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text revived in the economic literature through the efforts of jacob viner in the 1930s reads more modern than a majority of contemporary monetary discussions thornton s work is possibly the first successful marriage of the currency and the banking principles see pg 296 onwards here for more reference on the difference between the two schumpeter considered it the best theoretical monetary performance of the 1790 1870 era in his hea pp 657 658 thornton anticipated wicksell s cumulative process of the expansion or contraction of the economy in what was a bid to explain the observed regularity between issue of central bank liabilities and the nominal economy which is simply assumed by the quantity theory of money qtm as schumpeter notes hea pp 676 677 702 703 only ricardo and a few of his closest associates ever believed in the strict we would today call it naive form of quantity theory thornton though he was on ricardo s side in the bullionist controversy sought to explain it using processes and phenomena that he saw in the real world rather than posit it as a matter of logic as ricardo did in all thornton represents the centre in the theory of monetary policy comfortable with currency and credit with quantities and rates with a belief in the power of central banks though acting through private financial agents 6 schumpeter i label this cell with josef schumpeter s name borrowing from ashwin who describes endogenous money creation through banks extension of credit as an idea that is first best explained in ch 3 of his book theory of economic development i haven t read it so i will defer to ashwin s judgement with the caveat that schumpeter was an unbelievably wide scholar of the history of economic thought and it is my prior that someone so widely read is unlikely to hold polar positions so schumpeter himself might have been a schumpeter ian centrist somewhere between the thornton schumpeter cells in my typology however we are more concerned with what the cell signifies rather than the views of schumpeter himself so what makes for a schumpeterian theory of monetary actors and mechanisms in short this is a view that infuses the financial banking system with a lot of autonomy through both prices interest rates and quantities and thus renders the central bank a relatively smaller player in the purely monetary scheme of things the endogeneity of money supply is a common heterodox position and a large number of theorists with widely divergent policy prescriptions austrians real bills theorists post keynesians etc hold views on it which seem remarkably similar i submit that what would be specifically schumpeterian is the view that the financial system leads should lead credit and money creation rather than responding passively to consumer or investor real economy investors i e businesses demand the argument is definitely a claim about how the world works but is perhaps also normative enshrined in schumpeter s twin views as ashwin describes it of money creation through elastic credit as the differentia specifica of capitalism and of the banker as the capitalist par excellence this is in some contrast to the real bills view banks central banks should extend money only against safe short term collateral as well as the canonical post keynesian horizontalist view that even privately created endogenous money is merely accommodative i e responding passively to exogenous money demand however the monetary views of some notable 20th century empirical theorists particularly john gurley and edmund shaw are of a schumpeterian nature and the approach also resonates with post keynesians of a more structuralist persuasion witness thomas palley or bob pallin 7 woodford new view in 2003 mike woodford wrote what continues to be the benchmark monetary theory text in graduate macroeconomics woodford visualized a cashless or more precisely a currency less economy where monetary policy is focused on price stability and is conducted using just the short rate with the rest of the yield curve taking care of itself through financial equilibrium while this has been seen as a modern take on a wicksellian pure credit economy woodford s attempt should also be seen as the proper development of the new view of monetary economics that began with jim tobin s explorations of monetary economics in a world of modern financial internediaries and assets in the early 1960s as perry mehrling notes woodford s work should be seen not simply as a new keynesian reponse to the rational expectations revolution but also as an initial attempt by modern macroeconomics to rise to the challenge of modern finance i identify the critical element of this view as the attempt to infuse the monetary sovereign with full policy control through a monetary instrument even in a world of entirely interest bearing money money is the numeraire and the main monetary channel is expectations of future monetary action in developed economies with elaborate forward looking financial markets in a world of treasury etfs money market mutual funds zero cost sweeps between demand deposits and time deposits etc the woodford ian schema seems entirely reasonable as the default prior to begin working with rest to follow in parts iii and iv posted by ritwik at 12 10 am 5 comments friday april 19 2013 a typology of monetary theories i as a much delayed follow up from my post proposing a top level framework for thinking about business cycle macro here s a framework for thinking about monetary theories note that this is primarily about a theory of monetary mechanisms and propagation and thus corresponds better as a theory of monetary policy rather than pure monetary theory which would be more concerned with questions like why does money have non zero value in equilibrium yet because of the centrality of the financial system in macroeconomic ups and downs and because of the growth of central banking with the urge to exert control over the financial system arguably developments in the history of macroeconomic thought basically parallel developments in the history of central banking so here it is a typology of monetary theorists and theories here i ve attempted to categorize monetary theories along two axes the first axis deals with who is the primary monetary actor central bank vs pvt banks financiers the second axis deals with what is the primary monetary mechanism interest rates real or nominal vs the quantity of some monetary aggregates short notes on some of the cells follow 1 ricardo as schumpeter notes in his monumental history of economic analysis book iii chapter 7 pp 657 719 the contemporary history of monetary theory goes back to the bullionist controversy in the early 19th century and david ricardo was the leading flag bearer for the currency school broadly speaking a ricardian monetary intuition involves a commitment to the quantity theory of money in some form or the other a belief that outside or central bank money is special and that what is truly special about cb money is currency as of today scott sumner best represents ricardianism in monetary thought 2 old monetarists old monetarists would broadly be people who focus on monetary aggregates albeit both on base money currency reserves and broad money bank deposits etc aggregates a classic tendency would be to focus purely on the liabilities of the banking system as exemplified by milton friedman s contention that banks also have assets and that that s not quite important and to infuse