Download Amar Bhide - The Center on Capitalism and Society

Tufts University
Ants and Astronauts
A discussion of three papers presented at
Conference on the Occasion of the 40th Anniversary of
Microeconomic Foundations of Employment and Inflation Theory
Amar Bhidé
www.bhide.net
November 20, 2010
Thomas Schmidheiny Professor
The Fletcher School of Law and Diplomacy,
and member
Center on Capitalism and Society
09061-00-03Dec09-DC-rrdc2-CHI.ppt
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Credit Cycle: age old problem
Central policy question: macro-prudential or
structural (“micro)?
Paul Volcker on macro prudential regulation:
“Somehow those words grate on my ears”
Model generates credit cycles
Evidence for some implication (“model
works”)
 Model extended to show macro
prudential beats micro
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
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A “micro” partisan’s skepticism
Evidence doesn’t validate entire model (or its
extension)
Alternative (A Call for Judgment) explanation
Assumptions
“Each period there is a continuum of agents, all of whom work as
financial intermediaries for a single period. In other words, bankers
have, by assumption, short horizons. They aim to maximise their
reputation in the market at the end of this period. At the beginning of
each period, each bank originates a risky asset, the return on which
depends on (i) the banker’s ability, which can be high or low, and (ii) the
macro state, which can be good or bad.”
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
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Top-Down centralized approach
Abuses and Mistakes
Comparison to Monetary policy
The state of macro-prudential policy today has many
similarities with the state of monetary policy just after the
second world war. Data is incomplete, theory patchy,
policy experience negligible. Monetary policy then was
conducted by trial and error. The same will be true of
macro-prudential policy now.
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
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Discretion vs Rules (Taylor)
A Tale of two Swings
• First towards rules improving macroeconomic performance
• Then, towards discretion, worsening performance.
• Clear implication “go back to more rules-based policies”
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
4
What’s a rule?
Taylor rule (1993)
•short term interest rate should be set by the central bank to equal one-and-ahalf times the inflation rate plus one-half times the GDP gap plus one.
Prudent man rule (1840)
•directs trustees "to observe how men of prudence, discretion and intelligence
manage their own affairs, n regard to the permanent disposition of their funds,
considering the probable income, as well as the probable safety of the capital to
be invested.”
Prudent central banker rule ?
•“observe how other central bankers of prudence, discretion and intelligence set
interest rates, considering the probable inflation rate, as well as the probable
unemployment rate”
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
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More questions
Can the public expect policy makers to remain steadfast?
Do we want immutable rules in a dynamic, technologically
progressive economy
•Mineral rights, air rights
•Real bills doctrine
•Defining and measuring inflation
Emergencies?
When should we prefer discretion?
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
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Woodford: Principled policy making
Hierarchy of possible commitments
• Formulae
• Strategies
• Principles
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
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Questions about principles
Right level of abstraction
• “Pursuit of happiness”
How formulate new principles
• FCC
Errors and obsolescence
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
8
Questions about principles
Right level of abstraction
• “Pursuit of happiness
How formulate new principles
• FCC
Errors and obsolescence
Suggestion for ‘higher level’: commitment to process
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
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Questions about principles
Right level of abstraction
• “Pursuit of happiness
How formulate new principles
• FCC
Errors and obsolescence
Suggestion for ‘higher level’: commitment to process
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
10
Model for policy formulation
Idealized Fridemanite process
• First positive, then normative
• Abstract model, then test
Problems
• Modeling complex, non-stationary systems
• Cartwright’s carburetor
Testing
• interpretation of historical data “generally requires subtle
analysis and involved chains of reasoning, which seldom
carry real conviction.”
• . “The economist will be more tolerant than the sociologist”
in judging the evidence favoring a hypothesis that assumes
the “single-minded pursuit of pecuniary self-interest.”
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
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Pragmatist Process (ants, engineers, judges..)
Put concrete problem first
Inclusive
Integrative
Iterative
Role for modeling and testing
© Amar Bhidé based on A Call for Judgment Oxford University Press (2010)
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