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@ Nick Rowe

Yes, that is how a lot of people in West view African dictators. I think the reality is usually more nuanced.

@ K

Yes, some branches of physics use statics -- so do some engineers, for certain problems -- but Physics, with a capital 'P', has moved on.

Economic systems are particularly complex. So, while certain branches of physics may do well with static models economists do terribly. (Hence the fact they rarely make any empirically verifiable predictions etc. beyond very simple relationships).

So, is it postmodern babble? Not for Keen. He believes in making dynamic systems to model the economy. I think he's right to do so as it shows up the static theorists as lacking. But I think the whole model-the-whole-macroeconomy-based-on-special-assumptions approach is completely wrong. In that sense, I am a sort of postmodernist.

FAR more interesting for real economic analysis is Wynne Godley and Mark Lavoie's monetary models. They focus purely on balance sheets and only assign very limited postulates. Microfoundations don't even begin to become an issue (I'm sure Wynne would have laughed!). The whole thing is just completely boiled down. No 'agents'. None of that metaphysical rubbish. None of this nonsense that we can hypothesise how economies function and then model this. Economies evolve too much for that.

Instead we get a pure focus on balance-sheets. A focus that is fully stock-flow consistent and has, standing behind it, dynamic Post-Keynesian theory.

Godley himself was known for his predictive abilities -- they called him The Cassandra of the Fens -- and all the traders and hedge fund managers are jumping on board. Some through Martin Wolf's use of the models over at the FT. Some through the MMTers use of the models.

Frankly, I think Godley is going to win this battle. I think his models are going to spread among real market participants outside the classroom. I think this is what the popularity of MMT is all about. It provides the goods. (I hear some potential treasury secretaries of tomorrow at key investment firms are very interested...) Meanwhile, I think that economists are going to become increasingly irrelevant. Cloistered academics playing with irrelevant metaphysical toys.

I'm throwing my hat in with the traders. I learn immeasurably more from the FT Alphaville crew than I do on economics blogs. Am I a postmodernist? I dunno. Maybe. Yeah. No. Who cares?

Philip Pilkington,

Nevertheless, I do think that you undersell your case by the delivery sometimes. My advice would be to take a tactic out of the George Selgin playbook: if you want to convince someone of something, show them that it is as close as possible to what they already believe and that it's basically a logical extension of their prior beliefs. This shouldn't be too hard for you, since you're clearly in regularly contact with non-PK economists and you're not at all ignorant of what and how they think.

For instance, I find myself in a lot of agreement with the Post-Keynesians on debt-deflation. (I would say "despite being of a monetarist persuasion", but as you know the theory comes to us from Irving Fisher, who was a bit of a monetarist! More broadly, I'd say that debt-deflation is just a special and interesting case within a liquidity/asset/wealth view of how the macroeconomy works.) However, if I'd never heard of it called as such and I was simply told "Equilibrium is nonsense! We never reach it anyway! Actually, all that stuff about markets working is pseudo-scientific jibber-jabber, equivalent to the epicycles in Ptolemaic..." I'd simple switch off. That person clearly isn't ready for an intellectual exchange of equals.

In fact, while it may offend the sensibilities of Post-Keynesians, the best way to persuade people of the importance of monetary disequilibrium is to emphasise the role it plays in the thinking of Fisher and Friedman.

@ W. Peden

Well, the problem is that when you get to certain point you always run into the fact that the neoclassical theory is internally inconsistent. Their definition of 'Capital' is largely a meaningless tautology -- as Paul Samuelson essentially conceded in the Cambridge dispute. I still don't think anyone outside of Post-Keynesian circles has quite come to terms with the implications of that debate. It would destroy any sort of neoclassical macro-model because, as Sraffa proved, profits have nothing to do with marginal productivity of capital. Instead they are simply an arbitrary mechanism of wealth distribution -- a relation of power solidified through policy choices. Most economists stop you there and call you a communist. I'm not even a socialist, but I recognise the truth of the argument. That, in turn, has massive implications for how we view inflation -- which, in my view, is to a great degree a phenomenon of wealth distribution.

Then there's the SMD conditions. Which, to my mind, are just Keynes' 'fallacy of composition' brought to another level of analysis. Well, there goes your downward sloping aggregate demand curve!

