Macro Musings...

Rather than write a few brusque posts, I am wrapping or therefore comments into a "grab-bag" article. I merely wanted to comment on European banking worries, too diverse controversies regarding money.

European Banking System Worries - Why I Don't Do Standard Forecasting

There create got been a number of articles discussing issues inside the High German banking system. This is a potentially big issue, given the size of the residue sheets (and derivatives exposures) involved.

From a macro perspective, at that spot are iii nous scenarios.

1. The Lehman disruption is repeated; developed fiscal markets halt performance until global government interventions clear the mess. In the worst case, this leads to a European depository fiscal establishment holiday, afterwards which the banks reopen amongst novel national currencies.
2. Equity holders every bit good every bit other stakeholders depression inward the working capital alphabetic character construction convey losses, but the organisation muddles through.
3. Nothing actually happens, mayhap other than or therefore dilutive financing (which exclusively matters for existing equity holders).

I am non the somebody to enquire virtually the probability distribution of theses scenarios. Needless to say, the global government desire to avoid scenario #1, too therefore a meltdown telephone hollo upward relies on major policy errors.

From the perspective of macro theory, this province of affairs illustrates 1 of the fundamental problems amongst mathematical models inward economics. Any economical forecast produced past times almost whatever model is going to live conditional upon which scenario nosotros are in, every bit I dubiousness that whatever tractable economical model is going to contain credit analysis of exceptional banks.

Since nosotros hit non create got a systematic agency of determining which scenario volition play out, nosotros create got no agency of testing the predictive abilities of a model (keeping inward heed that nosotros are continuously facing such uncertainty). I volition beak over this farther inward an upcoming article - "Whither Mainstream Macro?"

(The US election - which I am otherwise ignoring inward my writing - is or therefore other expert root of uncertainty.)

Cheshire Cats too Money

Professor Nick Rowe lately penned the article "Cheshire Cats too New Keynesian Central Banks." (I previously wrote that I was uncomfortable amongst what he wrote, but it turns out that the percentage I questioned the most exclusively appeared inward his comments virtually Real Business Cycle models on Twitter. I hit non want to essay to reconstruct his Twitter comments here, therefore I volition ignore that indicate of debate.)

His thesis declaration is:

How tin coin disappear from a New Keynesian model, but the Central Bank notwithstanding gear upward a nominal charge per unit of measurement of involvement too create a recession past times setting it also high?
Ignore what New Keynesians say virtually their ain New Keynesian models too remove heed to me instead. I volition tell you lot how it is possible.

During the article, he discusses how nosotros tin translate New Keynesian models (without explicit coin demand functions) every bit having money, fifty-fifty though the aggregate coin residue is e'er zero.

I create got transcend away increasingly unhappy amongst economists' interpretations of their models. H5N1 mathematical model is a mathematical model, too is merely a toy organisation that reflects the assumptions that you lot position into it. Confusing mathematical model properties for properties of the existent globe is plainly dangerous.

I create got no job amongst describing a New Keynesian model every bit a model of a monetary economic scheme (although I am non peculiarly happy amongst the character of the model). However, that is non maxim real much.

The figure inward a higher house shows an extremely uncomplicated model for the U-3 Unemployment Rate inward the United States. I am non going to concur it out every bit a piece of work of quantitative genius, but at the same time, I create got seen a lot worse out-of-sample performance elsewhere. (And the "out-of-sample" performance is genuinely out of sample; this was used inward my 2013 "Battling Straight Line" article.)

• This is mathematical model of the unemployment charge per unit of measurement inward the United States.
• That is, 1 aspect of the US economy.
• The US is a monetary economy.
• Therefore, the model is inward fact a model of 1 aspect of a monetary economy.

I hit non want to laissez passer on the tiptop hush-hush proprietary details of this model, but I volition the world that at that spot is absolutely no exercise of monetary aggregates inside its calculation. In other words, nosotros hit non involve whatever monetary aggregates inward a mathematical model of a monetary economy. The fact that the US is a monetary economic scheme is a monetary economy, rather than a barter economy, is an lawsuit that is completely irrelevant to the model specification. The exclusively agency of determining whether it matters is to abide by a barter economy, too endeavour to model its unemployment rate.

(This observation is partly a answer to a reader who could non grasp how it was possible to eliminate "money" from economical models of monetary economies. The belief that coin must appear every bit a model variable is a variation of the "microfoundations" fallacy -- that an economical model must live developed from the indicate of stance of an private inside the economy.)

Helicopter Money - Sigh

I am currently launching a rhetorical gear upward on upon Positive Money (full reserve banking) for a chapter inward my upcoming book, leaving the topic of Helicopter Money for last. The to a greater extent than I hold off at "Helicopter Money," the to a greater extent than frustrating it is. How it is supposed to live implemented changes, every bit does what it is supposed to accomplish, too how it is supposed to work.

Gerard MacDonell raised a similar objection to Brad DeLong article:

H5N1 actually striking aspect of Delong’s give-and-take of h coin hither is that at that spot is no give-and-take of h money.  It is all virtually choosing upward sides. You are either this sort of somebody or that sort of person, amongst us or against us. He sounds  here similar due west trying to circular upward the coalition of the willing. 

This fits into a designing I create got noticed.   With a twosome admirable exceptions (e.g. Jordi Gali) most arguments from proponents of h coin don’t actually beak over the mechanics of how it would (not) work.  They convey every bit a given that it would piece of work too and therefore straightaway plow to why people don’t convey the goals that h coin is meant to serve:
"What is incorrect amongst you lot people? You know, benighted hard-money marketplace position fundamentalists similar Mike Woodford, Olivier Blanchard or (I surmise) Larry Summers."

I volition create got to read the Gali article that Gerard references (I am waiting until I larn to that chapter), but beyond that, I am increasingly mystified what to say virtually the topic.

The exclusively alleged payoff I run across of helicopter coin is a reliance upon fiscal repression -- forcing banks to concur reserves at the fundamental depository fiscal establishment at below-market rates. That said, fiscal repression tin live implemented at whatever time; no helicopter coin needed. However, I dubiousness that putting banks at a competitive disadvantage versus the shadow banking organisation is a peculiarly useful policy inward our electrical flow institutional structure.

(c) Brian Romanchuk 2016