tag:blogger.com,1999:blog-582368152716771238.post4812191388893120418..comments2024-03-28T11:50:52.581-05:00Comments on The Grumpy Economist: Doctrines OverturnedJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger38125tag:blogger.com,1999:blog-582368152716771238.post-62179476734474136362015-03-24T20:54:32.387-05:002015-03-24T20:54:32.387-05:00Douglas,
"But the real question...does raisi...Douglas,<br /><br />"But the real question...does raising interest rates without reducing reserves actually do anything is an interesting question"<br /><br />I am not sure which rate you mean. Are you talking about the discount window rate? Discount window lending by the central bank is a relatively small operation and so I am not sure what would happen if the Fed raised that rate while doing nothing else (no reverse QE). Would other interest rates rise with it? I imagine that credit spreads would widen. Banks making private loans may demand a higher interest rate if they use the discount window as a backstop.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6701952735726331182015-03-14T14:58:24.283-05:002015-03-14T14:58:24.283-05:00I've a question on copyright - any advice grea...I've a question on copyright - any advice greatly appreciated:<br /><br />On a previous post prof. Cochrane linked to a .pdf from a book copyrighted by Stanford where he has written chapter 10. Yes I do worry about fair use and the like but I'm not a lawyer so my question is if it's OK to quote the following in a different venue. Thank you.<br />John Cochrane, excerpts from “Across the Great Divide”, ch. 10. (copyright Stanford University)<br /><br />“……..“liquidity” no longer requires that people hold a large inventory of fixed- value, pay- on- demand, and hence run- prone securities. With today’s technology, you could buy a cup of coffee by swiping a card or tapping a cell phone, selling two dollars and fifty cents of an S&P 500 fund,<br />and crediting the coffee seller’s two dollars and fifty cents mortgage- backed security fund. If money (reserves) are involved at all—if the transaction is not simply netted among intermediaries—reserves are held for milliseconds. In the 1930s, this was not possible. “ p. 199<br /><br />“Many lenders are not legally eligible to hold the posted collateral, so those lenders may<br />have to dump the collateral immediately upon receipt. Having to unload a large portfolio of securities on the Monday afternoon of Lehman’s bankruptcy is not a picnic. Better to refuse rolling over the loan on Friday.” p. 205<br /><br />“..a coordinated rise in risk premiums, even in completely un- intermediated markets and even<br />after intermediation frictions washed away, was a major characteristic of financial markets in the fall of 2008…” p. 210<br /><br />“Floating- value funds generate a capital- gains tax record- keeping nightmare. Fixed- value funds appear as cash on balance sheets. Both facts are part of the implicit subsidies given to run- prone securities by many laws and regulations…” p. 225<br /><br />“…if you have a big firehouse, then people start to store gas in the basement and don’t keep their fire extinguishers ready. Sending an army of regulators around to make really sure nobody ever lights a match is not that effective. This moral hazard is well- known, but it is perhaps not so well- appreciated just how much more fragile markets are as a result of a century of crisis management….” p. 241<br /><br />“…If you still have any trust in regulatory prescience—or the ability of prescient individual regulators to take unpopular actions while trying to “bolster confidence” and prop up weak institutions—consider the astonishing fact that, with the financial crisis just behind them, European bank regulators still treated sovereign debt as a risk- free asset to banks….” p. 243<br /><br />“What happens if the sovereign defaults or severe inflation looms so there is effectively a run on government debt? Sovereign default, inflation, or currency devaluation are different kinds of<br />crises altogether from a run or panic in the private financial system. […] So, creating a run- free financial system reduces the chance that a private crisis will spill over and become a sovereign crisis. Constructing a financial and monetary system which is immune both to private and to public default is an interesting question. Rather than pursue a fundamentally different monetary standard—substitute bitcoins, gold, or SDR (special drawing rights) for short- term nominal Treasury debt—I think fairly simple innovations in government debt would suffice. If the government were to issue long- term, ideally perpetual, debt that comes with an option to temporarily lower or eliminate coupons, without triggering a legal or formal default, then government financial problems could be transferred to bondholders without crisis or inflation. Reputation and a desire to issue future debt at good prices would lead governments voluntarily to pay coupons when they can.” pp. 245-246<br /><br />Ecoute Sauvagehttps://www.blogger.com/profile/16322296385474846302noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-65754345911231952602015-03-13T10:40:17.048-05:002015-03-13T10:40:17.048-05:00SRP,
