tag:blogger.com,1999:blog-582368152716771238.post2518584682339900688..comments2024-03-28T14:41:03.793-05:00Comments on The Grumpy Economist: Challenges for central banks. John H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger37125tag:blogger.com,1999:blog-582368152716771238.post-38869123562741831112020-10-29T15:39:11.835-05:002020-10-29T15:39:11.835-05:00YuShan,
Think of central banking as process contr...YuShan,<br /><br />Think of central banking as process control.<br /><br />The input is the interest rate the central bank is willing to lend at.<br /><br />The immediate feedback loop is the willingness of borrowers at that interest rate.<br /><br />The output and delayed feedback loop is how much real GDP and inflation you get at the interest rate being offered.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56934090278257813862020-10-29T08:12:09.651-05:002020-10-29T08:12:09.651-05:00so nice👍so nice👍Alicehttps://www.blogger.com/profile/06869105169304593184noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70439263148881291282020-10-27T13:41:15.101-05:002020-10-27T13:41:15.101-05:00Anonymous,
Also, remember that the neo-Fisher sto...Anonymous,<br /><br />Also, remember that the neo-Fisher story does not address how interest rates affect the demand for credit or how that borrowed money is used.<br /><br />If the Fed raises the interest rate it is willing to lend at and credit growth slows or contracts, then inflation is likely to either remain stable or fall.<br /><br />If the fed raises the interest rate it is willing to lend at, credit growth remains steady, and productivity increases, again inflation is going to remain stable or fall.<br /><br />I don't know if economists are just terrible at mulitiple variable math (productivity, inflation, credit growth, interest rate) or if they just like simple stories to tell policy makers.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-61737180878146747202020-10-26T19:37:16.901-05:002020-10-26T19:37:16.901-05:00Fixed! Yes of course. Thanks. Neo-Fisher is really...Fixed! Yes of course. Thanks. Neo-Fisher is really about rational vs. adaptive expectations, not about money vs. other methods for raising interest rates, so yes. But remember it only works for widely anticipated, slow, steady, persistent interest rate rises, so most of your intuition about sudden, unexpected, temporary monetary shocks does not apply. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-45302650884442708892020-10-26T14:22:08.645-05:002020-10-26T14:22:08.645-05:00To be pedantic, the chastity prayer comes from St....To be pedantic, the chastity prayer comes from St. Augustine. <br /><br />More relevant, let's go back to M Friedman. If the Fed targets the money supply and forgets about interest rates, do we have any of those tiresome neo-Fisher stories? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6350874430897746472020-10-25T17:33:58.826-05:002020-10-25T17:33:58.826-05:00The cited article (https://news.energysage.com/sol...The cited article (https://news.energysage.com/solar-energy-vs-fossil-fuels/) is a poor source of information for a discussion such as this one.<br /><br />Comparing a simple cycle natural gas turbine driven electrical generation plant against a distributed roof-top solar photovoltaic panel installation on a commercial building or on a single-family residential housing unit ('house') is fraught with difficulties. The SCNG turbine generating plant is 'dispatchable', i.e., it produces electricity on demand. The solar photovoltaic panel output is 'non-dispatchable', i.e., it cannot produce electricity on demand (e.g., during non-daylight hours, or during the daylight hours under over-cast skies). The two different and distinct technologies serve different markets and different regions of the country. <br /><br />The cost of green-house gas emissions from stationary plants (coal or natural gas electrical generating plants) at a carbon tax rate of $30 per metric ton of CO₂-equivalent ("per mt-CO₂-eq.") is $0.022 per kilowatt-hour for a simple cycle turbine operating on natural gas (1,000 Btu/cu.ft.) at an efficiency rate of 25%.<br /><br />A solar photovoltaic panel offering electricity at $0.20 per kWh couldn't compete with a simple cycle gas turbine plant producing electricity for $0.10 per kWh ex carbon tax or $0.122 per kWh cum carbon tax. If we're talking about marginal costs for the next 1 kWh, then the cost of fuel for the solar PV panel is effectively zero, but the fuel cost for the simple cycle gas turbine is positive. For short periods of time during the peak afternoon demand period on days with clear skies, the solar PV panel beats the simple cycle gas turbine generating plant. But would you build a solar PV electrical generating plant on the off-chance that you could sell electricity only during sunny periods of the day? Perhaps in California you might consider it.