tag:blogger.com,1999:blog-582368152716771238.post2051089888865397059..comments2024-03-29T04:41:56.077-05:00Comments on The Grumpy Economist: The Neo-Fisherian QuestionJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger46125tag:blogger.com,1999:blog-582368152716771238.post-103150576265150692017-02-27T12:04:21.660-06:002017-02-27T12:04:21.660-06:00GOOD POSTGOOD POSTLewis Clarkhttps://www.blogger.com/profile/05470410316942686555noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-88595513761406694902015-12-17T17:33:15.900-06:002015-12-17T17:33:15.900-06:00The problem is that as you lower interest rates yo...The problem is that as you lower interest rates you lower velocity, see Hussman and my stuff here: <br />http://www.howfiatdies.blogspot.com/2015/09/punchbowl-removal-difficulties.html<br /><br />So on the way down everything seems easy. You have more money but lower velocity, so not much inflation, for awhile. <br /><br />The trouble comes as you try to return interest rates to normal or if you stay too long making money too long. As you raise rates you also raise velocity. So it is possible for things to spiral into hyperinflation. But the longer you go without getting back to normal the greater the danger of an eventual spiral. See more on that here:<br />http://howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html<br /><br />Using the equation of exchange I can simulate hyperinflation here:<br />http://howfiatdies.blogspot.com/2013/03/simulating-hyperinflation.html<br /><br />After interest rates are back to normal levels we can talk about what we learned from this extreme monetary experiment. But for now this is still an ongoing experiment, so it is too early to say what the experimental results are. Don't throw out the equation of exchange just yet, and least not from this ongoing experiment.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70223553521781669572015-12-17T13:43:34.894-06:002015-12-17T13:43:34.894-06:00Hi Prof Cochrane,
How do you know there's not...Hi Prof Cochrane,<br /><br />How do you know there's not another parameter which determines if an economy is an NK/Monetarist regime vs a neo-Fisherite regime. For example, the size of the economy relative to some other factor. This concept would (perhaps) allow economies to slowly evolve over decades from one regime to the other as they grew.<br /><br />Such a model does not necessarily have to be more complicated. In fact, it's possible it can be less complicated on the whole (fewer parameters overall).Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19551475476426735472014-11-18T10:27:46.663-06:002014-11-18T10:27:46.663-06:00Prof,
thank you for your response. I'm not co...Prof,<br /><br />thank you for your response. I'm not completely sure if I agree with your interpretations of these historical events, particularly with what would constitute short-run dynamics as opposed to long-run ones, but you've clearly given this a lot of careful thought and if I'm not necessarily agreeing with your interpretations, I can certainly see why you come about them.<br /><br />I guess I need to think about this some more. But, again, greatly appreciate you sharing your thoughts, thanks.Pedronoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-31088199507386862352014-11-14T07:59:30.827-06:002014-11-14T07:59:30.827-06:00Examples 1 and 2 (Germany WWI US 1950) are classic...Examples 1 and 2 (Germany WWI US 1950) are classics of the Fiscal Theory of the Price Level. If you look at "monetary policy with interest on reserves" you find that the precondition for determinacy with a fixed interest rate target is fiscal backing. That's exactly what was missing in Germany WWI (Sargent and Wallace, "ends of hyperinflations") and dissapeared in the Korean War in the US (Woodford, "fiscal foundations of price stability"). The third episode (canada) strikes me as just like the Sweden I was responding to: short run dynamics may well go the other way. The issue is long run dynamics, and hence how do you escape when interest rates can't go any lower. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-35885986145884959122014-11-14T07:06:35.276-06:002014-11-14T07:06:35.276-06:00Hi Prof Cochrane,
I've been reading your post...Hi Prof Cochrane,<br /><br />I've been reading your posts on the neo-Frisherian hypothesis with great interest, as I find to be a very interesting idea, but before going much further, you might want to look to the historical evidence, such as David Beckworth's nice summary of some episodes, that are, seemingly, inconsistent with the hypothesis:<br /><br />http://macromarketmusings.blogspot.co.uk/2014/04/the-cure-for-neo-fisherism-history.html<br /><br />Look forward to how you respond to these cases.Pedronoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-24224106956309634172014-11-11T13:49:36.308-06:002014-11-11T13:49:36.308-06:00I should add, still an interesting post, though. ...I should add, still an interesting post, though. It's just that investors want to know what inflation will do to their nominal returns, not what the Fed will do with interest rates.Davehttps://www.blogger.com/profile/11877699517690934530noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-47322372029649316232014-11-11T13:29:50.322-06:002014-11-11T13:29:50.322-06:00I think the model is too simple to be useful, and ...I think the model is too simple to be useful, and is not tested by recent events, because of expectations. No investor would ever expect the Fed to hold an interest rate peg.Davehttps://www.blogger.com/profile/11877699517690934530noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63406148874389458602014-11-11T12:57:01.541-06:002014-11-11T12:57:01.541-06:00Hello Math. Bo.,
