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Don Boudreaux at Cato Unbound.
Posted by Peter Boettke on December 20, 2011 at 10:56 PM | Permalink
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Regime uncertainty could lower investment demand. This implies a lower natural interest rate. A central bank using an interest rate target would have to lower its policy rate. Failure to do so would leave market rates above the natural rate. This works by the central bank creating monetary disequilibrium--an excess demand for money--sufficient to create a liquidity effect large enough to keep market rates from falling.
With any monetary regime that adjusts the quantity of money to match the demand to hold money, market determined interest rates will fall enough to match the decrease in the natural interest rate. There are real allocation effects of a decrease in investment demand--a shift in the allocation of resources away from capital goods and towards consumer goods. Nominal expenditure on output should remain stable--falling on capital goods and expanding on consumer goods. As time passes, the reduced production of capital goods will push labor productivity and output to a lower growth path.
Now, it is possible that regime uncertainty would also reduce saving supply. If saving supply and investment demand decreases by the same amount, then there is no effect on the natural interest rate or nominal expenditure on output. An interest rate targeting central bank might not even need to change the policy rate. The change in the allocation of resources are as above.
If the supply of saving falls more than the demand for investment, then the natural interest rate rises. At first pass, a interest rate targeting central bank would need to raise its policy rate. Nominal expenditure on output would rise. (Consumption spending rises more than spending on capital goods rise.) The change in the allocation of resources are as above.
bill woolsey |
December 21, 2011 at 08:46 AM
I think there is a bias against the regime uncertainty hypothosis in no small part because regime uncertainty is hard to measure and quantify.
December 21, 2011 at 09:01 AM
I think there is much to the regime uncertainty argument, despite the difficulties in measuring it, and also applaud Higgs's innovative use of the steepness of the corporate bond yield curve as a way of getting at it, even as I am less impressed by the Bloom et al measure cited by Boudreaux. A few caveats.
One is that while Bloom et al claim that mere economic uncertainty does not necessarily induce regime uncertainty, it certainly looks as if in the recent events economic decline leads to regime uncertainty, unsurprisingly as unhappy publics start demanding all sorts of policy changes of various sorts. This may not have been the explanation so clearly for 34-35, but the latest measures seem to suggest that regime uncertainty surged with the financial collapse in Sept. 2008, and has remained high since.
Also, Bloom et al get a bit contradictory, appearing to throw in calls for policy changes to supposedly reduce regime uncertainty. Among those is "entitlement reform." But Obamacare was an effort at such "reform," now widely denounced as a source of regime uncertainty, even as a large part of that involves the efforts by its opponents to undo it. Would not regime uncertainty be lessened if all those critics and opponents just laid off and accepted it?
Also, all the talk about "reforming" medicare and social security, does this not increase regime uncertainty? Should not all such talk be silenced so that we can be more certain about the policy/regime environment? I do not see Boudreaux or others loudly yelling about regime uncertainty as a terrible thing making such arguments.
Barkley Rosser |
December 21, 2011 at 12:36 PM
George Reisman’s treatment of money and velocity has convinced me that velocity isn’t constant, as mainstream econ insists, but lags behind money growth and acts as a damper on it in much the same way a coil dampens AC current. The lag in the change in velocity with respect to money can account from much of the lag in the effect on prices of a change in monetary policy. So if you’re looking for a measure of regime uncertainty, velocity would be a good candidate, too.
December 22, 2011 at 10:30 AM
I just found the most Libertarian/Pro-Ron Paul - and outright CRAZY - DAILY NEWSPAPER in the country. It's called GARDEN STATE JOURNAL (www.GardenStateJournal.com) and it's right outside NYC. See its lead article today, "THIRD PARTY CANDIDATES & THE ANTICHRIST" - and then go to the page of Mario Cash, the Editorial Page Editor, and you'll see a few dozen articles that will blow you away--this guy rips Obama, the Dems, and a lot of the Republiacn establishment. The paper has a mix of columnists that include Stossel, Napolitano, Sullum, and Chapman, but also some regular GOPs (some good, some bad) like O'Reilly, Coulter, Malkin, Buchanan, and some liberals like Estrich, Cockburn and Hightower...But it's focus seems clear: a true Libertarian viewpoint and that's so rare for a daily newspaper.
Infinite Justice |
December 22, 2011 at 11:09 AM
I wonder if regime uncertainty isn't best regarded as just another example of Mises' observation that government "solutions" to problems in the market economy generally cause more problems, which themselves are blamed on the market economy and become the justification for more intervention, which causes more problems, etc. What's necessary is to undo the web of interventionism. Reforming Medicare and Social Security on the way to their eventual elimination is an important step in the right direction.
Allan Walstad |
December 22, 2011 at 12:09 PM
Either Mediscam and antiSocial inSecurity get reformed, or Washington eventually looks like Athens.
Bill Stepp |
December 22, 2011 at 04:37 PM
Surely regime uncertainty raises the required after-tax rate of return. Investors (savers) require compensation for the geater uncertainty. The businessmen I know have simply closed their wallets. The negative shock is to the supply of savings.
Jerry O'Driscoll |
December 22, 2011 at 09:53 PM
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