direction of causality might depend on what the central bank is targeting? I can see actual Post Keynesian economists accepting that idea, because they seem very empirically minded. But MMT economists/laypeople and Post Keynesian laypeople?!?
3) Yes, of course. Think in terms of a dynamic (rate of change) AD-AS Model. If a central bank is targeting the inflation rate using the unsecured overnight interbank lending rate as its instrument, then it is essentially shifting the AD curve (AD=NGDP) to attain its inflation rate target. It's not much of a change to go from inflation rate targeting (IT) to NGDP rate targeting. Then to go from NGDP rate targeting to NGDP level targeting (NGDPLT) is only one more additional step.
4) Pegging the policy rate is impossible over the long run. Friedman explained very clearly why this is the case in his classic 1968 paper "The Role of Monetary Policy".It would eventually lead to either an inflationary or a deflationary spiral.
"The important thing is the policy counterfactual"
ReplyDeleteOf course, but that's what's so difficult about economics. Its the same thing when discussing the slow recovery after 2009. Someone who doesn't believe in fiscal policy will say 'See FP had no effect.'
Someone who does believe it will say it would have been even worse. Intuitively it strains credulity that inflation would have been even lower as-it is so low.
However, is QE important because it expands the monetary base or because of what it does for confidence and signifies about future monetary policy which both Sumner and Krugman believe?
"Intuitively it strains credulity that inflation would have been even lower as-it is so low."
DeleteInteresting, because Krugman has wondered out loud a few times why we didn't have accelerating deflation with a prolonged large output gap. But I think he has come to believe that the Phillips Curve is in fact a curve (as Phillips believed). That is, the Phillips Curve becomes more horizontal the higher the unemployment rate.
"However, is QE important because it expands the monetary base or because of what it does for confidence and signifies about future monetary policy which both Sumner and Krugman believe?"
Why does QE work? Probably through expectations as both Sumner and Krugman believe, but there may be other more direct channels of which we are not aware.
Ok, I admit I find this a little ironic. You, Sumner and many MMers have so many critical things to say about Krugman, yet in a pinch you're suddenly willing to concede his model if it seems to make your point?
DeleteYou agree then with Krugman's model that said there should have been prolonged deflation due to the prolonged output gap?
There's no question that the market thinks QE is good news and tapering is bad news. However, if it's due to expectations it's got nothing to do with the exact monetary base does it?
I quote Krugman approvingly far more often than I disagree with him. When I disagree with him it's out of extreme frustration because I know he knows better. I'm confident that Sumner feels the exact same way. Why do you think Sumner quotes Krugman in almost every other post?
Delete"You agree then with Krugman's model that said there should have been prolonged deflation due to the prolonged output gap?"
Very early into the recession I thought serious deflation was a real possibility. And actually, I think I became reconciled to what Krugman thinks now before he did.
"However, if it's due to expectations it's got nothing to do with the exact monetary base does it?"
To be honest Mike I don't really care that much why QE works. I'm very empirical and very pragmatic. If something has a record of working then I would say keep doing it until it stops working.
I'm very comfortable with ad hoc models, and while I'm willing to concede that microfoundations may be desirable, I don't believe they're absolutely essential.
TK a lot Josh for all your insights. This is exactly what I had in mind. Mark, I too look forward to your response.
ReplyDeleteWhat? The important thing is the policy counterfactual? I admit, I'm in the same boat as Mike when it comes to being a guy that has no business commenting on economic issues, per Sumner. I might even be considered a moron. (I have no training or degree from higher learning.) If only we had done X, Y would have occurred? It can't be proved, except in a model, right? Those pesky models with their assumptions based on assumptions. Just remember this: " A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Let's smash the can open with a rock." The chemist says, "Let's build a fire and heat the can first." The economist says, "Let's assume that we have a can-opener..." "
ReplyDelete"It can't be proved, except in a model, right?"
DeleteThat the monetary base Granger causes the PCEPI at the 10% significance level from December 2008 through September 2013, and that impulse response results show a significant positive effect, is an empirical fact. There is no model and there are no assumptions.
It's an empirical fact based on what-your own tests? In any case even if the MB GCed the PCEPI doesn't mean it caused it does it?
Delete"It's an empirical fact based on what-your own tests?"
DeleteI may have done the tests, but anyone with the know-how and wherewithall can reproduce those results.
"In any case even if the MB GCed the PCEPI doesn't mean it caused it does it?"
Not in the metaphysical sense.
In what sense have you proven it caused it?
DeleteIt Granger caused it.
DeleteCmon Mark that's a little abtuse. I know that my point is why should anyone care if something GCed something else-what is it's relationship to causality?
DeleteWhat does Granger Causlity mean to actual causality?
