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Tuesday, October 9, 2012
Randy Wray — MMT, Argentina, And Views On Inflation
Some have been asking for more about MMT's view of dealing with inflation. Randy goes into some of this in relation to Argentina.
Apparently Randy will continue the blog in a part II.
I'm glad he is digging deeper into the subject.
Keynesian economics lost credibility during the 70's stagflation, which Keynesian policies didn't seem to have an answer to. For that reason, I suggest it is very important that we post-Keynesians try to get a handle on the inflation issue in Argentina. It may well be due to international commodities, or wage indexing, or debt denominated in foreign currencies.
Otherwise, critics of post-Keynesian economics will point to Argentina as an example of how progressive polices failed to achieve full employment and low inflation.
Venezuela seems to have similar issues with high (18%) inflation and unemployment (7.4%).
Randy Wray also has a couple of interesting pages on hyperinflation in his recent Primer on Modern Money Theory.
One aspect that does need more elaboration within the MMT paradigm is the topic of interest rate policy and its effects on the economy.
For example, in his Primer Prof. Wray claims (in the context of discussing possible causes of hyper-inflationary processes) that "if the central bank reacts to growing deficits by raising interest rate targets, it helps to fuel growth of the deficit and also adds demand stimulus to the economy in the form of interest payments by the government".
This may seem plausible (although interest payments will have very different consequences depending on who receives them, say banks, corporations or households - a distinction Dr. Wray does not make) but it's also in opposition to mainstream theory and more or less agreed upon "facts".
For instance, the high interest rate policy of the Volcker era is usually credited with having destroyed inflation in the U.S. via a huge drop in aggregate demand that also pushed unemployment to record numbers.
I think it's not enough for MMTers to present an alternative theory on interest policy in a couple of short sentences. Maybe they have a point but it needs deeper digging, both at the level of theory and and empirical validation.
Otherwise MMT could see some of its component parts fall into the trap rightly criticized by Steve Keen in relation to the propositions of neoclassical economics: of being neat and plausible yet empirically wrong.
Jose, conventional wisdom gives Volker credit for destroying inflation, but the post-Keynesian view is that inflation was caused by high oil prices plus indexed wages, and that inflation fell when oil prices fell.
Post-Keynesians generally reject the IS/LM model to varying degrees. I don't have a link to a formal paper on the subject, but maybe someone else will be able to point us to one ?
I understand that but if Dr. Wray is right and high interest rates are generally stimulative then Volcker's policies should have contributed to a relatively mild recession following the oil shocks of the late 90s.
Instead the Volcker recession was unusually harsh.
I suppose it could be argued that it would have been even more profound if not for the high rate policy - but if this is the MMT position on this very important empirical episode then it should be stated formally, yet I have never seen a MMT oriented research paper on the topic.
And if such studies already exist they are almost invisible and should be more widely disseminated.
Wray discussed the Volcker madness many years ago. His common sense take is that, yes, you can cause a recession by jacking up interest rates to the extreme as Volcker did. Do a little googling and you will find this ground well-covered. It's absolutely consistent with MMT and Wray's perspective.
Jose: Wray has a paper with Linwood Tauheed "System Dynamics of Interest Rate Effects on Aggregate Demand" . with thoughts on this little explored territory that most say doesn't exist. I think the empirical side is associated with Gibson's Paradox - that higher long-term interest rates are associated with rises in price levels, not the reverse, as one would assume from the mainstream & Fed policy. As Dan says, a short term spike as high as Volcker's is going to cause a deflationary recession. What he's saying is more a long range effect, or one that you see in a (quasi)depression like now - that they can be stimulative in some not-rare conditions, not that they are generally stimulative.
Along these lines, other places, rather long ago, Wray advised Italy & some Latin American country to cut rates from (12% & 90%? respectively) to decrease inflation. Very tired, so no guarantee the above makes any sense.
Apparently Randy will continue the blog in a part II.
ReplyDeleteI'm glad he is digging deeper into the subject.
Keynesian economics lost credibility during the 70's stagflation, which Keynesian policies didn't seem to have an answer to. For that reason, I suggest it is very important that we post-Keynesians try to get a handle on the inflation issue in Argentina. It may well be due to international commodities, or wage indexing, or debt denominated in foreign currencies.
Otherwise, critics of post-Keynesian economics will point to Argentina as an example of how progressive polices failed to achieve full employment and low inflation.
Venezuela seems to have similar issues with high (18%) inflation and unemployment (7.4%).