I have been using the Personal C...Hello Math. Bo.,<br /><br />I have been using the Personal Consumption Expenditure Price Index - Chain Type which is the price level appropriate to the Fisher Equation. My discussion was directed at market prices not production costs.<br />David de los Angeleshttp://daviddelosangelesbuendia.tumblr.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-33470812719328459762014-11-11T10:59:37.201-06:002014-11-11T10:59:37.201-06:00The trick here is the straw man: "Or is it un...The trick here is the straw man: "Or is it unstable, careening off to hyperinflation or deflationary spiral?"<br /><br />The real question you're asking is: if the central bank pegs the interest rate at a fixed value, will growth be slowed below potential by excessive inflation when credit demand is high and slowed below potential by overly tight credit when credit demand is low, as standard macro teaches, or will growth and inflation be high when credit access is tight and low when credit access is easy, as my strange interpretation of the Fisher equation seems to suggest?tomnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32457452600531527382014-11-09T15:45:45.058-06:002014-11-09T15:45:45.058-06:00Majormax,
"0% interest here would be roughly...Majormax,<br /><br />"0% interest here would be roughly equivalent to a gold standard, and that period was indeed historically characterized by a relatively stable price level."<br /><br />And so it wasn't the "gold standard" that led to a relatively stable price level, but instead a period where fractional reserve banking did not exist.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-38180735159189652532014-11-09T07:04:00.814-06:002014-11-09T07:04:00.814-06:00David de los Angeles,
I think you're confusin...David de los Angeles,<br /><br />I think you're confusing the price level and relative prices. Quantity of money matters for the price level whereas production costs matter for relative prices.Math. Bo.https://www.blogger.com/profile/10481664971830236516noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13905893604236423352014-11-08T16:39:19.358-06:002014-11-08T16:39:19.358-06:00Great comment Nick Rowe, as a money manger it surp...Great comment Nick Rowe, as a money manger it surprises me that central bankers still believe that they have some kind of newtonian joystick that controls everything (remember Paul Krugman boasting inflation would be whatever the FED wanted plus minus 0,1%), when in fact they don't. I know it will be hard, but keep pushing that idea, it is importante people realize that.Jose Romeu Robazzinoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-30692909863858562302014-11-08T16:31:12.668-06:002014-11-08T16:31:12.668-06:00brasil61, I am Brazilian as well, it looks to me t...brasil61, I am Brazilian as well, it looks to me that aggregate demand in Brazil is too dependent on the fiscal stance of government, so rates go up in Brazil to force government cut spending, given the financing constraint...Jose Romeu Robazzinoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-47607680854357571472014-11-08T13:38:34.385-06:002014-11-08T13:38:34.385-06:00Yes must say this an idea that could only function...Yes must say this an idea that could only function in a narrow band of interest rates. It seems like pegging the interest rate very high or very low would not result in the inflation rate following along. If we had allowed interest rates to go negative is Cochrane trying to argue we would have had outright deflation?Steve Jnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32080433482416831932014-11-08T09:38:38.025-06:002014-11-08T09:38:38.025-06:00Hello Anonymous,