"If the Fed increases its interest on r...SRP,<br /><br />"If the Fed increases its interest on reserves, the taxpayer is not on the hook for increased taxes."<br /><br />That would depend if the federal government is running a deficit or surplus / neutral at the time the central bank raises the discount rate / sells government obligations. If the federal government is running a deficit, then the increase in rate(s) will likely be reflected in interest rates on new government bond auctions, and so the tax payer would be on the hook for the increased interest costs of new government issuance.<br /><br />"No, I don't think interest on reserves is like interest on federal bonds."<br /><br />The central bank (to my understanding), cannot literally print up interest payments. It can print up money to buy government bonds, and can accept money when it sells government bonds.<br /><br />It remains to be seen whether the central bank can buy government bonds on a large scale at a premium and / or sell them on a large scale at a discount - effectively this would be the same as the central bank printing up interest payments.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-31896813205385212292015-03-11T19:00:48.122-05:002015-03-11T19:00:48.122-05:00No, I don't think interest on reserves is like...No, I don't think interest on reserves is like interest on federal bonds. The latter are obligations of the taxpayer through the Treasury. The former are not--the Fed's monetary operations aren't part of the fiscal budget of the U.S. government. Of course, the Fed owns a vast portfolio of government bonds, originally purchased with newly created money, but the actual net purchasing power being handed to the banks comes from the monetary creation. If the Fed increases its interest on reserves the taxpayer is not on the hook for increased taxes.srpnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-702399481338868422015-03-10T12:10:09.703-05:002015-03-10T12:10:09.703-05:00SRP,
Interest on reserves is simply interest on g...SRP,<br /><br />Interest on reserves is simply interest on government bonds paid from taxpayers through the central bank to private banks that keep money at the central bank as reserves.<br /><br />In essence, the central bank is acting as proxy for private banks - coercing them to buy up U. S. government debt.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32745027346301920002015-03-10T10:59:21.436-05:002015-03-10T10:59:21.436-05:00Good post--- very clear and insightful.
The big...Good post--- very clear and insightful. <br /><br /> The big problem with raising interest rates on bank reserves is that in the short run there will be quasi-rents to the banks. They'll compete for deposits, to be sure, but it takes a while to get deposits away from your competitors, and one good strategy will be to keep your depositor interest rate low and make big profits in the short run, even though in the long run youll lose customers. Or, there'll be higher interest rates for new depositors, sort of like with phone company plans. Politically, it will look bad for the Fed to give money to the banks this way. <br /> Would there be some way to structure it so only a bank's increase in reserves get the higher interest rate? That could be gamed, if done simply, but maybe here's fancy way to do it. <br /><br /> Why not sell off Fed high-interest assets? They're not a substitute for money. Or are they, indirectly? <br /> Eric Rasmusenhttps://www.blogger.com/profile/01609599580545475695noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83290164386978075112015-03-09T18:06:07.952-05:002015-03-09T18:06:07.952-05:00Child of the 1970s here, biased toward seeing infl...Child of the 1970s here, biased toward seeing inflation under the bed, so perhaps that explains my concern here. How can the Fed afford to pay these interest rates on reserves forever and so keep the reserves from flooding out into the economy in the form of loans or other investments? It seems to me that there is a transversality problem with this prescription of infinite reserve growth paid for by infinite monetary creation.srpnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-15742842236498472292015-03-04T16:07:10.455-06:002015-03-04T16:07:10.455-06:00Anonymous,
