Lars P. Syll — Busting the NAIRU myth

Making policy based on fairy tales.

Lars P. Syll’s Blog
Busting the NAIRU myth
Lars P. Syll | Professor, Malmo University

Edmund S. Phelps — Nothing Natural About the Natural Rate of Unemployment

All this does not mean there is no natural unemployment rate, only that there is nothing natural about it. There never was.

Project Syndicate
Nothing Natural About the Natural Rate of Unemployment

Edmund S. Phelps | 2006 Nobel laureate in economics, and Director of the Center on Capitalism and Society at Columbia University

Lars P. Syll — Keynes vs. Wicksell — the loanable funds theory

Quote from Giancarlo Bertocco, "Some Observations About The Loanable Funds Theory"

Lars P. Syll’s Blog
Keynes vs. Wicksell — the loanable funds theory
Lars P. Syll | Professor, Malmo University

Biagio Bossone — John Maynard Keynes and Effective Macroeconomic Policy

Summary of Keynes on liquidity preference and his liquidity preference theory (LPT).

EconoMonitor

John Maynard Keynes and Effective Macroeconomic Policy
Biagio Bossone | founder and chairman of "The Group of Lecce" on global financial governance, and member of the Surveillance committee of the Centre d'Études pour le Financement du Développement Local

He has served as Head of the Evaluation Unit of Public Investments at Italy's Presidency of the Council of Ministers. He has been President of the Central Bank of the Republic of San Marino. He has been Executive Director of the World Bank Group, member of the IMF Executive Board, and advisor to the Executive Board of the Asian Development Bank. He has advised the Independent Evaluation Office of the IMF, the World Bank Group, and the African Development Bank, and has been a member of the group of experts assisting the High Commission on World Bank Reform chaired by former President of Mexico, The Hon. Ernesto Zedillo. He has been a consultant to national governments and private corporations on financial sector development projects and project financing operations.

As an economist and former official of the Banca d’Italia, he headed the international payment system division and has been involved in international financial analysis and relations issues. He has been a member of various EU and G10 central banking groups and task forces. He has been Professor of international financial markets at Universita' degli Studi di Palermo and Universita' del Salento, Italy. He has (co-)authored various academic and policy studies in the areas of money and banking, payment systems, international and development finance, and international financial relations. — World Bank

Brian Romanchuk — John Taylor Highlights The Uselessness Of Taylor Rules

A "rule" that is discretionary is not a rule. It's a regulation and not a regularity.

Setting a policy rate is a command system that is technocratic without being well-founded under present circumstances. What could go wrong?

Bond Economics
John Taylor Highlights The Uselessness Of Taylor Rules
Brian Romanchuk

Steve Keen — The Unnatural Rate Of Interest - Ultra Wonkish

Steve takes on Marx's labor theory of value, too. (It's not all that wonkish either.)

Forbes
The Unnatural Rate Of Interest -Ultra Wonkish

Steve Keen

Brian Romanchuk— U.S. Economic Growth - Mediocrity Rules

In summary, the dependence upon non-measured variables, of which we have little certainty as to their values, is a severe drawback of modern mainstream macro.

Bond Economics
U.S. Economic Growth - Mediocrity Rules
Brian Romanchuk

Brian Romanchuk — The Non-Falsifiability Of The Natural Rate Of Interest

The "natural rate of interest" is an analytical concept which is embedded in mainstream approaches to economics. Modern Dynamic Stochastic General Equilibrium (DSGE) models are built around the importance of interest rate (including expected interest rates) and the central bank's setting of those rates. If you are willing to assume that mainstream macro is correct, it provides a way of looking at the world. For example, "secular stagnation" (slow growth) can be blamed upon the natural real rate of interest falling to a negative value, leaving central banks unable to stimulate the economy.

