Interview, Talk, As Well As Slides
Kamis, 21 November 2019
Academic Articles,
Economists,
Inflation,
Macro,
Micro vs. macro,
Monetary Policy,
Stimulus,
Thesis topics
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I did an interview amongst Cloud Yip at Econreporter, Part I in addition to Part II, on diverse things macro, money, in addition to financial theory of the cost level. It's business office of an interesting series on macroeconomics. Being a transcript of an interview, it's non every bit build clean every bit a written essay, but non every bit incoherent every bit I unremarkably am when talking.
On the same topics, I volition live on giving a utter at the European Financial Association, on Friday, titled "Michelson-Morley, Occam in addition to Fisher: The radical implications of stable inflation at the zero bound," slides here. (Yes, it's an development of before talks, in addition to hopefully it volition live on a newspaper inwards the fall.)
And, also on the same topic, you lot mightiness abide by useful a gear upwardly of slides for a 1.5 threescore minutes MBA storey roofing all of monetary economic science from Friedman to Sargent-Wallace to Taylor to Woodford to FTPL. That likewise should teach written downwardly at unopen to point.
The utter incorporates something I merely figured out concluding week, namely how Sims' "stepping on a rake" model produces a temporary spend upwardly inwards inflation afterward an involvement charge per unit of measurement rise. Details here. The cardinal is unproblematic financial theory of the cost level, long-term debt, in addition to a Treasury that stubbornly keeps existent surpluses inwards house fifty-fifty when the Fed devalues long-term debt via inflation.
Here is actually unproblematic example.
Contrast a perpetuity amongst 1 menses debt, in addition to a frictionless model. Frictionless way constant existent rates in addition to inflation moves 1 for 1 amongst involvement rates
$$ \frac{1}{1+i_t} = \beta E_t \frac{P_t}{P_{t+1}} $$
The financial theory equation, existent value of regime debt = acquaint value of surpluses, says
$$\frac{Q_t B_{t-1}}{P_t} = E_t \sum \beta^j s_{t+j}$$
where Q is the bond price, B is the give away of bonds outstanding, in addition to sec are existent principal surpluses. For 1 menses debt Q=1 always. (If you lot don't run across equations inwards a higher house or motion painting below, come upwardly dorsum to the master here.)
Now, suppose the Fed raises involvement rates, unexpectedly, from \(i\) to \(i^\ast\), in addition to (really important) in that place is no alter to financial policy \(s\). Inflation \(P_{t+1}/P_t\) must jump instantly upwardly next the Fisher relation. But the cost storey \(P_t\)might jump too.
With 1 menses debt, that can't occur -- B is predetermined, the correct side doesn't change, hence \(P_t\) can't change. We merely ramp upwardly to to a greater extent than inflation.
But amongst long-term debt, whatever alter inwards the bond cost Q must live on reflected inwards a jump inwards the cost storey P. In the example, the cost of the perpetuity falls to
$$ Q_t = \sum_{j=1}^\infty \frac{1}{(1+i^\ast)^j} = \frac{1+i\ast}{i^\ast}$$
hence if nosotros were expecting P nether the master involvement charge per unit of measurement i, nosotros at nowadays have
$$\frac{P_t}{P} = \frac{1+i^\ast}{1+i} \frac{i}{i^\ast}$$
If the involvement charge per unit of measurement rises permanently from 5% to 6%, a 20% rise, the cost storey jumps downwardly 20%. The gummy cost version smooths this out in addition to gives us a temporary disinflation, but in addition to then a long run Fisher rising inwards inflation.
Do nosotros believe it? It relies crucially on the Treasury pigheadedly raising unchanged surpluses when the Fed inflates away coupons the Treasury must pay on its debt, hence all the Fed tin laissez passer on the sack arrive at is rearrange the cost storey over time.
But it tells us this is the of import query -- the dynamics of inflation next an involvement charge per unit of measurement rising depend crucially on how nosotros remember financial policy adjusts. That's a vastly dissimilar focus than nearly of monetary economics. That we're looking nether the incorrect couch is big tidings yesteryear itself.
