Let me admit right away that I'm not a big shot from within the Macro establishment-Sumner has often accused me of being too ignorant to even engage in a basic economic discussion.
I think Scott has been pretty uncharitable-I don't have any academic training in economics and will be the first to tell you that I'm just an interested layperson who's trying to catch up. In fairness Sumner has tried to be more friendly to me recently and we seem to have possibly something of an uneasy understanding.
Sometimes however, I wonder if my status of 'not being an economist helps me see the forest for the trees in ways that the insiders can't.
One thing that Sumner always found every annoying about me is that I 'politiize everything.' But I think that there is a political dimension to economic debates they are not purely academic affairs. I still believe that his Market Monetarism-like all Monetarism-is really about trying to abstract the political aspect out of economic discussions.
So to me when I look at the huge debate in the RBC world between Mike Woodford-considered by all the insiders to be the world's greatest monetary economist-and SW New Monetarism with its Neo-Fisherian theory about interest rates, my take on it is that this is a brilliant Trojan horse to cut off New Kenesianism at the knees.
The RBC Empire is striking back-and with great success it must be said.
http://newmonetarism.blogspot.com/2014/11/neo-fisherians-unite-and-throw-off-mvpy.html
http://johnhcochrane.blogspot.com/2014/11/the-neo-fisherian-question.html
This is all about Freshwater Macro taking back their journals from the dross of Saltwater. I take it that they're having some success by Woodford's need to invent a whole new model to refute them.
The reason I say it's brilliant is think about it this way: the Neo-Fisherians want the Fed to raise interest rates-they feel that they've been ZIRP much more than long enough. So how do they get the CB to listen? Basically, they've changed their rationale. Before it was the spectre of galloping inflation.
This led no one at the Fed to listen to them and a thousand Krugman posts mocking them for being so absurdly and obviously wrong. So it was counterproductive.
Stephen Williamson himself warned about galloping inflation for years. Then suddenly he, Cochrane, and others from the Freshwater establishment started changing their tune.
"One big challenge to the paradigm Woodford has built - which has won near-universal adoption at central banks - is the Neo-Fisherian idea. This is the idea that holding interest rates low for a very long time will either A) make the economy explode, or B) eventually cause persistently low inflation. Looking at the experience of Japan since 1990, (B) doesn't seem so crazy. John Cochrane explained the Neo-Fisherian idea in an epic blog post back in November, and the idea is supported by a more formal model by Schmitt-Grohe and Uribe. It's a big challenge to the Woodford paradigm because 1) the core of the idea is pretty simple, 2) it seems to fit with recent Japanese and possibly American experience, and 3) it says that central banks working in the Woodford paradigm are achieving the exact opposite of what they intend to achieve."
http://noahpinionblog.blogspot.com/2015/07/woodford-vs-neo-fisherians.html
You see what I mean? This is a brilliant adjustment. They had gone with A for years which made them look silly as while it was a simple idea it didn't fit with experience at all.
So they switch to B which
1. Fits with recent experience much better. We have seen a correlation of permanently low or zero interest rates for years with suboptimal inflation.
2. It also makes the NFers seem like good guys now as they have subtly changed from opposing the Keynesian goal to supporting it. Before the NKers wanted more inflation but they were warning that this was a Pandora Box that would cause the economy to explode.
Now they've switched to sharing the same goals as the NKers in raising the inflation rate; they're just helpfully explaining to the NKers that they have it backwards. They need to raise interest rates to raise inflation.
It's a brilliant tactical retrenchment. Ok so that's what political analysis can do for you. Looking at it this way you see the NFers haven't learned anything at all they're just trying a new tact.
Academic economists often seem reticent to admit the political dimension as obvious as it is here.
UPDATE: Woodford's answer itself is fascinating. He'arguing for a pullback in the belief in Rational Expctations.
"The question of whether interest rates affect inflation in a Woodfordian way or a Neo-Fisherian way depends on whether people's expectations are infinitely rational. Woodford's new idea - which will certainly be a working paper soon - is that people don't adjust their expectations to infinite order. He essentially puts bounded rationality into macro. He posits a rule by which expectations converge to rational expectations."