Then comes the empirical literature on excess capacity in most modern industry. Alan Blinder -- bless his heart -- did some pretty damning work on that. The potential for non-inflationary full employment hasn't even been broached. What's left? I'm not even sure.

As far as debt deflation goes, it kills equilibrium analysis. When a debt deflation takes hold (we didn't get a real one post-2008, thank God!) wage-price declines truly slide into an abyss. A deep, dark hole from which they could, theoretically, never get out. My feeling is that, allowed in true freefall with no government intervention, you'd get total social breakdown before you'd get stabalisation.

Some say it came out of Fisher's work. I don't think that it did. I think it came out of his personal bankruptcy. Fisher clearly states that he is not engaged in equilibrium analysis (his metaphor of the boat tipping that doesn't right itself is a nonequilirbium metaphor). I think all of his theoretical work can be scrapped after that paper was written (very brave paper, because I think Fisher saw the implications). Even his monetary identity looks a bit weird after that paper -- at least in the way he originally conceived it.

So, maybe we could push that line. It might catch. But we've actually seen this before once and it didn't turn out well. There's a fascinating chapter in the history of economics thought that no-one ever talks about. Axel Leijonhufvud released an interesting book that reads Keynes through the lens of Hayek in the mid-1960s. It focused on Fisher-like debt deflations and other self-reinforcing economic phenomenon. The neoclassicals became very enthusiastic about it apparently. But then guess what happened? They focused on the Hayekian aspect and started building the 'Efficient Market Hypothesis'. Little known fact: EMH came from neoclassical engagement with disequilibrium economics! Economics lost 30 years of intellectual progress. Leijonhufvud was pretty horrified, it must be said. There's a good interview around somewhere if you search for it.

The lesson of that story? Well, Leijonhufvud had unearthed something interesting. But neoclassicals still had their marginalist analysis firmly in mind when they took it up. The end product was a mutant that its father couldn't recognise at all. That, among other tales from the proverbial crypt, lead me to see neoclassical/marginalist economics as a pretty hopeless cause.

I have a lot of faith in Godley's models. They internalise everything I like about macroeconomics while at the same time being simple enough to teach to an undergraduate within maybe two classes. Those are the future, methinks.

Philip Pilkington,

Let's not get into the Cambridge capital dispute here unless we have to, except to say that we don't have to postulate dubious reasons for why most people don't care about that argument. Sraffa's work is an excellent case of the highly stylised, unrealistic-assumption-ridden reasoning of which neoclassical economics is so frequently accused.

I don't think that debt-deflation implies all that you suggest it does UNLESS it's coupled with a lot of controversial ancillary premises. I find the same thing with a lot of MMT: the focus is usually on uncontroversial statements (it is possible for a country to inflate its way out of debt) which are expressed in exciting but highly misleading ways ("A country can never go bankrupt!") and the real issues of dispute (the neutrality of money?) get ignored.

Philip @12.34: I think that comment is verging on trolling. You have made a lot of assertions that are not correct, IMHO, and that aren't really related to this post, to which I face the usual dilemma: do I let them stand unanswered, or is that just feeding? Back off a bit please.

W. Peden, I'd like you to stand behind that argument you just made on the cambridge capital controversies. I find it laughable that something that has never been rebutted properly in a formal paper is something neoclassicals already know about and have a rebuttal for. Please, by all means go right ahead and delve into it.

@ W. Peden

Re: Cambridge Capital thing. Samuelson admitted he lost that argument. Think of Sraffa what you want. That thing was buried without the implications being considered. Same which SMD theorem... and that one came from your side of the fence! These events make me think that neoclassical economics is a non-falsifiable doctrine. That weirds me out more than a little.

Re: debt deflation. When I say debt deflation, that IS what I'm talking about. And that's what Fisher was saying too, I think. Any ancillary premises are yours. Post-Keynesians don't trade in ancillary statements, I can assure you of that. Whenever I write anything I try to figure out how to say it assumption-free to the best extent I can. Our theories are built from the ground up. Your's are top down -- which I consider metaphysical-style reasoning.

This is what this whole endogenous theory debate has been (implicitly) about. Nick wanted to take a 'holistic' perspective and view money creation in terms of some pre-determined model. Post-Keynesians try to strip away all complexities and work from the ground up off a 'base model'.

