tag:blogger.com,1999:blog-582368152716771238.post1453940103292191889..comments2024-03-28T11:50:52.581-05:00Comments on The Grumpy Economist: Do higher interest rates raise or lower inflation? John H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger28125tag:blogger.com,1999:blog-582368152716771238.post-22702210888455994962018-11-16T12:35:53.418-06:002018-11-16T12:35:53.418-06:00Very good article Sir...Please read https://judici...Very good article Sir...Please read https://judicialeconomist.blogspot.com/2018/11/relationship-between-interest-rate-and.html and do comment...Thank you. Abhijit Senhttps://www.blogger.com/profile/05880547421993282574noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-27997207846164894302016-05-18T21:55:40.066-05:002016-05-18T21:55:40.066-05:00actually it is very simple - velocity of money has...actually it is very simple - velocity of money has never been lowerAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9608613668832183482016-04-01T02:02:23.174-05:002016-04-01T02:02:23.174-05:00Very, very interesting food for thought.
I am won...Very, very interesting food for thought.<br /><br />I am wondering how the Volker era fits into this? In the late '70's, I always felt that Volker's high interest rates were causing, not quashing, high inflation. <br /><br />I saw the Reagan/Greenspan decision to loosen things and lower interest rates then having an instant impact, lowering all sorts of costs. I was never convinced that the economy had 'turned' as a result of Volker beating inflation. <br /><br />The Greenspan approach subsequently went too far, with everyone becoming addicted to high asset prices and when Bernanke solidified the philosophy with the 2% inflation target, it seemed to focus his attention on the effect (inflation), not the cause (interest rates) of trouble. If it ever 2% inflation targeting worked, it seemed illusory to me and it seemed that we had to change the definition of both CPI and inflation to make it 'work' better.<br /><br />If inflation targeting is back-to-front and targeting the effect not the cause of trouble, what would happen under a policy that targeted interest rates themselves at 4.5% in a band of 2-6% (Piketty has real interest rates averaging 4.3% over 5 centuries) ? This would give entrepreneur investors and personal investors (savers) both greater certainty and a fairer deal whilst remaining within the economic remit of central banks.all for unconventional wisdomnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89138000880612370582015-11-02T11:44:16.062-06:002015-11-02T11:44:16.062-06:00Dr. Cochrane,
In the linked paper you wrote:"...Dr. Cochrane,<br /><br />In the linked paper you wrote:"Most theories contain the Fisher relation that the nominal interest rate equals the real rate plus expected inflation,<br />it = rt + Et{pi}t+1<br />, so they contain a steady state in which higher interest rates correspond to higher inflation."<br /><br /> <br />Is that correct? One can see that if expected inflation increases or the real interest rate increases then nominal interest rates should increase but does this equation demand that the reverse be true? If A is true then B is true, A is true therefore B is true but that does not mean that if B is true that A is true.David de los Ángeleshttp://daviddelosangelesbuendia.tumblr.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-33917832966487313822015-10-28T19:17:46.047-05:002015-10-28T19:17:46.047-05:00Is this result in agreement with the Friedman Rule...Is this result in agreement with the Friedman Rule of having a zero nominal interest rate peg is an optimal policy?<br />If so, why do you say "classical Monetarism assumes interest rates peg are unstable".Harold Vásquezhttps://www.blogger.com/profile/00299057793919569807noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19620468692240806082015-10-27T18:09:23.307-05:002015-10-27T18:09:23.307-05:00Thanks for your answer !
Best regards.Thanks for your answer !<br />Best regards.Anonymoushttps://www.blogger.com/profile/06527755322586136809noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-57327823461389933612015-10-27T16:23:35.083-05:002015-10-27T16:23:35.083-05:00I only have the new edition, and he doesn't do...I only have the new edition, and he doesn't do responses to monetary policy shocks with an interest rate rule. I would bet however that he adds a Taylor rule with mean-reverting shocks, thus gets a result with the jump to a lower equilibrium. See also p. 14 and Figure B1 here http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_taylor_rule_online_appendix_B.pdfJohn H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-92026293116378620382015-10-27T15:43:35.765-05:002015-10-27T15:43:35.765-05:00Prof. Cochrane,
I'm reading your paper and so...Prof. Cochrane,<br /><br />I'm reading your paper and something strikes me. <br />Please correct me if necessary. <br />Figure 2 represents the standard IRF of a transitory shock (mean reverting) on interest rate, in the standard NK model. Then, how do you explain the fact your IRF (regarding inflation dynamics) is at odds with the one in Gali's textbook (2008, p. 53), given that you're using the very same NK model?Anonymoushttps://www.blogger.com/profile/06527755322586136809noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-28512975391832073222015-10-23T11:30:56.618-05:002015-10-23T11:30:56.618-05:00There is not a single central bank in the world th...There is not a single central bank in the world that operates under the premise of permanent pegs or pegs that do not respond forcefully to inflation. So this is all nice theory but not relevant.