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New asymptotix paper: Quantitative Easing and the Yield on the Ten Year Gilt

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asymptotix QE10Y

this intro page updated / edited 7th July 2012
(the paper probably needs a re-write & update too)

At the beginning of asymptotix, explaining our philosphy here, I said;-

Back in the day; the Monetarist / Keynesian debate, bursting out in the US when Reagan was elected, the Keynesians (e.g. Cowles Commission) could attack monetarists by saying that monetarists had no theory [the monetarists were 'Logical Positivists']. The monetarist response (Chicago School and Berkeley) was that the Keynesians did not understand science and particularly did not understand data.

The original champions of the implementation of monetarist Logical Positivism were in the UK (where Thatcher had put the monetarist ideas into practice, as a political policy rule; before Reagan). The academic icons of the Thatcherite monetarist 'shock troops' were Friedrich August von Hayek and Sir Patrick Minford, (I never read Sir Alan Walters & John Redwood MP, in video below was the 'angry young man' of that time). Milton Friedman and Anna Schwarz had invented monetarism in Chicago and it was alive and well at Harvard and Yale in the presences of Barro (the Business Cycle) and Lucas (Rational Expectations [asymptotix RE tag]).

For risk management, modelling cannot be other than monetarist, statistical, (logical) positivist. Financial Risk modelling pivots on data intra-Financial Sector; most Keynsian models do not even consider "MONEY". The best structural models have modules analysing every economic relationship you could think of but they do not model the Banking Sector. The theoretical reasoning is lost in smoke filled rooms just after WW2 (Cowles-like at Yale) but its something to do with the invisibility or irrelevance of intra financial sector transactions during macroeconomic equilibrum! Today that sounds like Harry Potter or more closely Terry Pratchett or Philip Pullmann, see this asymptotix reference)

I have said here Basel III is all about the Business Cycle and the Rational Expectations ideas of the 1980s. I seem to be tuning into a thought process which is going on 'out there'; the most significant methodological contribution being from Jean Claude Trichet and the ECB which I have discussed in detail here. So in this new paper from asymptotix I take a look at the Yield Curve, I argue that it's the relative signals that yield transitions send along the curve and the sometimes idiosyncratic if not expectationally-perverse responses which "us" (you, me, the bankers, employers & investors) as 'informed agents' make to signals about the relative cost or return on capital which facilitates the yield curve as the ultimate reaction function pivotal to near-predictable human behavior. What I am saying which has become so clear in the recent LIBOR-rigging scandal is that IT IS the yield curve encompassing expectations about return on capital, inflation & trivially interest rates; which is the PIVOT between MONEY & (real economic) ACTIVITY.

This is not a formal 'academic' paper in any sense, its intended to help you take a view from a "Prior consideration" OR modelling perspective on the Yield Curve in your Stress Testing laborotories. Its intended; by documenting what I have been neurotically worrying about; to help you think about this most interesting and pivotal of functions. THE PAPER IS ON THIS LINK;-

Quantitative Easing and the Yield on the 10 Year Gilt

 

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