We have to give Bill Gross some credit for admitting his mistaken call on the U.S. Treasury market; see here.
Gross's call was based largely on the fact that the Fed's Treasury purchase program was about to expire. The idea is that with a large component of the demand for Treasury debt removed from the market, bond prices should fall once the program is terminated.
This is what you get when you apply the static Marshallian scissors toward understanding an economic phenomenon. It often works well. But not always. And in any case, we know that forecasting the path of security prices is a tricky business. This is what the efficient markets hypothesis tells us.
Gross's intuition was shared by a few of the macroeconomists I bumped into earlier this year at a macro conference in Konstanz. I remember one of my Fed colleagues and myself suggesting to a sceptical audience that one should not expect any dramatic bond price movement once the Fed's purchases ended, largely because the market had already discounted that event. I don't think we were very successful at persuading people. Well, we turned out to be right about that (maybe we got lucky). [Actually, I did give my view of Gross' predictions here in March 2011].
Subsequently, of course, the price of US Treasuries have risen substantially. We did not make that prediction (nor did we try). But evidently, Paul Krugman seems to think he did; see Who You Gonna Bet On?
Yep. All we need is the Econ 101 macro model to understand this crisis and predict bond prices. (Oh, and gold prices have shot up too...where do those appear in that model?)
Do we really need an IS-LM model to tell us that when two assets with similar risk properties and similar returns are swapped in the Fed's portfolio that nothing much is likely to happen? (And as I explain here, standard monetary models deliver "flight to quality" phenomena quite easily.)
Krugman's article gives the impression that simple IS-LM analysis could have predicted the recent fall in Treasury yields. Do people actually find this credible?
Gross's call was based largely on the fact that the Fed's Treasury purchase program was about to expire. The idea is that with a large component of the demand for Treasury debt removed from the market, bond prices should fall once the program is terminated.
This is what you get when you apply the static Marshallian scissors toward understanding an economic phenomenon. It often works well. But not always. And in any case, we know that forecasting the path of security prices is a tricky business. This is what the efficient markets hypothesis tells us.
Gross's intuition was shared by a few of the macroeconomists I bumped into earlier this year at a macro conference in Konstanz. I remember one of my Fed colleagues and myself suggesting to a sceptical audience that one should not expect any dramatic bond price movement once the Fed's purchases ended, largely because the market had already discounted that event. I don't think we were very successful at persuading people. Well, we turned out to be right about that (maybe we got lucky). [Actually, I did give my view of Gross' predictions here in March 2011].
Subsequently, of course, the price of US Treasuries have risen substantially. We did not make that prediction (nor did we try). But evidently, Paul Krugman seems to think he did; see Who You Gonna Bet On?
Yep. All we need is the Econ 101 macro model to understand this crisis and predict bond prices. (Oh, and gold prices have shot up too...where do those appear in that model?)
Do we really need an IS-LM model to tell us that when two assets with similar risk properties and similar returns are swapped in the Fed's portfolio that nothing much is likely to happen? (And as I explain here, standard monetary models deliver "flight to quality" phenomena quite easily.)
Krugman's article gives the impression that simple IS-LM analysis could have predicted the recent fall in Treasury yields. Do people actually find this credible?
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