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-45469046827189318532015-10-21T08:55:59.229-05:002015-10-21T08:55:59.229-05:00I'm skeptical about the starting premise of th...I'm skeptical about the starting premise of this study - that the stability of inflation during a prolonged period in which the overnight target for the federal funds rate was zero to 25bp overturns the longstanding claim that inflation must be unstable under an exchange rate peg. While the overnight rate was held stable at zero throughout this period, monetary policy was not pegged from 2008 to the present – far from it, the Fed innovated further easing via forward guidance and QE, both of which were intended to put downward pressure on longer term interest rates. Shadow fed funds measures like Wu-Xia attempt to map this back into fed funds equivalent space. If the Fed had given up when rates hit zero I suspect inflation would indeed have been unstable (to the downside). As a previous respondent noted, we were not in a pegged regime to the upside during this period either, as the FOMC communicated its expectation to eventually normalize policy. <br />Why should we not read the evidence instead as consistent with the view that the stability of inflation derived from the ongoing adjustment of the stance of monetary policy even after the overnight rate hit the zero bound?<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-22165248542100032722015-10-20T21:02:25.209-05:002015-10-20T21:02:25.209-05:00I wrote: "the current lack of inflation is be...I wrote: "the current lack of inflation is better explained by Fischer's book, than by economic modeling."<br /><br />JC replied: "The post is about an economic model that does explain the current lack of inflation."<br /><br />To which I respond: I understand that you posted about a model that purports to explain the current lack of inflation. I, however, am not persuaded that any economic model explains this phenomenon. I think that the better explanation is given by the book noted above.<br /><br />Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87070257067194569052015-10-20T12:19:00.457-05:002015-10-20T12:19:00.457-05:00"The post is about an economic model that doe..."The post is about an economic model that does explain the current lack of inflation. "<br /><br /><br />I'm wondering if the motivation for this modeling is to cast some doubt upon public opining that is based in part on Keynesian models and ideas.<br /><br />But as I understand it, the public arguments are based as much on evidence from empirical data as on theoretical (modeling) exercises.<br /><br /><br /><br />JZhttps://www.blogger.com/profile/12994372644670111315noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60688755575525430792015-10-20T06:42:40.810-05:002015-10-20T06:42:40.810-05:00Prof Cochrane, thanks for the paper. How interest ...Prof Cochrane, thanks for the paper. How interest rate reflect on asset prices? Low rates - stable asset prices? Or not? ATBMPAhttps://www.blogger.com/profile/05204223669169160577noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-84109317840616280512015-10-20T02:45:31.047-05:002015-10-20T02:45:31.047-05:00Kenneth & John, you may find this post interes...Kenneth & John, you may find <a href="http://informationtransfereconomics.blogspot.com/2015/10/interest-rate-dynamics.html" rel="nofollow">this post</a> interesting (addressing Ken's comment here, and John's paper).Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-35793241949634813362015-10-19T20:01:16.964-05:002015-10-19T20:01:16.964-05:00Can the Fed freeze the Fed funds rate or IOER and ...Can the Fed freeze the Fed funds rate or IOER and conduct QE without inflationary effect?<br /><br />If a nation restricts the supply of housing (30% of inflation), and there is economic growth, is some inflation inevitable or will freezing interest rates also freeze rents, even if demand exceeds supply? <br /><br /><br /><br /><br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82953576445779606152015-10-19T19:51:14.550-05:002015-10-19T19:51:14.550-05:00Where and how would you attribute the impact of re...Where and how would you attribute the impact of regulation (Basel III, Dodd-Frank etc) here? Lending and borrowing in the market today are skewed; Governments, Apple and Verizon can borrow billions without batting an eyelid but the lowly rated SMEs and individuals cannot. <br /><br />For them, credit is still tight; and effective rates are still high.alternative_thoughthttps://www.blogger.com/profile/10132970307115760375noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39034907295941488352015-10-19T17:25:48.085-05:002015-10-19T17:25:48.085-05:00Nice unintuitive paper, I'm glad that you take...Nice unintuitive paper, I'm glad that you take this topic seriously. (pg 63:"observation") <br /><br />I'd fill out the debt portion, IMHO. Interest rates are nothing but the price of borrowing, i.e. the supply of healthy balance sheet versus savings demand. <br /><br />The government debt market is a small portion of the overall debt markets. If the price of debt is high (rates low), then there are not enough strong balance sheets (that can take additional leverage) versus the number of prospective savers. <br /><br />Debt is deflationary -- inflation has been stable at zero rates because the economy is already so highly leveraged (preexisting deflation pressures). As long as the debt survives, inflation will be suppressed and monetary policy will be seemingly ineffective. Boosting interest rates will have both supply consequences for balance sheets (inability to roll over debt = default); and demand consequences (you dont save in "certificates of confiscation").<br /><br />When savings demand rushes out of fixed income and into other stores of wealth; and supply begins to get constrained by failing firms, you just might get higher monetary velocity & inflation.