I think Scott has been pretty uncharitable-I don't have any academic training in economics and will be the first to tell you that I'm just an interested layperson who's trying to catch up. In fairness Sumner has tried to be more friendly to me recently and we seem to have possibly something of an uneasy understanding.
Sometimes however, I wonder if my status of 'not being an economist helps me see the forest for the trees in ways that the insiders can't.
One thing that Sumner always found every annoying about me is that I 'politiize everything.' But I think that there is a political dimension to economic debates they are not purely academic affairs. I still believe that his Market Monetarism-like all Monetarism-is really about trying to abstract the political aspect out of economic discussions.
So to me when I look at the huge debate in the RBC world between Mike Woodford-considered by all the insiders to be the world's greatest monetary economist-and SW New Monetarism with its Neo-Fisherian theory about interest rates, my take on it is that this is a brilliant Trojan horse to cut off New Kenesianism at the knees.
The RBC Empire is striking back-and with great success it must be said.
http://newmonetarism.blogspot.com/2014/11/neo-fisherians-unite-and-throw-off-mvpy.html
http://johnhcochrane.blogspot.com/2014/11/the-neo-fisherian-question.html
This is all about Freshwater Macro taking back their journals from the dross of Saltwater. I take it that they're having some success by Woodford's need to invent a whole new model to refute them.
The reason I say it's brilliant is think about it this way: the Neo-Fisherians want the Fed to raise interest rates-they feel that they've been ZIRP much more than long enough. So how do they get the CB to listen? Basically, they've changed their rationale. Before it was the spectre of galloping inflation.
This led no one at the Fed to listen to them and a thousand Krugman posts mocking them for being so absurdly and obviously wrong. So it was counterproductive.
Stephen Williamson himself warned about galloping inflation for years. Then suddenly he, Cochrane, and others from the Freshwater establishment started changing their tune.
"One big challenge to the paradigm Woodford has built - which has won near-universal adoption at central banks - is the Neo-Fisherian idea. This is the idea that holding interest rates low for a very long time will either A) make the economy explode, or B) eventually cause persistently low inflation. Looking at the experience of Japan since 1990, (B) doesn't seem so crazy. John Cochrane explained the Neo-Fisherian idea in an epic blog post back in November, and the idea is supported by a more formal model by Schmitt-Grohe and Uribe. It's a big challenge to the Woodford paradigm because 1) the core of the idea is pretty simple, 2) it seems to fit with recent Japanese and possibly American experience, and 3) it says that central banks working in the Woodford paradigm are achieving the exact opposite of what they intend to achieve."
http://noahpinionblog.blogspot.com/2015/07/woodford-vs-neo-fisherians.html
You see what I mean? This is a brilliant adjustment. They had gone with A for years which made them look silly as while it was a simple idea it didn't fit with experience at all.
So they switch to B which
1. Fits with recent experience much better. We have seen a correlation of permanently low or zero interest rates for years with suboptimal inflation.
2. It also makes the NFers seem like good guys now as they have subtly changed from opposing the Keynesian goal to supporting it. Before the NKers wanted more inflation but they were warning that this was a Pandora Box that would cause the economy to explode.
Now they've switched to sharing the same goals as the NKers in raising the inflation rate; they're just helpfully explaining to the NKers that they have it backwards. They need to raise interest rates to raise inflation.
It's a brilliant tactical retrenchment. Ok so that's what political analysis can do for you. Looking at it this way you see the NFers haven't learned anything at all they're just trying a new tact.
Academic economists often seem reticent to admit the political dimension as obvious as it is here.
UPDATE: Woodford's answer itself is fascinating. He'arguing for a pullback in the belief in Rational Expctations.
"The question of whether interest rates affect inflation in a Woodfordian way or a Neo-Fisherian way depends on whether people's expectations are infinitely rational. Woodford's new idea - which will certainly be a working paper soon - is that people don't adjust their expectations to infinite order. He essentially puts bounded rationality into macro. He posits a rule by which expectations converge to rational expectations."
"This is only going to make the SW, Cochrane, Freshwater types madder. SW has denied that this divide matters or even exists but it seems to me that only FW types argue this never SW."
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