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TheMoneyIllusion货币幻觉

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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Will VAR studies become like yesterday’s newspapers?  

2009-06-28 17:54:43|  分类: 默认分类 |  标签: |举报 |字号 订阅

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Will VAR studies become like yesterday’s newspapers?

 

When you read old economic journals you come across lots of empirical studies of things that no longer interest us.  In the interwar period there are lots of studies of the world gold market; estimates of newly-mined gold, industrial use, dishoarding from the Indian subcontinent, etc.  I also seem to recall lots of studies of money demand being published in the 1980s; money demand in Turkey, money demand in South Korea, etc.  My impression is that people are no longer interested in those studies.  They are reread about as often as yesterday’s newspapers.  I wonder whether the same will be true of recent macro studies using techniques such as vector autoregression (VAR.)

[By the way, yesterday's newspapers can actually be quite interesting.  I spent a decade reading every New York Times from the 1930s.  History looks very different in the "first draft."]

Let me say upfront that I am going way out on a limb here, as I don’t really keep up with this literature, and hence my comments may already be out of date.  I hope you guys will correct me where I am wrong.  But I do think that I may at least have a few novel reasons for expecting macro to soon move on.

If I am not mistaken, VAR models try to find inter-temporal correlations between interesting macro variables, often including policy shocks.  The first time I heard about these studies there was mention of a “price puzzle,” which meant that monetary shocks seemed to have a “perverse” effect on the future price level.  Easy money led to lower inflation, and vice versa.  Let’s stop right there.

Suppose you want to test a model.  You collect the data that you think is most appropriate, and then you set up the statistical model that best tests your theory.  And suppose the test fails to confirm your theory.  Also assume it isn’t a borderline failure, but rather an abject failure.  What should you do?  If the data doesn’t suggest a model that directly contradicts yours first model, I think you have an ethical obligation to just drop it and move on to something else.  Of course I do know that many people are stubborn, or are selfish, and play around with different variables and different model specifications until they get the “right” result.  What is the right result?  It’s the one that you believe.  (See my earlier post on how people assume the universe was constructed to confirm their biases.)  Or if you are very cynical, then you might just want publications and tenure (although that begs the question of why you went into a low paid field like economic research.)

Let’s go back to the VAR studies.  When those first studies showed a persistent price puzzle the whole enterprise should have been dropped.  As I said I am not an expert here, but my guess is that the entire VAR approach is deeply flawed, at least in the area that I am interested in—monetary policy.  My hunch is that the price puzzle comes from a failure to correctly specify monetary shocks, aka the identification problem.  To anyone who has followed this blog, I don’t think this hunch will come as a big surprise.  I have strongly argued that there was a very contractionary monetary shock in the second half of 2008.  I know very few economists (other than Earl Thompson) who look at things this way.  The two most common ways of identifying monetary shocks (interest rates and the monetary base) both gave a highly expansionary reading in late 2008 (and 1932 as well.)

But of course economists did not discard the VAR approach when the initial studies came back with highly questionable findings.  Rather they kept trying new specifications (model mining?) until the tortured data finally yielded the “right” answer.  Did any of these models provide any useful advice to the Fed in the recent crisis?

Today we don’t care much about interwar gold studies because we no longer have a gold standard.  We don’t much care about money demand studies because fewer and fewer economists favor targeting the monetary aggregates.  I am suggesting that if we move away from backward-looking Taylor rules, and I think we will, then no one will much care about VAR studies of monetary shocks.

I have argued that the proper way of thinking about monetary policy is to assume that expansionary shocks occur when the market forecast of the goal variable (such as inflation or NGDP) exceeds the target, and contractionary shocks occur when forecasts of the goal variable fall short of the target.  From this perspective, something like the TIPS spread might become the monetary policy indicator, replacing conventional measures such as interest rates and the monetary aggregates.

I think when other economists hear about my proposal they have a sort of visceral reaction that by equating the policy indicator and goal, I am simply assuming away the problem of how to get from here to there.  The standard way of thinking about monetary policy is where the central bank sets the controls, and then they sit back for 6 months and pray that the economy moves in the desired direction.  In my proposal, there is no “wait and see,” as you immediately know if your setting is optimal.  Or to be more precise, it is optimal if we assume that the market forecast is optimal.

Under that kind of policy what sort of variables should we look at in a VAR study?  It seems to me that the interesting questions will all revolve around the relationship between observable nominal aggregate forecasts and the unobservable social welfare function.  If we have policy futures markets then all the transmission mechanism questions become unimportant, the important questions are about social welfare—are we better off with a stable inflation rate or a stable NGDP growth rate, level targeting or growth rate targeting, one year futures targeting or two years futures targeting, stable prices or 2% inflation?  And I have no idea whether VAR studies can answer those sorts of questions.

The logic behind policy futures markets is so powerful that I believe it is only a matter of time before the older approaches to monetary policy fade away.  Twentieth century monetary studies won’t simply be unread, that’s an easy prediction, but they will almost seem unreadable.  They will seem almost superstitious, like finance models before the EMH was discovered.

Here’s an example.  It is only an accident of history that we don’t already have an NGDP futures market.  There was a CPI futures market as far back as 1985.  If there had been an NGDP futures market last September, I think it would have showed very low expected NGDP growth, probably below 3% and falling fast.  That would have put great pressure on the Fed to move aggressively at their meeting on the 16th.  Instead they did nothing.  They can’t keep making these errors without more and more people noticing.  Not everyone accepts my view of the low TIPS spread last fall, but you can be sure that if it happens again, people are going to be saying “last time it that NGDP growth fell off a cliff. . .”  The human brain is very good at noticing patterns.

In a recent diablog, Robert Wright asked Tyler Cowen what he thinks about God.  Tyler said something to the effect that “the issue isn’t what I think of God, it’s what God thinks of me.”  (I hope that’s not too far off.)  The major central banks still may not think much of the forecasts embedded in financial markets.  But it would be in their interest to start paying attention.  In the long run what matters won’t be what the Fed thinks of futures markets, it will be what the futures markets think of the Fed.

Off topic:  Any film buffs out there?  After his previous fiasco, I almost didn’t see Coppola’s latest film, Tetro.  I’d be interested in the reactions of others.  On the one hand it seems like a must-see film.  But it also seems too derivative; too many scenes reminded me of other films, or other actors.  Did Coppola try to do too much?  Did he lack a powerful overarching vision to tie it together?  How can a film that is so well-crafted in so many ways leave such a blah impression?  Am I so jaded that all I care about is originality?

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