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es get unstable this is the reason nations have central banks to keep money in the window you might say it differently you might say central banks target interest rates not the quantity of money well yeah they say that don t they but the way they keep interest rates in the certain window is by buying and selling securities and such to adjust the quantity of money we call bank reserves that s what open market operations are in the normal economy there is a certain window that something must stay in for prices to remain stable central banks keep this something in the window by making adjustments to the quantity of the kind of money that central banks issue so there is some stable relation between the q of m and the size of gdp in the normal economy what this relation is a stable ratio for example or a stable rate of change in the ratio is not yet clear here s what i think something like this the concept is yet crude so i need you to try to understand what i m trying to say if m1 m2 is stable then a stable money output ratio is probably what s needed but if m1 m2 is falling if circulating money is falling and savings is increasing relative to the total stock of money then a stable ratio won t do the trick if the m1 m2 decline is stable then a stable increase in the ratio might work but if the m1 m2 is not stable then all bets of stability are off maybe m1 and m2 are out of date i won t even argue the point i m just talking about circulating money and total circulating plus uncirculating money and i m using two character shorthand feel free to pick better data for circulating and total money and get back to me with a graph if the total quantity of money is kept in a window but the circulating portion of it is declining as part of the total then the quantity of money needed available for transactions is declining relative to gdp that s a problem maybe it s not a problem for the people with most of the savings but it s a problem for everybody else and it s a problem for the economy that s why the first turning point on graph 1 comes just as the great depression begins too much money in savings and not enough money circulating to sustain the transactions needed for gdp growth if there is any chance that i am right in saying that excessive savings is the problem any chance that keynes and i and a handful of others since the dawn of civilization are right about this then i can tell you why civilizations die by suicide civilizations die by suicide because excessive savings is a problem and most people refuse to accept the fact most people refuse even to consider the possibility graphs and data can be visited at my savings and dpd google drive spreadsheet related post the desire to save posted by the arthurian at 4 00 am 4 comments sunday august 18 2013 what else could we reasonably do on expectations from unlearning economics any attempt at a serious discussion of transmission mechanisms is met with expectations as if expectations are a magic wand and not simply a reflection of the actual behaviour of the economy it s awkward when a great line is buried in such a way that when you quote it it seems something is missing and you ought to include the part that came before but anyway what ue says is expectations are a reflection of the actual behavior of the economy expectations depend on economic conditions if you want to improve expectations you have to improve the economy i do think it can temporarily work the other way i think the big boom we had early in the reagan years was partly expectations driven people had big hopes graph 1 the red spike early in the reagan years a brief interval of excitement it didn t last and it didn t happen again expectations were disappointed because the economy wasn t as good as reagan promised it would be as the graph shows but a lot of economists seem to remember the one impressive aberration and base too much of their work on the presumed power of expectations two paragraphs from chapter 12 of the general theory of employment interest and money by john maynard keynes the state of long term expectation it would be foolish in forming our expectations to attach great weight to matters which are very uncertain it is reasonable therefore to be guided to a considerable degree by the facts about which we feel somewhat confident even though they may be less decisively relevant to the issue than other facts about which our knowledge is vague and scanty for this reason the facts of the existing situation enter in a sense disproportionately into the formation of our long term expectations our usual practice being to take the existing situation and to project it into the future modified only to the extent that we have more or less definite reasons for expecting a change in practice we have tacitly agreed as a rule to fall back on what is in truth a convention the essence of this convention though it does not of course work out quite so simply lies in assuming that the existing state of affairs will continue indefinitely except in so far as we have specific reasons to expect a change expectations are a reflection of the actual behavior of the economy we assume that the existing state of affairs will continue indefinitely except in so far as we have specific reasons to expect a change what else could we reasonably do posted by the arthurian at 4 00 am 1 comments labels expectations saturday august 17 2013 when hope interferes science turns to alchemy as i see it there s no clear connection between increasing the q of m and increasing real output as lars christensen sees it easier monetary conditions mean higher nominal gdp growth remember mv ngdp and with sticky prices and excess capacity that most likely also mean higher real gdp growth most likely he says posted by the arthurian at 4 00 am 0 comments friday august 16 2013 the key discovery the one success what caused the great inflation according to arthur burns the fed chairman who presided over much of that inflation cost push pressures caused it in a post i return to again and again marcus nunes summarizes that other arthur s view according to robert hetzel during the period of the great inflation the prevailing view and the one embraced by arthur burns fed chairman from 1970 to 1977 was that inflation was a real cost push and therefore non monetary phenomenon nick rowe writes i know what it s like to live in a demand side world because i used to live in one i left that world when i discovered we lived in a monetary exchange economy like a fish discovering it swims in water when i saw the phillips curve shift in the 1970 s when i discovered milton friedman and learned not only that units didn t matter but that the rate of change of units didn t eventually matter either in comments scott sumner responds i remember those days the key discovery was that changing the trend rate of inflation within reason had no impact on the average rate of unemployment i cropped a but mostly sentence from nick to focus on phillips and friedman that s the part sumner calls the key discovery obviously it is pretty important to nick rowe as well let me re summarize a little history from stephen williamson some u s macroeconomic economic history starting with the 1960s let s review that i samuelson solow and others think that the phillips curve is a structural relationship a stable relationship between unemployment and inflation that represents a policy choice for the fed ii friedman in words says that this is not so