Even if the short-run sign is negative, that is non necessarily an invitation to activist monetary policy which exploits the negative correlation. Sims model, in addition to this one, is Fisherian inwards the long run -- higher involvement rates eventually hateful higher inflation. Like Friedman's lawsuit of adjusting the temperature inwards the shower, rather than fiddle amongst the knobs it mightiness live on amend to merely gear upwardly it where you lot desire it in addition to wait.
On the same topics, I volition live on giving a utter at the European Financial Association, on Friday, titled "Michelson-Morley, Occam in addition to Fisher: The radical implications of stable inflation at the zero bound," slides here. (Yes, it's an development of before talks, in addition to hopefully it volition live on a newspaper inwards the fall.)
And, also on the same topic, you lot mightiness abide by useful a gear upwardly of slides for a 1.5 threescore minutes MBA storey roofing all of monetary economic science from Friedman to Sargent-Wallace to Taylor to Woodford to FTPL. That likewise should teach written downwardly at unopen to point.
The utter incorporates something I merely figured out concluding week, namely how Sims' "stepping on a rake" model produces a temporary spend upwardly inwards inflation afterward an involvement charge per unit of measurement rise. Details here. The cardinal is unproblematic financial theory of the cost level, long-term debt, in addition to a Treasury that stubbornly keeps existent surpluses inwards house fifty-fifty when the Fed devalues long-term debt via inflation.
Here is actually unproblematic example.
Contrast a perpetuity amongst 1 menses debt, in addition to a frictionless model. Frictionless way constant existent rates in addition to inflation moves 1 for 1 amongst involvement rates
$$ \frac{1}{1+i_t} = \beta E_t \frac{P_t}{P_{t+1}} $$
The financial theory equation, existent value of regime debt = acquaint value of surpluses, says
$$\frac{Q_t B_{t-1}}{P_t} = E_t \sum \beta^j s_{t+j}$$
where Q is the bond price, B is the give away of bonds outstanding, in addition to sec are existent principal surpluses. For 1 menses debt Q=1 always. (If you lot don't run across equations inwards a higher house or motion painting below, come upwardly dorsum to the master here.)
Now, suppose the Fed raises involvement rates, unexpectedly, from \(i\) to \(i^\ast\), in addition to (really important) in that place is no alter to financial policy \(s\). Inflation \(P_{t+1}/P_t\) must jump instantly upwardly next the Fisher relation. But the cost storey \(P_t\)might jump too.
With 1 menses debt, that can't occur -- B is predetermined, the correct side doesn't change, hence \(P_t\) can't change. We merely ramp upwardly to to a greater extent than inflation.
But amongst long-term debt, whatever alter inwards the bond cost Q must live on reflected inwards a jump inwards the cost storey P. In the example, the cost of the perpetuity falls to
$$ Q_t = \sum_{j=1}^\infty \frac{1}{(1+i^\ast)^j} = \frac{1+i\ast}{i^\ast}$$
hence if nosotros were expecting P nether the master involvement charge per unit of measurement i, nosotros at nowadays have
$$\frac{P_t}{P} = \frac{1+i^\ast}{1+i} \frac{i}{i^\ast}$$
If the involvement charge per unit of measurement rises permanently from 5% to 6%, a 20% rise, the cost storey jumps downwardly 20%. The gummy cost version smooths this out in addition to gives us a temporary disinflation, but in addition to then a long run Fisher rising inwards inflation.
Do nosotros believe it? It relies crucially on the Treasury pigheadedly raising unchanged surpluses when the Fed inflates away coupons the Treasury must pay on its debt, hence all the Fed tin laissez passer on the sack arrive at is rearrange the cost storey over time.
But it tells us this is the of import query -- the dynamics of inflation next an involvement charge per unit of measurement rising depend crucially on how nosotros remember financial policy adjusts. That's a vastly dissimilar focus than nearly of monetary economics. That we're looking nether the incorrect couch is big tidings yesteryear itself.
Even if the short-run sign is negative, that is non necessarily an invitation to activist monetary policy which exploits the negative correlation. Sims model, in addition to this one, is Fisherian inwards the long run -- higher involvement rates eventually hateful higher inflation. Like Friedman's lawsuit of adjusting the temperature inwards the shower, rather than fiddle amongst the knobs it mightiness live on amend to merely gear upwardly it where you lot desire it in addition to wait.
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