<br /><br />Perhaps, like the author of the cited on-line article, you might suggest that "If only the government would stop 'subsidizing' fossil fuels...", solar and wind would become predominant sources of primary energy in the USA. One would then have to define what one means by 'subsidizing' fossil fuels and subsequently prove that fossil fuels are in fact subsidized--it's easier said than done. The author of the cited on-line article doesn't even try, which must tell us something.<br /><br />Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40212773599619324032020-10-24T15:24:40.635-05:002020-10-24T15:24:40.635-05:00YuShan,
"The borrowers have been getting it ...YuShan,<br /><br />"The borrowers have been getting it wrong. That is a weird thing to write."<br /><br />Not really. First let us dispense with the moralistic "right/wrong" notation. The core function of a central bank is to act as lender of last resort. They are not given the power to selectively decide which loans will result in higher real growth and which will lead to higher inflation - that is what the private banking industry (for personal / business loans) and for Congress (for government loans) are left to decide.<br /><br />The central bank is tasked by Congress to maintain price stability. And so how do they do that when they don't get to pick and choose which loans to accept / reject?<br /><br />On a first order level, they do that by adjusting the nominal interest rate based upon loan demand. The graph in John's paper fails (and most Taylor rules) fail to take that into account - how does the interest rate affect the demand for loans?<br />As the demand for loans / credit rises, the central bank can raise the interest rate in response.<br /><br />On a second order level, the central bank can look at trends in productivity, inflation / credit defaults, and other indicators to gauge how that previously borrowed money is being used. And so even in the face of high loan demand, a central bank may refrain from raising the interest rate if those loans are resulting in higher real economic growth.<br /><br />So "the borrowers have been getting it wrong" is absolutely the right way to describe central bank policy of the 1970's. If the borrowers had got it right in the 1970's, the central bank could have maintained a stable interest rate policy (see Greenspan Fed about 1992 through 2000).FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-64813616144875351782020-10-24T04:25:02.650-05:002020-10-24T04:25:02.650-05:00E5 and John,
There are life span issues to consid...E5 and John,<br /><br />There are life span issues to consider. Solar panels are generally guaranteed optimum electrical output for 30 years while gas wells run dry in about 10-11 years. And they (solar panels) are a technology that will improve over time (iPhone #1, #2, #3, etc.).<br /><br />And so how many real resources are used to locate, drill, and extract gas from a new well 3 times over 30 years?<br /><br />https://news.energysage.com/solar-energy-vs-fossil-fuels/<br /><br />The problem with solar isn't the cost per se.<br />It is it the intermittent nature of solar energy.<br />Obviously you want your lights and heat turned on at night when there is no sun.<br />Battery and other storage technologies are the big hiccup, but the technology behind them is improving as well.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58707634489935006732020-10-24T03:45:47.265-05:002020-10-24T03:45:47.265-05:00"The borrowers have been getting it wrong&quo..."The borrowers have been getting it wrong"<br /><br />That is a weird thing to write. The theory that underlies the central bank monetary policy is supposed to understand how the mechanics work. That includes the behaviour of borrowers. <br /><br />If the opposite happens from what your theory tells you, your theory is simply wrong! It keeps surprising me that central bankers keep sticking to the same dogmas. It is not just stupid, it is very harmful, because the bad "medicine" blows up ever bigger asset bubbles that undermine stability, require even bigger policy response, etc. It's truly scary.YuShannoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-16851056923038846832020-10-24T00:23:19.064-05:002020-10-24T00:23:19.064-05:00Scott,
