Is economics a science? (liquidity trap edition)

by on March 18, 2011 at 1:31 pm in Economics | Permalink

Not yet, apparently:

1. If I Google “predictions liquidity trap model,” the first author who comes up is me.

2. The second item which comes up is this article, which suggests a test: “A random coefficient estimation procedure is used to estimate the time profile of the interest rate elasticity of Japanese money demand. Contrary to the prediction of the liquidity trap hypothesis, the absolute value of the elasticity is found to decline at lower levels of interest rates.”

Is anyone right now talking about this test, much less performing it?  I don’t see it.  Is anyone mentioning that the test judges against the model, at least for Japan?

3. Toss in Google Scholar and the first item is Bennett McCallum arguing, on largely empirical grounds, that a liquidity trap is unlikely.

4. Liquidity trap proponents cite the confirming evidence when they see it, but do they discuss the disconfirming evidence?  Are negative supply shocks in fact expansionary?  Do asset price markets reflect this scenario?  Were big wage hikes expansionary in the Great Depression?  Scott Sumner has crushed that view, with an eyeball scan of the numbers, along with some simple narrative.

5. If I Google “predictions liquidity trap negative supply shock,” the first author who comes up is…me.

I conclude that economics is not yet a science.  Economics is most like a science when people do not care about the outcome of the argument.

Daniel Kuehn March 18, 2011 at 1:38 pm

I’m not sure this is the best test.

The liquidity trap is something like the Higgs boson at this point. Just because it’s mostly on the chalk board and we’re lacking in direct evidence doesn’t mean the whole discipline is unscientific. This is what scientific frontiers look like.

Justin March 18, 2011 at 1:39 pm

I conclude that economics is not yet a science. Economics is most like a science when people do not care about the outcome of the argument.

I think you are setting the bar so high that no science can clear it.

mulp March 18, 2011 at 4:59 pm

Are you arguing that in physics the scientists who showed Newton was wrong were invested in proving Newton wrong, and would have done anything, including forging results, to prove Newton was wrong?

When I read anything that argues for tax cuts or argues tax policy in general, almost none is honest in the way they analyze the existing data because they are determined to prove the tax cuts creates jobs theory to be true, no matter what the data suggests in almost every case.

Once Einstein published his first paper on relativity, we did not see a prolonged effort to argue that there was an aether that carried light and that the aether could explain the apparent constancy of the speed of light. Instead, the focus quickly shifted to breaking from the constraints (that were already falling) of classical mechanics, with a lot of unsettling data pulled out and explained using extensions of relativity and quantum mechanics.

Over the past decade we have seen the tax cuts creates jobs theory repeatedly tested and found false. Yet the result has been what seems to me to be a flailing around to find a reason to explain the lack of job creation that failed to follow tax cut after tax cut after tax cut after tax cut.

Tyler’s even written a book that tries to argue that the laws of the economics universe have fundamentally changed resulting in TGS.

I remember the first time I read the Heritage paper that argued that the job creation in the 90s was not the result of Clinton’s tax hikes, but instead the fruit of Reagan’s 1981 tax cuts, while ignoring the many tax hikes Reagan and HW Bush signed before Clinton hiked taxes in 1993. Government spending growth was reduced in the 90s as Republicans sought to cut taxes, tax cuts blocked by both PAYGO and Clinton’s veto. Reagan’s supply side starve the beast economics sure looks like Keynesian deficit spending stimulus to create jobs in depressed regions (look where the military spending ended up in the 80s).

The liquidity trap argument is an attempt to explain why citizens and corporations funding government by buying debt does create as many jobs and stable growth as citizens and corporations simply paying the same amount in added taxes to fund government. And to explain why private borrowing to fund consumption isn’t creating sustainable job creation as well as paying them more so they can consume more without going deeper in debt.

Keynes theory explained the past policies of the Congress, Hoover, and FDR administrations, none of which pursued a constant policy. Hoover became a Keynesian, but too late to reap the results, and his view that labor needed to be paid as little as possible at a minimum made him personally hated by those workers beaten up for seeking safer working condition which was seen as high cost labor. Neither Hoover nor FDR liked deficits, and both agreed that tax hikes of every sort were required.