DeleteSuppose I said that smoking cigarettes Granger caused lung cancer. That's actually a much stronger statement than simply saying smoking cigarettes is correlated to lung cancer. Would your response be to say that it doesn't prove that cigarettes cause lung cancer?
DeleteOf course, it is but it would be even stronger to say simply 'smoking cigarettes caused cancer.' The use of the term Granger suggests that this is a weaker form of cause.
DeleteCan you simply define what 'Granger Cause' means?
I mean you seem to be acting like I'm asking a stupid question and I can't seem to get a straightforward answer to my question but I'm just trying to get what GC really is. I admit I don't have the formal background that either you or Joshua have on this. However, when I asked him wether or not GC is not necessarily a cause he agreed:
Delete"As you correctly point out, Granger-causality tests (similar to any statistical test) cannot prove actual causality. GC basically looks at whether the lagged values of variable X improve the prediction of the current value of Y. In other words, GC demonstrates that changes in X not only occur prior to Y but hold predictive value for Y. Since any hypothesis of a causal relationship implies that X occurs prior to Y, a GC relationship supports a causal hypothesis."
"As I see it, a significant issue with GC results is the impact of expectations. For example, it has been shown that stock prices Granger-cause earnings per share (X --> Y). In spite of this result, most people would not argue that stock prices cause changes in earnings. Instead, a typical response is that expectations of changes in earnings cause changes in stock prices, resulting in the statistical anomaly. Most people therefore maintain the hypothesis that earnings cause changes in valuation (Y --> X)."
Now assuming Joshua is right and GC is not actual causality then what is it exactly and what does it prove?
First let me deal with this:
Delete"For example, it has been shown that stock prices Granger-cause earnings per share (X --> Y). In spite of this result, most people would not argue that stock prices cause changes in earnings. Instead, a typical response is that expectations of changes in earnings cause changes in stock prices, resulting in the statistical anomaly. Most people therefore maintain the hypothesis that earnings cause changes in valuation (Y --> X)."
One person that might disagree wit this is James Tobin.
http://www.deu.edu.tr/userweb/yesim.kustepeli/dosyalar/tobin1969.pdf
A General Equilibrium Approach to Monetary Theory
James Tobin
February 1969
[No Abstract]
Tobin's q theory provides a mechanism through which monetary policy affects the economy through its effects on the prices of equities. Tobin defines q as the market value of firms divided by the replacement cost of capital. If q is high the market price of firms is high relative to the replacement cost of capital, and new plant and equipment is cheap relative to the market value of business firms. Companies can then issue equity and get a high price for it relative to the cost of the plant and equipment they are buying. Thus investment spending will rise because firms can buy a lot of new investment goods with only a small issue of equity. On the other hand when q is low, firms will not purchase new investment goods because the market value of firms is low relative to the cost of capital. If companies want to acquire capital when q is low, they can buy another firm cheaply and acquire old capital instead. Inestment spending will be low.
Now recall the the Kalecki profit equation:
Profits = Investment – Household Savings – Government Savings – Foreign Savings
Kalecki used the profit equation to argue that business investment drove profits.
Thus between James Tobin and Michal Kalecki we have a clearly articulated mechanism by which stock prices cause earnings.
"Of course, it is but it would be even stronger to say simply 'smoking cigarettes caused cancer.' The use of the term Granger suggests that this is a weaker form of cause."
DeleteHow do you know that smoking cigarettes causes lung cancer?
They've done medical studies. You seem to be suggesting that there Granger Causality is the only causality? To say A caused B and A Granger caused B is the same thing....
DeleteYou seem not to want to elaborate here
"You seem not to want to elaborate here"
DeleteI'm trying to use a little Socratic method, so please be patient.
"They've done medical studies."
Excellent. Now, what specifically about these medical studies was it that caused you to believe that smoking cigarettes causes lung cancer?
Mike, you wanted a straight forward answer on Granger Causality? It certainly depends how you apply it, but essentially its a test of a statistical correlation. The idea is that if a change in one variable X causes a change in the second variable Y then the change in the second variable then X must precede Y. So you look for a correlation between X and following changes in Y, and you test how strong that relationship is statistically.
DeleteOf course you can't prove causation in any strong sense by showing a correlation, the strong proof of causation is to observe the mechanism by which Y follows X.
An example of why statistical tests should generally be considered pretty weak evidence is given by the following chess related article. The author goes about trying to show that the world chess championship was not decided between two players of exactly equal strength, with the luckier one at the time being the winner. For most matches he fails to show this with high confidence (over 90% confidence) despite the silly nature of the hypothesis. This just goes to show you need a lot of statistical evidence to show something as strong as observing a mechanism by which X causes Y.
http://en.chessbase.com/post/are-the-che-world-champions-just-lucky-part-3-211013
There are also mechanisms by which X and Y could be causes by another variable Z but with different lags, and these can't be tested by looking at X and Y alone.