However, if you are less willing to assume that mainstream macro is correct, and would like to test the efficacy of interest rates for steering the economy, you will run into a severe problem. The way that the natural rate of interest is currently conceptualised means that it can explain any observed economic outcome; that is, it is non-falsifiable. As a result, there is no point in trying to prove modern mainstream macro as being incorrect; that task is impossible. The only way forward is to ask whether modern macro can make an useful predictions (as opposed to fitting historical data); I would argue that there is little sign of any such predictive power.…

Bond Economics
The Non-Falsifiability Of The Natural Rate Of Interest
Brian Romanchuk

Jason Smith — The classical mechanics of Wicksell

Good one.

Information Transfer Economics
The classical mechanics of Wicksell

Jason Smith

William Dupor — Liftoff and the Natural Rate of Interest

Will Duper gives a short summary of the mechanics of monetary policy.

FRBSL
Liftoff and the Natural Rate of Interest
William Dupor, Assistant Vice President and Economist

Brad DeLong — Must-Read: Cullen Roche: Does a “Liquidity Trap” Ever End?: "Brad Delong has a very smart post over at Equitable Growth

Cullen on Krugman on getting the Keynesian "liquidity trap" wrong. For whatever reason, Brad has decide to put Post Keynesian analysis in play. Another step in the last mile.

Grasping Reality
Must-Read: Cullen Roche: Does a “Liquidity Trap” Ever End?: "Brad Delong has a very smart post over at Equitable Growth
Brad DeLong | Professor of Economics, UCAL Berkeley

Also

Must-Read: The hawk-eyed Mark Thoma picks up and develops a very important point: Mark Thoma: Krugman vs. DeLong: "...

Is the tide turning?

Liberty Street Economics — Why Are Interest Rates So Low?

Everything you wanted to know about the natural rate of interest as the core of monetary policy and how it is estimated, being unobservable. That is, the natural rate of interest  a theoretical term in general equilibrium neoclassical theory based on Knut Wicksell. The post discusses different ways to estimate it used by economists in forecasting and central banks in policy formulation.

High accessibility/low wonkishness.

FRBNY — Liberty Street Economics
Why Are Interest Rates So Low?

Marco Del Negro, Marc Giannoni, Matthew Cocci, Sara Shahanaghi, and Micah Smith

Brian Romanchuk — The Debt Supercycle Versus Secular Stagnation

Kenneth Rogoff has been advancing theories that the current environment of disappointing growth rates is the result of a "debt supercycle", not "secular stagnation". He recently summarised his arguments within the article "Debt supercycle, not secular stagnation". Although would agree that some version of a "debt supercycle" theory is correct, I am unconvinced about Rogoff's description of the mechanisms. Meanwhile, I doubt that he will succeed in winning the argument - he is pushing against the unmoveable object that is the circular logic of the natural rate of interest.

Catching up with Minsky but still can't shake neoclassical assumptions.

Excellent simple summary.

Bond Economics
The Debt Supercycle Versus Secular Stagnation
Brian Romanchuk

Lars P. Syll — The Bernanke-Summers imbroglio

As no one interested in macroeconomics has failed to notice, Ben Bernanke is having a debate with Larry Summers on what’s behind the slow recovery of growth rates since the financial crisis of 2007.

To Bernanke it’s basically a question of a savings glut.

To Summers it’s basically a question of a secular decline in the level of investment.
To me the debate is actually a non-starter, since they both rely on a loanable funds theory and a Wicksellian notion of a “natural” rate of interest — ideas that have been known to be dead wrong for at least 80 years …

Lars P. Syll’s Blog
The Bernanke-Summers imbroglio
Lars P. Syll | Professor, Malmo University

circuit — Ben Bernanke and the natural rate of interest

Not so fast there. circuit comes to Ben's defense, kinda.

If my understanding is correct, a point that circuit makes is that a natural rate rate of interest, like potential output, is a theoretical term that is model-determined rather than being an observable. Consequently, it may be useful for a central bank to use a model in which a natural rate of interest at full employment figures in theorizing about monetary policy. 

After all, if a central bank is going to set monetary policy through the nominal interest rate, then it has to have some rationale for doing so, and for economists, that means having a model. Since exogenous money has been discredited that leaves the central with with the interest rate as its policy tool. So the question becomes how and when to use that tool.