You are correct it is a common m...Hello Anonymous,<br /><br />You are correct it is a common misconception that every increase in the volume of money eo ipso results in an increase in prices. That is not to say that there are not specific conditions where this can occur. Dr. Friedman, a very prominent Monetarist has an excellent quote on the subject, to wit: "Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output." So rather than a universal position, it is conditional on the quantity of money increasing faster than the out put of goods and services. Using the MV = PQ equation, Dr. Friedman's quote only applies if delta M is greater than delta Q and if V is stable, as he assumed it was [1]. However the current economic climate is dominated by a declining velocity [2] so Dr. Friedman's quote in not apropos.<br /><br />It never ceases to amaze me how few people actually believe that prices of commodities are controlled by the dynamics of supply and demand. Obviously when supply and demand are at equilibrium, the price of a commodity is driven the costs to produce the commodity and distribution. When demand exceed supply the price raises above this equilibrium point and when the reverse is true, prices drop below that equilibrium point.<br /><br />If prices rises, inflation, it is because the cost of production and distribution have risen or the balance of supply and demand have shifted in favor of demand over supply. Is there any reason for to suppose that this is going to occur? What forces would be driving up prices? Is the economy expanding sufficiently that suppliers of goods and services can no longer meet demand? That seems unlikely as capacity utilization is low and has been declining for several years [3]. Further, with low levels of capital investment, why would demand for durable goods increase. Unemployment is still high so there will be little upward pressure on wages.<br /><br />We live in deflationary conditions and the Federal Reserve Bank needs to adopt policies appropriate to those conditions.<br /><br />[1] "The relative stability of monetary velocity and the investment multiplier in the United States, 1897 - 1958" by Friedman, M. and Meiselman, D. (1963) in Stabilization Policies. Prentice Hall .<br /><br />[2] http://bit.ly/111xlhg<br /><br /><br />[3] http://bit.ly/SEYIV6David de los Angeleshttp://daviddelosangelesbuendia.tumblr.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-1221565939219962582014-11-08T07:59:40.773-06:002014-11-08T07:59:40.773-06:00Interesting read. It staggers me how many people I...Interesting read. It staggers me how many people I come across, some quite well educated, who think that the only thing that causes prices to rise and fall is the quantity of money! Is this the return of Monetarism with a vengeance? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-65724686651730706192014-11-08T06:10:15.995-06:002014-11-08T06:10:15.995-06:00And my post in response! http://worthwhile.typepad...And my post in response! http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/11/black-holes-and-neo-fisherites-are-a-monetary-phenomenon.htmlNick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-7257739213831070602014-11-07T23:11:35.905-06:002014-11-07T23:11:35.905-06:00Hello Frank Restly,
M2 velocity has been falling ...Hello Frank Restly,<br /><br />M2 velocity has been falling for years now. It peaked in 1997 and has been falling since, although it did revive a bit in the mid-2000's. It resumed its decline in 2007 and then went into a free fall in 2008. The Quantitative Easing Policy did not stop the decline of velocity, it merely prevent prices from falling as well.<br /><br />http://research.stlouisfed.org/fred2/graph/?g=GHoDavid de los Angeleshttp://daviddelosangelesbuendia.tumblr.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-714878210866410842014-11-07T18:17:49.180-06:002014-11-07T18:17:49.180-06:00If this is true, what Cochran says, then the Fed s...If this is true, what Cochran says, then the Fed should hold interest rates at zero and conduct $500 billion dollars of quantitative easing every year. We will have no inflation and a decreasing national debt.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-33313093937580666422014-11-07T15:06:18.749-06:002014-11-07T15:06:18.749-06:00David,
"So the massive increase in the volum...David,<br /><br />"So the massive increase in the volume of money slightly offset the massive fall in velocity."<br /><br />Did the massive increase in volume of money offset the fall in velocity or did it in part cause the fall in velocity? What I am asking for is proof / disproof of causality, and if causality exists, which direction does it operate?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-33927950744127288132014-11-07T14:45:21.783-06:002014-11-07T14:45:21.783-06:00John,
I've been coming to many of the same c...John, <br /><br />I've been coming to many of the same conclusions you have here through an entirely different approach -- however, there is a difference that allows "quantity theory" economies to exist as a particular limit (high inflation) whereas "neo-Fisherite" economies tend to have low inflation (and a large monetary base relative to NGDP):<br /><br /><a href="http://informationtransfereconomics.blogspot.com/2014/11/in-which-i-agree-with-john-cochrane.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2014/11/in-which-i-agree-with-john-cochrane.html</a>Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77059997356040001282014-11-07T12:31:52.412-06:002014-11-07T12:31:52.412-06:00Hello Frank Restly,