What amazes me is the way the tax hikes of the 30s, signed by both Hoover and FDR, are claimed to have held back job creation, but the rate of job creation after the tax hikes is certainly the highest since 1930, rivaled only by the job creation that followed the demobilization and job losses after WWI. If we had had the job creation of the failed FDR first eight years when Bush was president, the number of employed would be at least 30 million higher and as much as 40 million. That isn’t possible because we don’t have the structural change from farm to non-farm of the 1900-1930 exploding into a crisis in the early 30s. FDR for good reason ended the previous “jobs” policy of handing out land to create small farm jobs after the policy created the “natural” disaster of the Dust Bowl plus the oversupply of farm goods with a collapsed export market and a lack of feed or grazing land to sustain growing cattle longer – the cattle had to be slaughters to prevent all the cattle from starving, so government paid farmers to kill their stock so other herds could survive.

For the 30s and the 80s, it is monetary policy that is blamed and credited – tight money for the first two years killed jobs, not the tax cuts, and easy money after, not the tax hikes, are the reason for the job creation. But no one points to the 00s and argues that it is the tax hikes of the Bush administration that blocked job creation, nor that Greenspan’s tight money policy was responsible for the stagnant job market of the 00s. Nope, that job market stagnation is not caused by monetary or tax policy, but is instead caused by some mystical unseen force, like the end of ideas, or too many ideas that increase productivity and efficiency too much. Or the liquidity trap debate on the failure of huge deficits in both public and private creating jobs (are businesses really generating really high profits, or are they converting productive capital to cash, reducing their stock of productive capital, for example getting rid of experience machinists who will never again work as machinists, and then being faced with only unskilled workers with either the cost of training, or the cost of outsourcing to Asia and Germany where they have maintained and expanded their capital stock of skilled machinists.)

Justin March 18, 2011 at 7:27 pm

Hi Mulp,

Sure, think about Max Planck’s famous quote and the prestige and philosophical implications of string theory and the Big Bang.

Dale March 19, 2011 at 11:08 am

For me, I think that is setting the bar too low. Why do you worship subjects and “scientists” who don’t care about the outcome of their work? I think you are confusing “caring” with the need to be thorough and unbiased in methodology and reporting. These are not the same things.

Daniel Kuehn March 18, 2011 at 1:40 pm

Keynes wasn’t sure it could even happen. I’m too green to know what to think, but that should tell people something. The man was not shy about speculating.

anonygoat March 18, 2011 at 1:42 pm

I contend that not only is economics not yet a science, but that scientific knowledge of the kind economics purports to provide is fundamentally impossible.

Contemplationist March 18, 2011 at 1:42 pm

Daniel Kuehn

You are ignoring the negative evidence. Does the Higgs Boson have negative evidence against its existence?
The liquidity trap is not simply a hypothesis waiting for more evidence. It is a hypothesis that is 1) a priori unlikely as central banks can always buy more types of assets and print more money. 2) Lacks real world evidence 3) Has negative evidence against it as TC has shown.

In short, the liquidity trap is voodoo economics. Its time for Keynesians to move on from this shamanistic concept

Jason March 18, 2011 at 2:32 pm

Particular models of the Higgs have evidence against them, as I would imagine any particular economic model might have evidence against it.

Brian March 18, 2011 at 1:45 pm

A lack of interest in a pet topic doesn’t imply lack of rigor in an entire discipline.

JS Allen March 18, 2011 at 1:46 pm

“I think you are setting the bar so high that no science can clear it.”

He’s not setting a bar that a science needs to clear; he’s describing the peculiar state of economics. For example, physics does a fine job of being scientific, even when the stakes in terms of life, people’s careers, etc. are high.

John Newton March 18, 2011 at 1:46 pm

You may be generating your own work because of your own preferences, stored in your Google profile and cookies. When I do the same search on Yahoo, I don’t see a Cowen reference until #30 or so.