You will notice in John's 4th grap...Anonymous,<br /><br />You will notice in John's 4th graph (mild Neo-Fisherian view) that the inflation rate rises to a point below the nominal interest rate.<br /><br />The spread that you see is a combination of two factors - productivity growth and the tax deductibility of interest payments - or perhaps they are the same factor with two different names?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81782272940210354052015-03-04T12:09:37.441-06:002015-03-04T12:09:37.441-06:00Thanks for reassuring us John. I guess some of us ...Thanks for reassuring us John. I guess some of us worry about people being contained in ivory towers.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-25889042284084286172015-03-04T07:05:35.084-06:002015-03-04T07:05:35.084-06:00Suppose the Fed credibly pegs rates at 3%, and inf...Suppose the Fed credibly pegs rates at 3%, and inflation rises to 2%. What happens next - does the Fed raise (lower) rates in response to deflationary (inflationary) shocks?<br />It seems reasonable that raising rates from 0 to 3% could raise inflation. But raising rates from 3% to 6% seems less likely to lead to higher inflation.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32201899889532379242015-03-03T19:00:22.644-06:002015-03-03T19:00:22.644-06:00IT WAS A JOKE! Really, let's not totally lose ...IT WAS A JOKE! Really, let's not totally lose perspective just because we're goofing off on the internet instead of working. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-15562752176849438772015-03-03T18:41:48.824-06:002015-03-03T18:41:48.824-06:00"OK, as they say at the University of Chicago..."OK, as they say at the University of Chicago, that's fine in the real world, but how does it work in theory? "<br /><br />Haven't you got your priorities the wrong the way around? What is so important about the theory? Are you really sure you have got the real world explanation right? That's all that matters.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-12634306046130123732015-03-03T18:20:56.872-06:002015-03-03T18:20:56.872-06:00The level of interest rates is a poor metric for t...The level of interest rates is a poor metric for the stance of monetary policy. I personally like the slope of the curve.<br /><br />M1 is a poor metric for the money supply. M3 growth has been been pretty meager throughout all of this "QE."<br /><br />But the real question... does raising interest rates without reducing reserves actually do anything is an interesting one.<br />Anonymoushttps://www.blogger.com/profile/06862418730092856369noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87800816290847787842015-03-03T11:37:17.657-06:002015-03-03T11:37:17.657-06:00All quantitative easing did was transfer wealth fr...All quantitative easing did was transfer wealth from the middle class to the wealthy. It was socialism for the rich. Pensions and savings have been and are being wiped out.<br /><br />Also, there is no chance the Fed will ever raise rates again. They have said they will raise rates many, many times since 2009. It was talked about in Spring 2010. Spring 2011. Spring 2013. All throughout 2014. And now 2015. It will never happen. The market has already pushed back its prediction for a rate hike from 1H 2015 to October 2015 and it will continue to be put off indefinitely. Janet Yellen will never raise rates in her term.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86935672838914211802015-03-02T15:01:53.691-06:002015-03-02T15:01:53.691-06:00"Raising the rate on abundant excess reserves..."Raising the rate on abundant excess reserves has no direct connection at all to lending or deposits." Why not? Is the banking system suddenly a cartel that is fixing prices? This is related to the Fed's worry that raising IOR will not affect other interest rates. OK maybe 25 basis points wouldn't do much, but how about 100 basis points? 200 basis points? How about selling (without a promise to repurchase) some of the stuff on the balance sheet? Are financial markets still functioning so poorly that selling all of the $2.4T in treasury bonds and notes would really have "no direct effect at all on borrowing and lending"? I feel as though there are these unspoken rules that the Fed and member banks have agreed to that I'm not aware of. What are they?PJGhttps://www.blogger.com/profile/16735742181830832193noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90249701527381917202015-03-02T09:51:42.154-06:002015-03-02T09:51:42.154-06:00First,