However, Ben doesn't seem to imply that he thinks there is actually a Wicksellian rate that leads naturally to full employment equilibrium in the long run if market forces are left to operate. What would be the point of monetary policy in that case unless to influence the short term. But that is basically to dismiss the long run as realistically significant. 

Or maybe he does "believe in" an actual Wicksellian rate that naturally leads to full employment in the long run but concludes that doing nothing and waiting for "the long run" is just not practical politically and that monetary policy can fill in.

Fictional Reserve Barking

Ben Bernanke and the natural rate of interest

circuit

Ramanan — Disappointing Start, Mr. Bernanke

Keynes v. Wicksell. Ben sides with Knut instead of Maynard.

Brief articulation of Wicksell's natural rate of interest and Keynes's realization that there is a natural rate of interest for every level of employment. There is therefore no necessity for equilibrium at full employment "in the long run" based on a Wicksellian "natural rate." 

Multiple equilibria at less than full employment are both possible theoretically and probable based on history. No liquidity traps required. Chronic unemployment is a bug in the system that can be squashed using fiscal policy.

The Case for Concerted Action
Disappointing Start, Mr. Bernanke

Ramanan

Lord Keynes — My Posts on the Natural Rate of Interest

Reference.

Social Democracy For The 21St Century: A Post Keynesian Perspective
My Posts on the Natural Rate of Interest
Lord Keynes

Lars P. Syll — Keynes vs. Wicksell on loanable funds theory

"The fundamental difference between Keynes and Wicksell and in general the supporters of the LFT [Loanable Funds Theory] lies in the specification of the consequences of the presence of bank money.…

In contrast, Keynes states that the spread of a fiat money such as bank money changes the structure of the economic system. He underscores this point by introducing the distinction between a real exchange economy and a monetary economy.…

Keynes notes that the classical economists formulated an explanation of how the real-exchange economy works, convinced that this explanation could be easily applied to a monetary economy. He believed that this conviction was unfounded …" — Giancarlo Bertocco

Lars P. Syll’s Blog
Keynes vs. Wicksell on loanable funds theory
Lars P. Syll | Professor, Malmo University

Philip Pilkington — Krugman at the Rethinking Economics Conference: Still Wrong on Monetary Theory

The Rethinking Economics conference in New York took place over the weekend. Anyway, Paul Krugman was on a panel with James Galbraith and Willem Buiter. The panel was interesting in and of itself. But what really caught my eye was when Krugman was confronted by an audience member on his support of NAIRU, the loanable funds theory and the theory of the natural rate of interest.

The audience member who asked this question was Rohan Grey, a friend of mine who runs the Modern Money Network who helped co-organise the event. You can see the question and the response in this video clip.

Go Rohan!

I don’t really want to get into the question of NAIRU too much as this would take us too far off track. But the other two questions provoked an interesting response from Krugman. First of all, he simply asserted that the loanable funds was true. Then he went on to assert that the natural rate of interest was true. “Clearly,” he said, “there is always some rate of interest that would produce more or less full employment”.

Krugman is an neoclassical monetarist and a Samuelson "Keynesian."

Krugman’s monetary theory is almost entirely wrong. He flip-flops on the loanable funds question and he is simply wrong on the question of a natural rate of interest. He also holds to an incorrect view of what a liquidity trap is that he picked up from John Hicks. While it is extraordinarily unlikely that he will give up on these ideas — he has dug in far too much now to concede these points and he seems unwilling to even openly debate them — I only hope that his errors will help to ensure that others do not make the same mistakes.

 So much for the economic champion of the "left."

Fixing the Economists
Krugman at the Rethinking Economics Conference: Still Wrong on Monetary Theory
Philip Pilkington

David Fields — What is the 'Classical Dichotomy'?

...the classical dichotomy implies that real variables and monetary variables are independent of each other. From a heterodox perspective, by contrast, both kinds of variables are explained by the relationship established between the central bank, bank lending, and entrepreneurs’ “animal spirits” every time effective demand is deemed profitable, reversing thereby the causality of the quantity-theory-of-money formula.

Naked Keynesianism
What is the 'Classical Dichotomy'?
David Fields