Brian March 18, 2011 at 1:49 pm

Interesting that Google would include ego stimulation in its search algorithm!

Matt March 18, 2011 at 2:50 pm

More likely is that they’re using his (obvious) interest in his blog to predict his (obvious) interest in his blog. The point of search is to return what you are looking for.

Gene Callahan March 18, 2011 at 2:33 pm

“You may be generating your own work because of your own preferences, stored in your Google profile and cookies. When I do the same search on Yahoo, I don’t see a Cowen reference until #30…”

Why would you check whether Cowen’s Google search is personalized with… Yahoo?! Is Google not available where you live?

John March 18, 2011 at 5:36 pm

I tried ‘em both. Yahoo is my default search engine, so I tried it first and mentioned it. Neither Google nor Yahoo give me the same results as Tyler’s. I’ve found differences of this sort with other results I’ve compared: our search results are tailored according to our past search experience and response.

Gimlet March 18, 2011 at 6:10 pm

I got Tyler as the first and second result for the first search, and also for the second search. But I’m not an economist and I read this blog a lot…

KevinH March 18, 2011 at 1:48 pm

could you unpack that last sentence for me a bit?

Andrew March 18, 2011 at 1:49 pm

“when people do not care about the outcome of the argument.”

Unfortunately, most (and by most I all except I’m too humble to say that) cannot (and by cannot I mean can not) live up to that standard. That means science isn’t even science.

What people idolize about what they think is science (e.g. peer review) is mostly making a virtue out of necessity. Peer review doesn’t make a paper true, it takes a small piece of the edge off of how utterly fraudulent the paper might be without it. This is one reason I think peer review should not waste time on things like checking methodology, quality, splashiness (except maybe Science and Nature et. al.) and focus entirely on reproducibility .

Andrew March 18, 2011 at 1:51 pm

In other words, if I were to say “economics is not (a) science” there is a 50% chance that I mean it as a compliment.

Loren F. File March 18, 2011 at 2:18 pm

Do macroeconomic results follow any less clearly from their microeconomic roots than classical physical realities from their quantum mechanical fundament?

lff

Corporate Serf March 18, 2011 at 2:27 pm

Why do you expect economics to be a science?

In my field in the few firms I have been at(writing trading strategies), people who come from math/physics/engineering backgrounds tend not to take their models too seriously, whereas economics / econometrics / financial engineering majors seem more invested in them. They work with similar accuracy in either case.

Seems to me, as a complete outside, that the dependence on model assumptions is insufficiently taught. I am talking, not about research economists, but of people going through the PhD and masters programs.

That said, I do love your blog.

mulp March 18, 2011 at 5:30 pm

Are you saying that both those from the natural sciences and from economics produce “economics” models that don’t work half the time, or that the scientist’s models for things depending on physics from classical to quantum to relativity are wrong half the time like the economics models are wrong half the time?

Do the scientists really not care when their physics models fail in the real world, while the economists question their fundamental theories when their models fail?

Certainly NASA has had decision making driven by what they wanted to be true on multiple occasions, but after their rather spectacular failures, NASA really seriously reviewed everything, but never finding their theory was wrong, but instead the rejection of theory that was at fault. It wasn’t an attitude of “we’ve been lucky so far” attitude but “our theory is correct because we haven’t failed” which ignored the record of failures.

We are debating all sorts of things today because the failed policies of the past decade are still failed policies, and no one is willing to look at such questionable “theories” like “tax cuts create jobs” because no one wants to prove “tax hikes creates jobs”. I say Reagan’s multiple tax hikes created jobs. HW Bush plus Clinton’s tax hikes created jobs. Hoover’s plus FDR’s tax hikes created jobs. The bracket creep tax hikes of the 60s and 70s created jobs. The excess oil profits tax hikes created jobs. Reagan’s 1981 tax cuts killed jobs. GW Bush’s many tax cuts killed jobs with only massive Keynesian deficit and public and private debt funded stimulus keeping the job losses to a minimum.

But no one wants to prove the virtue of tax hikes, so instead we have explanations like TGS.