I think that the former style of reasoning -- which we've seen across the disciplines at different points in history -- leads to a non-falsifiable and slippery edifice which, the more you pick away at it, shows itself to be constructed largely on tautological statements (which, to bring this comment full circle, are exactly what the neoclassical notion of 'capital' is together with 'downward sloping aggregate demand curves').

Another thing, since you seem to be so aware of all of the criticisms of neoclassical economics, how on this godly earth could you still consider yourself a neoclassical? I'm talking about the calculus of hedonism, your conception of capital, rational choice, marginal analysis, no room for inductive analysis(econometric studies on some level aren't induction, and many of them are complete BS) almost everything about it is completely wrong and should be thrown out. Either you're lying, you're a fool, or you have political tendencies that lean you that way.

I would add to what Philip is saying that we don't accept deductive models and assumptions, and this is largely what separates heterodox economists from neoclassical ones. To be a good neoclassical economist you must be particularly adept at deduction, and doing away with anyone's argument that is based on reality. That isn't to say that deduction isn't good or necessary, it certainly is, but at some level we have to say, OK, we need to look at the real world and develop a theory based on that. As Philip says, it's ground up, its induction. We develop theory from evidence, not from some perhaps inaccurate, assumption riddled model of the economy

@ Nick Rowe

And that is why this debate will never EVER take place. Pity? Maybe. I don't think so. I think the truth will win out here. So, I don't think the debate needs to take place.

Anyway, I've got to go out. This is the point that I think the argument starts coming apart and people just start talking past one another. So, I'll bow out.

But one more thing...

@ W. Peden

Consider the possibility that the ancillary premisses are yours, not ours for a moment. THEN it might become clear why you think certain Post-Keynesian statements seem weird. It's because they're not embedded in the framework that you hold. It's called (inaccurately) 'cognitive dissonance'. Now, some may say that the dissonance takes place on our side. But in my experience Post-Keynesians are far more up-to-speed on neoclassical theory than vice versa. That leads me to think that dissonance is on your side.

Philip Pilkington,

"Post-Keynesians don't trade in ancillary statements, I can assure you of that. Whenever I write anything I try to figure out how to say it assumption-free to the best extent I can."

I can't even begin to imagine what a process would be like. To test any particular statement, we need to work with a huge number of assumptions.

"Our theories are built from the ground up. Your's are top down -- which I consider metaphysical-style reasoning.

This is what this whole endogenous theory debate has been (implicitly) about. Nick wanted to take a 'holistic' perspective and view money creation in terms of some pre-determined model. Post-Keynesians try to strip away all complexities and work from the ground up off a 'base model'."

There's quite possibly something interesting here, but I'm sceptical of attempts to frame substantive disagreements as being primarily about methodology. The world is more than complicated enough for intelligent people to have normal disagreements i.e. disagreements that are not due to one side adopting a stupid methodology, having some alterior motive, or being dishonest.

Incidentally, what do you mean by "non-falsifiable"? Do you mean that neoclassicals, in practice, reject any attempt to falsify their views, or do you mean that there is something about the theory itself that makes it unfalsifiable?

Philip Pilkington,

Just to clarify: I think that there are ancillary statements on both sides, in any dispute, and that statements from people with whom you disagree with SHOULD sound weird, because otherwise there's probably caricaturing/miscommunication going on.

Oh, and Nick. It's hardly trolling. You don't like it. Fine. But it's not trolling. I wasn't even offensive. But I do think that equilibrium/marginalist/neoclassical analysis is wrong at the most basic level. And it's my God-given right to hold that view. The very fact that such dissent can be viewed as trolling speaks volumes in itself. I cannot imagine an empiricist on a philosophy blog saying something like that if I started talking about Kant. Weirdly though, it doesn't surprise me on an economics blog. Which is why I stay away.

Anyway, it was an interesting conversation while it lasted. Not that it lasted long...

W. Peden

The substantive disagreements are entirely about methodology. The methods we use are completely different, hence why its commonly said that we speak a completely different language than neoclassical economists. The common refrain from neoclassicals is that "well they don't have a model of xxx", they're not economists", and we on the other hand say "their views are anti-scientific", the mark of a good scientific analysis is if its FALSIFIABLE, but you cannot falsify behavioral assumptions. It's entirely what methods we decide to use. Economics is a social science, not a physical one, but if you go to a neoclassical economist the mark of good science to them is who has the best deductive model, irregardless of what assumptions one uses. Of course some were rather ridiculous like RBC, and hence why they were dismissed, so there is a clear line that is drawn at some level. Yet the more complicated its made, the less and less it can be falsified. It can only be countered with a model with different assumptions. Yet when does reality enter the picture? Almost never.

