Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: FR1 who wrote (2525)	6/24/2001 9:56:14 PM
From: ahhaha	Read Replies (2) \| Respond to of 24758

This is a formula for disaster: According to this policy rule the federal funds rate is increased or decreased according to what is happening to both real GDP and inflation. In particular, if real GDP rises one percent above potential GDP the federal funds rate should be raised, relative to the current inflation rate, by .5 percent. And if inflation rises by one percent above its target of 2 percent, then the federal funds rate should be raised by .5 percent relative to the inflation rate. When real GDP is equal to potential GDP and inflation is equal to its target of 2 percent, then the federal funds rate should remain at about 4 percent, which would imply a real interest rate of 2 percent on average. Something like it was tried before during the '70s. It was called wage and price controls. Seriously, the above rule is very much like the process FED currently uses. They don't try to stay strictly to action based on parameters exceeding certain values, but they are moved in ever greater degrees to take countercyclical action based on the incremental moves in critical parameters. The problem with this approach is the same with any control mechanism. The response lag time is indeterminate as is the amplitude of policy response. The FED ends up reacting to its own mistaken action. Modern research in macroeconomics provides many reasons why monetary policy should be evaluated and conducted as a policy rule - or contingency plan for policy - rather than as a one-time change in policy. It can be argued that this is exactly what is done now informally at Board meetings. Paradoxically, it can be argued that that is exactly what isn't done. First, the time-inconsistency literature shows that without commitment to a rule policymakers will be tempted to choose a suboptimal inflation policy—one that has a higher average inflation rate and no lower unemployment than a policy with a lower average inflation rate. This statement is so complex that it can refute itself and therefore must be disregarded. Second, one needs to stipulate future as well as current policy actions in order to evaluate the effects of policy. (This is a positive statement of the Lucas critique of policy evaluation.) It is why virtually all policy evaluation research on monetary policy in recent years has focused on policy rules. One needs to stipulate future policy actions in order to evaluate the effects of policy? More doubletalk. What he means is that policy must be uniform over time rather than arbitrary. The current set-up provides for operator intervention,e.g., AG's panic call from the telephone booth in Oct '98 to the NY Fed to open the fckn money flood gates. Below Taylor says this is ok, but that action was mistaken and led the FED to initiate a series of compensating policies ending up in the evolving disaster we have now. Taylor nor anyone else can tell you which of these policies was worst even after the fact, yet he argues for policy rule sufficiently weak to be useless. Third, credibility about monetary policy appears to improve its performance; sticking to a policy rule will increase credibility about future policy action. Third is implied by the only coherent interpretation of Second. Fourth, policy rules that give market participants a way to forecast future policy decisions would reduce uncertainty. This is academic pretense to knowledge and is the essence of why the US must eventually financially collapse. It will collapse right into AG's, his, and Friedman's lap. Delimitation of policy action actually increases uncertainty because the flexibility of policy is compromised. It becomes a game where private banks know what the FED can't do else FED exceeds policy. We've been through all this gamesmanship during the '70s and Taylor should know better than to expect a directed mechanism will induce proper behavior. Indeed, it was the conviction that FED would keep on pumping to prevent rates from rising that was rationally expected to lead to reduced private supply to money markets that accelerated the upward movement of rates. Fifth, policy rules are a way to teach new policymakers, students, and the public in general about the operations of the central bank. Haven't I lectured enough about central banker hypocrisy? He is saying we need to indoctrinate new fools into believing that price fixing in the money market is the way to ensure prosperity. After the student leaves Econ 202 where they are taught that price should not be artificially manipulated else natural equilibrium can't be achieved with the result of resource misallocation, the student is then taught "sock it to 'em" price fixing theory under the guise of policy rules. Finally, policy rules increase accountability, potentially requiring policymakers to account for differences between their actions and policy rules. I can't believe he's saying this. AG would choke to hear it. Policy rules accomplish the exact opposite, since like Reg FD less will be made public and no one will admit anything. Further, if an official has to rationalize policy divergence, officials are less likely to diverge and so private banks can use to their advantage what the public banker must do or else face retribution. Like I said above this was all debated to the nth degree during the '70s. In arguing in favor of policy rules I recognize that certain events may require that the rule be changed or departed from; that is, some discretion is required in operating the rule. QED. This guy is a clown, a hypocrite. Every event is necessarily requiring of departure from rule oriented action. Who is to say otherwise? He defeats the value of what he claims by providing the leeway that makes the policy rule superfluous. This is typical of the pseudo intellectual economics community and is definitely "liberal". But there is still a big difference between a policy approach that places emphasis on rules and one that does not. With a policy rule in mind the analysis of policy—including questions about whether a deviation from the rule is warranted—will tend to focus more on the rule rather than pure discretion. But to be more specific about rules versus discretion one needs to be more specific about the policy rule. What should the rule be? . . . This kind of gibberish should come out of the mouths of actors playing Polonius in Shakespeare's Hamlet. A survey of simulations of econometric models with rational expectations suggests to me that monetary policy should respond in the following way. First, the policy should respond to changes in both real GDP and inflation. Second, the policy should not try to stabilize the exchange rate, an action which frequently interferes with the domestic goals of inflation and output stability. Third, the interest rate rather than the money supply should be the key instrument that is adjusted. Because of the nature of the trade-off between inflation stability and output stability, the weights on these two measures of stability appear to matter relatively little for these general conclusions. These three points are precisely the worst possible thing that any policy oriented action could do. There is only one valid policy rule: do not interfere. Let the people slug it out. The rest of this is bunk and this guy is a rank amateur who has had no experience with the last 40 years of economic history. Everything he's saying has been tried in many forms and repeatedly with nothing but disastrous results. AG is still trying to push a few remnants of this whole anti-market, socialist, control freak agenda. If AG is successful, we are headed for collapse even sooner than my psychic predicted.

To: FR1 who wrote (2525)	6/27/2001 3:34:11 PM
From: ahhaha	Read Replies (2) \| Respond to of 24758

Further thoughts on Taylor. This is taken from a paper he wrote about the fed funds mechanism. The simple model of the supply and demand for Fed balances presented in this paper is capable of explaining the “open mouth operation” phenomenon that changes in the target federal funds rate cause changes in the actual federal funds rate with little or no immediate action by the Trading Desk. However, traditional “open market operations” are the fundamentals that underlie these announcement or expectations effects. By specifying a reaction function of the Trading Desk and showing how the demand for Fed balances depends on expectations of future federal funds rate, the model demonstrates how it is the “threat” of future open market operations that actually moves the rate. One reason why the deviations of the federal funds rate from the target rate at the times of target rate changes has diminished may be that traders are placing increased credibility on the reaction function of the Trading Desk as the FOMC has provided greater clarity about the target itself. He says, "However, traditional 'open market operations' are the fundamentals that underlie these announcement or expectations effects." So he's saying that what counts is what the Fed does, not what they warn they might do. Then he says, "By specifying a reaction function of the Trading Desk and showing how the demand for Fed balances depends on expectations of future federal funds rate, the model demonstrates how it is the “threat” of future open market operations that actually moves the rate." So which is it? "actual operations which underlie expectations effects" or "'threat' of future open market operations that actually moves the rate"? If it's the latter, then the former, the actual transactions are superfluous. And if it's the former, then the "open mouth", or Fed guidance, is superfluous. No one puts any credence in what FED says they might do, because by the time they take an action the conditions have substantially changed so they often do something else. It's the material economic conditions which causes the fed funds futures to change, not some jawboning by Fed governors or committee guidance. If ever there was a machine to determine expectations, it is the fed funds futures. They beat guidance 80% of the time.