New Keynesians are a variant of old monetarism. They are grappling with the same macroeconomic questions. Why does the economy experience extended periods of disequilibria? One New Keynesian answer, for example, is sticky nominal price and real wages. Despite a newly proposed answers, the question itself is not a Keynesian question. This brings me to the problem that Simon Wren-Lewis at Mostly Macro presents.
When it comes to macroeconomic policy, and keeping to the different language idea, the only significant division I see is between the mainstream macro practiced by most economists, including those in most central banks, and anti-Keynesians. By anti-Keynesian I mean those who deny the potential for aggregate demand to influence output and unemployment in the short term.  Why do I use the term anti-Keynesian rather than, say, New Classical? Partly because New Keynesian economics essentially just augments New Classical macroeconomics with sticky prices. But also because as far as I can see what holds anti-Keynesians together isn’t some coherent and realistic view of the world, but instead a dislike of what taking aggregate demand seriously implies.
He mentions another division, that of mainstream and heterodox, but this division appears to be swallowed by this [Mainstream] Keynesian/Anti-Keynesian divide that Simon posits.
Generalizations are troublesome. This one is especially troublesome because it obscures the origins of the arguments that New Keynesians grapple with. It also suggests that Wren-Lewis either ignores or misinterprets the history of economic thought. If New Keynesians have abandoned the Old Keynesian position on fiscal policy (it might be more accurate to say that they let the issue fade into the background), then they are, as Leland Yeager points out in “New Keynesians and Old Monetarists”, actually Old Monetarists. Two cases in intellectual history will suffice to make the point.
In a recent post, I presented an argument between Ralph Hawtrey and John Maynard Keynes where Keynes questioned the efficacy of monetary policy in regard to high unemployment. This was an ongoing debate between Hawtrey and Keynes. It did not only appear at the Macmillan Commission. Hawtrey dedicated “Public Expenditures and Trade Depression” (1933) to confronting this issue. In response to Keynes proposition that monetary policy can be impotent, Hawtrey wrote
But to a great extent their [the central bank’s] purchases of securities will result merely in the investment market paying off advances, so that the desired increase in the banks' assets is offset. If the banks persist in buying securities beyond the point at which the indebtedness of the investment market has been reduced to a minimum, the result will be a disproportionate rise in the prices of gilt-edged securities. There will thus be very great pressure upon the banks to find additional borrowers, and, in view of what I have said above as to the intermittent and partial character of the pessimism which seems to dominate markets, I should contend that there is good reason to expect that the borrowers would be forthcoming
Hawtrey accepted that the markets do not immediately adjust to aggregate demand shocks and argued that, given an institutional arrangement where central banks influence the money stock, an expansion via open-market purchases is sufficient to offset negative aggregate demand shocks due to a credit contraction. He also doubted the efficacy of fiscal policy. He was not a New Keynesian.
And consider also Herbert J. Davenport, who Yeager quotes in the above-mentioned piece.
Goods and services exchange for each other through the intermediary of money, for which an excess demand may sometimes develop. ‘The halfway house become a house of stopping.’ The problem is ‘withdrawal of a large part of the money supply at the existing level of prices; it is a change in the entire demand schedule of goods.’ (290) [internal quote from Davidson]
Yeager continues on the same page,
Supplies of bank account money and bank credit typically shrink at the stage of downturn into depression. A scramble for base money both by banks’ customers and by banks trying to fortify their imperiled reserves enters into Davenport’s story.
In this presentation, a negative aggregate demand shock initiated by a credit contraction occurs endogenously! Davenport accepts that economies do not immediately re-equilibrate after a demand shock. According to Yeager, Davenport wrote this in 1913, so he can hardly be considered a
New Keynesian. No, this was the status-quo of pre-Keynesian arguments concerning the business cycle. Most theories from the time period implicitly
concerned themselves with upward sloping short run aggregate demand supply curves, though they did not point this out explicitly. Note that this was also the case with Hawtrey's earlier work, Good
Trade and Bad, which was written in 1913.
The short-run aggregate supply curve was not purely a discovery by Keynes, so can we stop deluding ourselves and just admit that, except for the New Classicals, “we’re all monetarists now”?
HT David Glasner for his follow-upon the Wren Lewis post and Nick Rowe for his suggestion that "'Monetarist' vs 'anti-Monetarist' would work as well.”
I think that it works better.
But there is also a strong Neo-Wicksellian strand in New Keynesian macro, after Woodford. Monetary policy is interest rate policy, rather than money supply policy.
I think there might be two typos in this line?: "Most theories from the time period implicitly concerned themselves with upward sloping short run aggregate demand curves, though they did point this out explicitly."
Should "demand" be "supply"? Is there a "not" missing? Or did I totally misunderstand?
It should be supply. I fixed itReplyDelete
You are right about the Wicksell. This is again the trouble with generalizations. Which New Keynesian models do you have in mind?
Any New Keynesian model with a Taylor Rule in it. Or anything at all like a Taylor Rule, where the central bank sets a nominal rate of interest. And that is (nearly?) all New Keynesian models nowadays.Delete
Woodford in particular. The title of his book is "Interest and Prices" (unlike Patinkin's "Money Interest and Prices". It's monetary economics, without money.