Quickly. I'm going to be late now, crap...

"...disagreements that are not due to one side adopting a stupid methodology..."

Yes. I think this is largely the case here. You can trace the methodological error back to Jevons and Walras. It grew out of there. What was it Samuelson said? "Those who cannot do science do methodology". He was hiding something there... he really was. In his definition of 'science'.

"Do you mean that neoclassicals, in practice, reject any attempt to falsify their views, or do you mean that there is something about the theory itself that makes it unfalsifiable?"

The methodology neoclassical economics employs makes its CORE assumption non-falsifiable. When they are challenged, ad hoc rationalisations are stuck to the PERIPHERY of the theory to keep it floating. But the more this is done, the more the whole thing turns into a self-contradictory, logical mess. I think Imre Lakatos or one of his students wrote something about this. Can't recall what. Google search would probably call it up.

I should have been more clear...its as Philip says, its about the core assumptions. I was trying to say that the peripheral assumptions make the model more and more confusing, and at some level you can't falsify it because the neoclassical can refer to the relaxing assumptions to justify the core ones.

This degenerated. That's unfortunate.

Deus DJ: if you are really interested in reading a neoclassical response, C.J. Bliss "Capital theory and the distribution of Income" might be worth reading.

Take a Walrasian/Arrow-Debeu model. If you change the assumed preferences in that model, relative prices and interest rates will usually change. Therefore, if you don't know the preferences, you generally can't solve the model for the relative prices and interest rates. Therefore the rate of interest and distribution of income are indeterminate, and interest rates are an arbitrary mechanism of wealth distribution. I find that argument unconvincing.

Philip: you didn't respond well to a polite request.

Nathan. Yep.

I think this paper sums it up well just from a brief skim:

http://gesd.free.fr/harcourt3.pdf

Nick,

Could you explain how capital and leverage requirements limit bank lending? If MMT is right and deposits and reserves don't constrain lending by a multiplier could you still get a multiplier-like story from captial and leverage requirements?

I tried to ask Scott Fullwiler, but didn't get an answer.

Key line they quote from Bliss:

"Ideology and methodology, two subjects
most economists would rather avoid, were pervasive undercurrents fueling the
controversies (Bliss, 1975, chapter 15)."

I do not understand the MMT argument that banks are not constrained by deposits and reserves. If the bank does not have sufficient deposits (I assume deposits are the cheapest source of funding which would explain why banks offer such a service) then the reserves must come from somewhere (whether it be from other banks or the Fed). If the cost of that funding exceeds the expected profit from a potential loan then the loan will not be made. Does anyone doubt that the Fed exerts massive influence over the cost of said funding?

This reminds me of the whole MMT crusade where they argue that people don't understand that countries with their own currency "can always pay off their debts". Everyone already knows this. The issue at hand is the consequences of such an endeavor which depending on the state of the economy and the size of the deficit could lead to unwanted inflation (I think most people would agree that in the current depressed environment this isn't an issue).

In both cases there isn't "technically" a constraint, but pointing that out isn't some grand insight is somehow unique to MMT.

Paul- did you read this http://neweconomicperspectives.org/2012/04/krugmans-flashing-neon-sign.html ? The point about cost of funding is all thoroughly explained there and a prominent part of endogenous money theory.

anon: suppose that banks either desire or require a certain ratio between their capital and their total liabilities, and that they couldn't reduce that ratio by buying a safer composition of assets, and they couldn't reduce that ratio by issuing more shares or bonds and increasing their capital that way. Then I could see that they might want to increase their loans and deposits if only it wouldn't cause their capital ratio to drop below the desired or required level. So they can't expand when they otherwise would want to.