Corporate Serf March 18, 2011 at 2:32 pm

Forgot to add in my other comment.

I see economics more as a branch of applied math, but with easier math bits. Would you, as a teacher, say that undergraduates who are good at math, but lazy enough not to want to go through a math / physics or engineering major tend to pick economics? This has been my impression from interviewing candidates.

Neal March 18, 2011 at 2:54 pm

There’s no math in undergraduate economics. At least where I went to school, half the people in econ classes were business majors who wet themselves at the sight of an algebraic equation.

Corporate Serf March 18, 2011 at 2:59 pm

That would explain quite a bit.

James Oswald March 18, 2011 at 2:37 pm

By your evidence, I come to exactly the opposite conclusion. When I see people seriously wrestling with empirical data to try to explain phenomena, that to me is exactly what science is. Everyone has their pet theories, even in physics, chemistry, etc. Even the canonical experiments in the history of science, like the gold foil experiment, or Darwin’s voyage, were not conclusive. Science is about examining the evidence carefully and drawing conclusions and having others test those conclusions over and over. Knowledge emerges though the process of science. It is the result of human action, but not of human design.

Corporate Serf March 18, 2011 at 2:58 pm

James,

So if people start “seriously wrestling with empirical data ” in say, paranormal studies, that will constitute science to you?

Sorry for the snarky tone, its only half-intended.

I think it is important to recognize when your models are woefully short of capturing the full range of phenomena, and providing explanations, and so can be used to do inference. Economic models are nowhere close to that. Chemistry is one science that is far less mathematical, but still more scientific, because chemical pathways let you do inference, and not just regression.

The mental picture I have of economic models is this: we had this guy come in to do a valuation of our house when we were refi-ing a few years ago. He had a check list for number of bedrooms and so on, and one for recent sales. He looked up the relevant info of those sales and applied adjustments for a few factors. Maybe, that’s a simplification, but it is not too far off.

It could just boil down to a cultural difference.

James Oswald March 18, 2011 at 4:23 pm

If they did wrestle with the data, they’d realize that paranormal studies were crap. It all hinges on your definition of science. Is predicting the future science? Does science require exact mathematics? Does science involve observation of the real world? Can a scientific belief be overturned by empirical observation? My answers would be no, no, yes and yes, thus economics is a science. People who want to say economics is not a science would probably answer yes to all four. If you say yes to all four, you are basically left with just physics and chemistry as real science. Even then, the things that modern physicists talk about are so touchy feely that they can’t even come up with experiments to test them. At least most economists have in mind some empirical observation that, if they saw it, would change their minds on an issue.

mulp March 18, 2011 at 5:39 pm

Actually, the paranormal does get regular empirical study – James Randi has worked hard to teach scientists the art of illusion to give them much greater insight into what constitutes empirical data, because not only charlatans, but also nature, can work to deceive everyone, especially scientists who are often too trusting of what they observe – that steel ball rolling down the ramp isn’t out to fool the scientist into believing in gravity.

Jason March 18, 2011 at 3:09 pm

Of course economics is not scientific. There are arguments about higher order effects even though the first order approximations are not predictive to even 10%!

One particular case that comes to mind was where this was cited as a challenge to Keynesians:

http://gregmankiw.blogspot.com/2010/08/challenge-to-extreme-keynesians.html

The summer employment effect is less than 0.1% of the economy, but economists can apparently argue about the Lamb shift before they’ve derived the Schrodinger equation.

I’m not sure relying on liquidity trap models is any more “relying on an unscientific model” than relying on models that say we shouldn’t increase government spending (or even models that say we don’t know!). I am left trying to make a decision to believe either the person who says that government deficit spending won’t increase employment or the person who says government deficit spending will increase employment. The former is counterintuitive and requires effects like crowding out. The latter works like my checkbook. If interest rates are low, I should be more inclined to borrow money.

Andrew March 18, 2011 at 3:18 pm

“the person who says that government deficit spending won’t increase employment or the person who says government deficit spending will increase employment.”

