tag:blogger.com,1999:blog-582368152716771238.post3904125255727890366..comments2024-03-28T14:41:03.793-05:00Comments on The Grumpy Economist: Target the spread? John H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger19125tag:blogger.com,1999:blog-582368152716771238.post-92223803771869798012020-12-16T07:28:20.885-06:002020-12-16T07:28:20.885-06:00Very interesting idea. However, I see an issue rel...Very interesting idea. However, I see an issue related to liquidity premia. Unless the liquidity of nominal and indexed bonds is exactly the same, the difference in return of the two will be a function of both the relative liquidity premium and expected inflation - liquidity premium in the monetary sense, i.e. how acceptable are these assets in trades or how easy is it to liquidate them quickly. Furthermore, the liquidity premium typically depends on the supply of these assets, so the difference in liquidity premia between a nominal and an indexed bond won't be constant over time.Lukas Altermatthttps://www.blogger.com/profile/05617632612189094442noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-69298013847906202962020-12-10T11:48:44.273-06:002020-12-10T11:48:44.273-06:00Odd thought for fun: I don't know if this is f...Odd thought for fun: I don't know if this is feasible, but maybe you know about the MacroModelDatabase https://www.macromodelbase.com/ that John Taylor and others started to try out different mon-policy rules on a collection of models.<br />I never actually used it for that purpose. It turns out they put a bunch of great papers into Dynare and you can access all those programs. So I've used it to help undergrads learn basics of DSGE modeling by just "calibrating" models to other countries by finding new country-specific parameters. <br />Obviously you can and will code your own model when you get to that point, but I thought it might be fun for blog comments and just getting people talking about targeting the spread. The more people discuss and play with the idea, the better, I hope :-)<br />Again, I never really tried their database and program for what it's intended, but I believe the latest version let's you enter your own rule beyond (I THINK) just Taylor-type rules, but more elaborate ones as well.<br />Anyway, just a thought if anyone commenting wants to try or has students interested...Chris Ballhttps://www.blogger.com/profile/09391871073007427216noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77725975159518428642020-12-08T13:00:51.386-06:002020-12-08T13:00:51.386-06:00Re equation (9), as residuals are ~ N(0,1) and TIP...Re equation (9), as residuals are ~ N(0,1) and TIPS are thinly traded, our traders traded the CME two under ten treasury futures spread in the appropriate ratio. The spread is somewhat robust anticipating recessions and inflation. David Seltzernoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52475800734062549642020-12-08T00:49:55.390-06:002020-12-08T00:49:55.390-06:00"Ideally the Treasury should fix debt markets..."Ideally the Treasury should fix debt markets, vastly simplifying TIPS. I've argued for tax free indexed and non-indexed perpetuities, which would be ideal."<br /><br />How do perpetual loss indexed securities work from a legal standpoint? An insurance company / hedge fund / whatever buys perpetual TIPs prior to a significant deflation taking place. The principle value of that security can fall below zero - it is perpetual and offers a negative rate of return because inflation is negative.<br /><br />With equity shares and nominal interest rate bonds, there is a loss limitation. Equity shares can fall to zero but no further. The issuer of the nominal interest rate bond can go bankrupt generating a zero return on the bond.<br /><br />What you are arguing for is securities that have infinite (perpetual) downside risk.<br />And this is your ideal?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40920123858320688452020-12-08T00:10:17.865-06:002020-12-08T00:10:17.865-06:00"Ideally the Treasury should fix debt markets..."Ideally the Treasury should fix debt markets, vastly simplifying TIPS. I've argued for tax free indexed and non-indexed perpetuities, which would be ideal."<br /><br />Who is the buyer that is going to live forever and invest in perpetuities?<br /><br />Why would this Congress (and future Congress's) commit to interest expenditures on perpetual debt?<br /><br />They (Congress) are the only body Constitutionally authorized to borrow - not the federal reserve and not the Treasury (Executive Branch).FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-57526547175841662012020-12-07T19:40:22.298-06:002020-12-07T19:40:22.298-06:00As the post explains, TIPS need a lot of improveme...As the post explains, TIPS need a lot of improvement before this becomes practical. The Fed could offer indexed reserves directly. Or CPI swaps. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-35609868994054004762020-12-07T19:39:12.495-06:002020-12-07T19:39:12.495-06:00No, the static IS curve is wrong because most peop...No, the static IS curve is wrong because most people think they will live beyond tomorrow morning so they think about consumption today relative to consumption tomorrow. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58074108164831280572020-12-07T13:52:56.917-06:002020-12-07T13:52:56.917-06:00The reason the static IS curve is wrong it because...The reason the static IS curve is wrong it because it does not factor in equity finance or tax policy.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-74269514876480160702020-12-06T19:40:15.737-06:002020-12-06T19:40:15.737-06:00"Here I have deleted the... ....term in the f..."Here I have deleted the... ....term in the first equation, so it becomes a static IS curve, in which output is lower for a higher real interest rate."