Future inflation is not factored into exis...Scott,<br /><br />Future inflation is not factored into existing loans. For instance the 15%+ post-hoc inflation of the late 1970's in the U.S. was not factored into loans made in the late 1960's.<br /><br />As far as the "debt burden" goes, the easiest way to reduce the debt burden is to rely on the sale of equity rather than debt (bonds). For whatever reason unknown to me - economists, policy makers, and politicians have yet to figure this out.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-3844074366225086852020-10-24T00:22:51.594-05:002020-10-24T00:22:51.594-05:00Scott,
Future inflation is not factored into exis...Scott,<br /><br />Future inflation is not factored into existing loans. For instance the 15%+ post-hoc inflation of the late 1970's in the U.S. was not factored into loans made in the late 1960's.<br /><br />As far as the "debt burden" goes, the easiest way to reduce the debt burden is to rely on the sale of equity rather than debt (bonds). For whatever reason unknown to me - economists, policy makers, and politicians have yet to figure this out.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83290751040627028992020-10-23T17:40:02.295-05:002020-10-23T17:40:02.295-05:00I understand your point about creating mandates or...I understand your point about creating mandates or not, but really it just seems like the wrong tool. Carbon tax. Okay. Maybe there's a tax on all fossil fuel related business (sort of like a Tobin tax to throw sand in the wheels of international capital markets to slow capital flows) so that it generally is taxed on the output and input side, all to discourage fossil fuels. But still that's not the role of a monetary authority.<br />Your deeper economic point is that these institutions and so, so many economists fought for so long for central bank independence so they could focus on the one thing we THINK just maybe they can control in the long run: inflation. Then we all worried about the best instruments to achieve that: monetary aggregates, Taylor-type rules or pure rules vs discretion, etc. and the opinion is solidly on the side of rules of some form. After all that work. After all the apparent success of the great moderation. After most countries around the world adopt some sort of CB independence and maybe formal inflation targeting ... after all that, the "developed" economy central banks sneak in through the back door political objectives and erode their own central bank independence (read John's comments on MMT which is all about mixing monetary and political/social justice objectives). Once the ECB, FED, Bank of England, of Canada, etc. do this and the IMF etc push for it globally, central bank independence is going to crumble as every EM's bank follows suit.<br />That's the danger. And then... what happens? The economy is in the toilet and there are no funds to finance green projects :-) (Sorry, I had to end a little extreme).Chris Ballhttps://www.blogger.com/profile/09391871073007427216noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-27503090133660015232020-10-23T16:25:29.597-05:002020-10-23T16:25:29.597-05:00John H. Cochrane; October 23, 2020 at 9:30 AM
Dif...John H. Cochrane; October 23, 2020 at 9:30 AM<br />Different resources consumed. <br />1. Consumption of a certain amount of natural gas drawn from a well (that will run dry), and use of the transportation and generating equipment involved, and the losses along the way, and all the efforts of people to make that happen.<br />2. Consumption of a certain amount of the output of a device that has been constructed from certain resources, that will need to be replaced after a certain time, and all the efforts of people to make that happen.<br />Comparing those two, in terms of resources consumed, is not so easy. Some of the resources have a superficial similarity, if you are willing to equate an hour of roughneck work drilling a well with an hour of maintenance technician work in a silicon foundry. Others bear no comparison. What resource in #2 would you consider equivalent to fossil hydrocarbon reservoir depletion?<br />The money-based comparison only looks at the matrix of people's willingnesses to exchange a multiplicity of commodities, for other commodities, right now. And it makes no allowance for the value of preparing for a time in the not-too-distant future when the money-based comparison will yield the opposite answer.<br />--E5E5https://www.blogger.com/profile/09238177978445597828noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4828245563372698582020-10-23T16:24:26.065-05:002020-10-23T16:24:26.065-05:00i said I agree with you on the unaccountable insti...i said I agree with you on the unaccountable institutions. But your preferred solution wont happen without huge political pain. What are the third+ options?LALhttps://www.blogger.com/profile/08196675112184615614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-3706954919246434972020-10-23T13:38:58.950-05:002020-10-23T13:38:58.950-05:00Exactly right.