Actually, I don’t think people really say that in theory it won’t increase marginal employment at a certain margin. The question is whether it is worth the cost.

mulp March 18, 2011 at 5:52 pm

Well, we have certainly heard the theory that by cutting taxes and running a larger deficit, workers will consume more and that will create jobs, which then leads to the argument we can start a war and not hike taxes because not hiking taxes is like hiking taxes to pay for the war and then cutting taxes to put more money in the pockets of workers who will spend it and create jobs. Which then seems to argue that there is no cost to war, so we don’t need to run it well, demand results quickly, or allow the justification to be questioned.

Conservative Republicans are certainly the ones who ultimately argue for long term deficit spending to create jobs, because reducing the deficit by hiking taxes to pay for their wars is argued to be certain to kill jobs, I think Heritage has recently argued that military spending can’t be cut because it needs to be 4% of GDP with all wars added on top of that, but with no tax hikes to pay for the wars. And cutting military spending that has no purpose according to the military has been objected to by conservatives as job killing, so clearly deficit spending on useless weapons is considered job creating by conservative Republicans.

Andrew March 18, 2011 at 3:30 pm

I wonder if people take Keynes’ exaggeration about the bottles of buried money and extrapolate it to things not like digging up buried money.

Chris D March 18, 2011 at 4:06 pm

“Economics is most like a science when people do not care about the outcome of the argument.”

Heh. Good luck clearing that hurdle when the fundamental well-being of people, businesses, and nations depends on the outcome.

Brad Warbiany March 18, 2011 at 4:29 pm

I think a proper analogy for economics as a science is something akin to health research as a science.

In most of the “hard” sciences, i.e. physics/chemistry/molecular biology/etc, you design experiments to reduce or eliminate exogenous factors from the equation. You set up tests with a tightly defined “test group” and “control group”. And you select experiments that are repeatable and falsifiable.

With both economics and health research, you have significant trouble doing this — both due to the complexity of the systems involved and the inability to control outside factors. The phenomena are so complex that cause and effect can be very, very difficult to prove. You’re left with a lot of correlation, a lot of regression, and never an ability to “re-run” a test because by the time you try it again, all of those exogenous factors have changed.

So what do you do? You look at as big of a data set as you can. In country X with policy P, the situation is Y. In country Z, they have the same policy P as country X, and the situation is Y. In county Q with policy P, the situation is Y/2. Does this mean that policy P causes situation Y? Show your work in a peer-reviewed journal!

This doesn’t mean that economics isn’t a science, it only means that macroeconomic theories are MUCH harder to prove. Any data set you come up with will have multiple unrelated and interrelated strains of cause and effect going on, and thus you can almost always argue both sides of any conclusion. Trying to come up with a macroeconomic “theory of everything” in economics is an even more foolish undertaking than Einstein’s attempt to do so in physics.

Corporate Serf March 18, 2011 at 4:55 pm

So we should trust economic models less, right?

Brad Warbiany March 18, 2011 at 6:11 pm

Well, “less” or “more” is a relative term, so I can’t comment on whether “we” should trust them more or less.

The point is not that we shouldn’t trust economic models. It’s that we should understand that they are limited in scope, they are prone to decision-making [thereby error introduction] both on the inputs chosen *and* on the algorithm, and thus that you need to fully understand what the model says to be sure it’s applicable to your situation. Based upon your knowledge of the model and of the system you’re applying it to, you can give it a certain confidence level of its predictive ability.

Where we find problems is when people who don’t know how to use the model are trying to apply it where it doesn’t belong — whether that’s politicians, regulators, or even the economists themselves who, through ego, trust their model WAY too much.

Gene Callahan March 20, 2011 at 9:33 pm

“Trying to come up with a macroeconomic “theory of everything” in economics is an even more foolish undertaking than Einstein’s attempt to do so in physics.”

Why was Einstein’s attempt foolish? Scientists are still working on the project and making progress.

Walt March 18, 2011 at 4:42 pm

Nothing is a “science.” One investigates using a scientific method.