You will probably get a better answer from someone else.

wh10:

I did read that post. He seems to be conceding the point that reserves and deposits do constrain lending while pretending not to do so. He can claim all he wants that it is profitability that constrains lending, but that is obfuscating from the point that deposits and reserves are directly related to profitability as I understand it. If the cost of the source of funding increases then one of two things happens. Either the bank chooses not to make the loan because it isn't profitable or it raises the interest rate it intends to charge in order to maintain its margin. Perhaps he doesn't believe demand for loans is interest rate sensitive, but if it is then it becomes obvious how deposits and reserves constrain lending.

Paul...reserves do not "fund" anything. they are not "funding". They are a requirement that needs to be held to satisfy reserve requirements. In the midwest banks can mostly rely on cheap demand or savings deposits and are always at or above their required reserved ratio. The big banks however rely on the wholesale or fed funds market because they always make a large amount of loans comparatively speaking to their reserves. Hence, for those banks that are making a large amount of loans, they are actively seeking reserves. For those that don't make as many loans, they always have an excess supply of them.

Nick,

That's basically what I had in mind already.

I guess I was wondering if there is (or was) actually a legal requirement, if this creates a multiplier, if the government can control money by tightening it, and if the central bank can use quantitive easing to loosen it. (I'm guessing there may also be a legal requirement that does not work.) MMT people say the textbook multiplier story is wrong, I'm wondering if it's right but for the wrong reason.

I'm trying to follow the rest of the debate. I don't know if Krugman still believes the textbook story of the money multiplier, but is this an accurate summary of where things ended up?

Fullwiler: Central banks can target interest rates not quantity of reserves.

Krugman: No, they can target either, just not both at the same time. They targeted the later in the early eighties.

Fullwiler: No, they tried and failed to target the later in the early eighties. Targeting the later proved to be unstable and was abandoned for this reason.

Rowe/Hegel: Targeting the former is targeting the later because of inflation!

anon: yes, there are legal capital requirements. I don't see how they create a multiplier. Central banks don't normally (to my knowledge) use changes in capital ratios as an instrument of monetary policy (maybe China??). It's more about financial stability, and so the government doesn't need to bail out bust banks.

anon: and yes, the rest of your comment sounds roughly right.

Paul - he is saying it's about the PRICE of reserves, not the QUANTITY of reserves. And endogenous money people have been saying that all along.

curiositykilledmycat:

The funding I was referring to was where the reserves that the banks are required to hold come from. According to the MMT model as I understand it since banks make loans and then go later to get the reserves deposits and reserves are not a constraint on lending. My point is the "funding" for those reserves kept at the Fed comes from somewhere (deposits, interbank market etc.) If the cost of that funding increases then loans either become more expensive for the borrower (banks charge a higher IR to maintain their margin) or the loan becomes less profitable. In either case reserves can still act as a constraint on lending even if they are gotten after the fact insofar as they have implications for profitability.

wh10:

You don't think quantity and price are related?

curiositykilledmycat: "... reserves do not "fund" anything. they are not "funding". They are a requirement that needs to be held to satisfy reserve requirements"

Canada has no reserve requirements. Neither does NZ or Sweden, IIRC.

Nick's post said: "Assuming a non-corridor system, if the central bank one day decided to increase the monetary base, and if this monetary base exceeded the amount of reserves that the banking system was willing to hold, then it would cause the overnight rate to drop to near zero. So the textbook story is a non-starter."

Not really. That's where the textbook story would get started. With the overnight rate suddenly dropping to near 0%, commercial banks would want to expand loans and deposits, etc."

So lower interest rates are about more debt???

And, "and the process would continue until the increased demand for the monetary base pushed the overnight rate back up to where they don't want to expand loans and deposits any more."

If the reserve requirement is zero and people use the demand deposit(s) as medium of exchange so no one demands more currency, is there zero upward pressure on the central bank overnight rate?

anon said: "Nick,

Could you explain how capital and leverage requirements limit bank lending? If MMT is right and deposits and reserves don't constrain lending by a multiplier could you still get a multiplier-like story from captial and leverage requirements?

I tried to ask Scott Fullwiler, but didn't get an answer."

Try here. Lending is capital- not reserve-constrained

http://bilbo.economicoutlook.net/blog/?p=9075

One other thing. You need to distinguish between a deposit that is at risk vs. a deposit that is not supposed to be at risk.

Nick's post said: "anon: yes, there are legal capital requirements. I don't see how they create a multiplier."

I believe that JKH would be aghast/horrified at that statement.

anon, try these.

