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美国本特利大学经济学教授斯科特·萨姆纳(Scott Sumner)

 
 
 

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美国本特利大学经济学教授

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任何IS-LM模型能做的分析 费雪模型能做的更好  

2009-05-21 10:21:06|  分类: 默认分类 |  标签: |举报 |字号 订阅

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Anything IS-LM can do, Fisher did better

Here’s what economists knew before the General Theory:

1.  Monetary policy and velocity determine NGDP growth.

2.  Velocity is positively related to interest rates (and hence investment booms and deficit spending may raise velocity.)

3.  Wages and prices are sticky in the short run.

4.  Because of point 3 a monetary shock may produce a liquidity effect for short term rates.

5.  Because of point 3, money and velocity shocks can destabilize output in the short run.

Here’s what we have learned since:

1.  Macro models need to incorporate expectations that are consistent with the prediction of the model.

Here’s what IS-LM added to our knowledge:

1.  Conventional monetary policy may be ineffective in a liquidity trap.

Here’s what IS-LM subtracted from our knowledge:

1.  Monetary policy may be ineffective in a liquidity trap.

Net gain from IS-LM:   Zero.

What got me thinking about interwar macroeconomics was a recent post by Brad DeLong, which painted a very bleak picture of pre-Keynesian macro, and then argued that a great leap forward occurred in 1937.  It wasn’t clear whether he thought much progress had been made since.  (I certainly don’t think so—but then I also view 1937 as a step backward.)  Here’s the crux of DeLong’s argument:

If you try to read pre-Keynesian monetary theory, or for that matter talk about such matters either with modern laymen or with modern graduate students who haven’t seen this… you quickly realize that this seemingly trivial formulation is actually a powerful tool for clarifying thought, precisely because it is a general-equilibrium framework…. Here are some of the things it suddenly makes clear:

1.

What determines interest rates? Before Keynes-Hicks… there has seemed to be a conflict between the idea that the interest rate adjusts to make savings and investment equal [in financial markets, "loanable funds"], and that it is determined by the choice between bonds and money[, "liquidity preference"]. Which is it? The answer, of course–but it is only “of course” once you’ve approached the issue the right way–is both: we’re talking general equilibrium here, and the interest rate and price level are jointly determined in both markets.
2.

How can an investment boom cause inflation (and an investment slump cause deflation)? Before Keynes this was a subject of vast confusion, with all sorts of murky stuff about “lengthening periods of production”, “forced saving”, and so on. But once you are thinking three-good general equilibrium, it becomes a simple matter. When investment (or consumer) demand is high… [people] are… trying to shift from bonds to goods…. both the bond-market and goods-market equilibrium schedules… shift; and the result is both inflation and a rise in the interest rate.
3.

How can we distinguish between monetary and fiscal policy? Well, in a fiscal expansion the government sells bonds and buys goods…. In a monetary expansion it buys bonds and “sells” newly printed money, shifting the bonds and money (but not goods) schedules….

Of course, this is all still a theory of “money, interest, and prices” (Patinkin’s title), not “employment, interest, and money” (Keynes’). To make the transition we must introduce some kind of price-stickiness, so that incipient deflation is at least partly translated into output decline…. But the basic form of the analysis still comes from the idea of a three-good general-equilibrium model in which the three goods are “goods in general”, bonds, and money….

But step back from the controversies, and put yourself in the position of someone who must reach a judgement about the likely impact of a change in monetary policy, or an investment slump, or a fiscal expansion. It would be cumbersome to try, every time, to write out an intertemporal-maximization framework, with microfoundations for money and price behavior, and try to map that into the limited data available…. [T]hat is why old-fashioned macro, which is basically about that model, remains so useful a tool for practical policy analysis.

First let me talk about where I agree with DeLong.  The last paragraph is exactly my view—I like simple models best.  And I like old-fashioned models best.  The only exception is that I think rational expectations are crucial to any macro model, especially under a fiat money regime.