the central bank with a lot of control over the banking system nick rowe would probably be a good example of a current theorist who is an old style monetarist 3 real bills doctrine this was the opposite side to ricardo thornton in the bullionist controversy and this position has been revived a few times since the basic contention is that money liquid media of exchange is basically to be issued by pvt banks against high quality short term collateral in old school jargon this went by the name of discounting against self liquidating real bills though this seems more like practical advice than monetary theory the implied theory is easy to spot central banks are only supposed to respond to accommodate endogenous demand against specific limited collateral so that the primary monetary actors are private banks and financiers also the restrictions on the quality and maturity of collateral to be admitted restricts interest rates to a rather narrow band it is clear that quantities of collateral and exchange media issued are the main mechanisms here as perry mehrling notes in his book on fischer black milton friedman blamed this view for demanding that the central bank act in a pro cyclical fashion and thus exacerbating business cycles 4 fisher irving fisher created the first neoclassical macro model and brought monetarist thought to the united states he revived the quantity theory but also brought to notice the monetarist paradox in interest rates the observation that inflationary policies were associated with higher interest rates rather than lower he conducted deep research into the construction of price indices and proposed that a monetary regime attempt to maintain price stability it is clear that fisher thought it was firmly within the remit and capability of central banks to maintain macroeconomic stability through quantity mechanisms or rates mechanisms descriptions of the other cells and some quadrant level aggregations will follow in the next post posted by ritwik at 4 38 am 5 comments on reinhart and rogoff if you follow macroeconomics or global economic policy by now you d be familiar with the recent blow up over the so called reinhart rogoff r r results carmen reinhart and kenneth rogoff r r have compiled and conducted some extensive research into the experience of countries following financial crises which led to their book this time is different the central thesis of book was that financial crises have certain common hence perhaps predictable patterns and among the biggest challenges in mitigating their occurrence or ensuing damage has been the tendency to believe that this time is different the book received plaudits when it was released many have gone on to say that it s been their bible in the current global financial crisis a subset of the themes that r r covered in their book was the dynamics between growing public debt and growth this evolved into an independent line of published research from which the headline take away was that countries with public debt gdp ratios of over 90 experience strikingly slow growth and thus the 90 level might be an intuitive tipping point beyond which may lie treacherous territory for sovereign borrowing this argument though made with suitable academic precaution has been used or at least invoked by several influential policy makers in developed economies with debt gdp ratios exceeding the 90 level as reason to impose a cutback in fiscal spending immediately it is obviously at the centre of some of the most important global policy debates of our debates now two days ago rortybomb mike konczal posted research from three university of massachusetts economists herndon ash pollin that tried to replicate the rogoff reinhart results but could not they found that the r r results resulted from a rather messy combination of an excel code error choosing to exclude certain data points and devising a schema of weighting that seemed to skew the results and did not seem intuitively defensible unsurprisingly the microcosm of the online world that cares about these things more or less exploded first with schadenfreude then with appeals to subtle readings and very quickly as is the wont of online discourse to more systemic and meta things like the central lessons to be learned from the debacle the incentives facing economists etc for a quick update on what has been happening felix salmon has a good round up and tyler cowen continues to act as a conscientious and indispensable clearing house a short summary of just what has happened may be useful first of all though the schadenfreude is directed mostly at the excel error that error itself does not drive the biggest magnitude change in the result at hand it pushes the growth experienced by countries with debt in excess of 90 of gdp from 0 1 to merely 0 2 but removing the asymmetric weights and including all episodes changes it further to 2 2 and that s really where the meat and juice of the debate lies rortybomb has further posted analysis by u mass economist arin dube that shows that the debt slow growth correlation actually shows reverse causality i e it s the slow growth that causes high debt ratios rather than vice versa the economists themselves responded remarkably fast and were forthcoming about accepting the code error however they insisted that firstly they had only claimed association not causation and secondly at 2 growth for countries with public debt more than 90 of gdp was still a full 1 lower than that of countries with public debt less than 90 the first is the plausible deniability of every sophist s argument after all who gets global fame for simply showing that a high ratio is associated with a low denominator it was always the potential causation hinted at which mattered and the op eds that rogoff and reinhart wrote for popular audiences seemed to unambiguously hint at implied causation the second may still be relevant but 2 vs 3 simply lacks the jaw drop value of less than 0 vs 3 and is actually not even statistically significant but the r r defence wholly skipped over the deeper issues around including and excluding data points and arbitrary weighing schemata on this others have risen not to their defence per se but to shift focus and draw attention to the larger issues at hand i have now seen a bunch of these arguments and none of them are very convincing first up let s get the any data analysis exercise will have to make these choices bit out of the way this is true and for precisely this reason data analysis exercises offer or should offer at the very least footnotes or explanatory pieces detailing these choices and a short note on why they were preferred to other choices investment banking analysts are routinely laughed at for having plucked out of the air assumptions about projections of growth industry growth market share etc and yet any half decent analyst would not dare offer his or her work without detailing qualitative reasons for the quantitative assumptions being made and a list of sensitivities arguably the former is more important and should be dealt with at depth by an academic especially if the choices being made are not prime facie intuitive like say removing a 10 sigma outlier it is worth pointing out that the main reason r r come up with the 90 figure is because their intervals are of 30 i e they split the data into buckets of 0 30 30 60 and so on this is purely a modelling choice artifact and the actual tipping point assuming any exists may be 80 ...
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