Thursday, September 11, 2003

Academic Blogs and Infotainment

Tyler Cowen, in an interesting interview, argues that academic blogs are the wave of the future. Top academics will aim for a few prestigious publications and then present the rest of their ideas through blogs and other channels. I’m a bit skeptical since blog topics seem pretty limited to me. Cases, anecdotes and cute stories work well, which is why law and the cute-story part of economics (e.g. why there is such a big markup in movie popcorn) make up most of the blogs I read.

I think it works less well for other issues, such as those that make up most of economics. To give an example, Tyler Cowen presented his “Macroeconomics in Five Easy Lessons”. In his discussion of Fed policy he says (without any explanation)
“Don't worry about the discount rate, when the Fed lends to banks, that is secondary and I will ignore it.
In a response to the “first lesson”, Daniel Davies replies to that sentence by saying,
It isn’t secondary at all, particularly if you’re operating on a standard of “what the stock market cares about”. I explained at length a while ago how the control of the overnight money rate can be used to exercise a significant degree of control of the entire yield curve
For that exchange to be meaningful the reader should be able to answer the following questions: Why is anyone worrying about the discount rate in the first place? Why is Cowan right that you can ignore it? And what two things is Davies confusing?

Here is the answer.
The Federal Reserve can affect the amount of reserves in the economy through purchases of bonds (a process called open market operations) or by lending reserves directly to banks. The part of the Fed that makes loans is called the discount window, and the rate it lends at is the discount rate. In the past, the Fed has worked to control the quantity of reserves and short-term interest rates by regulating the amount borrowed at the discount window, which is why the discount rate was important in the past. It no longer does this. There is still some borrowing at the window, but it is mostly for technical reasons, seasonal loans to banks in agricultural areas, and very-short-term (mostly overnight) loans to banks that have temporary difficulties in meeting their reserve requirement. So, the reason you don’t need to know about the discount rate is that changes in Fed policy have made it irrelevant for bigger questions of monetary policy.

What matters for policy are open market operations. These influence the interest rate charged by banks to other banks on overnight loans, which is called the Fed Funds rate (this is the “overnight money rate” referred to by Davies). As he argues, the overnight rate is important; however, it is a separate thing from the discount rate.
My point is not that the discount rate is an important subject (although both people brought it up one way or the other) but rather that it is not entertaining, and this distorts the coverage. Because it is not entertaining, Cowen isn’t going to provide an explanation, and no one but economists with formal training will know what is really being talked about. Which is why I doubt that blogs will develop into an alternate location for serious discussions about most parts of economics. What works well on blogs is just too narrow.

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