Here’s where I disagree.  If you read David Laidler you will realize that pre-Keynesian models were actually much more sophisticated than they appear.  Indeed I have a much higher opinion of those models than even Laidler had, because I believe (with Milton Friedman) that for most purposes a partial equilibrium approach is to be preferred to a GE model.  Model the supply and demand for the medium of account to get nominal shocks, and use an SRAS to get business cycles.  Assume money is neutral in the long run.  Interest rates are hard to model, but I’ve never seen any evidence that they play an important role in business cycles.  (Yes, they affect velocity somewhat, but I see interest rates as mostly reflecting expected changes in NGDP growth, which are primarily driven by monetary policy.)

DeLong is not right about the (interwar) classical economists lacking a good framework for evaluating the effects of investment booms and fiscal stimulus.  Indeed he cites John Hicks very favorably, but doesn’t mention that in his famous 1937 paper Hicks claimed that the liquidity trap was the only real innovation in the entire General Theory.  If that is true (and I think it is), then it’s pretty hard to claim that classical economists had no coherent macro model.

People like Irving Fisher had a perfectly good macro model.  Indeed, except for Ratex it’s basically the model that I use in all my research.  But the problem is that these pre-1936 models didn’t use Keynesian language.  And they didn’t obsess about trying to develop a general equilibrium framework. A GE framework is not able to predict any better than Fisher’s models, and is not able to offer more cogent policy advice than Fisher’s model.  Indeed in many ways Fisher’s “compensated dollar plan” was far superior to the monetary policy the Fed actually implemented last October.  (Although I would prefer CPI futures target to a flexible gold price, at least Fisher’s plan had a nominal anchor.)

I’m not just skeptical of IS-LM; I’m fed up with almost all of modern macro.  If it’s 1995 and GDP growth is 3%, I have no doubt that structural models can predict 1996 GDP growth will also be 3%.  And they will usually be pretty close.  Of course when we really need advice from macroeconomists, at turning points like last fall, their models are basically useless.  When I saw the markets crash in October I knew that a few months later the Blue Chip forecasters would be downgrading their “consensus forecast.”  Now I just watch the markets, and hardly even waste time with econometric models and their forecasts.  My prediction is that within a few decades all these economic alchemists will given up on their fruitless attempts to create a golden structural model, and simply infer market forecasts of the policy goal.

The sophisticated reader may be saying I am unfair, models aren’t supposed to offer unconditional forecasts of turning points, they are supposed to offer conditional forecasts of how monetary and fiscal policy will affect the economy.  But can they even do that?  Nobody seems to believe in conventional monetary policy at this point, but what about fiscal policy?  It’s too soon to say, but in 1998 a famous economist expressed skepticism about the rationale for fiscal stimulus in a liquidity trap:

As a starting point for this discussion, we should notice that Japan has unwittingly managed to turn itself into an old-fashioned Keynesian economy, the sort of economy envisioned in the original, 1948 edition of Samuelson’s textbook. With large excess capacity, Japan is unmistakably constrained by demand rather than supply; with call money rates hard up against zero, Japan has the fixed interest rate assumed in naive multiplier analysis. . . .

What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.

Will somebody please explain this to me?

Note the exasperation in the last sentence.  That’s how I have felt for 8 months.  Even today there are professors who think massive government spending can overcome the BOJ’s deliberate policy of targeting inflation at negative 1%.  But we know better.  Who are we?  Who rejects the “orthodox, sensible thing to do?”  Paul Krugman and I.

[Read the entire piece---it's about Japan, but it's the best critique of current U.S. fiscal policy that I have ever read.  Much better than I could do.  Yes, one could argue that it's not applicable to the U.S., where a recovery would be self-sustaining.  But only because our central bank is not likely to pursue deflationary policies indefinitely.  It all comes back to monetary policy.  Fiscal policy won't work with a bad central bank, and isn't needed with a good one.]

Bonus points: Can anyone explain this sentence from DeLong’s post?

It is remarkable: if you ask, every macroeconomist says they believe in the quantity theory of money: MV = PY.


This entry was posted on May 19th, 2009 and is filed under Monetary Theory. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.

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