tag:blogger.com,1999:blog-8897997766931633186.post3309606393726431787..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Eggertsson on the Liquidity Trap (Does Palgrave make it official?)Bill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8897997766931633186.post-6208899837056183032010-01-05T03:12:55.039-05:002010-01-05T03:12:55.039-05:00Bill,
the only way to keep long term interest rat...Bill,<br /><br />the only way to keep long term interest rates low is to push down the present short term rate and all expected future short term rates. (At this point I exclude the risk and liquidity premia.)<br /><br />If the central bank buys long term bonds instead of bills to change the long term rate they have to believe in a portfolio balance effect or something else. But the effect of these effects are controversial.<br />So they have to go the hard way, keeping the short interest rate low. But how to make credible that the future short rates will be low? Here we are getting to the main problem. The central bank has to make a credible promise to keep the interest rates on a low level. <br />And here the central bank faces the problem of shaping expectations. There is no commitment to keep the rate low when the economy recovers. But the rate has to be low for a longer period to build up more inflation than under normal circumstances. This is the only way to downsize an existing output gap.<br /><br />QE means using the central banks balance sheet to push down long term interest rates by buying long term bonds instead of T-Bills. But this also means to keep down the short term rate.<br /> If you look on recent papers about Japan (Baba et al.) the effects of quantitative easing are moderate.<br /><br />I think Bernanke knows that, thats why he uses the term Credit Easing instead of QE. In my opinion the only difference between the two concepts is that CE focusses on the risk premia of interest rates, that´s all.<br /><br />But at this pint we are talking about nominal rate but we also know that the real rate matters...<br />If an economy is facing deflation inflation has to be generated to push the real rates down. But QE or CE includes no mechanism to create inflation... Saying that interest rates will be low for a long period will not shape inflation expectations. This is the credibility problem in the liquidity trap scenario. Krugman proposes inflation targeting, Eggertsson and Woodford prefer a history dependent price level targeting to solve the problem. But the Fed still follows CE, that´s why we suffer a recession. <br /><br />Best regards from Germany,<br />TobiasTobiashttp://www.nowebsite.comnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-11552865804791575282010-01-02T12:30:56.639-05:002010-01-02T12:30:56.639-05:00“For some reason, the central bank wants the price...“For some reason, the central bank wants the price level to grow from that low level at a targeted rate. Why?”<br /><br />That’s the rule the central bank is following. Eggertsson is himself following a rule here: if you want to explore the consequences of following a different monetary rule then you have to do the maths again from scratch.<br /><br />I don't believe that introducing long-term bonds would make much difference to the model. Surely the yield curve is determined by the expected path of short-term rates, so the extra equations wouldn't add anything?Kevin Donoghuehttps://www.blogger.com/profile/07534540865029864916noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-23882596336932660782009-12-29T04:15:25.679-05:002009-12-29T04:15:25.679-05:00"Or maybe they describe the behavior of a bli..."Or maybe they describe the behavior of a blind and foolish central bank."<br /><br />I don't see how there can be any other kind. Central planning tends to fail and produce these sort of results.Doc Merlinhttps://www.blogger.com/profile/13615897698740661539noreply@blogger.com