The New Era In Central Banking: Credit Policy

With interest rates hitting their effective lower bound, and the general skepticism towards the effects of growing central bank balance sheets via buying central government bonds, central bankers are being forced into a role they had largely avoided: directly extending credit to actors other than the central government. In some ways, this is a reversion to pre-World War II norms. From an analytical perspective, this shift largely eliminates the usefulness of most macro theory with respect to monetary policy.

Why Money Doesn't Matter That Much

Scott Sumner has continued his discussion of Modern Monetary Theory (MMT) and money. To summarise, he has misunderstood a passage from MMT version of an Economics 101 textbook (Macroeconomics by Mitchell, Wray, and Watts, denoted MWW), and mixing it up with other statements that he has seen. I am assuming that his misunderstanding is the result of leaping ahead to advanced topics, which requires a correspondingly more advanced set of MMT references. I just want to clear the confusion up in this article, without necessarily offering definitive views.

Comments On Scott Sumner's Questions About MMT

Scott Sumner asked a few questions about Modern Monetary Theory (MMT) (link), and this article is a short response to some of them. The issue at hand is the effect of open market operations, in particular, in the pre-2008 U.S. system (where reserves paid not interest). 

Debt Scolds Warming Up

The chatter around Biden's Treasury Secretary appointment has unsurprisingly coincided with various commentators harping on about government debt levels in the United States. Meanwhile, some Canadian opposition politicians are complaining about deficits.

None of the comments I saw were particularly interesting, so I will not bother responding to any in detail. I just want to point out it makes no sense to float such concerns in November 2020.

Roger Farmer's Comments On The Natural Rate Of Unemployment

One of my concerns about mainstream economic methodology is the dependence upon hidden variables that are estimated with techniques like the Kalman Filter. The issue is that the resulting methodology is non-falsifiable: it will always end up being consistent with any observed data (admittedly, some outright bizarre behaviour might be rejected). 

Although this might appear to be my own hobby horse, I just want to note that I was not the first person to make such a complaint. Various heterodox authors have levelled similar complaints, but my feeling they have done so in such a long-winded fashion that non-heterodox readers like myself have a very hard time picking out what is a straightforward -- but important -- point. In reading Prosperity for All: How to Prevent Financial Crises by Roger E. Farmer (Amazon affiliate link), he makes the same point with respect to the natural rate of unemployment.

Side Effects Of Stability Of DSGE Models

The stability of the solutions of workhorse dynamic stochastic general equilibrium (DGSE) models is a major drawback of these models when trying to explain recessions. This article looks at the estimated linear New Keynesian model that was used in the previous discussion of the estimation of r* -- the Holston-Laubach-Williams (HLW) model. 

As I have noted a few times previously, more interesting behaviour can be obtained by nonlinear DSGE models. However, this flexibility comes at the cost of increasing the difficulty of fitting the model to data. There is an infinite number of models one can use to tell stories with.

Vaccine News

The vaccine news seems positive to my inexpert eyes, but I do not want to waste my readers' time by discussing the obvious. I want to make a couple of observations.

The first is that if these news holds, policymakers are in a position to outline rollout strategies, and so we finally have a timeline for "normalisation." This will hopefully reduce the carping about the cost of support packages, since we can start to put an upper bound on costs. (The political situation in the United States might inject some uncertainty.) We should see a decent-sized snap-back in activity, the concern is that if support is withdrawn too soon, we have a wave of business/household failures hitting first.

A related point is the situation for airline travel and high profile tourist venues. My working assumption is that international travel is likely to be tied to vaccination status (if not legally, at least by traveller caution). My largely uneducated guess is that it might not take that long for the numbers of vaccinated would-be travellers to meet the capacity constraints for air travel. This would greatly help reduce the really big dollar amounts associated with air industry support.