Bank of International Settlements published Working Paper No 297

http://www.bis.org/publ/work297.pdf

http://bilbo.economicoutlook.net/blog/?p=15383

"The BIS paper also acknowledges that bank “loans drive deposits rather than the other way around”:

Bank lending … involves the creation of bank deposits that are themselves the means of payment. A bank can issue credit up to a certain multiple of its own capital, which is dictated either by regulation or market discipline. Within this constraint, the growth of bank lending is determined by the demand for and willingness of banks to extend loans. More generally, all that is required for new loans is that banks are able to obtain extra funding in the market. There is no quantitative constraint as such. Confusion sometimes arises when the flow of credit is tied to the stock of savings (wealth) when the appropriate focus should in fact be on the flow."

From the BIS paper itself:

"When a loan is granted, banks in the first instance create a new liability that is issued to the borrower. This can be in the form of deposits or a cheque drawn on the bank, which when redeemed, becomes deposits at another bank. A well functioning interbank market overcomes the asynchronous nature of loan and deposit creation across banks. Thus loans drive deposits rather than the other way around.5

This is the key feature that differentiates bank lending from non-bank credit. Capital market intermediation, like barter and commodity money or cash-based systems, requires that the creditor have on hand the means of payment to deliver to the debtor before the credit is extended. In modern financial systems, credit transaction between non-bank agents essentially involves the transfer of deposits. Bank lending, on the other hand, involves the creation of bank deposits that are themselves the means of payment. A bank can issue credit up to a certain multiple of its own capital, which is dictated either by regulation or market discipline. Within this constraint, the growth of bank lending is determined by the demand for and willingness of banks to extend loans. More generally, all that is required for new loans is that banks are able to obtain extra funding in the market. There is no quantitative constraint as such. Confusion sometimes arises when the flow of credit is tied to the stock of savings (wealth) when the
appropriate focus should in fact be on the flow.

Paul- by chance, Mosler just posted this:

"First, there is a distinction between fixed fx policy and floating fx policy.

With fixed fx lending is continuously reserve constrained and the interest rate is endogenous via competition for reserves.

With floating lending is never reserve constrained, as this particular institutional structure allows banks to create their own reserves.

that is, with floating fx/non convertible currency,
loans create deposits and reserves as a matter of accounting

any 'needed' reserves are, functionally, overdrafts in fed reserve accounts, and overdrafts are loans. so when the 'need' arises the deed is done. CB choice never enters into it. For the CB, it's necessarily about price, and never quantity. I call it hard endogeneity and have been pointing this out for going on 20 years."

@ Nick Rowe

You and I know well that there is nothing constructive to be had out of a debate on fundamentals.

I think you're a decent bloke. Let's leave it at that. Because real debate cannot take place here or anywhere else. And you and I know it...

K,
You wrote:
"Mark: You're mistaken, and you're being quite rude. In fact, I wasn't sure whether you knew what "neo" meant but I was quite sure you weren't familiar with Woodford's model. From the seventh line on, my comment is almost entirely about the NK model (the model used by Woodford), the role of money in that model, and the ways in which I disagree with your interpretation of it. Which part of my discussion exactly do you disagree with?"

I've been accused of being rude previously. Maybe you're right. But I needed some sleep, and I suspect you did too. But more importantly, I'm not mistaken.

The bottom line is Woodford doesn't believe monetary policy is ever impotent. This is in stark contrast to the Post-Keynesians.

Can I be very Post-Keynesian and say something... because I'm not coming back. Econoblogs are, in my opinion, naval-gazing farces. And the discipline will go down with the realisation that the whole thing is a load.

Mainstream economists have ZERO ideas. They have zero contributions to policy. They are COMPLETELY irrelevant. Duh!

Anyway, those interested in the real world can check out Godley/Lavoie. We won't go into that... Do an Amazon search...

But I will say to students: you're being tricked. You're being fooled into undertaking a lifelong Sudoku game in order to earn your livelihood. Fine. If you want.

BUT if you went into economics with a public purpose please ignore this stuff. It literally means nothing. It's just made up rubbish that people build their careers off. Understand this. Read some books. Etc. It's just tautological nonsense.

Anyway, I've said my piece. Your professors will say I'm a loon or delete my comment. Whatever. But consider it.

