I don't even now totally understand what Stephen Williamson has done or claimed but he's clearly kicked a major hornet's nest in the world of mainstream macro. Forget the wars between the MS school and the heterodox school.
http://diaryofarepublicanhater.blogspot.com/2013/11/simon-wren-lewis-meainstream-macro-and.html
The fights within the MS school itself is where the real rubber meets the road. Indeed, while in the recent years before the Great Recession it seemed that the MS world was basically a love in with RBCers and NKers linking arms, it took a long time to get to this-facade-of international brotherhood and peace between all men. DSGE was really a kind of Treaty imposed from above to avoid all the years of internecine warfare between the Keynesians and the New Classicals.
Since the GR started many of the buried differences and hostilities have come back to the surface. One rather enigmatic participant in this new kind of Golden Age of the salon-now to be found at the Internet economic blogs-has been Stephen Williamson. The main thing I got about him prior to his recent post which I wrote about here
http://diaryofarepublicanhater.blogspot.com/2013/11/stephen-williamson-on-zlb-interest.html
was that he seems not to like Paul Krugman very much. The best we can figure is that it goes back to Krugman's piece in 2009 that the MS school had failed as it chose 'beauty over truth.'
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all
SW seemed to take this piece awfully personally.
http://newmonetarism.blogspot.com/2010/04/krugman-again.html#comment-form
In this new piece though, SW says a number of things that have just raised lots of eyebrows. First of all, his model that has lots and lots of symbols that I have ah hard time remembering when I'm reading what they all mean-discovers that: QE actually causes deflation. This is a very counterintuitive result to say the least.
Scott Sumner sniffs that no one thinks this.
"Regarding empirical evidence, as far as I know all the empirical evidence is that QE has boosted inflation. And yet Andolfatto’s post is entitled:
"And the very first line of the post is:
"PPS. I do find the debate entertaining. Kocherlakota’s faux pas a few years back was the initial skirmish; this is the full blown battle. Kocherlakota himself seems to have switched sides. Then there are people like Tyler Cowen and Noah Smith, who think Williamson’s being criticized unfairly in theoretical grounds, but have some doubts about his empirical claims (at least that’s how I read Tyler and Noah.) Sorry to be such a wimp on this, but I’d rather not strongly defend a position unless I have a high level of confidence."
http://diaryofarepublicanhater.blogspot.com/2013/11/simon-wren-lewis-meainstream-macro-and.html
The fights within the MS school itself is where the real rubber meets the road. Indeed, while in the recent years before the Great Recession it seemed that the MS world was basically a love in with RBCers and NKers linking arms, it took a long time to get to this-facade-of international brotherhood and peace between all men. DSGE was really a kind of Treaty imposed from above to avoid all the years of internecine warfare between the Keynesians and the New Classicals.
Since the GR started many of the buried differences and hostilities have come back to the surface. One rather enigmatic participant in this new kind of Golden Age of the salon-now to be found at the Internet economic blogs-has been Stephen Williamson. The main thing I got about him prior to his recent post which I wrote about here
http://diaryofarepublicanhater.blogspot.com/2013/11/stephen-williamson-on-zlb-interest.html
was that he seems not to like Paul Krugman very much. The best we can figure is that it goes back to Krugman's piece in 2009 that the MS school had failed as it chose 'beauty over truth.'
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all
SW seemed to take this piece awfully personally.
http://newmonetarism.blogspot.com/2010/04/krugman-again.html#comment-form
In this new piece though, SW says a number of things that have just raised lots of eyebrows. First of all, his model that has lots and lots of symbols that I have ah hard time remembering when I'm reading what they all mean-discovers that: QE actually causes deflation. This is a very counterintuitive result to say the least.
Scott Sumner sniffs that no one thinks this.
"Regarding empirical evidence, as far as I know all the empirical evidence is that QE has boosted inflation. And yet Andolfatto’s post is entitled:
Is QE lowering the rate of inflation?
"And the very first line of the post is:
The answer may be “yes,” according to a new paper by Steve Williamson.
This confuses me, as I had thought it was widely understood that QE has been modestly expansionary for nominal spending and inflation. Recall that markets have responded to QE announcements by changing asset prices in a way that implied higher inflation expectations.
It's a very counintuitive result. Sumner did write a later post where he basically says the debate is over his head:
"PS. I don’t have any views on Williamson’s model as my math is so weak it would take me a month to have an intelligent opinion. I disagree with his empirical claim (as does David Beckworth), but that’s a different issue."
"PPS. I do find the debate entertaining. Kocherlakota’s faux pas a few years back was the initial skirmish; this is the full blown battle. Kocherlakota himself seems to have switched sides. Then there are people like Tyler Cowen and Noah Smith, who think Williamson’s being criticized unfairly in theoretical grounds, but have some doubts about his empirical claims (at least that’s how I read Tyler and Noah.) Sorry to be such a wimp on this, but I’d rather not strongly defend a position unless I have a high level of confidence."
Yet this is one of the fascinating aspects of this whole debate. SW's policy implications of his model are really more anti Sumner than anti Krugman. He's basically saying that Krugman is right and we're in a liquidity trap and for that reason we haven't gotten deflation but not because of Krugman's sticky wages. He also seems to be saying that what we actually need to get out of this is an increase in public debt. So the results are a lot more anti Market Monetarist-he's saying the Fed really is in a trap-but that an increase in government debt would get us there. Can you imagine a greater sacrilege than this for an MMer?