<br /><br />Go to the St. Louis federal reserve (FRED) website and plot a comparison of real interest rate (Ten Year Treasury minus year over year CPI) vs. Real GDP. You will find that generally, they are positively correlated.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-64853479916271085242020-12-06T16:59:26.192-06:002020-12-06T16:59:26.192-06:00My only concern would be with regards to time-vary...My only concern would be with regards to time-varying inflation risk premia. Changes in TIPS spreads may not reflect inflation expectations even if we fix the problems with taxation and liquidity.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79666269525904282152020-12-05T20:14:46.152-06:002020-12-05T20:14:46.152-06:00" If the Fed is going to buy a lot of long-da..." If the Fed is going to buy a lot of long-dated Treasurys, it shold issue term liabilities not just floating-rate overnight reserves."<br /><br />The Fed has the unique power to issue zero coupon perpetuals a/k/a cash.<br /><br />It has something like 1.3T$ of Benjamins outstanding. What it really needs to do is issue bigger denominations such as $1,000 and $10,000. I think it could easily pick up a couple of T$ of financing that way. Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-91104406461325118192020-12-05T19:44:56.914-06:002020-12-05T19:44:56.914-06:00John,
"Nominal interest rate - real interest...John,<br /><br />"Nominal interest rate - real interest rate = expected inflation. So, if the Fed wants to see 2% expected inflation, why not target the difference between one year TIPS (indexed treasurys) and one year treasurys at 2%? Then expected inflation has to settle down to 2%."<br /><br />You are presuming that TIPs accurately reflect market expectations of inflation.<br /><br />Treasury Secretary Jacob Lew changed the rules for TIPs so that they (at maturity) returned full principle + real interest rate if held to maturity (regardless of realized inflation / deflation) - which means that the market rate does not accurately reflect inflation expectations.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17780313120659093882020-12-05T16:51:21.740-06:002020-12-05T16:51:21.740-06:00This comment has been removed by the author.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-23298040784302552642020-12-05T11:57:34.049-06:002020-12-05T11:57:34.049-06:00These types of discussions about monetary policy a...These types of discussions about monetary policy always seem to assume that we have an agreed definition of inflation, that we can measure that inflation and that the definition and measurement are appropriate for monetary policy. Personally I don't think we agree on "inflation" within a factor of about plus minus 1.5% per year - which makes a mockery of most of these discussions and reduces them to just another example of the "first, assume we have a can opener" thinking. Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83884760980419696602020-12-05T11:52:04.241-06:002020-12-05T11:52:04.241-06:00This is fascinating and I hope you become widely a...This is fascinating and I hope you become widely attacked by defenders of older ideas (the alternative is to be ignored, killed by silence). I have no doubt your arguments will prevail, but I sound like a sycophant.<br /><br />What might the effect on the model be if the balloon floated in Treasury last autumn to index the basis for long-term capital gains were the tax law? <br />Is this a different issue since capital gains on bonds are taxed as interest/ordinary rates?Joe Cobbhttps://www.blogger.com/profile/08291560283071288527noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-51498438087949598652020-12-05T09:12:38.988-06:002020-12-05T09:12:38.988-06:00Indeed. Hence the last paragraph. Indeed. Hence the last paragraph. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-46270587044032325822020-12-05T09:12:01.772-06:002020-12-05T09:12:01.772-06:00Thanks for the pointer. To other readers, this is ...Thanks for the pointer. To other readers, this is a good paper, analyzing much more detailed models. How it works with more realistic Phillips curves is important, to what extent it allows better behavior given hard to observe underlying shocks is important, just why our intuition that it works for 5 year horizons (the paper) not overnight is important. Paper has a nice treatment of HANK and other current models. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29462655500155063022020-12-05T04:03:27.190-06:002020-12-05T04:03:27.190-06:00How would the Fed deal with the general lack of TI...How would the Fed deal with the general lack of TIPS liquidity? It seems like this strategy would require a pretty significant change in how Treasury issues debt for there to be enough TIPS to buy.<br /><br />It also seems like it would work better if Treasury took your advice on underlying debt structure and had a constant coupon perpetuity. It could then issue an inflation-protected version as well and target the spread between the two, with more liquidity.Dan Culleyhttps://www.blogger.com/profile/05478482975658606490noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-30756890499707880042020-12-05T03:35:56.655-06:002020-12-05T03:35:56.655-06:00I argue for rules of this form in a non-FTPL conte...I argue for rules of this form in a non-FTPL context in this draft working paper: https://www.tholden.org/assets/files/ARobustMonetaryRule.pdf (cites you of course).Tom Holdenhttps://www.blogger.com/profile/12321127116935047622noreply@blogger.com