Bryan Caplan  

Vindication by Events: A Few Questions for Scott Sumner

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I am always proud to claim vindication by bet.  But I am extremely reluctant to claim vindication by events.  Few things are easier than (a) making vague claims, (b) waiting for something or other to happen, then (c) crowing about your own foresight.  Serious thinkers should avoid (a)-(c) like the plague.

Nevertheless, I was extremely puzzled by Scott Sumner's recent self-deprecation:
Like Tyler (and Paul Krugman) I didn't expect an end to the flow of T-bond purchases to have a big impact on T-bond yields.  I'm still not sure exactly how large the impact was, but Evan's results, combined with the real time moves on last week's Fed news, convinces me that if I did know it would probably have been larger than I expected.
Questions for Scott: Wasn't the key event Bernanke's announcements about the Fed's medium-term monetary intentions?  And who's emphasized the efficacy of monetary intentions more strongly than you?  So if anyone has a right to claim "vindication by events," shouldn't it be you?


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COMMENTS (3 to date)
Scott Sumner writes:

Yes, it shows the power of expectations. But my point was different. I usually argue that the expectations of the longer term effects (income and inflation effects leading to lower rates after tightening) will trump the expected shorter term effects (liquidity effect leading to higher rates with tightening.)

In this case expectations of tightening seem, and I emphasize seem, to have led to higher long term rates. That's happened before on a few occasions, but it's still a bit puzzling to me.

To be clear, I've never argued that tightening always leads to lower short term rates, just that it usually leads to higher short term rates.

AS far as I know there are not ANY macro models that explain why long term rates sometimes rise with announcement of tightening, and sometimes fall with announcement of tightening.

Ken P writes:

Scott, I'm not an economist and may be way off here, but I think you are underestimating the extent of speculation taking place and the amount of leverage being used.

I don't think investors really expect rates to be this low, they expect that they will be able to move out of those positions and can make money until then.

Roger McKinney writes:
AS far as I know there are not ANY macro models that explain why long term rates sometimes rise with announcement of tightening, and sometimes fall with announcement of tightening.

Stock traders understand this well: macro models can't model it. I read an article on that subject recently. People are not machines. They don't respond in the same way to the same news every time. How they respond to the same news, or Fed announcement, depends upon the stage of the business cycle, the state of the market and expectations about the future.

People will react one way to news of tightening in the bottom of a recession with the market in the tank than they will when the market has reached historical highs and the economy is booming.

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