First, you are correct that D...Hello Frank Restly,<br /><br />First, you are correct that Dr. Friedman assumed that velocity was stable[1]. However even this is not assumed the Fisher Equation can still work well.<br /><br />Between the 1st Quarter of 2008 and the First Quarter of 2014 the volume of M2 increased by 34% (3,550 to 4,725 BUSD / Ratio of 1Q 2008 to 1Q2014 = 1.34). The velocity of M2 money fell in same period by 21% (1.940 to 1.533 / Ratio of 1Q 2008 to 1Q2014 = 0.79). If the values are multiplied M2*V2 the change over this same periods is 6% (6893 BUSD to 7243 BUSD / Ratio of 1Q 2008 to 1Q2014 = 1.06).<br /><br />So the massive increase in the volume of money slightly offset the massive fall in velocity. Prices increased during this period about 10% as measured by the Personal Consumption Expenditure Chain Type Index 100 = 2009 (99.14 to 108.2 / Ratio of 1Q 2008 to 1Q2014 = 1.10). Gross Domestic Product increased by about 8% (14,890 BUSD to 15,832 BUSD / Ratio of 1Q 2008 to 1Q2014 = 1.08).<br /><br />So [delta]M2*V2 = [delta]P*y is approximately correct. Of course only the Federal Reserve Bank (FRB) has no control over V, P, or Q and only limited control over M2. The FRB can control the total amount of currency (i.e. Federal Reserve Notes and coins) and the size of bank reserves but that is only a small portion of the total volume of money.<br /><br />Nonetheless, the FRB was able through monetary policy to counter the strong deflationary pressures indicated by falling velocity by a equal increase in the size of the volume of money.<br /><br />[1] “The relative stability of monetary velocity and the investment multiplier in the United States, 1897 – 1958″ by Friedman, M. and Meiselman, D. (1963) in Stabilization Policies. Prentice HallDavid de los Angeleshttp://daviddelosangelesbuendia.tumblr.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86043062754346137562014-11-07T11:54:25.696-06:002014-11-07T11:54:25.696-06:00Anonymous: that might be part of it. But I think I...Anonymous: that might be part of it. But I think I would put most of my faith in money. If it spirals down deep enough into a black hole, I could buy the whole world with a $1 coin. And I would, before anyone else beat me to it. Work backwards from there.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72392482741549968182014-11-07T11:52:46.894-06:002014-11-07T11:52:46.894-06:00Dr. Cochran,
The difficulty with your argument is...Dr. Cochran,<br /><br />The difficulty with your argument is his claim that "Just as much as monetarists worried about hyperinflation, Keyensians' forecast of a deflationary spiral just didn't happen." This is a strawman argument, few serious economist's argued that hyperinflation was just around the corner. Further, the deflation that the Federal Reserve Bank (FRB) worried so much about actually did occur. Prices did indeed see downward pressure but the Deflationary Spiral never matured because of the actions of the FRB, i.e. Quantitative Easing Policy (QEP).<br /><br />The FRB did indeed "print money", (i.e. had the United States Treasury Bureau of Engraving and Printing print money), quite a bit. The supply of M1 Currency (Federal Reserve Notes (FRNs) and coins) increased from 800 BUSD to 1200 BUSD between 2008 and 2012 [1], a 50% increase, which quite significant. During the same period the size of the M2 Money Stock increased dramatically as well, from 7,600 BUSD to 11.500 BUSD, a 40% increase. Of course the size of the Monetary Base rose by a staggering 400% [3] in the same period. Increasing the size of the money stock did indeed create inflationary pressures, the "monetarists" that you reference were correct about that.<br /><br />Where they were wrong however was in thinking that those inflationary pressures are the only pressures on prices. During the same period monetary velocity was falling, also quite dramatically, as was industrial utilization capacity, and rates of capital formation[4][5]. These represented deflationary pressures. The inflationary pressures created by the monetary policy of the FRB countered the deflationary pressures of the US economy, producing a small amount price increase.<br /><br />The "Keynesians" that you reference were correct, deflationary pressures did arise but prices fell very little, if at all. The Deflationary Spiral never occurred because of the anti-deflationary policies of the FRB, i.e. QEP. Your argument comes done to that of the man who lived down stream of a dam, he complained that dam did no good because since there was never any flooding.<br /><br />[1] https://research.stlouisfed.org/fred2/series/CURRENCY<br /><br />[2] https://research.stlouisfed.org/fred2/series/M2<br /><br />[3] https://research.stlouisfed.org/fred2/series/BASE<br /><br />[4] http://cpi-u-m2v.tumblr.com/<br /><br />[5] http://capitalformation19552014.tumblr.com/David de los Angeleshttp://daviddelosangelesbuendia.tumblr.com/noreply@blogger.com