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-65889876173284999322015-10-19T15:01:04.614-05:002015-10-19T15:01:04.614-05:00I like this very paper very much. I only have one...I like this very paper very much. I only have one concern. On page 47, you write ""equation (16) shows how to construct the Taylor rule assumption that generates any desired equilibrium. The fact that adding a Taylor rule, by itself, doesn't help us at all to choose an equilibria." I agree that the Werning construction method is useful in finding pairs \phi_{\pi} and i^\hat that support particular equilibrium sequences for inflation and interest rates.<br /><br />But, if one can go out and _measure_ the central bank's \phi_{\pi} and i^{\hat} and the central bank satisfies the Taylor principle, then one should observe one of the equilibria that you plot on page 37. Indeterminacy is no longer an issue once the central bank picks a particular Taylor coefficient and i|hat. For an empirically observed values of \phi_{\pi} and i^{\hat}, it may very well be the case that the unique equilibrium has the feature of "E" in Figure 14, i.e. inflation goes negative on impact.<br /><br />My comment does not imply that the long-run Fisherian relationship does not hold. I observe that all of the equilibria in the top panel of Figure 14 converge to a new higher inflation rate. On this longer-run relationship, I think you are on firmer ground.<br /><br />All of this being said, I think the paper is very nice.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-75418105354400138762015-10-19T13:44:46.053-05:002015-10-19T13:44:46.053-05:00"The post is about an economic model that doe..."The post is about an economic model that does explain the current lack of inflation."<br /><br />I confess I am a bit confused - from what I read (blogs, news pieces etc), I thought the lack of inflation is because banks are hoarding all those excess reserves at the Fed, and not putting it in circulation via loans. Is this position wrong?Manfred the mamoothhttps://www.blogger.com/profile/07516724901598949627noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63633721577819022532015-10-19T13:32:34.869-05:002015-10-19T13:32:34.869-05:00Good point. We do have a zero peg in the downward ...Good point. We do have a zero peg in the downward direction at least. I'll be more careful on language. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29700129884802442132015-10-19T13:31:39.765-05:002015-10-19T13:31:39.765-05:00The post is about an economic model that does expl...The post is about an economic model that does explain the current lack of inflation. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-59429639788693195692015-10-19T13:27:44.234-05:002015-10-19T13:27:44.234-05:00When I was much younger than I am now, in a previo...When I was much younger than I am now, in a previous millennium, I attended the University of Chicago. While so matriculated, I took the required course in elementary economics and political theory Called Social Science I. As part of that course, Mr. Friedman gave lectures on Money. He said that inflation is everywhere and at all times a monetary phenomenon. And, I believed him.<br /><br />Many years later I read a book by an eminent historian, "The Great Wave: Price Revolutions and the Rhythm of History" by David Hackett Fischer (OUP, 1996) http://www.amazon.com/Great-Wave-Revolutions-Rhythm-History/dp/019512121X/<br /><br />The book argues that inflation is caused by underlying demographic and technological changes. The book is not well regarded by economists as the author is not a guild member. But, it seems to me after the last couple of decades, the current lack of inflation is better explained by Fischer's book, than by economic modeling.Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-64500247362173321982015-10-19T13:00:54.802-05:002015-10-19T13:00:54.802-05:00". If inflation is stable at a zero peg, &quo...". If inflation is stable at a zero peg, "<br /><br />John: what are you talking about? We don't have a zero peg. We have a Fed that is just itching to raise rates at the earliest possible moment and everyone knows it. If the Fed announced, "we will create as much money as needed to hold the Fed Funds rate at zero no matter what happens with inflation or NGDP growth", you'd find inflation would be a bit less stable.<br />Kenneth Dudahttps://www.blogger.com/profile/10593455504357461005noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-16885187092879599212015-10-19T12:03:29.431-05:002015-10-19T12:03:29.431-05:00Before I read the paper, I want to know if you are...Before I read the paper, I want to know if you are making an reductio ad absurdum argument. <br /><br />I "know" that tighter central bank policy will lower the inflation rate. <br /><br />So, do I need to revise my priors, or do I need to reject NK type models? <br /><br />Could any econometric tests or case studies illuminate the controversy?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79757836832981127522015-10-19T11:39:00.949-05:002015-10-19T11:39:00.949-05:00John,
"The paper tries everything to revive ...John,<br /><br />"The paper tries everything to revive the idea that higher interest rates lower inflation, without luck."<br /><br />Try harder. Start with something simple - there are more bonds outstanding than there is money in circulation. All people trade in their money for bonds at once - what happens to the inflation rate?<br /><br />Or how about, central bank is the only bank in existence. All loans are made and retained by the central bank (Citigroup, JP Morgan, etc. do not exist). Total loans outstanding are growing 3% a year, annual interest payments (to the central bank) are 3% a year. With the inflation rate rise or fall as interest payments to the central bank are increased while loan growth remains the same.<br /><br />Of course, you may just be commenting on the state of the U. S. economy right now, but it is not that hard to imagine a scenario where having the central bank raising the nominal interest rate it lends at will lead to a lower inflation rate.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.com