The Fed in open market operations does not...First,<br /><br />The Fed in open market operations does not set an interest rate, it sets a bond price.<br /><br />The interest rate that any government security pays is set at auction and remains fixed. The central bank is not by law permitted to directly submit bids on U. S. government debt.<br /><br />https://www.treasurydirect.gov/indiv/products/prod_frns_glance.htm<br /><br />Treasury has begun selling floating rate notes, but the interest rate offered on these is based upon the auction result of 13 week notes (Why anyone would buy these is beyond me). Again, the central bank cannot directly submit bids on these.<br /><br />Neo-Fisherism can be right because it is about interest rates not bond prices. The central bank in open market operations sets bond prices, not interest rates.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9716219273845039222015-03-02T08:49:11.350-06:002015-03-02T08:49:11.350-06:00Just so we understand, the interest that is paid o...Just so we understand, the interest that is paid on reserves is directly equal to the interest that the federal government pays on Treasury debt held by the central bank. And so that begs the question - is interest on reserves a monetary policy action or a fiscal policy action assuming that all interest payments on Treasury debt are made from tax revenue.<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-28123964462824857662015-03-02T06:24:41.402-06:002015-03-02T06:24:41.402-06:00I love your answer to Benji's 1, 2, or 3I love your answer to Benji's 1, 2, or 3Morgan Warstlerhttps://www.blogger.com/profile/04055941003347768891noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-68858833300929921092015-03-02T04:16:38.477-06:002015-03-02T04:16:38.477-06:00Dear Prof Cochrane, your story is brilliant. Howev...Dear Prof Cochrane, your story is brilliant. However, quantitatively, your story has very disturbing implications for the real interest rate.<br /><br />So you say, the nominal interest rate hit the zero bound, and the inflation rate settled down calmly with the nominal rate instead of spiraling out... Very good, but the inflation rate settled at (positive) 2%! By the Fisher equation, the implied equilibrium real interest rate where we have settled is (negative) -2%!<br /><br />In other places you have stated that the long run real interest rate is about (positive) 6%. The real interest rate of -2% where we have settled is by 8% off from the plausible value of what long term real interest rate should be. In general, are negative equilibrium real interest rates not a problem in this class of models that you mention? (New Keynesian, RBC with some price stickiness.) Anonymoushttps://www.blogger.com/profile/02106484836182990577noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41172038577134148012015-03-02T04:01:22.180-06:002015-03-02T04:01:22.180-06:00I’d be delighted if the Fed had difficulty adjusti...I’d be delighted if the Fed had difficulty adjusting interest rates as a result of the large amount of base money / reserves sloshing around. Reason is that if aggregate demand needs adjusting, I see no reason to adjust ONLY lending based activity. That’s clearly distortionary: you might as well adjust only high energy consuming economic activities.<br /><br />Moreover, expanding the monetary base as a proportion of the total money supply is an inevitable consequence of a policy which John Cochrane rightly supports: removing run-prone liabilities from the liability side of commercial banks’ balance sheets. Those “run-prone liabilities” are actually plain simple old fashioned “money”, as it’s commonly called. And under the banking system advocated by JC (as I understand him), those liabilities are replaced by shares, and shares are not money. I.e. a wholesale removal of run-prone liabilities from commercial banks’ balance sheets results in the only form of money in existence being base money.<br /><br />There might seem to be a problem involved in adjusting demand JUST VIA fiscal rather than monetary means: it might see that that inevitably means getting politicians (aka Neanderthals) involved in stimulus decisions. In fact it’s perfectly possible to leave decisions of the SIZE OF STIMULUS in the hands of a committee of economists, while the exact nature of additional spending (e.g. whether the extra money goes to roads, education or whatever) stays with politicians. For details on how to do that, see p.10-12 here:<br /><br /><br /><br /><br />http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-57490987073640508632015-03-02T02:16:04.726-06:002015-03-02T02:16:04.726-06:00The Federal Reserve Bank of New York goes to its P...The Federal Reserve Bank of New York goes to its Primary Dealers and offers to buy securities. During the first two rounds of Quantitative Easing the Federal Reserve focused its purchase activities on US Treasuries. During round three it has committed to buying Mortgage Backed Securities (MBS) at the rate of $40 billion each month.