Jim March 18, 2011 at 5:31 pm

Didn’t you recently spend a lot of time commenting on “left-wing” vs. “right-wing” economists? That should have been your first clue that science was not part of the discussion.

Or maybe you have more posts coming about left-wing structural engineers vs. right-wing structural engineers.

DK March 18, 2011 at 5:33 pm

Not yet, apparently

“Apparently”?

Sam Penrose March 18, 2011 at 6:43 pm

“Is economics science?”: boring. “Should economics be based on physics?”: interesting to me at least. http://earlywarn.blogspot.com/2011/02/long-term-trends-in-economic-output.html?showComment=1296846325209#c7652024220952590376

Gene Callahan March 20, 2011 at 9:34 pm

““Is economics science?”: boring.’

No: you are bored. The question is not boring.

Bill March 18, 2011 at 7:33 pm

Since I know the secrets of the Google algorthim, if you Google “Who is the smartest man in the world?”, to paraphrase Tyler, the first name you will find is mine.

I change names frequently.

Dean Sayers March 18, 2011 at 9:52 pm

The correct answer is that there is no definitive standard for a science – this is actually an aspect of my latest blog, which discusses Popper, Mises and their similar philosophies on science – and their criticism of Marx.

TGGP March 20, 2011 at 7:13 pm

Could you elaborate on which of Einstein’s theories are non-falsifiable?

Steko March 19, 2011 at 1:36 am

I just googled “predictions comet impact model” and first author is “An independent Messianic Jewish ministry, offering scripture studies, apologetics, poetry, books & more!” Sorry astronomers, guess it’s back to the liberal arts quad!

Loren F. File March 19, 2011 at 8:16 am

“Economics is most like a science when people do not care about the outcome of the argument.”

And their caring can change the science itself. The feedback of people “caring” about economic outcomes changes future outcomes. Individuals may take advantage of their ability to predict economic outcomes but as more and more people become aware and take advantage of the ability the outcomes change and the old rules no longer apply. Can this be science?

lff

lff

Jeff March 19, 2011 at 8:43 am

Economics is a science, but many economists are not scientists. They ignore what economic analysis tells them it conflicts with their ideological position. Or they pretend that the exceptional case is typical, so they can ignore the overwhelming arguments for things like free trade, no legal price floors or ceilings, open borders, low and non-distortionary taxes, and on and on.

Yancey Ward March 19, 2011 at 10:36 am

Bingo!

To reword Cowen’s last sentence: Economists seem less like scientists when they care about the answer. This, of course, applies to every researcher in any field of inquiry.

Paul Voyles March 19, 2011 at 11:08 am

Some of this must be because economists are subject to pressure and influence from rich, powerful interests outside economics in ways that quantum physicists rarely are. Although in some cases individual economists might be influenced to change their views, I would guess that the effects are more systemic: economists espousing views like taxes cuts (or unions) creating growth are given positions, fellowships, research funding, exposure, etc. not because their views are correct or supported by evidence, but because they are useful. These markers of professional success for their proponents keep the ideas alive even if they’re wrong.

Quantum physicists fight tooth and nail and with intense self-interest, but without the external influence, they are free to fight mostly over whether their ideas are supported by the evidence. The community is relatively free to judge winners and losers, and professional rewards (mostly and over time) accrue to scientists who are right. Discredited ideas and their proponents are discarded over time, some quickly, some slowly, and correct ideas pass into consensus.

Gene Callahan March 20, 2011 at 9:39 pm

No, in fact, no science can answer policy questions, and to think economic science offers an “overwhelming argument” for, say, free trade is to confuse theory and practice. (Lionel Robbins was very good on this point, btw.)

Stewart March 19, 2011 at 10:38 am

Like many of the “sciences” econ. is pretty good at gathering data and not very good in talking about them (e.g., theorizing).

Max March 19, 2011 at 2:45 pm

Best line Mr. Cowen: “Economics is most like a science when people do not care about the outcome of the argument.”