Seems like it would be fertile ground for a JG ?
I agree with Dan Lynch, MMT should be able to explain this stuff otherwise it is perceived as squeaky noises coming from the dustbin of history.
ReplyDeleteRandy Wray also has a couple of interesting pages on hyperinflation in his recent Primer on Modern Money Theory.
ReplyDeleteOne aspect that does need more elaboration within the MMT paradigm is the topic of interest rate policy and its effects on the economy.
For example, in his Primer Prof. Wray claims (in the context of discussing possible causes of hyper-inflationary processes) that "if the central bank reacts to growing deficits by raising interest rate targets, it helps to fuel growth of the deficit and also adds demand stimulus to the economy in the form of interest payments by the government".
This may seem plausible (although interest payments will have very different consequences depending on who receives them, say banks, corporations or households - a distinction Dr. Wray does not make) but it's also in opposition to mainstream theory and more or less agreed upon "facts".
For instance, the high interest rate policy of the Volcker era is usually credited with having destroyed inflation in the U.S. via a huge drop in aggregate demand that also pushed unemployment to record numbers.
I think it's not enough for MMTers to present an alternative theory on interest policy in a couple of short sentences. Maybe they have a point but it needs deeper digging, both at the level of theory and and empirical validation.
Otherwise MMT could see some of its component parts fall into the trap rightly criticized by Steve Keen in relation to the propositions of neoclassical economics: of being neat and plausible yet empirically wrong.
Jose, conventional wisdom gives Volker credit for destroying inflation, but the post-Keynesian view is that inflation was caused by high oil prices plus indexed wages, and that inflation fell when oil prices fell.
ReplyDeletePost-Keynesians generally reject the IS/LM model to varying degrees. I don't have a link to a formal paper on the subject, but maybe someone else will be able to point us to one ?
Dan,
ReplyDeleteI understand that but if Dr. Wray is right and high interest rates are generally stimulative then Volcker's policies should have contributed to a relatively mild recession following the oil shocks of the late 90s.
Instead the Volcker recession was unusually harsh.
I suppose it could be argued that it would have been even more profound if not for the high rate policy - but if this is the MMT position on this very important empirical episode then it should be stated formally, yet I have never seen a MMT oriented research paper on the topic.
And if such studies already exist they are almost invisible and should be more widely disseminated.
Jose,
ReplyDeleteHere is a talk related to "inflation" that I did s post about a while back...
You may find the discussion that occurs at about the 13:00 mark interesting...
http://mikenormaneconomics.blogspot.com/2011/11/infaltion.html
What may be happening down in Argentina is that the govt is "ratifying" the increase in prices created by some sort of supply/demand shock...
rsp,
also,
ReplyDeleteIf Argentina had a JG then unemployment would be zero.... perhaps measures of "inflation" would be non-zero...
resp,
Jose,
ReplyDeleteWray discussed the Volcker madness many years ago. His common sense take is that, yes, you can cause a recession by jacking up interest rates to the extreme as Volcker did. Do a little googling and you will find this ground well-covered. It's absolutely consistent with MMT and Wray's perspective.
@ Detroit Dan,
ReplyDeleteCan you provide the links? Thanks.
A Wray paper about monetary policy at the link. It does not answer Jose's question in depth, though.
ReplyDeletehttp://www.cfeps.org/pubs/wp-pdf/WP21-Wray.pdf
At least one post-Keynesian, Rodger Mitchell, still believes in the power of interest rates to control inflation.
Jose: Wray has a paper with Linwood Tauheed "System Dynamics of Interest Rate Effects on Aggregate Demand" . with thoughts on this little explored territory that most say doesn't exist. I think the empirical side is associated with Gibson's Paradox - that higher long-term interest rates are associated with rises in price levels, not the reverse, as one would assume from the mainstream & Fed policy. As Dan says, a short term spike as high as Volcker's is going to cause a deflationary recession. What he's saying is more a long range effect, or one that you see in a (quasi)depression like now - that they can be stimulative in some not-rare conditions, not that they are generally stimulative.
ReplyDeleteAlong these lines, other places, rather long ago, Wray advised Italy & some Latin American country to cut rates from (12% & 90%? respectively) to decrease inflation. Very tired, so no guarantee the above makes any sense.
Thanks for pointing to the Wray paper, Calgacus. Here's the link:
ReplyDeletehttp://www.cfeps.org/pdftocs/mfis_toc.pdf