So at the minimum causation is not an easy thing to show. Is GC the best we can do in economics? I know that one problem for economics is natural experiments are hard to come by
DeleteLooks as though Nic the NZer and I are pretty much on the same page. As your question, Mike, I think GC is the best we can do in economics from a statistical standpoint, at least at the macro level. On some micro topics I could imagine circumstances that closely approximate a natural experiment. On the macro level there is simply no way to control for all the relevant variables.
DeleteThanks Josh. I guess my thing is that I always think about Granger himself and associate him with people like lucas and the whole Rational Expectaitons anti-Keynesian offensive.
DeleteI admit that this may not always be the best way to look at things-but I don't think the politics of an economiist can wholly be ignored even if it isn't the only thing to look at.
However, my perception that he is a Right wing economist may be a misperception based on this Wiki entry.
http://en.wikipedia.org/wiki/Clive_Granger
Mark, Then please explain what you mean by the policy counterfactual. i'm obviously confused.
ReplyDeleteI mean if there had been no change in the monetary base.
ReplyDeleteMark, Thanks for being patient. you said: .... Credit Easing is a policy designed to support the financial sector when it is distressed. It isn't designed to have any monetary policy impact beyond that. Well, it may not be designed to have any impact beyond supporting the distressed financial sector, but did it? It certainly seems to have caused an excess demand for money.Or, would you argue that this was the intent of the policy? Interestingly, Yellen, in testimony before the Senate yesterday, clearly signaled that easing will continue for the foreseeable future, precisely because monetary policy and fiscal policy are working at cross purposes. I don't think that monetary policy can work by itself, let alone when we see the continued insistence by the austerity crowd in congress that more cuts to spending are necessary. Call me an old fashioned Keynesian, The economy is demand constrained at a time when the financial sector is too weak, or unwilling, to stimulate the economy. How much longer should the unemployed be required to wait for recovery of a distressed financial sector?
ReplyDeleteWhen I said "Credit Easing" I was intentionally trying to draw a distinction with "Quantitative Easing". I pointed out that the Swedish expansion of the monetary base in 1994-97 was CE and not QE.
DeleteBy Credit Easing I mean policies like the Fed's “credit and liquidity programs”. Credit and liquidity programs are “designed to support the liquidity of financial institutions and foster improved conditions in financial markets.” These programs are denoted by acronyms such as CPFF, MMIFF, PDCF, TALF, TSLF TAF etc. These programs mostly came to an end in July 2010.
Credit Easing consists of either loans or sterilized security purchases These policies are specifically designed *not* to have monetary policy impact beyond that of enhancing credit in financial markets. Quantitative Easing consists of unsterilized asset purchases, and *is* intended to have monetary policy impact.
I note your use of *not" and *is". Does it matter if the policy does impact monetary policy even when the intent is not to? And the much larger question of whether the unintended effects are positive or negative for the economy as a whole. Can you honestly say that the TALF program did not consequences that led to changes in the monetary base? Couldn't one easily argue that sterilizing purchases would allow for an expansion of the base, and hence it was part of the policy objective? Again, I appreciate your response Mark.
Delete"Does it matter if the policy does impact monetary policy even when the intent is not to?"
DeleteYes.
Not to complicate things but the Fed's “credit and liquidity programs” were fully sterilized prior to the Lehmans filing for bankruptcy on September 15, 2008. This means the Fed was reducing the non-Credit Easing portion of the monetary base in order to extend loans to the financial sector. In my opinion this had the effect of tightening monetary policy although clearly that was not the intent.
But, by and large, in my opinion, Credit Easing policies do not have monetary policy impact as practiced.
"And the much larger question of whether the unintended effects are positive or negative for the economy as a whole. Can you honestly say that the TALF program did not [have] consequences that led to changes in the monetary base? Couldn't one easily argue that sterilizing purchases would allow for an expansion of the base, and hence it was part of the policy objective?"
The phrase "monetary base" has a very precise meaning. It refers to the sum of currency (physical cash) and reserve balances (bank deposits with the central bank). Thus the size of the monetary base can only change if the central bank makes unsterilized purchases of assets or makes unsterilized loans through the discount window or Credit Easing policies.
After Lehmans filed for bankruptcy the US Credit Easing policies were completely unsterilized, meaning they added directly to the monetary base. But since they were loans to specific entities, and not outright purchases of assets, they did not have monetary policy impact beyond relieving the illiquidity of the financial sector. These loans had to be paid back sooner are later. At peak there was $1,067 billion lent out on December 17, 2008. All but $2 billion has been paid back with interest.
sorry, didn't proof closely enough. it should read: ...TALF programs did not HAVE consequences....
ReplyDelete