Robert Lucas interview in Brazil, 2nd November 2012

Robert Lucas on the defining belief of the Left over Left and the Greens

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Interview with Robert Lucas on the global financial crisis and the great recession

Ideas and Growth Lecture with Nobel Laureate Robert E. Lucas Jr

2014 Homer Jones Memorial Lecture – Robert E. Lucas Jr.

The first part of his lecture discusses how the Fed can influence inflation and financial stability.

Central banks can control inflation. Can central banks maintain economic stability’s financial stability? This is still an open question as to whether central banks can do that. The quantity theory of money makes certain sharp predictions about monetary neutrality which are well borne out by the cross country evidence.

In the second part of this lecture, Lucas discusses how central banks around the world have used inflation targeting to keep inflation under control.

What is the Fed to do with the stable relationship between money and prices? Inflation targeting is superior to a fixed growth monetary supply growth rule. This always pushes policy in the direction of the inflation rate you want. Central banks around the world have succeeded in keeping inflation low by explicitly or implicitly targeting the inflation rate.

In the last part of his lecture, Lucas discusses financial crises. he agrees with Gary Gordon’s analysis that 2008 financial crisis was a run on Repo. A run on liquid assets accepted as money because they can be so quickly changed into money. The effective money supply shrank drastically when there was a run on these liquid assets.

Lucas favoured the Diamond and Dybvig of bank runs as panics. The logic of that model applies to the Repo markets now was well as to the banking system. How to extend Glass–Steagall Act type regulation of bank portfolios to the Repo market is a question for future research.

Inflation targeting is working well but the lender of last resort function is yet to be fully understood.

Note: The Diamond-Dybvig view is that bank runs are inherent to the liquidity transformation carried out by banks. A bank transforms illiquid assets into liquid liabilities, subject to withdrawal.

Because of this maturity mismatch, if depositors suspect that others will run on the bank, it is optimal for each depositor to run to the bank to withdraw his or her deposit before the assets are exhausted. The bank run is not driven by some decline in the fundamentals of the bank. Depositors are spooked for some reason, panic, and attempt to withdraw their funds before others get in first. In this case, the provision of deposit insurance and lender of last resort facilities reassures depositors and stems the bank run

In the Kareken and Wallace model of bank runs, deposit insurance is problematic because of the incentives it gives to deposit taking institutions that are insured to take much greater risks. When there is deposit insurance, depositors don’t care about the greater risk in the portfolios of their banks. The greater risk taking leads to higher returns at no extra cost because if these risky investments do fail, the deposit insurance covers their losses

It is therefore necessary to regulate the portfolio of insured banks to ensure that they do not do this. That is the great dilemma for banking regulation because quasi-banks and other liquidity transformation intermediaries such as a Repo market spring up just outside the regulatory net.

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Robert Lucas on Ideas and Growth – Brazil, December 2013

 

Favourite Lucas and Sargent quotes

Lucas and Sargent from After Keynesian Macroeconomics (1979):

For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, non-economists

Thomas J. Sargent

Robert Lucas from Tobin and Monetarism: A Review Article (1981):

Keynesian theory is in deep trouble, the deepest kind of trouble in which an applied body of theory can find itself: It appears to be giving seriously wrong answers to the most basic questions of macroeconomic policy.

Proponents of a class of models which promised 3 to 4 per cent unemployment to a society willing to tolerate annual inflation rates of 4 to 5 per cent have some explaining to do after a decade such as we have just come through.

A forecast error of this magnitude and central importance to policy has consequences, as well it should.

We got the high-inflation decade, and with it as clear-cut an experimental discrimination as macroeconomics is very likely to see, and Friedman and Phelps were right.

Haberler, Jacob Viner, Robertson, Pigou and Frank Knight pointed out in their reviews of the General Theory that it lacked originality, and presented old ideas often incorrectly in confusing new vocabularies that made the book difficult to read. These reviews are worth reading today such as this by Frank Knight:

Many of Mr. Keynes’s own doctrines are, as he would proudly admit, among the notorious fallacies to combat which has been considered a main function of the teaching of economics.

Robert Lucas and Edward Prescott discuss the future of economic growth, 2014

On 21 March, Robert E. Lucas Jr., and Edward C. Prescott participated in a roundtable on “The Wealth of Nations in the 21st Century” in Barcelona.

 

via Chong-En Bai, Robert Lucas, Edward Prescott discuss economic growth in Barcelona – Barcelona GSE.

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