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It's a graphic novel treatment of Gene Fama's Does the Fed Control Interest Rates? paper, from the Booth school's Capital Ideas magazine, by Eric Cochrane (yes, we're related). If it appears squished, use a wide browser window. The art is better in the printed form.
Eric captured cointegration and error correction, and Gene's regressions of short and long-term interest rates, cleverly with the story. Does Sally take Lucy for a walk, or is Lucy really leading Sally around? Well, when Lucy goes off hunting for a squirrel, who then moves to catch up?
John,
ReplyDeleteI would ask the same question about interest rates on government debt. Does Treasury announce to bond buyers - "Here is the tax rate the government has implemented - bond buyers must accept an interest rate that the government can pay"? Or do bond buyers announce to Treasury - "Here is the interest rate bond buyers will accept - government must implement a tax rate sufficient to make the payments"?
Thia graphic illustration made me really laugh a lot :D
ReplyDeleteThe Fed controls rates by controlling the numirare of NGDP, no? NGDP is the intervening variable, rates are the outcome.
ReplyDeleteNo, rates are the intervening variable, NGDP is the outcome...unless this is after 2008, in which case, you're right.
DeleteCare to explain how interest rates produce NGDP? I thought that the Fed controlled the monetary base.
DeleteI think this illustrates the advantage of thinking about monetary policy in terms of the quantity of reserves rather than interest rates.
ReplyDeleteCute, but I think this is more about why pushing on string (aka leash) doesn't work. Sally has complete power to prevent Lucy from chasing the squirrel (aka inflation) way high up the tree simply by pulling tight on the choke leash, but she can't force Lucy to go up there no matter how hard she pushes on it. Sally has total power, but that power is effective in one direction only -- restraint.
ReplyDeleteBut this is not the case for the Fed, which can easily spike inflation whenever it wants to.
DeleteSorry, I don't follow. They are below their inflation target.
DeleteI love it. Also you can pull Lucy to water with the leash but you can't make her drink.
DeleteFound a good write-up on GM vs. VW, how they were treated differently by US Govt.
ReplyDeletehttp://www.zerohedge.com/news/2015-09-22/dear-volkswagen-was-your-biggest-mistake
Look how BP was treated. They would never have done that to a big American owned oil company.
Delete...and, actually, the Fed could set short rates at 10% forever. The data suggests that if the Fed keeps the monetary base at a steady 4.75% of NGDP, you'll get 10% short rates.
ReplyDeleteI guess Eric is your son, whom you named after named after your late father, who died much too young. May he rest in peace.
ReplyDeleteI think this is misleading to a amateur reader (who it appears to be aimed at), as it would leave the impression that the Fed wants to control interest rates. They don't, they want to control inflation and employment. If the Fed sets an interest rate at 2% it is only because they think that is a rate that is in accordance with fufilling those goals, if they move the interest rate it isn't because they could or couldn't control interest rates, it should be because either something has changed or the fed thinks it made a mistake. I don't think this concept comes across at all in the cartoon.
ReplyDelete