As to the question of models, the trouble is that not only is this very complex but it depends what your preferences are. Krugman is criticizing SW for not having proper microfoundations for his claim about QE giving us deflation. Yet what about us heterodox guys who are skeptical of micro?
Noah Smith does get SW to admit that he's changed his mind:
"Back in days of yore, my concern was that we could indeed get higher inflation. How? I had thought that the Fed had the ability to control inflation, but when push came to shove, they wouldn't do it. Once people caught on to that idea, we could get on a high-inflation path that was self-sustaining. Of course, since I said that, I've continued to work on these problems, and stuff has been happening. In particular, we're not seeing that high-inflation path. How come? That's what my previous post is about."
http://newmonetarism.blogspot.com/2013/12/noahs-complaint_2.html
Yet, if SW has changed his mind, he's claiming that he gets this new result-deflation from teh same exact model that was worrying him about a rise in inflation previously.
If the concern is not theoretical but policy then I got to say I like a lot of what SW has done here. He's gotten us a pretty impressive looking reason for more government debt and has reversed Sumner's one-sided obsession with monetary over fiscal policy. The idea that QE actually gets us deflation seems goofy.
Just going by what the emprical results of QE are it seems that it does increase many asset prices-the stock market clearly loves it and trembles at the very possibility of any tapering. However, we have seen this in correlation with very low inflation-we did have short-term deflation in 2009. I've debated MMer's like Mark Sadowski who insist that if it weren't for QE we would have deflation-we're very close to it now with very mild inflation. As Sumner says:
"As far as I know everyone who seriously follows QE knows that the program is inflationary. The only serious debate is whether it has only a tiny inflationary effect, or whether it has a modest inflationary effect. I can’t imagine anyone claiming it’s been deflationary. For God’s sake the dollar fell by 6 cents against the euro on the day QE1 was announced! Does anyone seriously think a 6 cent depreciation in the dollar is deflationary? So why develop models to explain empirical results that don’t exist? I don’t get it."
http://www.themoneyillusion.com/?p=25079
If the effect of QE has been inflationary this effect has been tiny indeed. In this sense the debate with SW would come down to whether he's right and it's
1. A little deflationary
Or Sumner's right and:
2. It's very mildly inflationary
The important thing that SW has done is get monetary offset of the front pages.
P.S. I didn't get to everythuing by far-there is so much great stuff out there. Here are some good links that I will be later commenting on
http://krugman.blogs.nytimes.com/2013/12/02/immaculate-stability-wonkish/?_r=0
http://newmonetarism.blogspot.com/2013/12/teachable-moment.html
http://newmonetarism.blogspot.com/2013/12/stories.html
As to the question of models, the trouble is that not only is this very complex but it depends what your preferences are. Krugman is criticizing SW for not having proper microfoundations for his claim about QE giving us deflation. Yet what about us heterodox guys who are skeptical of micro?
Noah Smith does get SW to admit that he's changed his mind:
"Back in days of yore, my concern was that we could indeed get higher inflation. How? I had thought that the Fed had the ability to control inflation, but when push came to shove, they wouldn't do it. Once people caught on to that idea, we could get on a high-inflation path that was self-sustaining. Of course, since I said that, I've continued to work on these problems, and stuff has been happening. In particular, we're not seeing that high-inflation path. How come? That's what my previous post is about."
http://newmonetarism.blogspot.com/2013/12/noahs-complaint_2.html
Yet, if SW has changed his mind, he's claiming that he gets this new result-deflation from teh same exact model that was worrying him about a rise in inflation previously.
If the concern is not theoretical but policy then I got to say I like a lot of what SW has done here. He's gotten us a pretty impressive looking reason for more government debt and has reversed Sumner's one-sided obsession with monetary over fiscal policy. The idea that QE actually gets us deflation seems goofy.
Just going by what the emprical results of QE are it seems that it does increase many asset prices-the stock market clearly loves it and trembles at the very possibility of any tapering. However, we have seen this in correlation with very low inflation-we did have short-term deflation in 2009. I've debated MMer's like Mark Sadowski who insist that if it weren't for QE we would have deflation-we're very close to it now with very mild inflation. As Sumner says:
"As far as I know everyone who seriously follows QE knows that the program is inflationary. The only serious debate is whether it has only a tiny inflationary effect, or whether it has a modest inflationary effect. I can’t imagine anyone claiming it’s been deflationary. For God’s sake the dollar fell by 6 cents against the euro on the day QE1 was announced! Does anyone seriously think a 6 cent depreciation in the dollar is deflationary? So why develop models to explain empirical results that don’t exist? I don’t get it."
http://www.themoneyillusion.com/?p=25079
If the effect of QE has been inflationary this effect has been tiny indeed. In this sense the debate with SW would come down to whether he's right and it's
1. A little deflationary
Or Sumner's right and:
2. It's very mildly inflationary
The important thing that SW has done is get monetary offset of the front pages.
P.S. I didn't get to everythuing by far-there is so much great stuff out there. Here are some good links that I will be later commenting on
http://krugman.blogs.nytimes.com/2013/12/02/immaculate-stability-wonkish/?_r=0
http://newmonetarism.blogspot.com/2013/12/teachable-moment.html
http://newmonetarism.blogspot.com/2013/12/stories.html
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