there is no long run tradeoff between unemployment and inflation it is possible to have high inflation and high unemployment iii macroeconomic events play out in a way consistent with what friedman stated we have high inflation and high unemployment iv lucas writes down a theory that makes rigorous what friedman said v paul volcker takes friedman seriously nothing technical there s never anything technical there is only a sort of reverence a kneeling before the great and wonderful oz since that friedman thing his 1968 speech to the aea and its aftermath since it is the key discovery and all shouldn t there be a bit of technical presentation somewhere that lays it out like science don t you think not too technical or i would fail to understand but something more than a blind religious embrace would be nice religious yeah nick rowe s post linked above is a story of his conversion to the new faith that s what bothers me that is what i had in mind when i wrote to marcus it seems people say he friedman predicted the high inflation high unemployment combination that showed the mis use of the phillips curve it seems the friedman event brought expectations into economics but i never see any but non technical acceptance of what friedman supposedly said nothing technical perhaps this is what williamson meant when he wrote friedman in words mark thoma lays it out well estimates of the phillips curve that produced stable looking relationships were based upon data from time periods when inflation expectations were stable and unchanging friedman warned that if policymakers tried to exploit this relationship and inflation expectations changed the phillips curve would shift in a way that would give policymakers the inflation they were after but the unemployment rate would be unchanged when subsequent data appeared to validate friedman s prediction the new classical rational expectations microfoundations view of the world began to gain credibility over the old keynesian model the subsequent data appeared to validate friedman s prediction at angry bear back in may 2012 robert asked a question did samuelson and solow claim that the phillips curve was a structural relationship did they claim that it showed a permanent tradeoff between inflation and unemployment james forder says no this is an important post for me robert s post nick rowe and sumner and williamson and nunes and many others point to milton friedman s put down of the phillips curve that put down it seems was the birth of an alternative to keynesian economics that alternative was based on samuelson and solow being wrong about the trade off but there are doubts about that that s what robert s post is about and that s why his post is important robert writes paul krugman john quiggin and others including me robert writes have argued that the one success of the critics of old keynesian economics is the prediction that high inflation would become persistent and lead to stagflation that s the key point for me one success parlayed friedman predicted stagflation and when his prediction came true friedman became like a religious icon but see i have a different explanation of stagflation than friedman so if friedman is right i must be wrong i don t think i m wrong posted by the arthurian at 4 00 am 15 comments thursday august 15 2013 outperforming our potential andrew bartels shows that the 2013 comprehensive revision didn t have much effect on rgdp source andrew bartels i look at it this way graph 2 real gdp red and potential gdp blue a tale of 2009 dollars versus 2005 dollars real gdp after the revision is better than potential gdp before the revision now that s one helluva change how much inflation did it take to push real gdp above potential like that graph 3 2009 based deflator converted back to 2005 100 shows prices almost 9 higher by 2009 between 8 and 9 percent maybe tomorrow they ll revise potential gdp to the 2009 base posted by the arthurian at 4 00 am 5 comments labels 2013 revision wednesday august 14 2013 going thru the motions this is the graph i created at fred to gather the data i needed in order to duplicate lars christensen s simple index calculation graph 1 the fred source data from mine of the 12th to simplify my life i ll chop off all the years before 1990 and just look at data since 1990 the same as christensen did graph 2 same data since 1990 only now i can apply the calculations that lars applied to the data i have the average value for each series and the standard deviation for each series in the excel file i ve been using for the past few posts the first step of christensen s calculation was to subtract the series average value from each data value for all the datasets i ll just do that in fred graph 3 for each series subtract the series average value the most obvious change on graph 3 is that the white plot window is not as wide as on graph 2 there s a lot more description for the vertical axis and it crowds the plot window but the relevant change is that each line is now centered on the zero level and that means all the lines are centered on each other they re all a little lower as a result you can tell because the highest value on the vertical axis is now 40 instead of 50 the second step of christensen s calculation is to divide by the standard deviation of each series this is where the amplitude the up and down variation of each series gets reduced and they all get similarized this impresses me the greater the amplitude variation of a line the greater the standard deviation and the more the variation is reduced by the division you can tell by the way people use standard deviation all the time that it must be pretty important but this is the first time i ever saw it used in a significant way that i could understand anyhow graph 4 for each series now divide by the standard deviation now the vertical axis values have been reduced to a high of 3 and a low of 5 that is far less than in the previous graphs the orange and green lines no longer travel to the extremes we saw in the previous graphs the lowest value on graph 4 is actually in the red line quite a difference posted by the arthurian at 4 00 am 5 comments labels standard deviation tuesday august 13 2013 i have to look at the spreadsheet 2 picking up where we left off yesterday i wanted to use a zoho spreadsheet so you could click on cells in the sheet and look at the formula bar to see what the calculations are but the zoho sheet makes the blogger screen jump down to the spreadsheet and as a blogger i won t stand for that my next choice was to use google drive but the series values are quarterly and that sometimes means there are too many pieces of information for the google drive spreadsheet to handle the graphs don t come out right so excel it is that means i can show you the graphs and i can show you images of cell calculations if it comes to that but if you want the live action of a spreadsheet you ll have to download the excel file and get into it yourself or you can read the story i tell here and take my word for it i don t have excel on the computer where i do my blogging i ve been using open office calc which can read and write excel files but open office messes up the x axis labeling on excel graphs and i prefer not to manipulate excel created graphs on this computer because of it and i have some nice visual basic routines i ve been developing to format my excel graphs to standardize the size and appearance of those graphs but those...
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