Philip Pilkington,
You may be right in a way. I recently was relieved of an adjunct position. The official reason in my opinion was quite beside the point. I was teaching a course in Development Economics and received a great deal of resistance from my students who thought Development Economics was a course on economic growth (which ironically is my research interest).

But don't ever tell me mainstream economics has nothing to offer, because I consider myself a mainstream economist. The problem is that even mainstream economists have trouble securing employment these days due to the enourmous amount of interests alligned against them.

Mark: "The bottom line is Woodford doesn't believe monetary policy is ever impotent. This is in stark contrast to the Post-Keynesians."

If I was going to look for differences, I wouldn't hang my hat on that one. The NK model says that there are circumstances under which monetary policy may be arbitrarily ineffective. I think lots of post-Keynesians would admit to varying amounts of monetary effectiveness depending on the circumstances. Like I said, I think the two communities make some different assumptions especially about the asymptotic behaviour of economic variables. They just don't look that irreconcilable to me, or at least, I am hopeful that an agreement could be found on some common mathematical foundations as well as agreement on what exactly we disagree about. The NK model is certainly consistent with the endogenous money view. There are lots of ingredients: ratex, intertemporal optimization, market power, sticky prices/wages plus a variety of other possible features depending on the particular model. Don't like ratex? Change it. Want to add heterogeneous agents? Go for it. Where is the fundamental irreconcilability with PK?

Philip: I don't agree that nothing deep can be settled here. We've had some great debates and I think even some novel ideas have resulted. Certainly we've managed to reach consensus on difficult issues starting from disparate positions at times. Your manner has degenerated from what I felt was originally a respectful and thoughtful voice, to a rambling, undisciplined, and frankly incoherent stream of rants. It's too bad because I used to look forward to reading what you had to say, here and also elsewhere. Obviously you don't care so no loss to you. So be it.

K,
You wrote:
"The NK model is certainly consistent with the endogenous money view. There are lots of ingredients: ratex, intertemporal optimization, market power, sticky prices/wages plus a variety of other possible features depending on the particular model. Don't like ratex? Change it. Want to add heterogeneous agents? Go for it. Where is the fundamental irreconcilability with PK?"

No, sorry, none of those things make money endogenous. All they do is make the effects of monetary policy variable. If PKs truly believes in endogenous money then they believe monetary policy is totally impoent under all circumstances. End of discussion. (Make up your mind.)

Good night my friends,
Austrians and RBCers to the right of us, PKs and MMTers to the left of us. No where left to go but into the breach and hope we come out alive on the other side.

By making the toolkit (exchange rate reaction to inflation) part of the model, the model itself precludes the use of other tools. The only explanations I have for doing this are
a: Laziness. tweaking interest rates is such an easy thing to do from the cockpit.
b: Carelessness. those in charge of monetary policies will generally not be those who suffer most from its consequences. I.e. it works if you apply it generously enough, but if we cared to look how exactly it 'works' we'd be much more careful about using it. Digression: we have become more careful about large interest rate swings since the Volcker experiment, but that's also the reason it hasn't worked particularly well since t5hen.
c: Politics. we don't want government to meddle with monetary issues.
d: Any combination of the above.

the first sentence in brackets should have read interest rate, not exchange rate...

Mark,

I can see how you might think I was saying those things *make* money endogenous. I wasn't. All I was saying was that money *is* endogenous in the NK model (I think that's why the Market Monetarists don't like it) *and* the model has all these other cool features, most of which you can modify if you want (and people do) and you can add new ones. My point was: what's not to like? And more importantly, what is it about the NK model that's intrinsically disagreeable to PKs?

"If PKs truly believes in endogenous money then they believe monetary policy is totally impoent under all circumstances. End of discussion."

This just is not right. There is no reason why the CB can't exercise control over, e.g. the short rate, in an endogenous money system. As discussed earlier, many countries with no reserve requirement (and essentially zero reserves) do that very effectively. If I remember correctly, Woodford has a paper on his site with some really good general discussions of the mechanisms of the transmission of rates policy in a zero reserve system. You should read them.

"(Make up your mind.)"

About what? I don't think I've changed it.