<br /><br />The Federal Reserve currently deals with 21 Primary Dealers, which include banks and securities broker-dealers. These Primary Dealers have agreed to serving as the Fed's counter-party in executing its monetary policy. Note that the Primary Dealers are generally global and diversified financial institutions.<br /><br />Primary Dealers often hold inventory of US Treasuries and MBS as part of their day-to-day business activities. When the Fed goes to the market to purchase new securities, the Primary Dealer can sell the Fed its inventory as well as bid out the offer to the Primary Dealer's clients, who might include pensions, hedge-funds or sovereign wealth funds who own US Treasuries or MBS.<br /><br />At the completion of the purchase, the Federal Reserve moves the purchased security on to its balance sheet as an asset and electronically credits the Primary Dealer with cash equal to the purchase price of the security. Now this leads to an interesting question, where does the Fed get the cash to buy US Treasuries and MBS from the Primary Dealers? It can create the cash electronically and literally create money "out of thin air."<br /><br />The Primary Broker or its clients now have an option; 1) they can keep their cash or 2) they can use the cash for a variety of purposes (lending, purchase of other securities or business operations). The Fed is hoping that the Primary Broker and Clients will choose the latter. The Fed's policy results in artificial stimulation of the demand for Treasuries and now MBS and thus drives prices higher (and yields lower).<br /><br />The Fed also anticipates this to have a ripple effect through other investment vehicles as the Primary Brokers and its clients seek alternatives to deploy their new cash. The Fed may only be operating in a couple of markets, but it anticipates its impact to be felt throughout the financial eco-system and ultimately the real economy.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-68818582777350066522015-03-01T18:30:49.948-06:002015-03-01T18:30:49.948-06:00John Cochrane: you are correct in that Fed created...John Cochrane: you are correct in that Fed created $3 trillion in reserves and took in $3 trillion in Treasuries. But Treasury bond sellers also got $3 trillion in cash. You ignore the final component. What does it mean when bond sellers get $3 trillion in cash?Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-43769084913629444432015-03-01T17:01:12.684-06:002015-03-01T17:01:12.684-06:00The Fed has said it's targeting price stabilit...The Fed has said it's targeting price stability with 2% inflation. If that is credible, and it seems to be, then neo-fisherism can't be right. Because if rates are inconsistent with 2% inflation, then it's rates that the Fed will change, not inflation. Neo-fisherism would require that a change in interest rates by the Fed cause a change in the Fed's inflation target. Why?<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-45767539629550309522015-03-01T16:48:43.070-06:002015-03-01T16:48:43.070-06:00John, you're on a roll here! A couple of thing...John, you're on a roll here! A couple of things in relation to this:<br /><br />"Reserves that pay market interest are not inflationary. Even in enormous quantities. Going forward interest rates will not be zero. But reserves will pay the same interest as Treasuries."<br /><br />First, as I've pointed out before, interest-bearing reserves *can* be inflationary if the carrying cost is financed by money printing. <br /><br />Second, the caveat here is "as long as reserves pay market rates." But what are we (you) assuming here? It seems like you are assuming that the Fed must *follow* market forces in adjusting its policy rate (to keep inflation in line). Or, is it safe to assume that the Fed *sets* the policy rate (so that the nominal yields on bonds will follow whatever the Fed chooses as its IOER rate) and that inflation will ultimately be determined by the Fisher equation (with fiscal support)? <br /><br />That was a bit convoluted, but hopefully you can understand what I'm asking. :)David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-35539947897488974712015-03-01T14:28:38.786-06:002015-03-01T14:28:38.786-06:00Cochrane: natural experiment shows that the econom...Cochrane: natural experiment shows that the economy is not unstable at the zero lower bound, contra predictions of theory. "We hit the zero bound and ... nothing happened" to interest rates or inflation. "The economy is stable."<br /><br />But we've also experienced punishing unemployment while at the zero lower bound. <br /><br />What happens when you include unemployment in your empirical story?<br /><br /><br /><br />JZhttps://www.blogger.com/profile/12994372644670111315noreply@blogger.com