It is a double sided trade, emitte...Exactly right. <br />It is a double sided trade, emitter and damaged. When looking for the correct model look at tort as the assumption is a tort judge is a small, negligible player.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-91803579599805158752020-10-23T13:37:39.575-05:002020-10-23T13:37:39.575-05:00YuShan,
Correlation is not causation (as any good...YuShan,<br /><br />Correlation is not causation (as any good statistician will tell you).<br /><br />A central banker will only know the effect of the money that he lends after he lends it. Whether that borrowed money is used for productive purposes or for consumption or destructive purposes (wars), is completely out of their (central banker) hands.<br /><br />It's not that central banks have been "getting it wrong". It is that borrowers have been "getting it wrong" - they are the ones that deploy the borrowed money into the economy.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13583589175987349662020-10-23T12:40:56.132-05:002020-10-23T12:40:56.132-05:00Inflation doesn't actually reduce the debt bur...Inflation doesn't actually reduce the debt burden, because inflation is factored into nominal interest rates. A surge in inflation would reduce the debt burden, but in recent decades inflation has actually been trending downward, it's been less than anticipated, so it's made the debt burden worse.Scott Sumnerhttps://www.blogger.com/profile/15864819372390187247noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-48898243517903230262020-10-23T10:09:45.089-05:002020-10-23T10:09:45.089-05:00Mr Cochrane, I found your video very interesting. ...Mr Cochrane, I found your video very interesting. Especially the first part about the correlation between inflation and interest rates. Why is it that central banks have been getting this wrong for so long, while overwhelming evidence is staring them in the face?<br /><br />YuShannoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79646464651088639252020-10-23T09:30:50.348-05:002020-10-23T09:30:50.348-05:00I'll answer for David. Suppose you can keep th...I'll answer for David. Suppose you can keep the lights on for 10 c / kWh by burning natural gas, or 20 c / kWh from solar cells. Ignoring the production, installation, etc. the solar cells don't make carbon, of course. Leaving out the anti-carbon benefits, the economy is using more resources to do the same thing. The resources making solar cells could be making iPhones, which you essentially get for free if you burn the gas rather than make use and install the solar cells. Now the solar cells don't make carbon, which is good. But the value of carbon saved had better be 10 c / kWh. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-44238126998565919682020-10-22T23:58:14.012-05:002020-10-22T23:58:14.012-05:00Question for David Seltzer ... October 21, 2020 at...Question for David Seltzer ... October 21, 2020 at 5:04 PM ....<br />"electricity and transportation inputs will have to be increased to produce the same outputs"<br />What do you mean by that phrase? I'm not asking about money flow. I am asking about real resource inputs.<br />--E5E5https://www.blogger.com/profile/09238177978445597828noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73122743705909527772020-10-22T12:17:02.130-05:002020-10-22T12:17:02.130-05:00The ECB embarked on a programme of purchasing corp...The ECB embarked on a programme of purchasing corporate debt of european companies in the secondary market during the pandemic downturn this year. Private power utility corporation debt has been acquired by the ECB through that programme. Many of those corporations rely on petroleum (oil and/or natural gas) or coal for their primary energy. The ECB also purchased the corporate bonds of oil and gas producers and distributors, e.g., Shell, through this programme. The argument from the 'green' lobbyists' faction is that these purchases go against the 2015 Paris Agreement proposal to limit overall global atmospheric temperature increase to 1.5 Celsius degrees by the year 2100, and as such the ECB is funding the very companies that the 'green' lobbyists should not be supported by public investment. That is one argument.