I found the Woodford paper. Conveniently, it's called Monetary Policy in a World Without Money! It was written in 2000, as some people were becoming concerned about the ability of central banks to control inflation in a world of electronic transactions without any quantity of CB currency. Among other things, he points out that the quantity of reserves in some countries is already effectively zero *and* those countries even pay interest on the tiny amounts of reserves that do exist. Lots of interesting discussion. His conclusion is very clear that currency has nothing to do with the CBs ability to control rates (and there can be no doubt given his other papers that he believes the macro transmission mechanism to be quite direct via the *real* and not the nominal rate of interest). Reading Fullwiler's recent reply to Krugman, I see little that differs from Woodford.

So again, why do Post-Keynesians have issues with New-Keynesians? It certainly has nothing to do with the endogeneity of money.

It's over. Royal Mint, digital currency. http://developer.mintchipchallenge.com/

Nick,

You're right, I think.

I was thinking banks could maybe lend a multiple of capital. Like if the capital ratio was 20 percent, for every 100 dollars in capital the bank could create 800 in loans, but really they could only make 500 in loans, right?

And banks can't create capital out of thin air, right? They have to raise it through profits or investors? So a capital constrained bank in bad economic times may have trouble raising capital? Even if they're able to game this system in real life, at least in theory a regulated bank could be unable to make loans. Perhaps (big?) banks are (usually) always able to find willing investors?

Too Much Fed,

That Bill Mitchell link was the type of thing I was looking for, thanks. Interesting about Dean Baker. (I'm not sure Baker is saying exactly what Mitchell thinks, but I don't know.) I'm familiar with the loans creat deposits/savings aren't required argument.
(I think Baker is just saying the Fed can lower rates by adding reserves to the system. His comment is so brief, though, it's easy to interpret a number of ways.)

K

1. Woodford's is not the only NK model - he is an extreme in not modelling money. Svensson/Taylor/Bernanke/Kiyotaki/Gertler all have different models that have money, and all are New Keynesians.

2. Paying interest on reserves has nothing to do with the effectiveness of reserves or liquidity constraints - it is a way to shift interest rates without engaging in open market operations. In the US, due to 0 IoR historically, all of the fed funds rate comes from what Kashyap/Stein call the ysr (FFR = IoR + ysr) - the 'convenience yield of excess reserves' - and quantity operations (which affect ysr) and rate targets become completely joint at the the hip and indistinguishable from each other. Hence all the talking past each other that you see between monetarists and MMT.

In the future you will see the Fed manipulate its balance sheet *somewhat* independently of its rate target due to the flexibility afforded by an independent ysr once the IoR puts a floor on FFR. (this is also the case right now, but these are abnormal times, and the proper IoR should probably be -0.25%, not 0.25%). And then the theoretical differences and predictions made by MMT/ monetarists will differ substantively.

e.g. adding to the base while holding IoR constant would be expansionary in the monetarist/neo-classical model while not so in the PK model, even when the IoR is say 5%.

"Woodford's is not the only NK model - he is an extreme in not modelling money."

No, he isn't. The standard NK model has no "money supply." The BoC, the BoE and the ECB all use NK models *without any money* in them as their principal macro guides. "NK" doesn't mean some bunch of theorists who call themselves that. It's a particular base model plus a large amount of variations. I've never seen anybody try to add the "money supply" but there is no reason you couldn't strap it on the side if you wanted to. But it would be an internally irrelevant appendage.

I agree that paying interest on reserves is irrelevant to monetary policy (as is the quantity of reserves). Paying exactly the policy rate may lead to a breakdown of the collateral markets though since banks will fund from the Fed, which I don't think is healthy.

"adding to the base while holding IoR constant would be expansionary in the monetarist/neo-classical model while not so in the PK model, even when the IoR is say 5%. "

I totally agree, as does the NK model. PK and MM are totally different. Monetarists are the cause of all this pointless QE nonsense. What I'm saying is that the PKs and the NKs have very similar views on this: both believe that QE is a ridiculous distraction. What I don't understand is why the PKs are averse to the standard NK model. What is it about it that they dislike?

anon, you're welcome for the link.

I'm not sure what Dean Baker meant there either. At first glance, it doesn't seem correct.

Capital ratio 20% and enforced. $100 of capital leads to a maximum of $500 of loans in this case.

"And banks can't create capital out of thin air, right? They have to raise it through profits or investors?"

With a quick glance, I believe those two(2) are correct.

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