And it is also applicable to a host of other research subjects and sciences ranging from biology to chemistry, engineering and physics. Of course, it is apparant in political sciences and social sciences (especially gender research). I came to that conclusion mostly by wading into climate science, because it is highly political in any aspect (otherwise it would have been a niche science).
I think the more political or the more incentives there are that you need your opinion to be right to get acclaim/funds/political power, the more we will see this problem occur. Medical sciences is a whole field that has quality issues with a host of papers. So, I doubt that economics is really the only “science” branch that has to confront this problem.
But evidently some economics researchers seem to wake up to that problem. Kudos to you.

zach March 20, 2011 at 2:38 am

you got too meta. Now the first thing that comes up on the google search is this post.

Jacob March 20, 2011 at 8:49 am

I just tried this. For me, five of the first six were this post and other blogs quoting this post.

himaginary March 20, 2011 at 9:40 am

“Is anyone right now talking about this test, much less performing it? I don’t see it. Is anyone mentioning that the test judges against the model, at least for Japan?”

See:
http://www.gakushuin.ac.jp/univ/eco/gakkai/pdf_files/keizai_ronsyuu/contents/4502/4502suzuki.htm
http://harp.lib.hiroshima-u.ac.jp/bitstream/harp/5376/1/Jouhouronsyu0802(Inagaki).pdf

From the former paper:
“M1 demand among elderly households and low-income households has increased significantly since 1996….although we cannot determine whether Japan was in a liquidity trap, our discussion of household behavior does contribute to an understanding of the macrophenomenon of monetary demand and the liquidity trap in Japan.”

From the latter paper:
“Using cointegration techniques,we find that the interest rate semi-elasticity increases “exponentially” as the interest rate spread falls below 1%. The peak of the semi-elasticity is observed in 2005,a nd is 350 times larger than the value in 1990. Furthermore,we find that the demand for money in the low interest rate environment after 1995 is better explained by the MIUF model than the log-level functional form that does not allow for the existence of the liquidity trap. We conclude that Japan’s liquidity trap is well described by our approach.”

“Bennett McCallum arguing, on largely empirical grounds, that a liquidity trap is unlikely.”

IIRC, Stefano Eusepi rebutted it in “Learnability and monetary policy: A global perspective.”

Joe Seydl March 20, 2011 at 5:49 pm
himaginary March 20, 2011 at 8:27 pm

Professor Cowen:

My previous comment at March 20, 2011 at 9:40 am is still at “Your comment is awaiting moderation” status. As I said nothing harmful or advertizing in that comment in which I just intended to offer you some information you seem to seek, I suppose it was automatically and wrongly categorized as spam comment (maybe because of the links to the papers on liquidity trap). I’d appreciate it if you could check it.

himaginary March 22, 2011 at 8:14 am

OK, now it seems that my original comment is going to be awaiting moderation until hell freezes over. Let me repost without the links.
=====
“Is anyone right now talking about this test, much less performing it? I don’t see it. Is anyone mentioning that the test judges against the model, at least for Japan?”

See:
“Determinants of the Upsurge in M1 Demand in Japan: Evidence from Household-Level Analysis” by Wataru Suzuki
“Estimating the Liquidity Trap Phenomenon in Japan” by Kazuyuki Inagaki

From the former paper:
“M1 demand among elderly households and low-income households has increased significantly since 1996….although we cannot determine whether Japan was in a liquidity trap, our discussion of household behavior does contribute to an understanding of the macrophenomenon of monetary demand and the liquidity trap in Japan.”

From the latter paper:
“Using cointegration techniques,we find that the interest rate semi-elasticity increases “exponentially” as the interest rate spread falls below 1%. The peak of the semi-elasticity is observed in 2005,and is 350 times larger than the value in 1990. Furthermore,we find that the demand for money in the low interest rate environment after 1995 is better explained by the MIUF model than the log-level functional form that does not allow for the existence of the liquidity trap. We conclude that Japan’s liquidity trap is well described by our approach.”

“Bennett McCallum arguing, on largely empirical grounds, that a liquidity trap is unlikely.”

IIRC, Stefano Eusepi rebutted it in “Learnability and monetary policy: A global perspective.”

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