<br /><br />A second argument arises from commercial banking loan syndications which are a principal means of funding corporate operations through the banking sector. To the extent that syndicated loans are to corporations whose operations and profits are petroleum-dependent and coal-dependent and hence subject to 'asset stranding' risk, the systematic risk of the commercial banking sector is increased, and this should be a concern of the ECB relative to its price-stability mandate. Naturally, one would want to evaluate the actual prospects of 'asset stranding' within the term horizon of such syndicated loans--if the prospect is small to negligible, then the effect on systematic risk is likely to be correspondingly small. Conversely, if the risk of 'stranding' is moderate to high, then the effect on systematic risk is commensurably higher and not negligible. It is to the advantage of 'green' lobbyists to play up the risk, if it is truly small or negligible, in order to advance their social agendas; conversely, it is to the advantage of bank borrowers, and perhaps the banks themselves, to play down the risk, if the risk is non-negligible or high, in order to give themselve time to adjust their operations or sell those assets off at a price acceptable to their owners.<br /><br />The EU and USA differ in their banking systems, and it would be an error to conflate the two and say that the EU banking sector operates in the same way that the US banking sector does. The remarks by "FRestly" should be viewed as coming from a US banking system perspective. Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-25892853588077064352020-10-21T20:37:33.034-05:002020-10-21T20:37:33.034-05:00How was this talk received?How was this talk received?EBnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-88693163153538872002020-10-21T19:16:29.673-05:002020-10-21T19:16:29.673-05:00Scott,
TIPs have an element of legislative risk t...Scott,<br /><br />TIPs have an element of legislative risk that must be recognized - they were not voted into existence by Congress (see U. S. federal register, circa 1996-1997), but remain as a liability of the government. As such, it is fully within the power of Congress (facing a budget constraint) to define the inflation component any way they see fit (for instance 0%) or in the very least redefine the CPI once again (see 1983 elimination of houses, see 1996 Boskin Commission).<br /><br />My own opinion is that if a government needs to rely on post-hoc inflation to eat away at the value of it's debt, then it shouldn't be borrowing. Instead, it should be selling equity where the buyer is aware of the risk before purchasing the security (see Social Security as example). The only problem with Social Security is the mandate.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67732756424861184512020-10-21T17:54:32.100-05:002020-10-21T17:54:32.100-05:00Gosh John, do you think allowing commercial bankin...Gosh John, do you think allowing commercial banking, investment banking, and insurance to be all run out of the same shop is still a good idea? If so, then why not just throw some green energy companies (solar, wind, etc.) under the same umbrella?<br /><br />You say, central bank mission creep begins with a central bank getting off it's core duties. I say, central bank mission creep began when some central banker who will remain nameless decided to team up with some former Wall Street Treasury Secretary who will remain nameless and combined commercial banking, investment banking, and insurance.<br /><br />You tell me when Glass Steagal is going to be reinstated in full, and then you will know when the U. S. central bank will go back to it's core function.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81910762368647993912020-10-21T17:04:45.344-05:002020-10-21T17:04:45.344-05:00The central bank's concern with climate change...The central bank's concern with climate change is one half of the macroeconomic equation. Taxes are the other half. The democrat's plan to lower carbon emissions means electricity and transportation inputs will have to be increased to produce the same outputs. Coupled with increased marginal tax rates, capital intensity will be reduced. This translates to reduced employment. A decline in capital stock. A decline in real GDP and real HH consumption. The CBO's 2030 projections for employment, capital stock, real GDP and HH consumption puts the central bank in a real bind. Tax more? Print more? Choose inflation, another tax, more? Finally, If one is interested see: Oct 20 Hoover Daily-Report, An Analysis Of Vice President Biden's Agenda. The Long Run Impacts of Regulations, Taxes and Spending. It ain't pretty! David Seltzernoreply@blogger.com