This Wicksellian-Monetarist division, let's call it, is especially apparent when Keynes debates the old monetarists. They talk past each other as Keynes relies on the interest rate for his analysis of monetary policy and the monetarists talk about demand for money and increases in the money stock.ReplyDelete
In modern analysis, we might say the IS-LM, which is more Wicksellian, and the monetarist AD-AS analysis, with a unit elastic AD-curve, represent this split. Do you know if anyone has proposed this?
Yep. The ISLM is a halfway house between monetarist and Wicksellian.Delete
If the central bank sets an interest rate, the LM curve is horizontal, which is how some textbooks do it nowadays, and they call the LM curve the MP (monetary policy) curve. Then it's pure Wicksellian. M doesn't matter.
"Do you know if anyone has proposed this?"
No. Not sure. Maybe someone has. There was a small argument between me and Simon about a year back, with Simon wanting IS/MP and me wanting AS/AD. Worth doing a post on anyway.
I am an anti-keynesian in that I think making money and lowering interest rates is not a long term win. I do not deny that in the short term it can make GNP go up (in part because government spending is part of GNP). But I think it is a short term gain and long term loss. In particular if you get hyperinflation the loss wipes out all previous gains.ReplyDelete
I am not sure what you are suggesting. Central banks will have a hard time creating hyperinflation in the modern world. This is not to say that they cannot, but that there is little benefit for them to do so. Seigniorage is no longer a viable source for government revenue. The exeception would be if a government defaults on its creditors, but that would be a one time shock to the economy, not a hyperinflation.
You are aware of the very modern Argentina and Venezuela and what their central banks are doing at this very moment?Delete
I don't believe any central bank ever decided to make hyperinflation or thought it was in their benefit to do so. Hyperinflation is where the market is rejecting a currency, not something planned by the central bank.
Pardon my lack of clarity. By modern I mean developed. The turmoil in Venezuela is a sign that it is not developed. Argentina devalued, but it is in the face of exacerbated dollar demand as other monetary regimes tighten. Lars Christensen has much to say on these issues, and he is usually right.Delete
What is your definition of hyperinflation? I've heard some say 20 percent price increases per month. Others more. Others less.
The first thing in my FAQ is about the definition. I like 100% in 3 years, or sort of 26% per year.Delete
So if Japan gets hyperinflation will you then agree that the US can get hyperinflation?
26% per year is not a very high threshold. It is not a comfortable economic situation, but markets are good at mitigating damage from that sort of inflation.Delete
I'm still not sure what we are debating. I have not said that we live under an ideal system or that I support hyperinflation. That latter would be an odd statement for anyone to make.
Lets debate the explanation for hyperinflation. I have a collection of explanations using a variety of theories. Do you agree with any of these or do you have another explanation?Delete
Vincent, I think James is spot-on regarding Lars Christensen and undeveloped economies like Argentina. He has a lot of material on that subject, and you might have better luck engaging him on that specific issue.Delete
But I would love to hear James' response to your ideas about the gold standard between WWI and WWII, or even pre-WWI. I suspect you two would have very different ideas on that.
James, let me ask you a direct question on Vincent's behalf: will Japan experience hyper-inflation sometime over the next two years (defined any way you like)? If not, why not? Any guess about how high annual inflation might get in Japan over the next two years?Delete
I'm not very familiar with the situation. From a quick search I have found:Delete
Japan's monetary base is about 2 X 10^14 yen. Expansion is expected to be about 7 X 10^13 per year. That means the base will be expanding at about 35% per year. I'm not familiar with banking practices in Japan, so I cannot assume that all of the money will end up in circulation. Remember that, in the U.S., the Fed more than doubled the base, but much of that money is sitting in its own vaults.
Central banks have to consider the policies of one another. In looking at the dollar yen chart, it looks like the yen was strengthening after the 2008 financial crisis, after which time the Fed has been expanding. When prices fall continually, that discourages growth. The expansion in Japan seems to have off set this valuation. Notice that the exchange rate stabilized after they expanded the base.
Again, Sumner and Christensen probably know more.
As long as Japan's exchange rate with the dollar remains stable it should not experience price fluctuations that are much different than that experienced in the U.S..Delete
James, thanks. BTW, you have an interesting blog. I haven't read your papers yet, but they look interesting by their abstracts (the ones you posted links to having to do with the gold standard). Suitable for a layman such as myself?Delete
I don't think it is too far outside your reach if it is. Plenty of narrative and the models are relatively simple.Delete
It seems to me that people who are not anti-keynesians usually don't think there is any risk of hyperinflation. Even in countries that later got hyperinflation. I also think they usually don't really understand hyperinflation and that is why they discount the risk of hyperinflation. So that is why I would like to debate the explanation for hyperinflation.ReplyDelete
Vincent, what do you think "Keynesian" means and what do you think "anti-Keynesian" means? Have you read this for example?:Delete
What is your response?
i.e. do you really mean "anti-Monetarist?"Delete